-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JjqtRny4rpjp+fRbZaEjlocaFufEswJ0MBa7APrL7ia45+zCqrTy2UvygRD41J5R F2KHefXJiJ4JOdMYi2RjJg== 0000928385-96-001272.txt : 19961001 0000928385-96-001272.hdr.sgml : 19961001 ACCESSION NUMBER: 0000928385-96-001272 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL FEDERAL CORP CENTRAL INDEX KEY: 0000744778 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 470658852 STATE OF INCORPORATION: NE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11515 FILM NUMBER: 96636762 BUSINESS ADDRESS: STREET 1: 2120 S 72ND ST CITY: OMAHA STATE: NE ZIP: 68124 BUSINESS PHONE: 4025549200 MAIL ADDRESS: STREET 1: COMMERCIAL FEDERAL TOWER 13TH FLOOR STREET 2: 2120 SOUTHJ72ND STREET CITY: OMAHA STATE: NE ZIP: 68124 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended June 30, 1996, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------- ------- Commission file number: 1-11515 COMMERCIAL FEDERAL CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) Nebraska 47-0658852 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 2120 South 72nd Street, Omaha, Nebraska 68124 - --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (402) 554-9200 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sales price of the registrant's common stock as quoted on the New York Stock Exchange on September 19, 1996, was $541,113,993. As of September 19, 1996, there were issued and outstanding 13,846,491 shares of the registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1996 - Parts I, II and IV. 2. Portions of the Proxy Statement relating to the 1996 Annual Meeting of Stockholders - Part III. PART I Item 1. Business - ------- -------- GENERAL - ------- Commercial Federal Corporation (the "Corporation") was incorporated in the state of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan holding company. The purpose of the Corporation was to acquire all of the capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in connection with the Bank's 1984 conversion from mutual to stock ownership and to provide the structure to expand and diversify its financial services to activities allowed by regulation to a unitary savings and loan holding company. The general offices of the Corporation are located at 2120 South 72nd Street, Omaha, Nebraska 68124. The primary subsidiary of the Corporation is the Bank. The Bank was originally chartered in 1887 and converted to a federally chartered mutual savings and loan association in 1972. On December 31, 1984, the Bank completed its conversion from mutual to stock ownership and became a wholly-owned subsidiary of the Corporation. Effective August 27, 1990, the Bank's federal charter was amended from a savings and loan to a federal savings bank. The assets of the Corporation, on an unconsolidated basis, substantially consist of all of the Bank's common stock. The Corporation has no significant independent source of income, and therefore depends almost exclusively on dividends from the Bank to meet its funding requirements. The Corporation incurs interest expense on $47.15 million of subordinated and senior debt and pays operating expenses primarily for shareholder and stock related expenditures such as the annual report, proxy, corporate filing fees and assessments and certain costs directly attributable to the holding company. The Corporation will also incur interest expense on a short-term note for $28.0 million borrowed in August 1996 pursuant to the repurchase of a portion of the Corporation's common stock. Such note bears interest at the prime rate and matures January 31, 1997. See the "Recent Development -- Subsequent Event -- Repurchase of Common Stock" section of this report for additional information. In addition, on October 4, 1995, the Board of Directors of the Corporation established a policy of paying a regular quarterly cash dividend on its common stock. Prior to October 4, 1995, the Corporation had never paid dividends. Accordingly, cash dividends totaling $5.9 million, or $.40 per common share, were declared during fiscal year 1996 with $4.4 million paid through June 30, 1996. During fiscal year 1996 the Corporation received dividends totaling $9.3 million from the Bank which were made primarily to cover (i) the interest payments on the Corporation's subordinated debt and senior notes which amount totaled $4.9 million in the aggregate and (ii) the common stock cash dividends of $4.4 million paid by the Corporation to its shareholders through June 30, 1996. The Bank pays dividends to the Corporation on a periodic basis primarily to cover the amount of the interest payable to the subordinated and senior debt noteholders and for the common stock cash dividends paid to the Corporation's shareholders. The Bank operates as a federally chartered savings institution with deposits insured by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a consumer-oriented financial institution that emphasizes traditional savings and loan operations, including single-family residential real estate lending, retail deposit activities and mortgage banking. All loan origination activities are conducted through the Bank's branch office network, through the loan offices of Commercial Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage banking subsidiary, and through a nationwide correspondent network numbering approximately 375. The Corporation also provides insurance and securities brokerage and other retail financial services. The operations of the Corporation are significantly influenced by general economic conditions, by inflation and changing prices, by the related monetary, fiscal and regulatory policies of the federal government and by the policies of financial institution regulatory authorities, including the Office of Thrift Supervision ("OTS"), the Board of Governors of the Federal Reserve System ("FRB") and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing, consumer loans and other types of loans, which, in turn, are affected by the interest rates at which such financings may be offered, the availability of funds, and other factors, such as the supply of housing for mortgage loans. 2 At June 30, 1996, the Corporation had assets of $6.6 billion and stockholders' equity of $413.3 million, and through the Bank operated 34 branch offices in Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 19 branch offices in Oklahoma, 24 branches in Kansas, and one branch in Iowa. The increase in branches over fiscal year 1995 was primarily the result of two acquisitions during fiscal year 1996. On October 2, 1995, the Corporation consummated its merger with Railroad Financial Corporation ("Railroad") of Wichita, Kansas (18 branches, 71 agency offices and total assets of $602.9 million at the date of merger). On February 1, 1996, the Corporation acquired Conservative Savings Corporation ("Conservative") of Omaha, Nebraska (nine branches and total assets of $302.9 million at acquisition). The Bank is one of the largest retail financial institutions in the Midwest, and, based upon total assets at June 30, 1996, the Corporation was the 18th largest publicly-held thrift institution holding company in the United States. In addition, CFMC serviced a loan portfolio totaling $9.8 billion at June 30, 1996, with $5.9 billion in loans serviced for third parties and $3.9 billion in loans serviced for the Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" in the Corporation's 1996 Annual Report to Stockholders (the "Annual Report") which is incorporated herein by reference. The Corporation's strategy for growth emphasizes both internal and external growth. Operations focus on increasing deposits, including demand accounts, making loans (primarily single-family mortgage and consumer loans) and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to expand its operations within its market areas either through direct marketing efforts aimed at increasing market share, branch expansions, or opening additional branches. The Corporation's retail strategy will continue to be centered on attracting new customers and selling both new and existing customers multiple products and services. Additionally, the Corporation will continue to build and leverage an infrastructure designed to increase fee and other income. Complementing its strategy of internal growth, the Corporation will continue to grow its five-state franchise through an ongoing program of selective acquisitions of other financial institutions. Acquisition candidates will be selected based on the extent to which the candidates can enhance the Corporation's retail presence in new or existing markets and complement the Corporation's present retail network. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is one of the 12 regional banks for federally insured savings institutions comprising the FHLB System. The Bank is further subject to regulations of the Federal Reserve Board, which governs reserves required to be maintained against deposits and certain other matters. As a federally chartered savings bank, the Bank is subject to numerous restrictions on operations and investments imposed by applicable statutes and regulations. See "Regulation." RECENT DEVELOPMENTS - ------------------- Subsequent Event - Repurchase of Common Stock. - --------------------------------------------- On August 21, 1996, the Corporation consummated the repurchase of 1,250,100 shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas- based investment company, for an aggregate purchase price of approximately $48.9 million. Such purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of approximately $28.2 million and surrender of a warrant (valued at approximately $20.7 million) which would have enabled the Corporation to purchase 99 shares of non-voting common stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. After repurchase, a total of 13,844,036 shares of common stock remain issued and outstanding as of August 21, 1996. The cash portion of the repurchase was financed in part by a loan from a financial institution secured by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As consideration, the Corporation also reimbursed CAI Corporation for certain expenses totaling $2.2 million incurred in connection with its ownership of the 1,250,100 shares, including costs and expenses incurred by CAI Corporation in connection with the 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. Concurrent with the close of the repurchase, two directors of the Corporation, who also serve as executive officers of CAI Corporation, resigned from the Corporation's Board of Directors. In addition, CAI Corporation and each of its shareholders agreed to a standstill agreement for a period of 60 months beginning August 21, 1996. The Corporation and CAI Corporation have each agreed 3 to waive and release all claims against the other and the Corporation has agreed to indemnify CAI Corporation and its directors, officers and affiliates against certain derivative claims. Regulatory Issues. - ------------------ The Corporation's savings deposits are insured by the SAIF, which is administered by the FDIC. The assessment rate currently ranges from 0.23% of deposits for well-capitalized institutions to 0.31% of deposits for undercapitalized institutions. The FDIC also administers the Bank Insurance Fund ("BIF"), which has the same designated reserve ratios as the SAIF. On August 8, 1995, the FDIC adopted an amendment to the BIF risk-based assessment schedule which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range from 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well-capitalized institutions, which constitute over 90% of BIF-insured institutions. The FDIC amendment became effective September 30, 1995. Subsequently, the FDIC reduced the premium rate for the most highly rated BIF-insured institutions to the statutory minimum of $1,000 per semi-annual period and reduced the rate paid by undercapitalized BIF- insured institutions to 0.27% of insured deposits. The FDIC amendment creates a substantial disparity in the deposit insurance premiums paid by the BIF and SAIF members and places SAIF-insured savings institutions at a significant competitive disadvantage to BIF-insured institutions. A number of proposals have been considered to recapitalize the SAIF in order to eliminate the premium disparity. Any such proposals would require a one time assessment of an amount sufficient to bring the SAIF to a level equal to 1.25% of insured deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995. Recently, the FDIC revised its estimate of the size of the special assessment to 68 basis points of insured deposits to bring the SAIF statutory level to the 1.25% of insured deposits. Any such assessment will depend on the SAIF fund balance once BIF-SAIF legislation has been passed. It would also depend on adjustments in the assessable base provided in legislation, but still would be allocated among institutions on the basis of deposits at March 31, 1995. Assuming a .68% assessment on a $4.2 billion deposit base, the assessment would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge of approximately $18.3 million to the Corporation. Such assessment would have the effect of reducing the Bank's tangible capital to $390.4 million, or 5.92% of adjusted total assets, core capital to $406.6 million, or 6.15% of adjusted total assets, and risk-based capital to $442.3 million, or 13.08% of risk-weighted assets. The Bank would, on a pro forma basis as of June 30, 1996, continue to exceed the minimum requirements to be classified as a "well-capitalized" institution under applicable regulations. If such a special assessment were required and the SAIF as a result was fully recapitalized, it could have the effect of reducing the Bank's deposit insurance premiums to the SAIF, thereby increasing net income in future periods. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) require recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These changes will result in the recognition of additional deferred tax liabilities of approximately $103,000 in the first quarter of fiscal year 1997. The remaining unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. Also under consideration by Congress are proposals relating to merger of the BIF and SAIF funds and elimination of the thrift charter. Management of the Corporation is unable to predict accurately at this time whether any of these proposals will be adopted in their current form or the impact of these proposals on the Corporation. Pending Acquisition. - --------------------- On May 16, 1996, the Corporation entered into a Reorganization and Merger Agreement (the "Merger Agreement") by and among the Corporation, the Bank, Heritage Financial, Ltd. ("Heritage") and Hawkeye Federal Savings Bank ("Hawkeye Federal"). Under the terms of the Merger Agreement, the Corporation will acquire all 180,762 of the 4 outstanding shares of Heritage's common stock. As defined in the Merger Agreement, Heritage's common stock will be exchanged for cash and a pro-rata amount of the Corporation's common stock. Based on the Corporation's closing stock price on June 30, 1996, of $38.25, each share of Heritage common stock would be exchanged for $18.73 in cash and 2.559 shares of the Corporation's common stock, resulting in the exchange of approximately 462,570 shares of the Corporation's common stock with a total aggregate value approximating $21.1 million. Cash will be paid in lieu of fractional shares. In addition, holders of Heritage stock options, which totaled 23,037 at June 30, 1996, will receive in cancellation of their options a cash payment in an amount equal to the per share value of the proposed merger, less the exercise price of such option, net of any cash which must be withheld under federal and state tax requirements. Additional cash consideration up to approximately $1.2 million may be paid to Heritage shareholders pending the final disposition of an impaired asset of Hawkeye Federal totaling $1.8 million at June 30, 1996. At June 30, 1996, Heritage had assets of approximately $182.1 million deposits of approximately $157.9 million and stockholders' equity of approximately $12.9 million. Heritage operates six branches located in Iowa. This pending acquisition is expected to be completed in October 1996. Acquisitions During Fiscal Year 1996. - ------------------------------------- Conservative. On February 1, 1996, the Corporation consummated its acquisition - ------------- of Conservative, parent company of Conservative Savings Bank, FSB. Under the terms of the merger agreement the Corporation acquired all of the outstanding shares of Conservative's common stock (1,844,838 shares) and preferred stock (460,000 shares). Each share of Conservative's common stock was exchanged for $6.34 in cash and .2453 shares of the Corporation's common stock. Each share of Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares of the Corporation's common stock. Based on the Corporation's closing stock price of $36.50 at February 1, 1996, the total consideration for this acquisition approximated $44.1 million. Before purchase accounting adjustments, Conservative had assets of approximately $302.9 million, deposits of approximately $197.9 million and stockholders' equity of approximately $35.1 million. Conservative operated nine branches with seven located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. Three of the former Conservative branches and two branches of the Corporation closed in the consolidation process pursuant to this acquisition. The Conservative acquisition was accounted for as a purchase with core value of deposits and goodwill resulting from this transaction totaling $13.0 million. Railroad. On October 2, 1995, the Corporation consummated its acquisition of - --------- Railroad, parent company of Railroad Savings Bank, FSB and, pursuant to the terms of the merger agreement, 2,156,232 shares of Railroad's common stock were delivered to the Corporation in exchange for approximately 1,377,617 shares of the Corporation's common stock. Railroad operated 18 branches and 71 agency offices throughout the state of Kansas and at September 30, 1995, had assets of approximately $602.9 million, deposits of approximately $421.4 million and stockholders' equity of approximately $27.7 million. This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements have been restated for all periods prior to the acquisition to include the accounts and results of operations of Railroad. Railroad's results of operations were reported on a calendar year basis previous to its merger into the Corporation. However, in restating prior periods, Railroad's accounts and results of operations were conformed to the Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years, Railroad's accounts and results of operations for the six months ended June 30, 1994, including total revenue of $18.1 million and net income totaling $185,000 were excluded from reported results of operations for the restated combined companies but are included in the Corporation's Consolidated Statement of Stockholders' Equity. Fiscal year 1996 operations include $3.6 million (pre- tax) of merger and transition related expenses from this acquisition. Accounting for Mortgage Servicing Rights. - ----------------------------------------- As of July 1, 1995, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 122 ("SFAS No. 122") entitled "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires capitalization of internally originated mortgage servicing rights as well as purchased servicing rights. The net effect of adopting the 5 provisions of SFAS No. 122 was to increase fiscal year 1996 pre-tax earnings approximately $4.0 million. At June 30, 1996, mortgage servicing rights totaled $45.0 million. SFAS No. 122 also requires that mortgage servicing rights be reported at the lower of cost or fair value. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value. At June 30, 1996, the fair value of the Corporation's mortgage servicing rights approximated $77.5 million and no valuation allowance for capitalized servicing rights was necessary to be established. The future effect of SFAS No. 122 is dependent, among other items, upon the volume and type of loans originated, the general levels of market interest rates and the rate of estimated loan prepayments. Accordingly, management is unable to predict with any reasonable certainty what effect this statement will have on the Corporation's future results of operations or its financial position. Common Stock Dividends. - ----------------------- On October 4, 1995, the Corporation's Board of Directors established a policy of paying a regular quarterly cash dividend on its common stock. Accordingly, cash dividends totaling $5.9 million, or $.40 per common share, were declared during fiscal year 1996 with $4.4 million paid through June 30, 1996. The Corporation plans to continue to pay dividends on a quarterly basis. The declaration and amount of such dividends on the common stock is subject to the discretion of the Board of Directors of the Corporation and depends on a variety of factors, including operating results and financial condition, liquidity, regulatory capital limitations and other factors. Nonrecurring Expenses in Fiscal Year 1996. - ------------------------------------------ Fiscal year 1996 net income includes $4.5 million of pre-tax nonrecurring expenses associated with the Railroad merger and the 1995 proxy contest. The Railroad merger expenses totaled $3.6 million and consisted of accounting, legal, investment banking, severance benefits, advertising and miscellaneous transition and conversion expenses. The 1995 proxy contest expenses totaling $901,000 consisted of consulting services, legal fees, solicitation fees and printing and mailing costs. Supervisory Goodwill Lawsuit. - ----------------------------- On September 13, 1994, the Bank commenced litigation against the United States in the United States Court of Federal Claims seeking to recover monetary relief for the government's refusal to honor certain contracts between the Bank and the Federal Savings and Loan Insurance Corporation. The suit alleges that such governmental action constitutes breach of contract and an unlawful taking of property by the United States without just compensation or due process in violation of the Constitution of the United States. The litigation status and process of the multiple legal actions, such as that instituted by the Bank with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank uncertain as to ultimate outcome, and contingent on a number of factors and future events which are beyond the control of the Bank, both as to substance, timing, and the dollar amount of damages which may be awarded to the Bank if it finally prevails in this litigation. Reclassification of Securities - ------------------------------ During fiscal year 1996, in accordance with the one-time reclassification permitted under a special accounting report, and the reassessment of the appropriateness of the classifications of all securities held, management of the Corporation developed as asset/liability management strategy to reclassify substantially all of its 15- and 30-year fixed rate mortgage-backed securities approximating $370.4 million and agency investment securities approximating $49.9 million from held to maturity to available for sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. The purpose of this strategy is to sell such securities and use the proceeds to fund FHLB advances as they become due and to have the flexibility, should the opportunity arise, to reinvest proceeds into adjustable-rate or shorter duration interest-earning assets. During fiscal year 1996, approximately $230.8 million of such securities were sold with the proceeds used primarily to pay maturing FHLB advances. Net pre-tax gains totaled $253,000 from such sales. 6 Regulatory Capital Compliance. - ------------------------------ The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial position and results of operations. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the following tables of tangible, core and total risk-based capital. Prompt Corrective Action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") require specific supervisory actions as capital levels decrease. To be considered well-capitalized under the regulatory framework for Prompt Corrective Action under FDICIA, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the following tables. At June 30, 1996, the Bank exceeded the minimum requirements for the well-capitalized category. As of June 30, 1996, the most recent notification from the OTS categorized the Bank as "well-capitalized" under the regulatory framework for Prompt Corrective Action provisions under FDICIA. There are no conditions or events since such notification that management believes have changed the Bank's classification. The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements as of June 30, 1996.
- ------------------------------------------------------------------------------------------- Actual Capital Required Capital ---------------- ---------------- (Dollars In Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------- OTS Capital Adequacy: Tangible capital $408,708 6.18% $ 99,137 1.50% Core capital 424,909 6.41 198,760 3.00 Risk-based capital 460,674 13.62 270,629 8.00 FDICIA Regulations to be Classified Well-Capitalized: Tier 1 leverage capital 424,909 6.41 331,266 5.00 Tier 1 risk-based capital 424,909 12.56 202,971 6.00 Total risk-based capital 460,674 13.62 338,286 10.00 - --------------------------------------------------------------------------------------------
See "Regulation -- Regulatory Capital Requirements" and Note 20 of Notes to Consolidated Financial Statements in the Annual Report for additional information. Effects of New Accounting Pronouncements. - ----------------------------------------- During fiscal year 1996, the Corporation adopted the provisions of two accounting pronouncements: Statement No. 121 entitled "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" and Statement No. 122 entitled "Accounting for Mortgage Servicing Rights." See Note 1 to the Consolidated Financial Statements for a discussion of the implementation of the provisions of these new accounting pronouncements and their effect, if any, on the Corporation's financial position and results of operations. Other Information. - ------------------ Additional information concerning the general development of the business of the Corporation during fiscal year 1996 is included in the Annual Report under the captions: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. Additional information concerning the Bank's regulatory capital requirements and other regulations which affect the Corporation is included in the "Regulation" section of this report. 7 LENDING ACTIVITIES - ------------------ General. The Corporation concentrates its lending activities primarily on the - -------- origination of first mortgage loans for the purpose of financing or refinancing single-family residential properties, single-family residential construction loans, commercial real estate loans consumer and home improvement loans. As a result of a continued emphasis on consumer-oriented operations, including single-family residential lending and mortgage-banking activities, the origination of residential loans during fiscal year 1996 increased over fiscal year 1995. However, loan origination activity was significantly lower for fiscal years 1996 and 1995 compared to fiscal year 1994 due to a relatively lower interest rate environment in 1994 than the past two fiscal years. See "Loan Originations." The functions of processing and servicing real estate loans, including responsibility for servicing the Corporation's loan portfolio, is conducted by CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation conducts loan origination activities primarily through its 98 branch office network to help increase the volume of single-family residential loan originations and take advantage of its extensive branch network. The Corporation's mortgage banking subsidiary has continued and will continue to originate real estate loans through the Corporation's various loan offices located in its existing market areas, loan offices of CFMC and through its nationwide correspondent network. At June 30, 1996, the Corporation's total loan and mortgage-backed securities portfolio was $6.0 billion, representing over 90.7% of its $6.6 billion of total assets at that date. Mortgage-backed securities totaled $1.2 billion at June 30, 1996, representing 19.7% of the Corporation's total loan and mortgage- backed securities portfolio at such date. Approximately 95.0% of the Corporation's total gross loan and mortgage-backed securities portfolio has historically been and continues to be secured by real estate. Commercial real estate and land loans (collectively referred to as "income property loans") totaled $284.2 million or 4.7% of the total loan and mortgage-backed securities portfolio at June 30, 1996, compared to $226.7 million or 3.8% of such total portfolio at June 30, 1995. These loans are secured by various types of commercial properties including office buildings, shopping centers, warehouses and other income producing properties. Single-family residential construction loans totaled $185.3 million or 3.0% of the total loan and mortgage-backed securities portfolio at June 30, 1996, compared to $177.5 million or 3.0% of such portfolio at June 30, 1995. The Corporation's single-family residential construction lending activity is primarily a result of the construction lending operation's conducted by Railroad and continued by the Corporation after the October 1995 acquisition of Railroad. The Corporation conducts single-family residential construction lending operations primarily in Las Vegas, Nevada and in its primary five-state market area. At June 30, 1996, multi-family residential loans consisting of loans secured by various types of properties, including townhomes, condominiums and apartment projects with more than four dwelling units, totaled $40.3 million, or .7% of the total loan portfolio, compared to $33.7 million or .6% at June 30, 1995. The Bank presently does not originate a significant amount of multi-family residential loans, and expects to originate such loans primarily for purposes of resolving certain nonperforming assets. The Corporation's primary emphasis in recent years has been on the origination of loans secured by existing single-family residences. Adjustable-rate single- family residential loans are originated primarily for retention in the Corporation's loan portfolio to match more closely the repricing of the Corporation's interest-bearing liabilities as a result of changes in interest rates. Fixed-rate single-family residential loans are originated using underwriting guidelines, appraisals and documentation which are acceptable to the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Corporation ("GNMA") and the Federal National Mortgage Corporation ("FNMA") to facilitate the sale of such loans to such agencies in the secondary market. The Corporation also originates fixed-rate single-family residential loans using internal lending policies in accordance with what management believes are prudent underwriting standards but which may not strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans are originated or purchased for the Corporation's loan portfolio if such loans have characteristics which are consistent with the Corporation's asset and liability goals and long-term interest rate yield requirements. 8 In recent years, the Corporation has not originated any significant amounts of commercial real estate loans or multi-family residential loans with the exception of loans primarily to resolve nonperforming assets. However, beginning fiscal year 1994, the Corporation has initiated commercial and multi- family real estate lending, on a limited basis, with such loans secured by properties located within the Corporation's primary market areas. Such loans, which are subject to prudent credit review and other underwriting standards and procedures, are not expected to constitute a significant portion of the Corporation's lending business in the future. In addition to real estate loans, the Corporation originates consumer, home improvement, savings account and commercial business loans (collectively, "consumer loans") through the Corporation's branch network and direct mail solicitation. However, the Corporation presently does not originate commercial business loans, except for loans to resolve nonperforming assets. Regulatory guidelines generally subject savings institutions to the same loans to one borrower limitations that are applicable to national banks. At June 30, 1996, all loans to one borrower were within the Corporation's limitation of $69.5 million. See "Regulation -- Limitations on Loans to One Borrower." 9 Composition of Loan Portfolio. The following table sets forth the composition - ------------------------------ of the Corporation's loan and mortgage-backed securities portfolios (including loans held for sale and mortgage-backed securities available for sale) as of the dates indicated:
June 30, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------------ ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- (Dollars in Thousands) Loan Portfolio - -------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $3,739,191 61.1% $3,603,379 59.8% $3,125,477 58.0% $2,784,073 59.5% $2,683,033 62.1% Multi-family residential 37,322 .6 33,338 .5 43,379 .8 60,935 1.3 75,233 1.7 Land 14,582 .2 7,257 .1 9,080 .2 9,322 .2 10,356 .2 Commercial real estate 258,933 4.2 210,676 3.5 203,840 3.8 254,281 5.4 272,769 6.3 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total 4,050,028 66.1 3,854,650 63.9 3,381,776 62.8 3,108,611 66.4 3,041,391 70.3 Construction loans - Single-family residential 185,327 3.0 177,539 3.0 50,870 1.0 20,851 .5 13,670 .3 Multi-family residential 3,027 .1 380 -- -- -- -- -- -- -- Land -- -- 1,600 -- 1,640 -- -- -- 1,581 -- Commercial real estate 10,734 .2 7,195 .1 871 -- -- -- 4,810 .2 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total 199,088 3.3 186,714 3.1 53,381 1.0 20,851 .5 20,061 .5 FHA and VA loans 347,569 5.7 392,463 6.5 415,866 7.7 461,066 9.8 355,474 8.2 Mortgage-backed securities 1,171,256 19.1 1,354,142 22.5 1,338,775 24.8 947,919 20.2 777,874 18.0 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total real estate loans 5,767,941 94.2 5,787,969 96.0 5,189,798 96.3 4,538,447 96.9 4,194,800 97.0 Consumer and other loans - Home improvement and other consumer loans 344,129 5.6 231,818 3.8 188,756 3.5 131,432 2.8 116,544 2.7 Savings account loans 11,648 .2 10,026 .2 9,136 .2 8,713 .2 9,713 .2 Other loans 2,113 -- 853 -- 1,322 -- 3,696 .1 3,845 .1 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total consumer and other loans 357,890 5.8 242,697 4.0 199,214 3.7 143,841 3.1 130,102 3.0 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total loans $6,125,831 100.0% $6,030,666 100.0% $5,389,012 100.0% $4,682,288 100.0% $4,324,902 100.0% ---------- ===== ---------- ===== ---------- ===== ---------- ===== ---------- =====
(Continued on next page) 10 Composition of Loan Portfolio (continued): - ------------------------------------------
June 30, ---------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------------ ------------------ ------------------ ------------------ Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- (Dollars in Thousands) Balance forward of total loans $6,125,831 100.0% $6,030,666 100.0% $5,389,012 100.0% $4,682,288 100.0% $4,324,902 100.0% ===== ===== ===== ===== ===== Less: Unamortized discounts, net of premiums 12,335 6,884 11,938 (4,941) (17,747) Deferred loan fees, net (3,673) (1,362) (1,126) (7,365) (8,211) Loans in process (91,262) (80,211) (32,085) (12,905) (5,970) Allowance for loan losses (49,278) (48,541) (44,851) (46,908) (50,704) Allowance for losses on mortgage- backed securities (742) (1,837) (1,860) (1,890) (2,007) ---------- ---------- ---------- ---------- ---------- Loan portfolio $5,993,211 $5,905,599 $5,321,028 $4,608,279 $4,240,263 ========== ========== ========== ========== ==========
- -------------------------------------------------------------------------------- For additional information regarding the Corporation's loan portfolio and mortgage-backed securities, see Notes to the Consolidated Financial Statements in the Annual Report. 11 The table below sets forth the geographic distribution of the Corporation's total real estate loan portfolio (excluding mortgage-backed securities and before any reduction for unamortized discounts (net of premiums), undisbursed loan proceeds, deferred loan fees and allowance for loan losses) as of the dates indicated:
June 30, ------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 -------------------- -------------------- -------------------- -------------------- -------------------- State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - ---------------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- (Dollars in Thousands) ------------------------------------------------------------------------------------------------------------ Nebraska $ 929,982 20.2% $ 836,054 18.9% $ 767,988 19.9% $ 654,850 18.2% $ 403,140 11.8% Colorado 843,670 18.3 909,363 20.5 797,141 20.7 814,384 22.7 682,725 20.0 Kansas 350,248 7.6 317,109 7.2 282,238 7.3 271,892 7.6 308,011 9.0 Georgia 217,957 4.7 202,331 4.6 210,299 5.5 241,286 6.7 303,321 8.9 Oklahoma 212,468 4.6 198,480 4.5 135,893 3.5 91,302 2.5 76,754 2.2 Texas 204,002 4.4 225,866 5.1 181,547 4.7 190,605 5.3 191,516 5.6 Missouri 170,032 3.7 180,144 4.1 158,291 4.1 197,978 5.5 249,856 7.3 California 151,412 3.3 154,803 3.5 172,767 4.5 127,260 3.5 181,969 5.3 Virginia 123,806 2.7 111,081 2.5 81,290 2.1 67,821 1.9 47,849 1.4 New Jersey 113,824 2.5 119,223 2.7 110,267 2.9 38,064 1.1 42,723 1.3 Maryland 112,152 2.4 100,762 2.3 76,365 2.0 69,769 1.9 77,936 2.3 Florida 111,692 2.4 100,471 2.3 92,531 2.4 97,116 2.7 95,428 2.8 Iowa 80,820 1.8 70,515 1.6 65,365 1.7 65,512 1.8 35,689 1.0 Nevada 80,624 1.8 51,817 1.2 -- -- -- -- -- -- Illinois 79,570 1.7 78,043 1.7 57,378 1.5 69,596 1.9 94,088 2.8 Connecticut 75,946 1.7 81,418 1.8 83,002 2.2 85,204 2.4 92,321 2.7 Arizona 68,637 1.5 63,467 1.4 60,995 1.6 77,448 2.2 84,827 2.5 Washington 64,796 1.4 55,812 1.3 40,558 1.1 37,294 1.0 29,057 .8 Pennsylvania 59,859 1.3 53,355 1.2 43,223 1.1 30,372 .8 38,716 1.1 Ohio 47,396 1.0 47,851 1.1 37,603 1.0 15,192 .4 11,229 .3 Michigan 46,548 1.0 45,784 1.0 46,239 1.2 10,391 .3 11,486 .3 Massachusetts 44,300 1.0 45,233 1.0 17,658 .5 6,371 .2 6,694 .2 Minnesota 42,144 .9 32,866 .7 23,347 .6 30,880 .9 17,146 .5 South Carolina 40,674 .9 26,402 .6 27,163 .7 13,792 .4 15,451 .5 Alabama 39,514 .9 38,147 .8 38,604 1.0 43,126 1.2 53,700 1.6 New York 38,794 .8 40,532 .9 27,700 .7 13,014 .4 16,725 .5 North Carolina 31,601 .7 23,260 .5 19,683 .5 20,404 .6 22,277 .7 Indiana 27,191 .6 25,048 .5 13,652 .3 7,556 .2 6,092 .2 Tennessee 22,247 .5 23,194 .5 20,434 .5 24,256 .7 31,831 .9 Other States 164,779 3.7 175,396 4.0 161,802 4.2 177,793 5.0 188,369 5.5 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- $4,596,685 100.0% $4,433,827 100.0% $3,851,023 100.0% $3,590,528 100.0% $3,416,926 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
12 The following table presents the composition of the Corporation's total real estate portfolio (excluding mortgage-backed securities and before any reduction for unamortized discounts (net of premiums), undisbursed loan proceeds, deferred loan fees and allowance for loan losses) by state and property type at June 30, 1996:
Residential Multi- Land Sub Commercial % of State 1-4 Units Family Loans FHA/VA Total Loans Total Total ------------ ---------- -------- ------- --------- ---------- ----------- ------ ----- (Dollars in Thousands) -------------------------------------------------------------------------------------------- Nebraska $ 775,847 $ 9,865 $ 3,420 $ 57,129 $ 846,261 $ 83,721 $ 929,982 20.2% Colorado 717,519 13,690 2,448 20,517 754,174 89,496 843,670 18.3 Kansas 272,029 55 454 46,161 318,699 31,549 350,248 7.6 Georgia 204,675 -- -- 10,079 214,754 3,203 217,957 4.7 Oklahoma 183,206 2,527 -- 19,203 204,936 7,532 212,468 4.6 Texas 169,397 9,903 -- 20,999 200,299 3,703 204,002 4.4 Missouri 146,107 555 -- 17,869 164,531 5,501 170,032 3.7 California 131,447 8 -- 13,879 145,334 6,078 151,412 3.3 Virginia 108,911 -- -- 14,895 123,806 -- 123,806 2.7 New Jersey 112,723 -- -- 1,101 113,824 -- 113,824 2.5 Maryland 97,241 -- -- 14,911 112,152 -- 112,152 2.4 Florida 84,576 -- -- 13,321 97,897 13,795 111,692 2.4 Iowa 61,148 3,746 -- 11,215 76,109 4,711 80,820 1.8 Nevada 66,885 -- 8,260 5,098 80,243 381 80,624 1.8 Illinois 68,482 -- -- 11,088 79,570 -- 79,570 1.7 Connecticut 75,835 -- -- 111 75,946 -- 75,946 1.7 Arizona 52,041 -- -- 10,623 62,664 5,973 68,637 1.5 Washington 57,943 -- -- 6,853 64,796 -- 64,796 1.4 Pennsylvania 58,243 -- -- 1,616 59,859 -- 59,859 1.3 Ohio 41,089 -- -- 6,307 47,396 -- 47,396 1.0 Michigan 45,277 -- -- 1,271 46,548 -- 46,548 1.0 Massachusetts 43,653 -- -- 229 43,882 418 44,300 1.0 Minnesota 37,391 -- -- 4,753 42,144 -- 42,144 .9 South Carolina 36,822 -- -- 2,852 39,674 1,000 40,674 .9 Alabama 32,251 -- -- 7,263 39,514 -- 39,514 .9 New York 37,438 -- -- 571 38,009 785 38,794 .8 North Carolina 26,871 -- -- 4,730 31,601 -- 31,601 .7 Indiana 22,439 -- -- 4,752 27,191 -- 27,191 .6 Tennessee 17,615 -- -- 4,632 22,247 -- 22,247 .5 Other States 139,417 -- 13,541 152,958 11,821 164,779 3.7 ---------- ------- -------- ---------- -------- ---------- ----- Total $3,924,518 $40,349 $14,582 $347,569 $4,327,018 $269,667 $4,596,685 100.0% ========== ======= ======= ======== ========== ======== ========== ===== % of Total 85.4% .9% .3% 7.5% 94.1% 5.9% 100.0% ========== ======= ======= ======== ========== ======== ==========
13 Contractual Principal Repayments. The following table sets forth certain - --------------------------------- information at June 30, 1996, regarding the dollar amount of all loans and mortgage-backed securities maturing in the Corporation's portfolio based on contractual terms to maturity but does not include scheduled payments or an estimate of possible prepayments. Demand loans (loans having no stated schedule of repayments and no stated maturity) and overdrafts are reported as due in one year or less. Since prepayments significantly shorten the average life of mortgage loans and mortgage-backed securities, management believes that the following table will bear little resemblance to what will be the actual repayments of the loan and mortgage-backed securities portfolios. Loan balances have not been reduced for (i) unamortized discounts (net of premiums), undisbursed loan proceeds, deferred loan fees and allowance for loan losses or (ii) nonperforming loans.
- -------------------------------------------------------------------------------- Due During the Year Ended June 30, -------------------------------------------- - -------------------------------------------------------------------------------- 1998- After 1997 2001 2001 Total -------- ---------- ---------- ---------- Principal Repayments (In Thousands) - -------------------- Real estate loans: Single-family residential (1) Fixed-rate $ 74,549 $ 345,800 $1,760,100 $2,180,449 Adjustable-rate 28,292 138,224 1,739,016 1,905,532 Multi-family residential, land and commercial real estate Fixed-rate 18,177 37,135 44,505 99,817 Adjustable-rate 17,298 66,642 127,859 211,799 -------- ---------- ---------- ---------- 138,316 587,801 3,671,480 4,397,597 -------- ---------- ---------- ---------- Construction loans: Fixed-rate 80,269 3,313 -- 83,582 Adjustable-rate 115,506 -- -- 115,506 -------- ---------- ---------- ---------- 195,775 3,313 -- 199,088 -------- ---------- ---------- ---------- Mortgage-backed securities: Fixed-rate 37,716 192,330 158,038 388,084 Adjustable-rate 12,166 54,213 716,793 783,172 -------- ---------- ---------- ---------- 49,882 246,543 874,831 1,171,256 -------- ---------- ---------- ---------- Consumer and other loans: Fixed-rate 75,019 260,384 -- 335,403 Adjustable-rate 6,025 16,462 -- 22,487 -------- ---------- ---------- ---------- 81,044 276,846 -- 357,890 -------- ---------- ---------- ---------- Principal repayments $465,017 $1,114,503 $4,546,311 $6,125,831 ======== ========== ========== ========== - --------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans. 14 Scheduled contractual principal repayments do not reflect the actual maturities of such assets. The average maturity of loans is substantially less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Corporation the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan rates. Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management" in the Annual Report. The following table sets forth the amount of all loans and mortgage-backed securities due after June 30, 1997, which have fixed interest rates and those which have adjustable interest rates. Such loans and mortgage-backed securities have not been reduced for (i) unamortized discounts (net of premiums), undisbursed loan proceeds, deferred loan fees and allowance for loan losses or (ii) nonperforming loans.
- -------------------------------------------------------------------------------- Adjustable Fixed-Rate Rate Total ---------- ---------- ---------- (In Thousands) Real estate loans: Single-family residential $2,105,900 $1,877,240 $3,983,140 Multi-family residential, land and commercial 81,640 194,501 276,141 Construction loans 3,313 -- 3,313 Mortgage-backed securities 350,368 771,006 1,121,374 Consumer and other loans 260,384 16,462 276,846 ---------- ---------- ---------- Principal repayments due after June 30, 1997 $2,801,605 $2,859,209 $5,660,814 ========== ========== ========== - --------------------------------------------------------------------------------
LOAN ORIGINATIONS - ----------------- Residential Loans. The Corporation, through its 98 branch network and CFMC's - ------------------ loan offices and nationwide correspondent network, originates and purchases both fixed-rate and adjustable-rate mortgage loans secured by single-family units. Such residential mortgage loans are either (i) FHA/VA loans which qualify for sale in the form of securities guaranteed by GNMA, (ii) conventional mortgage loans which comply with the requirements for sale to, or conversion into securities issued by, FNMA or FHLMC ("conventional conforming loans") or (iii) mortgage loans which exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise generally comply with FNMA and FHLMC loan requirements ("conventional nonconforming loans"). The Corporation originates substantially all conventional conforming loans or conventional nonconforming loans (collectively, "conventional loans") with loan-to-value ratios at or below 80.0% unless the borrower obtains private mortgage insurance, at the borrower's own expense, for the Corporation's benefit covering that portion of the loan in excess of 80.0% of the appraised value. Occasional exceptions to the 80.0% loan- to-value ratio for conventional loans are made for loans to facilitate the resolution of nonperforming assets. 15 Fixed-rate residential mortgage loans generally are originated with terms of 15 and 30 years and are amortized on a monthly basis with principal and interest due each month. Adjustable-rate residential mortgage loans generally are also originated with terms of 15 and 30 years. However, certain adjustable-rate loans contain provisions which permit the borrower, at the borrower's option, to convert at certain periodic intervals over the life of the loan to a long-term fixed-rate loan. The adjustable-rate loans currently have interest rates which are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various indices, including the Treasury Constant Maturity Index or the Eleventh District Federal Home Loan Bank Board Cost of Funds Index. The amount of any such interest rate increase is limited to one or two percentage points annually and four to six percentage points over the life of the loan. Certain adjustable- rate loans are also offered which have interest rates fixed over annual periods ranging from two through seven years, and also ten year loans, with such loans repricing annually after the fixed interest-rate term. In order to encourage public acceptance of adjustable-rate loans, such loans are currently offered at initial rates below the fully indexed rate, which is a common practice in the Corporation's market area. Residential Construction Loans. In years prior to 1993, the Corporation was not - ------------------------------- actively pursuing construction loans, but provided interim construction financing that was tied to permanent real estate mortgage loans. After fiscal year 1993, and especially the last two fiscal years, the Corporation's single- family residential construction lending activity has increased primarily as a result of the construction lending operations conducted by Railroad and continued by the Corporation after the October 1995 acquisition of Railroad. During fiscal years 1996, 1995 and 1994, the Corporation originated $206.4 million, $216.2 million and $63.4 million, respectively, of residential construction loans. The Corporation conducts its single-family residential construction lending operations predominantly in its primary five-state market area and Las Vegas, Nevada. Such lending operations, which loans are subject to prudent credit review and other underwriting standards and procedures, are not expected to constitute any greater portion of the Corporation's lending business in the future than in fiscal year 1996. Commercial Real Estate and Land Loans. The Corporation originated commercial - -------------------------------------- real estate loans totaling $45.2 million, $29.4 million and $18.0 million, respectively, during fiscal years 1996, 1995 and 1994. Commercial real estate lending may entail significant additional risks compared with residential real estate lending. These additional risks are due to larger loan balances which are more sensitive to economic conditions, business cycle downturns and construction related risks. The payment of principal and interest due on the Corporation's commercial real estate loans is substantially dependent upon the performance of the projects securing such loans. As an example, to the extent that the occupancy and rental rates are not high enough to generate the income necessary to make such payments, the Corporation could experience an increased rate of delinquency and could be required either to declare such loans in default and foreclose upon such properties or to make concessions on the terms of the repayment of such loans. See "Asset Quality" herein. The aggregate amount of loans which a federal savings institution may make on the security of liens on nonresidential real property may not exceed 400.0% of the institution's total risk-based capital as determined under current regulatory capital standards. Such limitation totaled approximately $1.843 billion at June 30, 1996. This restriction has not and is not expected to materially affect the Corporation's business. Consumer Loans. Federal regulations permit federal savings institutions to make - --------------- secured and unsecured consumer loans up to 30.0% of an institution's total regulatory assets. In addition, a federal savings institution has lending authority above the 30.0% category for certain consumer loans, such as home equity loans, property improvement loans, mobile home loans and savings account secured loans. During fiscal years 1996, 1995 and 1994, the Corporation originated $276.5 million, $164.5 million and $157.7 million, respectively, of consumer loans. Consumer loans originated by the Corporation are primarily second mortgage loans, loans to depositors on the security of their savings accounts and loans secured by automobiles. The Corporation has increased its secured consumer lending activities in order to meet its customers' financial needs and will continue to emphasize such lending activities in the future in its primary market areas. 16 Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Corporation, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. Bulk Loan Purchases. Between January 1991 and June 30, 1992, as part of its - -------------------- balance sheet restructuring, the Corporation purchased 71 whole loan packages, the majority of which was from the Resolution Trust Corporation ("RTC"), comprised of 46,500 loans primarily collateralized by single-family residential properties with principal balances aggregating $2.5 billion. These purchased loans had a weighted average yield of 8.71%. At June 30, 1996, 1995 and 1994, the aggregate principal balance of these bulk purchased loans associated with such restructuring was $574.4 million, $701.9 million and $868.0 million, respectively. To supervise and coordinate the residential loan purchase program, the management of the Corporation established a loan purchase committee responsible for identifying the loan packages to review, directing the loan review process, preparing the bid or rejecting the package, facilitating the purchase and transfer of loan servicing and coordinating the put back process as necessary. Management established specific guidelines to define the types of loans management would consider for purchase, and established internal standards for underwriting and documentation for loan purchases. Management implemented procedures to analyze the credit and servicing risks of a loan package and the expected return of the loan package. Based upon both a review and analysis of the information provided by the seller with respect to each loan package and management's own due diligence review of a certain percentage (usually 5.0% to 10.0%) of the loans within a loan package, management established specific estimated allowance amounts which were allocated from the discount amounts on the loan packages. At June 30, 1996, 1995 and 1994, $12.8 million, $15.3 million and $17.3 million, respectively, of the discount amount relating to these purchased loans was allocated to an estimated allowance amount for potential credit risk associated with such bulk purchased loans. These allowances are available to absorb losses associated with the respective purchased loan packages and are not available to absorb losses from other loans. The loan purchase agreements generally provided for a 30-to-90 day period after purchase and delivery of the loan in which to identify and put back loans which did not conform to legal documentation presented by the seller. In addition, the loan purchase agreements contained representations and warranties concerning the loans in the package generally warranting, at a minimum, as of the date of sale of the loans, the accuracy of information previously disclosed by seller, and the validity, enforceability, and first lien status of the loans and the delinquency or current payment status of the loans. The Corporation's right to enforce remedies for breach of representations or warranties was generally not limited in duration except as measured from the time that a breach is discovered. Substantially all of the obligations of sellers in RTC loan sales are guaranteed by the RTC in its corporate capacity. At June 30, 1996, 1995 and 1994, $17.8 million, $17.8 million and $17.5 million, respectively, of these purchased loans were past due 90 days or more. To the extent opportunities to make similar bulk purchases of loans become available, the Corporation will consider making such purchases in the future. The Corporation also purchases loans from its correspondent network and will continue to do so in the future. During fiscal years 1996, 1995 and 1994, the Corporation purchased $286.1 million, $461.3 million and $545.8 million, respectively, of other loan packages not associated with the aforementioned restructuring efforts. 17 Loan Sales. In addition to originating loans for it's portfolio, the - ----------- Corporation, through its mortgage banking subsidiary, participates in secondary mortgage market activities by selling whole and securitized loans to institutional investors or other financial institutions with the Corporation generally retaining the right to service such loans. Substantially all of the Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC. Conventional conforming loans are either sold for cash as individual whole loans to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC which are then sold to investment banking firms. FHA/VA loans are originated or purchased by the Corporation's mortgage banking subsidiary and, either are retained for the Corporation's real estate loan portfolio, or are pooled to form GNMA securities which are subsequently sold to investment banking firms, or are sold to the Bank and retained in the Corporation's mortgage-backed securities held for investment portfolio. During fiscal years 1996, 1995 and 1994, the Corporation sold an aggregate of $667.7 million, $654.4 million and $2.0 billion, respectively, in mortgage loans resulting in net gains of $164,000 and $1.4 million, respectively, in fiscal years 1996 and 1994, and a net loss of $1.7 million in fiscal year 1995. Of the amount of mortgage loans sold during fiscal year 1996, $570.7 million were sold in the secondary market, of which 57.0% were converted into GNMA securities, 42.0% were sold directly to FNMA or FHLMC for cash or were exchanged for securities issued by FNMA or FHLMC, and the remaining were sold to other institutional investors. At June 30, 1996, the carrying value of loans held for sale totaled $89.4 million. The net gain recorded in fiscal year 1996 is attributable to the relatively stable interest rate environment and to the adoption effective July 1, 1995, of the provisions of Statement of Financial Accounting Standards No. 122 ("SFAS No. 122") entitled "Accounting for Mortgage Servicing Rights," which prescribes accounting methods that generally result in comparatively higher amounts of gains, or lower losses realized from the sales of loans. SFAS No. 122 requires capitalization of internally originated mortgage servicing rights as well as purchased mortgage servicing rights. The net effect of adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre-tax earnings approximately $4.0 million. At June 30, 1996, mortgage servicing rights totaled $45.0 million. SFAS No. 122 also requires that mortgage servicing rights be reported at the lower of cost or fair value. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to loan servicing income. No valuation allowance for capitalized servicing rights was necessary to be established as of June 30, 1996. The future effect of SFAS No. 122 is dependent, among other items, upon the volume and type of loans originated, the general levels of market interest rates and the rate of estimated loan prepayments. Accordingly, management of the Corporation is unable to predict with any reasonable certainty what effect this statement will have on the Corporation's future results of operations or its financial position. Mortgage loans are generally sold in the secondary mortgage market without recourse to the Corporation in the event of borrower default, subject to certain limitations applicable to VA loans. Historical losses realized by the Corporation as a result of limitations applicable to VA loans have been immaterial on an annual basis. However, in connection with a 1987 acquisition of a financial institution, the Bank assumed agreements providing for recourse in the event of default on obligations transferred in connection with sales of certain securities by such institution. At June 30, 1996, the remaining balance of such loans sold with recourse totaled $39.3 milllion. 18 Set forth below is a table showing the Corporation's loan and mortgage-backed securities activity for the fiscal years indicated:
- ---------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------ (In Thousands) Loans originated: Real estate loans - Residential loans (1) $ 593,488 $ 564,731 $1,453,444 Construction loans 206,364 216,191 63,419 Commercial real estate and land loans 45,214 29,381 17,967 Consumer loans 276,507 164,499 157,728 ---------- ---------- ---------- Loans originated $1,121,573 $ 974,802 $1,692,558 ========== ========== ========== Loans purchased: Conventional mortgage loans - Residential loans 607,878 $ 604,958 $1,548,977 Bulk loan purchases 286,066 461,299 545,823 Commercial loans -- 942 -- Mortgage-backed securities 50,197 11,504 214,811 ---------- ---------- ---------- Loans purchased $ 944,141 $1,078,703 $2,309,611 ========== ========== ========== Loans securitized: Conventional mortgage loans securitized into mortgage-backed securities $ 63,445 $ 189,031 $ 605,490 ========== ========== ========== Acquisitions: Residential real estate loans $ 138,679 $ 101,067 $ 771 Consumer loans 27,599 12,173 19,027 Mortgage-backed securities 82,580 42,648 -- ---------- ---------- ---------- Loans from acquisitions $ 248,858 $ 155,888 $ 19,798 ========== ========== ========== Loans sold: Conventional mortgage loans $ 667,683 $ 654,439 $1,958,394 Mortgage-backed securities 178,580 40,815 20,601 ---------- ---------- ---------- Loans sold $ 846,263 $ 695,254 $1,978,995 ========== ========== ========== - -------------------------------------------------------------------------------
(1) Includes single-family and multi-family residential loans and FHA and VA loans. In addition, includes loans refinanced of $176,520, $32,564 and $359,135 for fiscal years 1996, 1995 and 1994, respectively. 19 Loan Servicing. The Corporation, through its mortgage banking subsidiary, - --------------- services substantially all of the mortgage loans that it originates and purchases (whether retained for the Bank's portfolio or sold in the secondary market), thereby generating ongoing loan servicing fees. The Corporation also periodically purchases mortgage servicing rights. At June 30, 1996, the Bank's mortgage banking subsidiary was servicing approximately 107,800 loans and participations for others with principal balances aggregating $5.9 billion, compared to 93,100 loans with principal balances totaling $5.2 billion at June 30, 1995. At June 30, 1996, adjustable-rate mortgage loans represented 21.2% of the aggregate dollar amount of loans in the servicing portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General," -- "Loan Servicing Fees" and -- "Note 24 - Segment Information" in the Annual Report for information pertaining to revenue from servicing loans for others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow (impound funds) for payment of taxes and insurance, making inspections as required of the mortgage premises, collecting amounts due from delinquent mortgagors, supervising foreclosures in the event of unremedied defaults and generally administering the loans for the investors to whom they have been sold. The Corporation receives fees for servicing mortgage loans for others, ranging generally from .25% to .50% per annum on the declining principal balances of the loans. The average service fee collected by the Corporation was .42% for fiscal years 1996 and 1995. The Corporation's servicing portfolio is subject to reduction primarily by reason of normal amortization and prepayment of outstanding mortgage loans. In general, the value of the Corporation's loan servicing portfolio may also be adversely affected as mortgage interest rates decline and loan prepayments increase. It is expected that income generated from the Corporation's loan servicing portfolio also will decline in such an environment. This negative effect on the Corporation's income may be offset somewhat by a rise in origination and servicing fee income attributable to new loan originations, which historically have increased in periods of low mortgage interest rates. The weighted average mortgage loan note rate of the Corporation's servicing portfolio at June 30, 1996, was 7.90% compared to 7.76% (excluding the effect of Railroad) at June 30, 1995. At June 30, 1996, 95.0% of the Corporation's mortgage servicing portfolio for other institutions was covered by servicing agreements pursuant to the mortgage- backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the Corporation may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Corporation cannot charge any interest on such advance funds, the Corporation typically recovers the advances within a reasonable number of days upon receipt of the borrower's payment, or in the absence of such payment, advances are recovered through FHA insurance or VA guarantees or FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. During fiscal year 1996, the average amount of funds advanced by the Corporation pursuant to servicing agreements was approximately $1.5 million. Interest Rates and Loan Fees. Interest rates charged by the Corporation on its - ----------------------------- loans are primarily determined by secondary market yield requirements and competitive loan rates offered in its lending areas. Nebraska, Iowa and Oklahoma law do not provide an interest rate limitation on loans secured by real estate, however, such states do impose various limitations on the interest rate which may be charged on installment and personal loans made to non-corporate borrowers. Generally, interest rates on these loans are limited in Nebraska as follows: (i) 19.0% for unsecured loans made for the purpose of property alterations or repairs and for loans made in accordance with the provisions of Titles I or II of the National Housing Act, and (ii) 16.0% for loans to individuals providing such loans are not secured by real estate, total less than $25,000 and are not home improvement loans. Oklahoma and Iowa laws generally limit interest rates charged on installment and personal loans made to non- corporate borrowers to 21.0%, although loans in excess of $45,000 and $25,000, respectively, are not subject to any interest rate limitation. Colorado statutory usury limitations prohibit the Corporation from contracting for payment by the debtor of any loan finance charge in excess of a 45.0% annual percentage rate when the loan is secured by a first lien against real estate or is for a business or commercial purpose. Colorado usury limitations also restrict the Corporation for all other loans, excluding business or commercial purpose loans, from contracting for payment by the debtor of any loan finance charge in excess of a 21.0% annual percentage 20 rate. Kansas law limits the interest rate on fixed-rate non-business loans secured by real estate to an index based on FHLMC securities, while interest rates imposed on variable rate mortgages are generally not limited. Kansas law imposes various interest rate limitations on consumer loans of $25,000 or less which are generally limited to 18.0% per annum. In addition to interest earned on loans, the Corporation receives loan origination fees for originating certain loans. These fees are a percentage of the principal amount of the mortgage loan and are charged to the borrower. Loan Commitments. At June 30, 1996, the Corporation had issued commitments of - ----------------- $173.6 million, excluding undisbursed portion of loans in process, to fund and purchase loans. These commitments are generally expected to settle within three months following June 30, 1996. These outstanding loan commitments to extend credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn. The Corporation anticipates that normal amortization and prepayments of loan and mortgage-backed security principal will be sufficient to fund these loan commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in the Annual Report. Collection Procedures. If a borrower fails to make required payments on a loan, - ---------------------- the Corporation generally will take immediate action to satisfy its claim against the security for the loan. If a delinquency cannot otherwise be cured, the Corporation records a notice of default and commences foreclosure proceedings. When a trustee sale is held, the Corporation generally acquires title to the property. The property may then be sold for cash or with financing conforming to normal loan requirements, or it may be sold or financed with a "loan to facilitate" involving terms more favorable to the borrower than those permitted by applicable regulations for new loans. 21 ASSET QUALITY - ------------- Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a - --------------------- nonaccruing status when, in the opinion of management, the collection of additional interest is doubtful. Loans are placed on a nonaccruing status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on nonaccruing status is charged against interest income. Subsequent payments are applied to the outstanding principal balance until such time as the loan is removed from nonaccruing status. Real estate acquired by the Corporation as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. Such property is stated at the lower of cost or fair value, minus estimated costs to sell. Valuation allowances for estimated losses on real estate are subsequently provided when the carrying value exceeds the fair value minus estimated costs to sell the property. In certain circumstances the Corporation does not immediately foreclose when a delinquency is not cured promptly, particularly when the borrower does not intend to abandon the collateral, since by not foreclosing the risk of ownership would still be retained by the borrower. The evaluation of borrowers and collateral may involve determining that the most economic way to reduce the Corporation's risk of loss may be to allow the borrower to remain in possession of the property and to restructure the debt as a troubled debt restructuring. In these circumstances, the Corporation would strive to ensure that the borrower's continued participation in and management of the collateral does not put the Corporation at further risk of loss. In situations in which the borrower is not performing under the restructured terms, foreclosure proceedings are commenced when legally allowable. A troubled debt restructuring is a loan on which the Corporation, for reasons related to the debtor's financial difficulties, grants a concession to the debtor, such as a reduction in the loan's interest rate, a reduction in the face amount of the debt, or an extension of the maturity date of the loan, that the Corporation would not otherwise consider. The Corporation's nonperforming assets totaling $66.5 million increased by $3.8 million, or 6.1%, at June 30, 1996, compared to June 30, 1995, primarily as a result of net increases of $5.6 million in nonperforming loans and $1.3 million in real estate offset by a net decrease of $3.1 million in troubled debt restructurings. 22 The following table sets forth information with respect to the Bank's nonperforming assets at June 30 as follows:
- -------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------- (Dollars in Thousands) Loans accounted for on a nonaccruing basis: (1) Real estate - Residential $34,660 $30,784 $27,470 $ 29,888 $ 33,871 Commercial 2,357 773 5,613 1,377 11,937 Consumer 888 701 409 322 100 ------- ------- ------- -------- -------- Total 37,905 32,258 33,492 31,587 45,908 ------- ------- ------- -------- -------- Accruing loans which are contractually past due 90 days or more - -- -- -- -- ------- ------- -------- -------- Total nonperforming loans 37,905 32,258 33,492 31,587 45,908 ------- ------- ------- -------- -------- Real estate: (2) Commercial 8,850 8,795 16,869 23,808 53,035 Residential 4,986 3,784 4,566 6,519 8,517 ------- ------- ------- -------- -------- Total 13,836 12,579 21,435 30,327 61,552 ------- ------- ------- -------- -------- Troubled debt restructurings: (3) Commercial 13,894 16,566 19,455 39,852 40,322 Residential 909 1,294 1,580 2,164 3,233 ------- ------- ------- -------- -------- Total 14,803 17,860 21,035 42,016 43,555 ------- ------- ------- -------- -------- Nonperforming assets $66,544 $62,697 $75,962 $103,930 $151,015 ======= ======= ======= ======== ======== Nonperforming loans to total loans (4) .78% .70% .83% .80% 1.29% Nonperforming assets to total assets 1.01% .95% 1.27% 1.97% 3.00% - -------------------------------------------------------------------------------------------- Allowance for loan losses: Other loans $36,513 $33,261 $27,530 $ 24,637 $ 20,973 Bulk purchased loans (5) 12,765 15,280 17,321 22,271 29,731 ------- ------- ------- -------- -------- Total $49,278 $48,541 $44,851 $ 46,908 $ 50,704 ======= ======= ======= ======== ======== Allowance for bulk purchased loan losses to bulk purchased loans (5) 2.22% 2.18% 2.00% 1.69% 1.88% Allowance for loan losses (other loans) to total loans (less bulk purchased loans) .85% .86% .87% 1.02% 1.07% Allowance for loan losses to total loans (4) 1.01% 1.06% 1.11% 1.26% 1.43% Allowance for loan losses to total nonperforming assets 74.05% 77.42% 59.04% 45.13% 33.58% Allowance for loan losses (other loans) to total nonperforming loans (less nonperforming bulk purchased loans) (6) 182.0% 230.1% 171.61% 183.16% 74.29% - --------------------------------------------------------------------------------------------
(Continued on next page) 23 (1) During fiscal years 1996, 1995 and 1994, the Corporation did not record any interest income on these nonaccruing loans. Had these loans been current in accordance with their original terms and outstanding throughout this fiscal year or since origination, the Corporation would have recorded gross interest income on these loans of $2.2 million, $1.9 million and $2.0 million, respectively. Gross interest income has not been restated for fiscal years 1995 and 1994 for the effect of the Railroad merger which was accounted for as a pooling of interests. Such restatement would not be material. (2) Real estate as a component of nonperforming assets does not include performing real estate held for investment, which totaled $2.8 million, $4.2 million and $2.9 million, respectively, at June 30, 1996, 1995 and 1994. (3) During fiscal years 1996, 1995 and 1994, the Corporation recognized interest income on these loans classified as troubled debt restructurings aggregating $1.7 million, $2.0 million and $1.8 million, respectively, whereas under their original terms the Corporation would have recognized interest income of $1.5 million, $1.9 million and $2.2 million, respectively. At June 30, 1996, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. (4) Based on the total balance of loans receivable (before any reduction for unamortized discounts (net of premiums, undisbursed loan proceeds, deferred loan fees and allowance for loan losses) at the respective dates. (5) At June 30, 1996, 1995 and 1994, $12.8 million, $15.3 million and $17.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans is included in the total allowance for loan losses to provide for the credit risk associated with these bulk purchased loans, which had balances of $574.4 million, $701.9 million and $868.0 million, respectively, at June 30, 1996, 1995 and 1994. These allowances are available only to absorb losses associated with the respective bulk purchased loans and are not available to absorb losses from other loans. (6) Nonperforming bulk purchased loans approximating $17.8 million, $17.8 million and $17.5 million, respectively, at June 30, 1996, 1995 and 1994, and the allowance for loan losses associated with the total bulk purchased loans, have been excluded from this calculation since these allowances are not available to absorb the losses associated with other loans in the portfolio. - -------------------------------------------------------------------------------- For a discussion of the major components of the $3.8 million increase in nonperforming assets during the fiscal year ended June 30, 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Loan Losses and Real Estate Operations" in the Annual Report. 24 The geographic concentration of nonperforming loans at June 30 was as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------- (In Thousands) State - ----- California $ 4,624 $ 3,758 $ 3,966 $ 2,802 $ 5,077 Georgia 3,389 2,559 2,355 3,273 2,870 Texas 3,290 3,601 4,417 3,377 3,408 Colorado 2,789 2,794 5,016 2,260 10,078 Nebraska 2,352 2,037 1,551 2,237 3,607 Missouri 2,018 1,864 1,720 2,334 2,991 Kansas 2,012 469 1,022 1,407 2,230 Maryland 1,548 743 613 -- 140 Oklahoma 1,496 1,019 541 609 1,189 Illinois 1,158 1,234 1,502 1,976 1,835 New Jersey 1,069 1,680 1,361 793 1,003 Florida 891 1,553 1,148 1,268 2,355 Virginia 880 446 790 552 332 Connecticut 739 643 37 385 594 Pennsylvania 663 715 823 967 388 Washington 647 745 841 465 376 New York 447 855 407 366 189 Arizona 411 539 569 2,061 160 Indiana 238 411 145 113 9 North Carolina 205 455 237 220 178 Other states 7,039 4,138 4,431 4,122 6,899 ------- ------- ------- ------- ------- Nonperforming loans $37,905 $32,258 $33,492 $31,587 $45,908 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------
Nonperforming loans at June 30, 1996, consisted of 1,015 loans with an average balance of $37,345. Nonperforming loans totaling $37.9 million at June 30, 1996, consisted of $2.4 million (5 loans) collateralized by commercial real estate, $32.1 million (717 loans) collateralized by residential real estate, $2.5 million (21 loans) collateralized by residential construction real estate and $888,000 (272 loans) of consumer loans. 25 The geographic concentration of nonperforming real estate at June 30 was as follows:
- -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (In Thousands) State ----- Colorado $ 6,011 $ 6,823 $ 4,027 $ 8,871 $17,390 Nebraska 5,356 5,770 6,868 8,241 8,727 Texas 1,608 999 8,323 8,772 20,712 Oklahoma 384 391 1,348 1,016 561 Florida 312 197 115 551 535 New Jersey 270 280 90 -- -- California 187 109 64 -- 1,979 Georgia 187 510 2,549 2,888 3,741 Missouri 125 262 219 -- -- Pennsylvania 116 326 351 362 555 Iowa 108 129 248 653 4,083 Kansas 36 47 138 1,664 1,887 Tennessee -- 119 -- 23 -- Other states 2,063 624 1,484 774 3,696 Unallocated reserves (2,927) (4,007) (4,389) (3,488) (2,314) ------- ------- ------- ------- ------- Nonperforming real estate $13,836 $12,579 $21,435 $30,327 $61,552 ======= ======= ======= ======= ======= - --------------------------------------------------------------------------------
At June 30, 1996, total commercial real estate was $8.8 million (15 properties) or 63.5% of the $13.8 million in total nonperforming real estate (consisting of 90 properties), and the remaining $5.0 million (75 properties) consisted of residential real estate. The Corporation's commercial real estate at June 30, 1996, is located primarily in Colorado and Nebraska. 26 Classification of Assets. Savings institutions are required to review their - ------------------------- assets on a regular basis and, as warranted, classify them as "substandard," "doubtful," or "loss as defined by OTS regulations." Adequate general valuation allowances are required to be established for assets classified as substandard or doubtful. If an asset is classified as a loss, the institution must either establish a specific valuation allowance equal to the amount classified as loss or charge off such amount. An asset which does not currently warrant classification as substandard but which possesses credit deficiencies or potential weaknesses deserving close attention is required to be designated as "special mention." In addition, a savings institution is required to set aside adequate valuation allowances to the extent that any affiliate possesses assets which pose a risk to the savings institution. The OTS has the authority to approve, disapprove or modify any asset classification or any amount established as an allowance pursuant to such classification. Based on a review of the Corporation's portfolio at June 30, 1996, pursuant to reporting on the quarterly thrift financial report, the Corporation had $24.6 million in assets classified as special mention, $61.8 million in assets classified as substandard, no assets classified as doubtful or as loss. As required, specific valuation allowances have been established in an amount equal to 100.0% of all assets classified as loss. Substantially all nonperforming assets at June 30, 1996, are classified as either substandard or loss pursuant to applicable asset classification standards. Of the Corporation's loans which were not classified at June 30, 1996, there were no loans where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms. Loan and Real Estate Review Policy. Management of the Corporation has the - ----------------------------------- responsibility of establishing policies and procedures for the timely evaluation of the credit risk in the Corporation's loan and real estate portfolios. Management is also responsible for the determination of all specific and general provisions for loan and real estate losses, taking into consideration a number of factors, including changes in the composition of the Corporation's loan portfolio and real estate balances, current economic conditions, including real estate market conditions in the Corporation's lending areas, that may affect the borrower's ability to make payments on loans, regular examinations by the Corporation's credit review group of the quality of the overall loan and real estate portfolios, and regular review of specific problem loans and real estate. See "Nonperforming Assets." Management also has the responsibility of ensuring timely charge-offs of loan and real estate balances, as appropriate, when general and economic conditions warrant a change in the value of these loans and real estate. To ensure that credit risk is properly and timely monitored, this responsibility has been delegated to a credit review group which consists of key personnel of the Corporation knowledgeable in the specific areas of loan and real estate valuation. The objectives of the credit review group are (i) to define the risk of collectibility of the Corporation's loans and the likelihood of liquidation of real estate and other assets and their book value, (ii) to identify problem assets at the earliest possible time, (iii) to assure an adequate level of allowances for possible losses to cover identified and anticipated credit risks, (iv) to monitor the Corporation's compliance with established policies and procedures, and (v) to provide the Corporation's management with information obtained through the asset review process. This credit review group analyzes all significant loans and real estate of the Corporation for appropriate levels of reserves on these assets based on varying degrees of loan or real estate value weakness. Accordingly, these types of loans and real estate are assigned a credit risk rating ranging from one (excellent) to six (loss). Loans and real estate with minimal credit risk (not adversely classified or with a credit risk rating of one to four) generally have general reserves established on the basis of the Corporation's historical loss experience. Loans and real estate adversely classified (substandard, loss or with a credit risk rating of five or six) generally have greater levels of general reserves similarly established on the basis of the Corporation's historical loss experience, as well as specific reserves established as applicable to recognize permanent declines in the value of loans or real estate. 27 It is management's responsibility to maintain a reasonable allowance for loan losses applicable to all categories of loans through periodic charges to operations. The Corporation employs a systematic methodology to determine the amount of general loan losses, in addition to specific valuation allowances, to be recorded as a percentage of the respective loan balances as follows:
- -------------------------------------------------------------------------------- General Loan Loss Type of Loan and Status Percentage ----------------------- ---------- Residential real estate loans: Current .25% 90 days delinquent (or classified substandard) 7.50 Residential construction loans: Current 1.00 90 days delinquent 12.50 Commercial real estate loans: Current 1.00 Classified special mention 2.00 90 days delinquent (or classified substandard) 10.00 Consumer loans: Current .50 Classified substandard and 90 days delinquent 20.00 120 days delinquent 100.00 - --------------------------------------------------------------------------------
As appropriate, management of the Corporation attempts to ensure that the Corporation's reserves are in general compliance with previously established regulatory examination guidelines. Allowance for Losses on Loans. The allowance for loan losses is based upon - ------------------------------ management's continuous evaluation of the collectibility of outstanding loans, which takes into consideration such factors as changes in the composition of the loan portfolio and economic conditions that may affect the borrower's ability to pay, regular examinations by the Corporation's credit review group of specific problem loans and of the overall portfolio quality and real estate market conditions in the Corporation's lending areas. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Loan Losses and Real Estate Operations" in the Annual Report. The Corporation's policy is to charge-off loans or portions thereof against the allowance for loan losses in the period in which loans or portions thereof are determined to be uncollectible. A majority of the Corporation's loans are collateralized by residential or commercial real estate. Therefore, the collectibility of such loans is susceptible to changes in prevailing real estate market conditions and other factors which can cause the fair value of the collateral to decline below the loan balance. When the Corporation records charge-offs on these loans, it also begins the foreclosure process of taking possession of the real estate which served as collateral for such loans. Recoveries of loan charge-offs generally occur only when the loan deficiencies are completely cured. Upon foreclosure and conversion of the loan into real estate owned, the Corporation may realize a credit to real estate operations through the disposition of such real estate when the sale proceeds exceed the value of the real estate. Although management believes that the Corporation's allowance for loan losses is adequate to reflect the risk inherent in its portfolios, there can be no assurance that the Corporation will not experience increases in its nonperforming assets, that it will not increase the level of its allowances in the future or that significant provisions for losses will not be required based on factors such as deterioration in market conditions, changes in borrowers' financial conditions, delinquencies and defaults. In addition, regulatory agencies review the adequacy of the allowance for losses on loans on a regular basis as an integral part of their examination process. Such agencies may require additions to the allowance based on their judgments of information available to them at the time of their examination. 28 The following table sets forth the activity in the Bank's allowance for loan losses for the fiscal years ended June 30 as indicated: - --------------------------------------------------------------------------------
1996 1995 1994 1993 1992 -------- -------- -------- -------- --------- (Dollars in Thousands) Allowance for losses on loans at beginning of year $48,541 $44,851 $46,908 $50,704 $ 54,605 ------- ------- ------- ------- -------- Loans charged-off: Single-family residential (1,130) (1,171) (940) (1,475) (1,848) Multi-family residential and commercial real estate (210) (842) (2,083) (1,264) (6,098) Consumer (4,193) (1,758) (1,075) (1,043) (2,151) ------- ------- ------- ------- -------- Loans charged-off (5,533) (3,771) (4,098) (3,782) (10,097) ------- ------- ------- ------- -------- Recoveries: Single-family residential 20 64 147 -- -- Multi-family residential and commercial real estate 46 815 164 857 -- Consumer 668 455 432 404 760 ------- ------- ------- ------- -------- Recoveries 734 1,334 743 1,261 760 ------- ------- ------- ------- -------- Net loans charged-off (4,799) (2,437) (3,355) (2,521) (9,337) Provision charged to operations 6,107 6,408 6,248 6,185 7,981 ------- ------- ------- ------- -------- Railroad activity for the six months ended June 30, 1994 -- (58) -- -- -- Allowances from acquisitions 1,944 1,818 -- -- -- Estimated allowance net for bulk purchased loans (1) -- -- 39 173 17,268 Change in estimate of allowance for bulk purchased loans (1)(2) (2,273) (1,705) (4,357) (5,334) (18,728) Charge off to allowance for bulk purchased loans (1) (242) (336) (632) (2,299) (1,085) ------- ------- ------- ------- -------- Allowance for losses on loans at end of year $49,278 $48,541 $44,851 $46,908 $ 50,704 ======= ======= ======= ======= ======== - ---------------------------------------------------------------------------------------- Ratio of net loans charged-off to average loans outstanding during the year .10% .07% .11% .13 % .33% - ----------------------------------------------------------------------------------------
(1) At June 30, 1996, 1995 and 1994, $12.8 million, $15.3 million and $17.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans, was included in the total allowance for loan losses. Such bulk purchased loans had balances of $574.4 million, $701.9 million and $868.0 million, respectively, at June 30, 1996, 1995 and 1994. These allowances are available only to absorb losses associated with the respective bulk purchased loans and are not available to absorb losses from other loans. (2) Consists of changes in estimates of allowance amounts for bulk purchased loans resulting from the securitization of these bulk purchased loans into mortgage-backed securities or from loan principal payoffs such that these allowance amounts either will be amortized into income as a yield adjustment over the respective remaining lives of the related mortgage- backed securities or accreted directly to interest income on payoffs of purchased loans. 29 INVESTMENT ACTIVITIES - --------------------- The Corporation is required by federal regulations to maintain average daily balances of liquid assets (defined as U.S. Treasury and other governmental agency obligations, cash, deposits maintained pursuant to Federal Reserve Board requirements, time and savings deposits in certain institutions, obligations of states and political subdivisions thereof, shares in mutual funds with certain restricted investment policies, highly rated corporate debt, and mortgage loans and mortgage related securities with less than one year to maturity or subject to purchase within one year) equal to the monthly average of not less than a specified percentage (currently 5.0%) of its net withdrawable savings deposits plus short-term borrowings. The Corporation is also required to maintain average daily balances of short-term liquid assets at a specified percentage (currently 1.0%) of the total of net withdrawable savings accounts and borrowings payable in one year or less. The Corporation's general policy is to invest primarily in short-term liquid assets in compliance with these regulatory requirements. As of June 30, 1996, the Corporation had total average liquid assets of $378.9 million, which consisted of $39.0 million in cash, $3.6 million in federal funds and $336.3 million in agency-backed securities. The Corporation's liquidity and short-term liquidity ratios were 7.07% and 1.75%, respectively, at June 30, 1996. See "Regulation -- Liquidity Requirements." The Corporation's management objective is to maintain liquidity at a level sufficient to assure adequate funds, taking into account anticipated cash flows and available sources of credit, to allow future flexibility to meet withdrawal requests, to fund loan commitments and to make other investments. Such liquid funds are managed in an effort to produce the highest yield consistent with maintaining safety of principal and within regulations governing the thrift industry. In recent years, because of the uncertain nature of interest rates, the Corporation has deemed it prudent to purchase short-term securities. Due to the maturities on such funds, the yields tend to respond quickly to changes in the level of interest rates in the money market. The following table sets forth the carrying value of the Corporation's investment securities held to maturity and short-term cash investments at June 30: - -----------------------------------------------------------------------
1996 1995 1994 - ----------------------------------------------------------------------- (Dollars in Thousands) Investment securities held to maturity: U.S. Treasury and other Government agency obligations $213,800 $296,443 $285,397 Obligations of states and political subdivisions 18,642 -- -- Other securities 10,703 1,050 50 -------- -------- -------- Total investment securities held to maturity 243,145 297,493 285,447 Cash on deposit 2,400 6,345 5,551 -------- -------- -------- Total Investments $245,545 $303,838 $290,998 ======== ======== ======== - -----------------------------------------------------------------------
30 The following table sets forth the scheduled maturities, carrying values, market values and weighted average yields for the Corporation's investment securities held to maturity at June 30, 1996: - --------------------------------------------------------------------------------
One Year Over One Within Over Five Within More Than or Less Five Years Ten Years Ten Years Total ------------------ ------------------ ------------------ ------------------ -------------------------- Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield --------- ------- --------- ------- --------- ------- --------- ------- --------- -------- ------- (Dollars in Thousands) Investment securities held to maturity: - --------------------------- U.S. Treasury and other Government agency obligations $46,173 6.82% $167,627 5.79% $ -- --% $ -- --% $213,800 $210,236 6.01% States and political subdivisions -- -- 213 4.46 14,135 5.91 4,294 5.39 18,642 18,202 5.78 Other securities -- -- 50 6.06 -- -- 10,653 7.52 10,703 10,703 7.51 ------- ---- -------- ---- ------- ---- ------- ---- -------- -------- ---- Total $46,173 6.82% $167,890 5.79% $14,135 5.91% $14,947 6.91% $243,145 $239,141 6.06% ======= ==== ======== ==== ======= ==== ======= ==== ======== ======== ====
For further information regarding the Corporation's investment securities held to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the Annual Report. 31 SOURCES OF FUNDS - ---------------- General. Deposits have historically been the major source of the Corporation's - -------- funds for lending and other investment purposes. In addition to deposits, the Corporation derives funds from principal and interest repayments on loans and mortgage-backed securities, sales of loans, FHLB advances, prepayment and maturity of investment securities, and other borrowings. The Corporation has considered, and anticipates that it will in the future continue to consider, possible mergers with and acquisitions of other selected financial institutions. During fiscal year 1996 the Corporation consummated the merger with Railroad and the acquisition of Conservative. In addition, on May 16, 1996, the Corporation entered into a merger agreement with Heritage Financial, Ltd. See Notes 2, 3 and 27 to the Consolidated Financial Statements for additional information on these completed and pending acquisitions. Such completed and proposed acquisitions present the Corporation with the opportunity to further expand its retail network over last fiscal year in the Iowa, Kansas and Nebraska markets; and to increase its earnings potential by increasing its mortgage and consumer loan volumes funded by deposits which generally bear lower rates of interest than alternative sources of funds. The cash proceeds from the fiscal year 1994 deposit acquisitions allowed the Corporation to repay advances from the FHLB and to originate and purchase primarily single-family residential loans. Deposits. The Corporation's deposit strategy is to emphasize retail branch - --------- deposits by offering a variety of rates and deposit programs to satisfy customer needs. As such, during fiscal year 1996, NOW accounts increased $35.7 million, from $296.5 million at June 30, 1995, to $332.2 million at June 30, 1996. In addition, during fiscal year 1996 passbook accounts increased $73.6 million, from $549.9 million at June 30, 1995 to $623.5 million at June 30, 1996. Rates on deposits are priced based on investment opportunities as the Corporation attempts to control the flow of funds in its deposit accounts according to its business objectives and the cost of alternative sources of funds. Fixed-term, fixed-rate retail certificates are the primary sources of deposits for the Corporation and at June 30, 1996, represented 74.1% of the Bank's total deposits compared to 74.1% and 72.9%, respectively, at June 30, 1995 and 1994. The Corporation offers certificate accounts with terms ranging from one month to 120 months. Total deposits increased $293.3 million during fiscal year 1996 from $4.011 billion at June 30, 1995, to $4.305 billion at June 30, 1996. This increase is primarily a result of the acquisition of Conservative with deposits totaling $197.9 million and to increases in retail deposits in the Colorado and Oklahoma markets. The additional amount of the increase is attributable to (i) this larger franchise base from such acquisitions the last three fiscal years which has broadened the Corporation's retail deposit base and (ii) to an increase primarily in Colorado and Oklahoma deposits, and to a leser extent in Kansas deposits, due to increased marketing efforts and product promotion. 32 The following table sets forth the balances and percentages of the various types of deposits offered by the Corporation at the dates indicated and the change in the dollar amount of deposits between such dates:
June 30, 1996 June 30, 1995 June 30, 1994 -------------------------------- -------------------------------- -------------------- % of Increase % of Increase % of Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits ---------- -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in Thousands) Passbook accounts $ 623,505 14.5% $ 73,648 $ 549,857 13.7% $ 85,018 $ 73,925 12.9% NOW accounts 332,233 7.7 35,681 296,552 7.4 9,738 20,831 7.5 Market rate savings 159,672 3.7 (31,322) 190,994 4.8 (54,954) 245,948 6.7 Certificates of deposit 3,189,166 74.1 215,246 2,973,920 74.1 295,696 2,678,224 72.9 ---------- ----- -------- ---------- ----- -------- ---------- ----- Total Deposits $4,304,576 100.0% $293,253 $4,011,323 100.0% $335,498 $3,675,825 100.0% ========== ===== ======== ========== ===== ======== ========== =====
33 The following table shows the composition of average deposit balances and average rates for the fiscal years indicated.
- ----------------------------------------------------------------------------------- Year Ended June 30, ------------------------------------------------------- 1996 1995 1994 ----------------- ----------------- ----------------- Average Avg. Average Avg. Average Avg. Balance Rate Balance Rate Balance Rate ---------- ----- ---------- ----- ---------- ----- (Dollars in Thousands) Passbook accounts $ 582,706 4.24% $ 541,061 4.38% $ 298,008 2.93% NOW accounts 436,027 .63 277,995 .93 301,198 .95 Market rate savings 170,886 3.34 218,646 3.36 210,486 2.80 Certificates of deposit 2,966,505 6.10 2,752,501 5.33 2,441,971 5.13 ---------- ---- ---------- ---- ---------- ---- Average deposit accounts $4,156,124 5.15% $3,790,203 4.76% $3,251,663 4.39% ========== ==== ========== ==== ========== ==== - -----------------------------------------------------------------------------------
The following table sets forth the Corporation's certificates of deposit (fixed maturities) classified by rates as of the dates indicated.
- ----------------------------------------------------------------------------------- June 30, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (In Thousands) Rate - --------------- Less than 3.00% $ 8,848 $ 11,846 $ 15,876 3.00% - 3.99% 19,978 67,404 691,464 4.00% - 4.99% 285,083 518,061 870,124 5.00% - 5.99% 1,948,836 1,017,841 741,221 6.00% - 6.99% 606,704 1,026,035 210,230 7.00% - 7.99% 300,040 290,950 90,973 8.00% - 8.99% 15,090 34,798 45,100 9.00% and over 4,587 6,985 13,236 ---------- ---------- ---------- Certificates of deposit $3,189,166 $2,973,920 $2,678,224 ========== ========== ========== - -----------------------------------------------------------------------------------
The following table presents, the outstanding amount of certificates of deposit in amounts of $100,000 or more by time remaining until maturity as of the dates indicated.
- ----------------------------------------------------------------------------------- Maturity Period June 30, - --------------- ---------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Three months or less $ 98,128 $ 63,978 $ 36,640 Over three through six months 43,718 37,346 24,572 Over six through twelve months 73,999 37,025 45,689 Over twelve months 62,994 64,728 68,644 -------- -------- -------- Total $278,839 $203,077 $175,545 ======== ======== ======== - -----------------------------------------------------------------------------------
For further information regarding the Corporation's deposits, see Note 13 to the Notes to Consolidated Financial Statements in the Annual Report. 34 Borrowings. The Corporation has also relied upon other borrowings, primarily - ----------- advances from the FHLB of Topeka, as additional sources of funds. Advances from the FHLB of Topeka are typically secured by the Corporation's stock in the FHLB, a portion of first mortgage real estate loans and mortgage-backed securities. The maximum amount of FHLB advances which the FHLB will advance for purposes other than meeting deposit withdrawals fluctuates from time to time in accordance with federal regulatory policies. The Corporation is required to maintain an investment in FHLB stock in an amount equal to the greater of 1.0% of the aggregate unpaid loan principal of the Corporation's loans secured by home mortgage loans, home purchase contracts and similar obligations, or 5.0% of advances from the FHLB to the Corporation. The Corporation is also required to pledge such stock as collateral for FHLB advances. In addition to this collateral requirement, the Corporation is required to pledge additional collateral which may be unencumbered whole residential first mortgages with an aggregate unpaid principal amount equal to 158.0% of the Corporation's total outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of the market value of U.S. government or U.S. government agency guaranteed securities, including mortgage-backed securities, as collateral for the outstanding FHLB advances. Pursuant to this requirement, as of June 30, 1996, the Corporation had pledged a portion of its real estate loans and its FHLB stock of $79.1 million. At June 30, 1996, the Corporation had advances totaling approximately $1.4 billion from the FHLB of Topeka at interest rates ranging from 4.61% to 9.43% and at a weighted average rate of 5.66%. At June 30, 1995, such advances from the FHLB totaled $1.8 billion at interest rates ranging from 4.45% to 10.75% and at a weighted average rate of 5.89%. The Corporation also borrows funds under repurchase agreements. During fiscal years 1996 and 1995 the Corporation utilized securities sold under agreements to repurchase primarily for liquidity and asset liability management purposes. Under a repurchase agreement, the Corporation sells securities (generally, government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued mortgage-backed securities) and agrees to buy such securities back at a specified price at a subsequent date. Repurchase agreements are generally made for terms ranging from one day to four years, are subject to renewal, and are deemed to be borrowings collateralized by the securities sold. At June 30, 1996, the Corporation's repurchase agreements aggregated $380.8 million at an average rate of 6.51%. The Corporation's repurchase agreements were collateralized by $410.5 million of mortgage-backed securities at June 30, 1996. At June 30, 1996, these repurchase agreements had maturities ranging from September 1996 to January 1998 with a weighted average maturity of 372 days. Set forth below is certain information relating to the Corporation's securities sold under agreements to repurchase at the dates and for the periods indicated: - --------------------------------------------------------------------------------
Year Ended June 30, ----------------------------- 1996 1995 1994 -------- -------- -------- (In Thousands) Balance at end of year $380,755 $208,373 $157,432 Maximum month-end balance $380,755 $208,373 $157,432 Average balance $187,563 $103,223 $155,897 Weighted average interest rate during the year 7.14% 7.59% 6.15% Weighted average interest rate at end of year 6.51% 7.08% 6.08%
- -------------------------------------------------------------------------------- For further information regarding the Corporation's FHLB advances and securities sold under agreements to repurchase, see Notes 14 and 15 to the Notes to the Consolidated Financial Statements in the Annual Report. 35 Customer Services. The Corporation aggresssively markets its various checking - ------------------ account products and telephone bill paying system. It is the Corporation's objective to utilize these services and its technology, rather than paying above market interest rates on deposits, to attract and service customers to which it can cross sell its numerous services on a cost-effective, profitable basis. Accordingly, management continues to update data processing equipment in the Corporation's branch operations in order to provide a cost-effective and efficient delivery of services to its customers. The Corporation has also been proactive in the implementation of new consumer-oriented technologies, offering home banking services by providing Microsoft's Money, Intuit's Quicken and America Online's BankNow financial software to its customer base. Customers can now conduct business through home banking via personal computers, extended evening and weekend branch hours, 24-hour customer service lines and telephone bill paying. Additional information about the Corporation and its competitive products can also be accessed through the Corporation's "web site" which such address on the internet as http://www.comfedbank.com. At June 30, 1996, there were 102 strategically located proprietary automatic teller machines ("ATM.") in use. These ATMs are also linked with a series of regional, national and international ATM services, including CASHBOX, CIRRUS, NETS, and MINIBANK. As a result of the Corporation's participation in these ATM services, electronic banking machines are currently available worldwide for the convenience of the Corporation's customers. SUBSIDIARIES - ------------ The Bank is permitted to invest an amount equal to 2.0% of its consolidated regulatory assets in capital stock and secured and unsecured loans in its service corporations, and an amount equal to 1.0% of its consolidated regulatory assets when such additional investment is used for community development purposes. In addition, federal savings institutions meeting regulatory capital requirements and certain other tests may invest up to 50.0% of their regulatory core capital in conforming first mortgage loans to service corporations. Under such limitations, at June 30, 1996, the Bank was authorized to invest up to $198.8 million in the stock of, or loans to, service corporations (based upon the 3.0% limitation). As of June 30, 1996, the Bank's investment in capital stock in its service corporations and their wholly-owned subsidiaries was $55.1 million less unsecured loans including conforming loans from those entities totaling $3.7 million for a net investment of $51.4 million. Regulatory capital standards also contain a provision requiring that in determining capital compliance all savings associations must deduct from capital the amount of all post April 12, 1989, investments in and extensions of credit to subsidiaries engaged in activities not permissible for national banks. Currently, the Bank has one subsidiary, Commercial Federal Service Corporation, engaged in activities not permissible for national banks. Investments in such subsidiary must be deducted from capital, for the Bank, at 60.0% of such investment until July 1, 1996, when the deduction will be 100.0%. See "Regulation -- Regulatory Capital Requirements." At June 30, 1996, $2.2 million of the $3.6 million total investment in such subsidiary was deducted from capital for this purpose. Capital deductions are not required for investment in subsidiaries engaged in non-national bank activities as agent for customers rather than as principal, subsidiaries engaged solely in mortgage banking activities, and certain other exempted subsidiaries. The capital deductions under applicable regulations have the effect of reducing the Bank's capital during the phase-out period. The Bank is also required to give the FDIC and the Director of OTS 30 days prior notice before establishing or acquiring a new subsidiary, or commencing any new activity through an existing subsidiary. Both the FDIC and the Director of OTS have authority to order termination of subsidiary activities determined to pose a risk to the safety or soundness of the institution. At June 30, 1996, the Bank had fifteen wholly-owned subsidiaries, three of which own and operate certain real estate properties of the Bank. As such, these subsidiaries are considered engaged in permissible activities and do not require deductions from capital as discussed above. During fiscal year 1994, CFMC was approved by the OTS to be classified as an "operating subsidiary." As such, CFMC ceased to be subject to the regulatory investment in service corporation limitations as of June 30, 1994. The remaining wholly-owned subsidiaries, exclusive of CFMC, are classified as service corporations. The principal active subsidiaries of the Bank are described below. Commercial Federal Mortgage Corporation ("CFMC"). CFMC is a full-service - ------------------------------------------------- mortgage banking company. The Corporation's real estate lending, secondary marketing, mortgage servicing and foreclosure activities are conducted primarily through CFMC. At June 30, 1996, CFMC serviced 62,000 loans for the Bank and 107,800 loans for others. See "Loan Originations -- Loan Servicing." 36 Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers to customers - ------------------------------------------------------ discount brokerage services through INVEST, a service of INVEST Financial Corporation ("IFC"), in 26 of the Corporation's branch offices. INVEST provides investment advice and access to all major stock, bond, mutual fund, and option markets. IFC, the registered broker-dealer, provides all support functions either independently or through affiliates. INVEST affects transactions only on behalf of its customers and does not buy or sell for its own account nor does it underwrite securities. Commercial Federal Insurance Corporation ("CIC"). CIC was formed in November - ------------------------------------------------- 1983 and serves as a full-service independent insurance agency, offering a full line of homeowners, commercial, health, auto and life insurance products. Additionally, a wholly-owned subsidiary of CIC provides reinsurance on credit life and disability policies written by an unaffiliated carrier for consumer loan borrowers of the Corporation. Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to - ------------------------------------------------ develop and manage real estate, principally apartment complexes located in eastern Nebraska, directly and through a number of limited partnerships. Subsidiaries of CFSC act as general partner and syndicator in many of the limited partnerships. Under the capital regulations discussed above, the Bank's investments in and loans to CFSC must be excluded from regulatory capital in increasing amounts over a phase-out period ending on July 1, 1996. See "Regulation -- Regulatory Capital Requirements." EMPLOYEES - --------- At June 30, 1996, the Corporation and its wholly-owned subsidiaries had 1,399 full-time equivalent employees. The Corporation provides its employees with a comprehensive benefit program, including basic and major medical insurance, dental plan, life insurance, accident insurance, short and long-term disability coverage and sick leave. The Corporation also offers loans with below market rates to its employees who qualify based on term of employment (except that no preferential rates or terms are offered to executive officers and senior management) and offers a deferred compensation plan (401(k) plan) for eligible employees. The Corporation considers its employee relations to be good. EXECUTIVE OFFICERS - ------------------ For certain information concerning the Registrant's directors and executive officers as of June 30, 1996, refer to Part III -- Item 10. "Directors and Executive Officers of the Registrant" of this report. COMPETITION - ----------- The Corporation faces strong competition in the attraction of deposits and in the origination of real estate loans. Its most direct competition for savings deposits has come historically from thrift institutions and from commercial banks located in its primary market areas. The Corporation's primary market area for savings deposits includes Nebraska, Colorado, Kansas, Oklahoma and Iowa and, for loan originations, includes Nebraska, Colorado, Kansas, Oklahoma, Iowa and Las Vegas, Nevada (residential construction lending). Management believes that the Corporation's extensive branch network has enabled the Corporation to compete effectively for deposits and loans against commercial banks and other financial institutions. The Corporation has been able to attract savings deposits primarily by offering depositors a wide variety of deposit accounts, competitive rates of interest, convenient branch locations and a full range of financial services. The Corporation's competition for real estate loans comes principally from other thrift institutions, mortgage banking companies, commercial banks, insurance companies and other institutional lenders. The Corporation competes for loans principally through the efficiency and quality of the services it provides to borrowers and the interest rates and loan fees it charges. 37 REGULATION ---------- GENERAL - ------- As a federal savings bank, the Bank is subject to extensive regulation by the OTS. The lending and deposit taking activities and other investments of the Bank must comply with various regulatory requirements. The OTS periodically examines the Bank for compliance with various regulatory requirements and the FDIC also has the authority to conduct special examinations of the Bank because its deposits are insured by the SAIF. The Bank must file reports with the OTS describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. As a savings and loan holding company, the Corporation is subject to the OTS's regulation, examination, supervision and reporting requirements. Certain of these regulatory requirements are referred to below or appear elsewhere herein. REGULATORY CAPITAL REQUIREMENTS - ------------------------------- At June 30, 1996, the Bank exceeded all minimum regulatory capital requirements mandated by the OTS. The following table sets forth information relating to the Bank's regulatory capital compliance at June 30, 1996:
- -------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Actual Requirement Excess - -------------------------------------------------------------------------------------------------------- Bank's stockholder's equity $447,817 Add unrealized holding loss on securities available for sale, net 2,703 Less intangible assets (39,630) Less phase-out of investments in non-includable subsidiaries (2,182) - -------------------------------------------------------------------------------------------------------- Tangible capital $408,708 $ 99,137 $309,571 - -------------------------------------------------------------------------------------------------------- Tangible capital to adjusted assets (1) 6.18% 1.50% 4.68% - -------------------------------------------------------------------------------------------------------- Tangible capital $408,708 Plus certain restricted amounts of other intangible assets 16,201 - -------------------------------------------------------------------------------------------------------- Core capital (Tier 1 capital) $424,909 $198,760 $226,149 - -------------------------------------------------------------------------------------------------------- Core capital to adjusted assets (2) 6.41% 3.00% 3.41% - -------------------------------------------------------------------------------------------------------- Core capital $424,909 Plus general loan loss allowances 35,933 Less amount of land loans and non-residential construction loans in excess of an 80.0% loan-to-value ratio (168) - -------------------------------------------------------------------------------------------------------- Risk-based capital (Total capital) $460,674 $270,629 $190,045 - -------------------------------------------------------------------------------------------------------- Risk-based capital to risk-weighted assets (3) 13.62% 8.00% 5.62% - --------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $6,609,129,000. (2) Based on adjusted total assets totaling $6,625,329,000. (3) Based on risk-weighted assets totaling $3,382,857,000. - -------------------------------------------------------------------------------- The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five regulatory capital categories: well-capitalized, adequately- capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized; and authorized banking regulatory agencies to take prompt corrective action with respect to institutions in the three undercapitalized categories. These corrective actions become increasingly more stringent as an institution's regulatory capital declines. In addition, the OTS has adopted a prompt corrective action rule under which a savings 38 institution that has a core capital ratio of less than 4.0% would be deemed to be "undercapitalized" and may be subject to certain sanctions. At June 30, 1996, the Bank exceeded the minimum requirements for the well-capitalized category as shown in the following table. - --------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital to Adjusted to Risk- to Risk- Total Assets Weighted Assets Weighted Assets - ----------------------------------------------------------------------------------------- Percentage of adjusted assets...... 6.41% 12.56% 13.62% Minimum requirements to be classified well-capitalized..... 5.00% 6.00% 10.00%
- -------------------------------------------------------------------------------- Under OTS capital regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal to 3.0% of adjusted total assets and "total" or "risk-based" capital (a combination of core and "supplementary" capital) equal to 8.0% of risk-weighted assets. In addition, the OTS has recently adopted regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See "-- Prompt Corrective Regulatory Action." Under the OTS's capital regulations, tangible capital is defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries and certain nonwithdrawable accounts and pledged deposits, less intangible assets, with only a limited exception for purchased mortgage servicing rights and purchased credit card relationships. Purchased mortgage servicing rights and purchased credit card relationships may be deducted from tangible capital, if not meeting certain criteria, at the lower of 90.0% of fair market value, 90.0% of original cost, or 100.0% of current amortized book value. Core capital consists of tangible capital plus restricted amounts of certain grandfathered intangible assets. Effective December 31, 1994, no newly added intangible assets other than those includable in tangible capital are permitted to be included in core capital. The Bank's core capital of $424.9 million at June 30, 1996, includes no qualifying supervisory goodwill and $16.2 million of restricted amounts of certain intangible assets (core value of deposits). Regulatory capital is further reduced by an amount equal to the savings association's debt and equity investments in subsidiaries engaged in activities not permissible for national banks. Certain subsidiaries are exempted from this treatment, including any subsidiary engaged in impermissible activities solely as agent for its customers (unless the FDIC determines otherwise), subsidiaries engaged solely in mortgage banking, and depository institution subsidiaries acquired prior to May 1, 1989. In addition, the capital deduction is not applied to federal savings associations existing as of August 9, 1989, that were either chartered as a state savings bank or state cooperative bank prior to October 1, 1982, or that acquired their principal assets from such an association. The required deduction for this purpose is 60.0% as of July 1, 1993, and 100.0% as of July 1, 1994. However, this phase-in provision was amended to allow institutions to request, at their option, a delayed phase-in schedule for subsidiary investments until July 1, 1996. The Bank requested regulatory approval of such a delayed phase-in and on December 18, 1992, such request was approved by the OTS. Pursuant to such approval, the Bank's deduction was 60.0% until July 1, 1996, when such deduction will be 100.0%. Accordingly, at June 30, 1996, the Bank had approximately $3.6 million of debt and equity invested in service corporations engaged in activities not permissible for national banks, 60.0% (or approximately $2.2 million) of which was deducted from capital in accordance with the OTS approved delayed phase-in schedule previously discussed. See "Business -- Subsidiaries." 39 Adjusted total assets for purposes of the core and tangible capital requirements are equal to a savings institution's total assets as determined under generally accepted accounting principles, increased by certain goodwill amounts and by a prorated portion of the assets of subsidiaries in which the savings institution holds a minority interest and which are not engaged in activities for which the capital rules require the savings institution to net its debt and equity investments in such subsidiaries against capital, as well as a prorated portion of the assets of other subsidiaries for which netting is not fully required under phase-in rules. Adjusted total assets are reduced by the amount of assets that have been deducted from capital and the portion of savings institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. In determining compliance with the risk-based capital requirement, the Bank is allowed to include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed its core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the Bank's general loss allowances. Allowances for loan and lease losses includable in capital are includable only up to 1.25% of risk-weighted assets. In addition, equity investments and those portions of nonresidential construction and land loans, and loans with loan-to-value ratios in excess of 80.0% must be deducted from total capital under the same phase-out period as is applied to investments in subsidiaries engaged in activities not permissible for national banks. The Bank's investments subject to this deduction totaled $168,000 at June 30, 1996, which was deducted from capital in accordance with applicable regulations. The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a zero percent risk weight. Mortgage-backed securities that qualify under the Secondary Mortgage Enhancement Act, including those issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family first mortgages not more than 90 days past due with loan-to-value ratios under 80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80.0% and average annual occupancy rates over 80.0%, and certain qualifying loans for the construction of one- to four-family residences pre-sold to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non- qualifying residential construction loans and commercial real estate loans, repossessed assets and assets more than 90 days past due, as well as all other assets not specifically categorized, are assigned a risk weight of 100.0%. The portion of equity investments not deducted from core or supplementary capital is assigned a 100.0% risk-weight. OTS capital regulations require savings institutions to maintain minimum total capital, consisting of core capital plus supplemental capital, equal to 8.0% of risk-weighted assets. Effective July 1, 1994, the OTS amended its risk-based capital standards to include an interest rate risk component. The amendment requires thrifts with interest rate risk in excess of certain levels to maintain additional capital. Under this amendment, thrifts are divided into two groups, those with "normal" levels of interest rate risk and those with "greater than normal" levels of interest rate risk. Thrifts with greater than normal levels are subject to a deduction from total capital for purposes of calculating risk-based capital. In a letter dated August 21, 1995, the OTS notified all savings associations that it had delayed this interest rate risk capital deduction until further notice, pending the testing of the OTS appeals process pursuant to Thrift Bulletin No. 67. Based on the Bank's interest rate risk profile and the level of interest rates at June 30, 1996, as well as the Bank's level of risk-based capital at June 30, 1996, management believes that the Bank does not have a greater than normal level of interest rate risk as measured under the OTS rule and will not be required to increase its capital as a result of the rule. In April 1991, the OTS proposed to amend its core capital requirement to establish a minimum 3.0% core capital ratio for savings institutions in the strongest financial and managerial condition. For all other savings institutions, the minimum core capital ratio would be 3.0% plus at least an additional 1.0% to 2.0%, determined on a case-by-case basis by the OTS after assessing both the quality of risk management systems and the level of overall risk in each individual savings institution. The Bank does not anticipate that it will be materially affected by this regulation if adopted in its current form. In addition to the proposed rule, the OTS has adopted a prompt corrective action rule under which a savings 40 institution that has a core capital ratio of less than 4.0% would be deemed to be "undercapitalized" and may be subject to certain sanctions. See "Prompt Corrective Regulatory Action." In addition to generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The Director of the OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC. FEDERAL HOME LOAN BANK SYSTEM - ----------------------------- The Bank is a member of the FHLB System. The FHLB System consists of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB of Topeka, the Bank is required to acquire and hold shares of capital stock in the FHLB of Topeka in an amount at least equal to the greater of 1.0% of the Bank's aggregate unpaid principal of its residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 5.0% of its then outstanding advances (borrowings) from the FHLB of Topeka. The Bank was in compliance with this requirement at June 30, 1996, with an investment in FHLB of Topeka stock totaling $79.1 million compared to a required amount of $67.5 million. During fiscal years 1996, 1995 and 1994, the Bank received income from its investment in FHLB stock totaling $5.8 million, $6.0 million and $6.5 million, respectively. The FHLB of Topeka serves as a reserve or central bank for its member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Topeka. Under applicable law, long-term advances may only be made for the purpose of providing funds for residential housing lending. At June 30, 1996, the Bank had advances of $1.4 billion from the FHLB of Topeka. LIQUIDITY REQUIREMENTS - ---------------------- Federal regulations require savings associations to maintain an average daily balance of liquidity assets (defined as cash, deposits maintained pursuant Federal Reserve Board requirements, time and savings deposits in certain institutions, U.S. Treasury and other government agency obligations, obligations of states and political subdivisions thereof, shares in mutual funds with certain restricted investment policies, highly rated corporate debt, and mortgage loans and mortgage-related securities with less than one year to maturity or subject to purchase within one year) equal to a monthly average of not less than a specified percentage of its net withdrawable savings deposits plus short-term borrowings. This liquidity requirement, which is currently 5.0%, may be changed from time to time by the OTS to any amount within the range of 4.0% to 10.0% depending upon economic conditions and the savings flows of savings associations. Regulations also require each savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. The average liquidity and short-term liquidity ratios of the Bank as of June 30, 1996, were 7.07% and 1.75%, respectively. QUALIFIED THRIFT LENDER TEST - ---------------------------- The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a qualified thrift lender ("QTL") test. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of 41 dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). To meet the QTL test, an institution's "Qualified Thrift Investments" must total at least 65.0% of "portfolio assets." Under OTS regulations, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20.0% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50.0% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (iii) stock in an FHLB or the FHLMC or FNMA. In addition, subject to a 20.0% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments 200.0% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas. In order to maintain QTL status, the savings institution must maintain a weekly average percentage of Qualified Thrift Investments to portfolio assets equal to 65.0% on a monthly average basis in nine out of 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. At June 30, 1996, approximately 92.6% of the Bank's portfolio assets were invested in Qualified Thrift Investments, which was in excess of the percentage required to qualify the Bank under the QTL test. RESTRICTIONS ON CAPITAL DISTRIBUTIONS - ------------------------------------- OTS regulations impose certain limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Bank. Under these regulations, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirements (a "Tier 1 Association") is generally permitted, after notice, to make capital distributions during a calendar year in the amount equal to the greater of: (a) 75.0% of its net income for the previous four quarters; or (b) up to 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk-based capital ratio requirement at the beginning of the calendar year. A savings institution with total capital in excess of current minimum capital ratio requirements but not in excess of the fully phased-in requirements (a "Tier 2 Association") is permitted, after notice, to make capital distributions without OTS approval of up to 75.0% of its net income for the previous four quarters, less dividends already paid for such period. At June 30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $92.9 million in dividends under these regulations. A savings institution that fails to meet current minimum capital requirements (a "Tier 3 Association") is prohibited from making any capital distributions without the prior approval of the OTS. A Tier 1 Association that has been notified by the OTS that its is in need of more than normal supervision will be treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1 Association. Despite the above authority, the OTS may prohibit any savings institution from making a capital distribution that would otherwise be permitted by the regulation, if the OTS were to determine that the distribution constituted an unsafe or unsound practice. Furthermore, under the OTS's prompt corrective action regulations, which took effect on December 19, 1992, the Bank would be prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "-- Prompt Corrective Regulatory Action." ENFORCEMENT - ----------- Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a savings institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. Criminal penalties for most financial institution crimes include fines of up to $1.0 million and 42 imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. DEPOSIT INSURANCE - ----------------- The Bank is charged an annual premium by the SAIF for federal insurance of its insurable deposit accounts up to applicable regulatory limits. The FDIC may establish an assessment rate for deposit insurance premiums which protects the insurance fund and considers the fund's operating expenses, case resolution expenditures, income and effect of the assessment rate on the earnings and capital of SAIF members. The SAIF assessment rate is not less than 0.23% for the period from January 1, 1991, through December 31, 1993. The minimum rate may be decreased to not less than 0.18% for the period January 1, 1994, through December 31, 1997. After December 31, 1997, the SAIF assessment rate will be a rate established by the FDIC but not less than 0.15%. The FDIC has adopted a risk-based deposit insurance assessment system under which the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which is determined by the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period. Well capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk- based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well capitalized institutions but which satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized institutions consist of institutions that do not qualify as either "well capitalized" or "adequately capitalized." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The assessment rate ranges from 0.23% of deposits for well capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized institutions in Subgroup C. The Bank's deposit insurance premium has been .23% of deposits since July 1, 1994. On August 8, 1995, the FDIC approved a significant reduction in the deposit insurance premiums charged to those financial institutions that are members of the Bank Insurance Fund ("BIF"). The FDIC adopted an amendment to the BIF risk- based assessment schedule which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range from 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well- capitalized institutions, which constitute over 90% of BIF-insured institutions. The FDIC amendment became effective September 30, 1995. No similar reduction was approved for institutions, such as the Bank, that are members of the SAIF. Subsequently, the FDIC reduced the premium rate for the most highly rated BIF- insured institutions to the statutory minimum of $1,000 per semi-annual period and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27% of insured deposits. The FDIC amendment creates a substantial disparity in the deposit insurance premiums paid by the BIF and SAIF members and places SAIF- insured savings institutions at a significant competitive disadvantage to BIF- insured institutions. A number of proposals have been considered to recapitalize the SAIF in order to eliminate the premium disparity. Any such proposals would require a one time assessment of an amount sufficient to bring the SAIF to a level equal to 1.25% of insured deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995. Recently, the FDIC revised 43 its estimate of the size of the special assessment to 68 basis points of insured deposits to bring the SAIF statutory level to the 1.25% of insured deposits. Any such assessment will depend on the SAIF fund balance once BIF-SAIF legislation has been passed. It would also depend on adjustments in the assessable base provided in legislation, but still would be allocated among institutions on the basis of deposits at March 31, 1995. Assuming a .68% assessment on a $4.2 billion deposit base, the assessment would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge of approximately $18.3 million to the Corporation. Such assessment would have the effect of reducing the Bank's tangible capital to $390.4 million, or 5.92% of adjusted total assets, core capital to $406.6 million, or 6.15% of adjusted total assets, and risk-based capital to $442.3 million, or 13.08% of risk- weighted assets. The Bank would, on a pro forma basis as of June 30, 1996, continue to exceed the minimum requirements to be classified as a "well- capitalized" institution under applicable regulations. If such a special assessment were required and the SAIF as a result was fully recapitalized, it could have the effect of reducing the Bank's deposit insurance premiums to the SAIF, thereby, increasing net income in future periods. The FDIC is authorized to raise insurance premiums for SAIF-member institutions in certain circumstances. If the FDIC determines to increase the assessment rate for all SAIF-member institutions, institutions in all risk categories could be affected. While an increase in premiums for the Bank could have an adverse effect on the Bank's earnings, a decrease in premiums could have a positive impact on the earnings of the Bank. SAIF members are generally prohibited from converting to the status of members of the BIF, also administered by the FDIC, or merging with or transferring assets to a BIF member prior to the date on which the SAIF meets the required ratio of reserves to insured deposits (1.25%). The FDIC, however, may approve such a transaction in the case of a SAIF member in default or if the transaction involves an insubstantial portion of the deposits of each participant. In addition, mergers, transfers of assets and assumptions of liabilities may be approved by the appropriate bank regulator so long as deposit insurance premiums continue to be paid to the SAIF for deposits attributable to the SAIF members plus an adjustment for the annual rate of growth of deposits in the surviving bank without regard to subsequent acquisitions. Each depository institution participating in a SAIF-to-BIF conversion transaction is required to pay an exit fee to SAIF and an entrance fee to BIF. A savings institution is not prohibited from adopting a commercial bank or savings bank charter prior to the expiration of the moratorium on SAIF - BIF conversions provided that the resulting bank remains a SAIF member. The FDIC has adopted a regulation which provides that any insured depository institution with a ratio of Tier 1 capital to total assets of less than 2.0% will be deemed to be operating in an unsafe or unsound condition, which would constitute grounds for the initiation of termination of deposit insurance proceedings. The FDIC, however, will not initiate termination of insurance proceedings if the depository institution has entered into and is in compliance with a written agreement with its primary regulator, and the FDIC is a party to the agreement, to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is defined as the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased servicing rights and purchased credit card receivables and qualifying supervisory goodwill eligible for inclusion in core capital under OTS regulations and minus identified losses and investments in certain securities subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2.0% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the savings association is meeting the Tier 1 capital requirement for state non- member banks of 4.0% of total assets for all but the most highly rated state non-member banks. TRANSACTIONS WITH RELATED PARTIES - --------------------------------- Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its 44 subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10.0% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non- affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Further, savings institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10.0% stockholder of a savings institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's loans-to-one-borrower limit (generally equal to 15.0% of the institution's unimpaired capital and surplus). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10.0% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Savings institutions are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for extension of credit to executive officers of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 (i) prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) prohibits extensions of credit to executive officers, directors, and greater than 10.0% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. CLASSIFICATION OF ASSETS - ------------------------ Savings institutions are required to classify their assets on a regular basis, to establish appropriate allowances for losses and report the results of such classification quarterly to the OTS. Troubled assets are classified into one of four categories as follows: Special Mention Assets, Substandard Assets, Doubtful Assets and Loss Assets. A special mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention assets are not considered as adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. An asset classified substandard is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that an association will sustain some loss if the deficiencies are not corrected. An asset classified doubtful has the weaknesses of those classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of 45 currently existing facts, conditions, and values, highly questionable and improbable. That portion of an asset classified loss is considered uncollectible and of such little value that its continuance as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion thereof) even though partial recovery may be effected in the future. With respect to classified assets, if the OTS concludes that additional assets should be classified or that the valuation allowances established by the savings institution are inadequate, the examiner may determine, subject to review by the savings institution's Regional Director, the need for and extent of additional classification or any increase necessary in the savings institution's general or specific valuation allowances. A savings institution is also required to set aside adequate valuation allowances to the extent that an affiliate possesses assets posing a risk to the institution and to establish liabilities for off- balance sheet items, such as letters of credit, when loss becomes probable and estimable. In August 1993, the OTS issued revised guidance for the classification of assets and a new policy on the classification of collateral-dependent loans (where proceeds from repayment can be expected to come only from the operation and sale of the collateral). With limited exceptions, effective September 30, 1993, for troubled collateral-dependent loans where it is probable that the lender will be unable to collect all amounts due, an institution must classify as "loss" any excess of the recorded investment in the loan over its "value", and classify the remainder as "substandard". The "value" of a loan is either all present value of the expected future cash flows, the loan's observable market price or the fair value of the collateral. The Bank did not incur any adverse impact from the implementation of the revised guidance for classification of assets or collateral dependent loans. On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve Board issued an interagency policy statement on the allowance for loan and lease losses (the "Policy Statement"). The Policy Statement requires that federally-insured depository institutions maintain an allowance for loan and lease losses ("ALLL") adequate to absorb credit losses associated with the loan and lease portfolio, including all binding commitments to lend. The Policy Statement defines an adequate ALLL as a level that is no less than the sum of the following items, given the appropriate facts and circumstances as of the evaluation date: (1) For loans and leases classified as substandard or doubtful, all credit losses over the remaining effective lives of those loans. (2) For those loans that are not classified, all estimated credit losses forecasted for the upcoming 12 months. (3) Amounts for estimated losses from transfer risk on international loans. Additionally, an adequate level of ALLL should reflect an additional margin for imprecision inherent in most estimates of expected credit losses. The Policy Statement also provides guidance to examiners in evaluating the adequacy of the ALLL. Among other things, the Policy Statement directs examiners to check the reasonableness of ALLL methodology by comparing the reported ALLL against the sum of the following amounts: (a) 50 percent of the portfolio that is classified doubtful, (b) 15 percent of the portfolio that is classified substandard; and (c) For the portions of the portfolio that have not been classified (including those loans designated special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans, adjusted for current conditions and trends). The Policy Statement specified that the amount of ALLL determined by the sum of the amounts above is neither a floor nor a "safe harbor" level for an institution's ALLL. However, it is expected that the examiners will review a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is 46 reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered. PROMPT CORRECTIVE REGULATORY ACTION - ----------------------------------- Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") generally is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5.0% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A significantly undercapitalized institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution. The senior executive officers of such an institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt, with certain exceptions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution is subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. Under OTS regulations implementing the prompt corrective action provisions of FDICIA, the OTS measures a savings institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk- weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). A savings institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized" savings institution is a savings institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a composite 1 CAMEL rating). An "undercapitalized institution" is a savings institution that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating). A "significantly undercapitalized" institution is defined as a savings institution that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized" savings institution is defined as a savings institution that has a ratio of core capital to total assets of less than 2.0%. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMEL rating category. The Bank is classified as "well capitalized" under the OTS regulations. 47 STANDARDS FOR SAFETY AND SOUNDNESS - ------------------------------------ Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle - -------------------------------- Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"), each federal banking agency is required to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS, released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The final rule and the guidelines took effect on August 9, 1995. The guidelines require savings associations to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the association's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings associations should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a savings association is not in compliance with the safety and soundness guidelines, it may require the association to submit an acceptable plan to achieve compliance with the guidelines. A savings association must submit an acceptable compliance plan to the OTS within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the association to regulatory sanctions. Management believes that the Bank meets all the standards adopted in the interagency guidelines, and therefore does not believe that these regulatory standards materially affect the Bank's operations. Additionally under FDICIA, as amended by the CDRI Act, the federal banking agencies are required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate. On July 10, 1995, the federal banking agencies, including the OTS, issued proposed guidelines relating to asset quality and earnings. Under the proposed guidelines, a savings association would be required to maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the asset quality and earnings standards, in the form proposed by the banking agencies, would not have a material effect on the Bank's operations. FEDERAL RESERVE SYSTEM - ---------------------- Pursuant to current regulations of the Federal Reserve Board, a thrift institution must maintain average daily reserves equal to 3.0% on the first $52.0 million of transaction accounts, plus 10.0% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non- interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of June 30, 1996, the Bank met its reserve requirements. LIMITATIONS ON LOANS TO ONE BORROWER - ------------------------------------ Under applicable law, with certain limited exceptions, loans and extensions of credit to a person outstanding at one time shall not exceed 15.0% of a savings association's unimpaired capital and surplus (defined as an association's core and supplementary capital, plus the balance of its allowance for loan and lease losses not included in its supplementary capital). Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10.0% of unimpaired capital and surplus. Savings associations are further permitted to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to develop residential housing provided (i) the purchase price of each single- family dwelling in the development does not exceed $500,000 (ii) the savings association is in compliance with its fully phased-in capital standards, (iii) the loans comply with applicable loan-to-value requirements, (iv) the aggregate amount of loans made under this authority does not exceed 150.0% of unimpaired capital and surplus and (v) the savings association is, and continues to be, in compliance with its fully phased in capital requirements. At June 30, 1996, the Bank's loan to one borrower limitation was $115.8 million and all loans to one borrower were within such limitation. 48 LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS - ----------------------------------------------- The aggregate amount of loans which a savings association may make on the security of liens on nonresidential real property may not exceed 400.0% of the institution's capital. The Director of the OTS is authorized to permit federal savings associations to exceed the 400.0% capital limit in certain circumstances. The Bank estimates that it is permitted to make loans secured by nonresidential real property in an amount equal to $1.8 billion. At June 30, 1996 the Bank's nonresidential real property loans totaled $284.2 million. SAVINGS AND LOAN HOLDING COMPANY REGULATION - ------------------------------------------- The Corporation is a savings and loan holding company as defined by the HOLA. As such, it is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Corporation and affiliates thereof. ACTIVITIES RESTRICTIONS - ----------------------- The Board of Directors of the Corporation presently intends to operate the Corporation as a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director of the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Qualified Thrift Lender Test." If the Corporation were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. 49 RESTRICTIONS ON ACQUISITIONS - ---------------------------- Savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5.0% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15.0% of the voting shares of an under- capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company's other subsidiaries must have tangible capital of at least 6.5% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25.0% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquired is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Under the Bank Holding Company Act of 1956, bank holding companies are specifically authorized to acquire control of any savings association. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating a savings institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the Bank Holding Company Act. 50 TAXATION - -------- The Corporation and its subsidiaries, including the Bank, currently file a consolidated federal income tax return based on a fiscal year ending June 30. Consolidated taxable income is determined on an accrual basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. However, under certain circumstances, dividends and other distributions by a thrift institution can result in the recapture into taxable income of previously deducted provisions to the bad debt reserve. Savings institutions such as the Bank are subject to the provisions of the Internal Revenue Code (the "Code") in the same general manner as other corporations. However, institutions such as the Bank which meet certain definitional tests and other conditions prescribed by the Code may benefit from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. For purposes of the bad debt reserve deduction, loans are separated into "qualifying real property loans," which generally are loans secured by interests in improved real property, and "nonqualifying real property loans," which are all other loans. The bad debt reserve deduction with respect to nonqualifying loans must be based on actual loss experience. The amount of the bad debt reserve deduction with respect to qualifying real property loans may be based upon actual loss experience (the "experience method") or a percentage of taxable income determined without regard to such deduction (the "percentage of taxable income method"). The Bank computed its bad debt deduction utilizing the percentage of taxable income method in 1996 and 1995 and the experience method in fiscal year 1994. Under the percentage of taxable income method, the bad debt reserve deduction for qualifying real property loans is computed as a percentage of taxable income, with certain adjustments. The allowable deduction under the percentage of taxable income method (the "percentage bad debt deduction") was 8.0% for fiscal years 1996 and 1995. The percentage bad debt deduction may be claimed as long as not less than 60.0% of the total dollar amount of the assets of an institution falls within certain designated categories. In the event the percentage of assets in the designated categories falls below 60.0%, the institution could be required to recapture, generally over a period of up to four years, its existing bad debt reserve, although net operating loss carryforwards available to the thrift could be used to offset such recapture. As of June 30, 1996, the Bank's assets falling within such categories exceeded 60.0%. It is anticipated that the Bank will continue to meet the 60.0% of assets test in the foreseeable future. The bad debt deduction under the percentage of taxable income method is limited to the amount which (i) does not exceed the amount necessary to increase the balance at the close of the taxable year of the reserves for losses on qualifying real property loans to 6.0% of such loans outstanding at such time, and (ii) the amount when added to the addition to the bad debt reserve for losses on nonqualifying loans, equals the amount by which 12.0% of total deposits or withdrawable accounts of depositors at year-end exceeds the sum of surplus, undivided profits and reserves at the beginning of the year. It is not expected that either limitation will restrict the Bank from making the maximum addition to its bad debt reserve. The percentage bad debt deduction is reduced by the deduction for losses on nonqualifying loans. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) require recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These changes will result in the recognition of additional deferred tax liabilities of approximately $103,000 in the first quarter of fiscal year 1997. The remaining unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. To the extent earnings appropriated to a thrift institution's bad debt reserves for qualifying real property loans and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method ("Excess"), and to the extent of the institution's supplemental reserves for losses on loans, such Excess and the supplemental reserve may not, without adverse tax consequences, be utilized for payment of dividends or certain other distributions to a shareholder (including distributions in redemption, dissolution, or liquidation) or for any other purpose 51 (except to absorb bad debt losses). The Code provides different sequences of accounts to which a distribution is attributed, depending upon whether the distribution is or is not a redemption, dissolution or liquidation distribution. To the extent a distribution by the Bank is deemed paid out of the Excess or the supplemental reserves under these rules, the Excess or supplemental reserve would be reduced and the Bank's gross income for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the Excess or supplemental reserve. As of June 30, 1996, the Bank had $8.4 million of Excess and supplemental reserves. However, at June 30, 1996, the Bank has an estimated $98.1 million in its earnings and profit account, which account would be utilized prior to reaching the Excess or the supplemental reserves in the case of a distribution that is not part of a redemption, dissolution or liquidation. The Corporation's federal income tax returns were last audited in 1985. Management is unaware of any significant income tax deficiencies outstanding. The State of Nebraska imposes a franchise tax on all financial institutions. Under the franchise tax, the Bank may not join in the filing of a consolidated return with the Corporation and will be assessed at a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to 3.81% of the Bank's income before tax (including subsidiaries) as reported on the regular books and records. At June 30, 1996, the Bank paid its tax based on the average level of deposits. Savings institutions are taxed like other corporations in certain other states. Colorado imposes an income tax of 5.0% of net income apportioned to Colorado. Oklahoma imposes a 6.0% privilege tax, essentially equivalent to an income tax on income apportioned to Oklahoma. Kansas also has a privilege tax on income from Kansas sources. A corporation's "net income" for Colorado and Oklahoma income tax purposes is equal to the corporation's federal taxable income increased and decreased by certain items including the federal net operating loss deduction and the interest income on obligations issued by the U.S. Government. Iowa imposes a 5.0% franchise tax, essentially equivalent to an income tax on corporate income apportioned to Iowa. For further information regarding federal income taxes payable by the Corporation, see Note 18 of the Notes to the Consolidated Financial Statements. Item 2. Properties - ------------------- At June 30, 1996, the Corporation conducted business through 34 offices in Nebraska, 20 offices in Colorado, 24 offices in Kansas, 19 offices in Oklahoma and one office in Iowa. See Item 1. Business - "Recent Developments--Pending Acquisition" for additional branches to be added pursuant to a pending acquisition. At June 30, 1996, the Corporation owned the buildings for 70 of its branch offices and leased the remaining 28 offices under leases expiring (not assuming exercise of renewal options) between November 1996 and August 2031. The Corporation has 102 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas and Oklahoma. At June 30, 1996, the total net book value of land, office properties and equipment owned by the Corporation was $73.6 million. Management believes that the Corporation's premises are suitable for its present and anticipated needs. Item 3. Legal Proceedings - -------------------------- There are no pending legal proceedings to which the Corporation, the Bank or any subsidiary is a party or to which any of their property is subject which are expected to have a material adverse effect on the Corporation's financial position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill Lawsuit" for other legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1996. 52 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ------------------- The information contained under "Regulation -- Restrictions on Capital Distributions" in Part I of this Report and the section "Stock Prices and Dividends" appearing on page 33 of the Annual Report is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The presentation of selected financial data for the years ended June 30, 1992 through 1996 is included in the "Selected Consolidated Financial Data" section appearing on pages 12 and 13 of the Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------- Management's comments on the Corporation's financial condition, changes in financial condition, and the results of operations for fiscal year 1996 compared to fiscal year 1995 and fiscal year 1995 compared to fiscal year 1994 are included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section appearing on pages 14 through 33 of the Annual Report and are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ------- ------------------------------------------- The "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" set forth on pages 34 through 74 of the Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ------------------------------------------------ None. 53 PART III Item 10. Directors and Executive Officers of the Registrant - -------- -------------------------------------------------- For information concerning the Board of Directors of the Corporation, the information contained under the section captioned "Proposal I -- Election of Directors" in the Corporation's definitive proxy statement for the Corporation's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. For information regarding certain beneficial ownership reports filed by management and 10.0% or more owners of the Corporation's common stock, reference is made to "Beneficial Ownership Reports" in the Proxy Statement, which is incorporated herein by reference. The executive officers of the Corporation and the Bank as of June 30, 1996, are as follows:
Age at Name June 30, 1996 Current Position(s) as of June 30, 1996 - --------------------------- ------------- --------------------------------------- William A. Fitzgerald 58 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank James A. Laphen 48 President, Chief Operating Officer and Chief Financial Officer of the Corporation and the Bank Gary L. Matter 51 Senior Vice President, Controller and Secretary of the Corporation and of the Bank Joy J. Narzisi 40 Treasurer of the Corporation and Senior Vice President, Treasurer and Assistant Secretary of the Bank Margaret E. Ash 43 Senior Vice President and Assistant Secretary of the Bank Gary L. Baugh 55 Senior Vice President of the Bank Jon W. Stephenson 48 Senior Vice President of the Bank Terry A. Taggart 41 Senior Vice President of the Bank Gary D. White 51 Senior Vice President of the Bank Ronald A. Aalseth 40 First Vice President of the Bank R. Hal Bailey 48 First Vice President of the Bank Michael C. Bruggeman 48 First Vice President of the Bank David E. Gunter, Jr. 58 First Vice President of the Bank
(Continued on next page) 54
Age at Name June 30, 1996 Current Position(s) as of June 30, 1996 - --------------------------- ------------- --------------------------------------- Roger L. Lewis 46 First Vice President and Assistant Secretary of the Bank Kevin C. Parks 41 First Vice President of the Bank Thomas N. Perkins 44 First Vice President of the Bank Dennis R. Zimmerman 45 First Vice President of the Bank
The principal occupation of each executive officer of the Corporation and the Bank for the last five years is set forth below. William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the - ---------------------- Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice President in 1968, Executive Vice President in 1973, President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is well known in the banking community for his participation in numerous industry organizations, including the Federal Home Loan Bank Board, the Nebraska League of Savings Institutions and the board of America's Community Bankers. Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973. James A. Laphen is President, Chief Operating Officer and Chief Financial - --------------- Officer of the Corporation and the Bank. Prior to his promotion to President in November 1994, Mr. Laphen held the positions of Executive Vice President, Secretary and Treasurer of the Corporation and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined the Corporation in November 1988 as Treasurer of the Corporation and First Vice President and Treasurer of the Bank and has been in various positions of responsibility within the organization. Prior to 1988, Mr. Laphen was President and Chief Executive Officer of Home Unity Mortgage Services, Inc. in Pennsylvania, and prior to such positions, was Executive Vice President and Chief Financial Officer of Home Unity Savings Bank. Gary L. Matter, a Senior Vice President, Controller, and Secretary of the - --------------- Corporation and the Bank, joined the Bank in December 1990 as First Vice President and Controller. Mr. Matter, a certified public accountant, was the Treasurer of Anchor Glass Container Corporation from June 1983 to November 1990. Joy J. Narzisi, Treasurer of the Corporation and Senior Vice President, - --------------- Assistant Secretary and Treasurer of the Bank, joined the Bank in September 1980. Ms. Narzisi was named Senior Vice President and Assistant Secretary of the Bank in July 1995 after first being appointed Treasurer of the Corporation in November 1994, Treasurer of the Bank in 1991 and First Vice President in June of 1989. Prior to 1989, Ms. Narzisi was Investment Portfolio Manager since July 1987. Since joining the Bank, she has held other various Treasury related management positions. Margaret E. Ash, was named Senior Vice President and Assistant Secretary of the - ---------------- Bank in July 1995. Ms. Ash joined Commercial Federal in 1973 and has held numerous management positions within the Bank for 19 years. Most recently she was First Vice President of Retail Operations since July 1993, First Vice President of the Colorado Retail Division since 1989 and Vice President/Regional Manager of Colorado Retail prior to that time. Gary L. Baugh, a Senior Vice President responsible for the Kansas operation of - -------------- the Bank since November 1995, joined the Bank pursuant to the Railroad acquisition. Mr. Baugh, a certified public accountant, joined Railroad in 1973, was employed in various capacities, and in June 1988 was named President and Chief Operating Officer. Jon W. Stephenson, a Senior Vice President of the Bank since July 1995, joined - ------------------ the Bank as First Vice President in July 1994, with responsibility for Oklahoma retail operations. Mr. Stephenson, a certified public accountant, was President and Chief Executive Officer of Home Federal Savings and Loan Association of Ada, Oklahoma prior to joining Commercial Federal. Terry A. Taggart, was named Senior Vice President of Corporate Retail Banking in - ----------------- August 1993. Mr. Taggart has held various positions of responsibility within the Bank, including First Vice President/Retail Operations in May 1989 and Vice President/Regional Sales Manager in March 1988. Mr. Taggart joined the Bank in January 1986 as an advanced manager trainee. 55 Gary D. White, was named Senior Vice President of the Bank and State Director in - -------------- July 1995. Previous positions held include Director of Residential Mortgage Lending in May 1994 and First Vice President and Director of Human Resources in March 1984. Mr. White joined the Bank in 1976 as an Investment Account Executive and has held the positions of Branch Manager and Employment Manager. Prior to 1976, Mr. White was Vice President of College Relations at the College of Saint Mary. Ronald A. Aalseth, a First Vice President of the Bank since November 1994, - ------------------ joined the Bank in December 1984 and serves as President of Commercial Federal Insurance Corporation; ComFed Insurance Services Company, Limited; and Commercial Federal Investment Services, Inc. He has served in this capacity since June 1987. R. Hal Bailey, is First Vice President and Director of Residential Construction - -------------- Lending. He joined Railroad Savings Bank in June 1987 as Senior Vice President and Chief Lending Officer. Prior to that he worked for American Savings and Loan in Salt Lake City, Utah, Bank of America in Los Angeles and Smith Barney in San Francisco. Michael C. Bruggeman is First Vice President and Director of Human Resources. - -------------------- He joined the Bank in August 1994. Prior to 1994, Mr. Bruggeman was Vice President of Human Resources and Public Affairs for Ransomes America Corporation and Cushman Inc., where he also served as a Board of Director member and Corporate Secretary. David E. Gunter, Jr., has been with the Bank since 1982. Mr. Gunter became - --------------------- First Vice President of the Bank in December 1992 with responsibility for commercial real estate lending and income recovery. Mr. Gunter is also the President of Commercial Federal Service Corporation. Roger L. Lewis, a First Vice President and Assistant Secretary of the Bank, - --------------- joined the Bank in 1986 as Vice President and Director of Public Relations until he became First Vice President and Director of Marketing in March 1988. Prior to joining Commercial Federal, Mr. Lewis was Vice President and Communications Director for Omaha National Bank. Kevin C. Parks was named First Vice President of the Bank responsible for - -------------- Internal Audit, Legal Oversight/Compliance and Security in November 1993. Mr. Parks, a certified public accountant, certified internal auditor, and chartered bank auditor, was previously self employed as a practicing accountant since 1989. Prior to 1989, Mr. Parks was Manager of Internal Audit for Security Pacific Bank - Arizona since 1985. Thomas N. Perkins is First Vice President and Acquisitions Manager. Mr. Perkins - ----------------- joined the Bank in 1976 and has held various management positions in the Bank's Retail division prior to assuming the Acquisitions position in August 1993. Dennis R. Zimmerman became First Vice President in October 1991 and Director of - ------------------- Information Systems as of July 1993. Mr. Zimmerman joined the Bank in 1987 and has held the positions of Information Systems Audit Manager, Internal Audit Manager and Director of Internal Audit/Legal Oversight. Prior to 1987, Mr. Zimmerman was the Director of Financial Systems for a subsidiary of Enron Corporation. 56 Item 11. Executive Compensation - -------------------------------- The information under the section captioned "Proposal I -- Election of Directors - -- Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information concerning beneficial owners of more than 5.0% of the Corporation's common stock and security ownership of the Corporation's management is included under the section captioned "Principal Stockholders " and "Proposal I -- Election of Directors" in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" in the Proxy Statement. 57 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements (incorporated herein by reference from the indicated section of the Annual Report): Consolidated Statement of Financial Condition at June 30, 1996 and 1995. Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1996, 1995 and 1994. Consolidated Statement of Operations for the Years Ended June 30, 1996, 1995 and 1994. Consolidated Statement of Cash Flows for the Years Ended June 30, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedules: All schedules have been omitted as the required information is not applicable, not required or is included in the financial statements or related notes thereto. (3) Exhibits: 2.1 Reorganization and Merger Agreement by and between Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank and Heritage Financial, Ltd. and Hawkeye Savings Bank, dated May 16, 1996 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 333-08591) 3.1 Articles of Incorporation of Registrant (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 3.2 Bylaws of Registrant, as amended and restated (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 4.1 Form of Certificate of Common Stock of Registrant (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-003300) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Manufacturers Hanover Trust Company (incorporated by reference to the Registrant's Form 8-K Current Report Dated January 9, 1989) 58 10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.2 Change in Control Executive Severance Agreements with William A. Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.3 Form of Change in Control Executive Severance Agreement entered into with Senior Vice Presidents and First Vice Presidents (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as Amended and Restated Effective August 1, 1992 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-60448) 10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated August 21, 1996 (filed herewith) 10.8 Employment Agreement With William A. Fitzgerald, dated May 15, 1974, As Amended February 14, 1996 (filed herewith) 10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, As Amended February 14, 1996 (filed herewith) 10.10 Form of Change of Control Executive Severance Agreements entered into with Two First Vice Presidents Dated October 2, 1995 (filed herewith) 10.11 Change of Control Executive Severance Agreement entered into with a Vice President Dated October 2, 1995 (filed herewith) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1996 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith) (b) Reports on Form 8-K: The Corporation filed a Current Report on Form 8-K dated May 16, 1996, reporting the Corporation entering into, on the same date, a merger agreement by and among the registrant, the Bank, Heritage Financial, Ltd. and Hawkeye Federal Savings Bank. Under the terms of the merger agreement, the Corporation will acquire all 180,762 of the outstanding shares of Heritage's common stock which will be exchanged for cash and the Corporation's common stock. At June 30, 1996, Heritage had assets of $182.1 million, deposits of $157.9 million and stockholders' equity of $12.9 million. Heritage operates six branches located in Iowa. This pending acquisition is expected to close by October 31, 1996. (c) Exhibits to this Form 10-K are attached or incorporated by reference as stated above. (d) No financial statement schedules are filed, and as such are excluded from the Annual Report as provided by Exchange Act Rule 14A-3(b)(i). With the exception of the information expressly incorporated by reference in Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1996 Annual Report to Stockholders is not deemed "filed" with the Securities and Exchange Commission or otherwise subject to Section 18 of the Securities and Exchange Act of 1934. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized. COMMERCIAL FEDERAL CORPORATION Date: September 27, 1996 By: /s/ William A. Fitzgerald ------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: Date: September 27, 1996 By: /s/ William A. Fitzgerald ------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer Principal Financial Officer: Date: September 27, 1996 By: /s/ James A. Laphen ------------------- James A. Laphen President, Chief Operating Officer and Chief Financial Officer Principal Accounting Officer: Date: September 27, 1996 By: /s/ Gary L. Matter ------------------ Gary L. Matter Senior Vice President, Controller and Secretary Directors: Date: September 27, 1996 By: /s/ Talton K. Anderson ---------------------- Talton K. Anderson Director Date: September 27, 1996 By: /s/ Robert F. Krohn ------------------- Robert F. Krohn Director 60 Date: September 27, 1996 By: /s/ Charles M. Lillis --------------------- Charles M. Lillis Director Date: September 27, 1996 By: /s/ Carl G. Mammel ------------------ Carl G. Mammel Director Date: September 27, 1996 By: /s/ Robert S. Milligan ---------------------- Robert S. Milligan Director Date: September 27, 1996 By: /s/ James P. O'Donnell ---------------------- James P. O'Donnell Director 61 INDEX TO EXHIBITS
Page (by Sequential Exhibit Numbering Number Identity of Exhibits System) - ------ -------------------- -------- 2.1 Reorganization and Merger Agreement by and between Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank and Heritage Financial, Ltd. and Hawkeye Savings Bank, dated May 16, 1996 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 333-08591) 3.1 Articles of Incorporation of Registrant (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 3.2 Bylaws of Registrant, as amended and restated (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 4.1 Form of Certificate of Common Stock of Registrant (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33- 003300) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Manufacturers Hanover Trust Company (incorporated by reference to the Registrant's Form 8-K Current Report Dated January 9, 1989) 10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.2 Change in Control Executive Severance Agreements with William A. Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33- 60589) 10.3 Form of Change in Control Executive Severance Agreement entered into with Senior Vice Presidents and First Vice Presidents (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33- 60589) 10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as Amended and Restated Effective August 1, 1992 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-60448) 10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated August 21, 1996 (filed herewith) 10.8 Employment Agreement With William A. Fitzgerald, dated May 15, 1974, As Amended February 14, 1996 (filed herewith) 10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, As Amended February 14, 1996 (filed herewith) 10.10 Form of Change of Control Executive Severance Agreements entered into with Two First Vice Presidents Dated October 2, 1995 (filed herewith) 10.11 Change of Control Executive Severance Agreement entered into with a Vice President Dated October 2, 1995 (filed herewith) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1996 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith)
EX-10.7 2 EXHIBIT 10.7 Exhibit 10.7 Stock Purchase Agreement STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement"), is dated as of August 21, 1996, by and among CAI Corporation, a Delaware corporation ("CAI"), Commercial Federal Corporation, a Nebraska corporation ("CFC"), Mr. Robin R. Glackin ("Glackin"), Mr. Steven M. Ellis ("Ellis") and Mr. Bryon A. Lax ("Lax"). Each of Glackin, Ellis and Lax is sometimes hereinafter referred to as a "Shareholder", and collectively as the "Shareholders." WHEREAS, CAI owns an aggregate of 1,250,100 shares of common stock, par value $0.01 per share (the "CFC Common Stock"), of CFC; and WHEREAS CFC owns the Warrant to Purchase 99 Shares of Common Stock (Par Value $.01 per Share) of CAI Corporation, dated December 31, 1989 (the "Warrant"), which entitles the holder thereof to purchase, upon exercise thereof, 99 shares of non-voting common stock of CAI; and WHEREAS, CFC desires to purchase from CAI the shares of CFC Common Stock owned by CAI; and WHEREAS, CAI wishes to acquire from CFC, and cancel, the Warrant; and WHEREAS, the parties desire to make certain representations, warranties and agreements in connection with the transactions contemplated hereby. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained herein, and intending to be legally bound hereby, the parties agree as follows: ARTICLE 1 SALE AND TRANSFER OF COMMON STOCK; RETURN OF WARRANT 1.1 Sale and Transfer of Common Stock. Upon the basis of the representations, --------------------------------- warranties and agreements herein contained, and subject to the terms and conditions hereof, CAI agrees to sell, transfer and assign to CFC 1,250,100 shares of CFC Common Stock (such shares of CFC Common Stock are hereinafter referred to as the "Shares"), in exchange for (i) a payment of $28,227,162 (the "Cash Consideration"), (ii) the transfer and assignment to CAI of the Warrant (in whole and not in part), unexercised and free and clear of any Liens (as defined herein), (iii) a payment of $2,200,000 in reimbursement of certain costs and expenses incurred by CAI in connection with its ownership of the Shares, including costs and expenses incurred in connection with the proxy contest of 1995 (the "Expense Reimbursement Payment"), and (iv) a payment of $62,500 as an agreed upon amount in lieu of the pro rata portion of the dividend on the Shares of CFC's current fiscal quarter (the "Dividend Amount"). 1.2 Return of Warrant; Payment of Consideration. Upon the basis of the ------------------------------------------- representations, warranties and agreements herein contained, and subject to the terms and conditions hereof, CFC agrees to (i) purchase and accept from CAI the Shares, (ii) transfer and assign the Warrant (in whole and not in part), unexercised and free and clear of any Liens, to CAI, (iii) pay CAI the Cash Consideration, (iv) pay CAI the Expense Reimbursement Payment and (v) pay CAI the Dividend Amount. 1.3 Closing. The closing of the sale and purchase of the Shares and the ------- other transactions contemplated hereby (the "Closing") shall take place in Omaha, Nebraska on August 21, 1996, or at such other time or place as the parties may mutually agree (the "Closing Date"). 1.4 Closing Deliveries. At the Closing, the parties shall deliver the ------------------ following documents, and take the following actions, all of which deliveries and actions shall be deemed to occur simultaneously and none of which shall be effective until all have occurred: (a) CFC shall deliver, or cause to be delivered, to CAI (i) the Warrant (in whole and not in part), duly endorsed, unexercised and free and clear of any Liens, (ii) the Cash Consideration, the Expense Reimbursement Payment and the Dividend Amount, in the form of a cash payment of $30,489,662, by wire transfer of immediately available same day funds in United States dollars to an account designated in writing by CAI; and (b) CAI shall deliver, or cause to be delivered pursuant to book entry at DTC, to CFC 1,250,000 of the Shares and stock powers and certificate for 100 of the Shares. ARTICLE II REPRESENTATIONS AND WARRANTIES OF CFC CFC hereby represents and warrants to CAI and the Shareholders as follows: 2.1 Corporate Organization. CFC is a corporation duly organized, validly ---------------------- existing and in good standing under the laws of the State of Nebraska. CFC has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualification necessary. 2.2 Authority; No Violation. ----------------------- (a) CFC has full corporate power and authority to execute and deliver this Agreement and the other documents and instruments contemplated hereby and to consummate the transactions contemplated hereby and thereby. The execution and delivery by CFC of each of this Agreement and the other documents and instruments contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of CFC, and no other corporate proceedings on the part of CFC are necessary to consummate the transactions contemplated hereby and thereby. This agreement has been, and upon execution and delivery thereof by CFC, each of the other documents and instruments contemplated hereby will be, duly and validly executed and delivered by CFC and (assuming due authorization, execution and delivery by CAI) this Agreement constitutes, and upon execution and delivery thereof by CFC, each of the other documents and instruments contemplated hereby will constitute, a valid and binding obligation of CFC enforceable against CFC in accordance with its respective terms. (b) Neither the execution and delivery of this Agreement or any other document or instrument contemplated hereby by CFC nor the consummation by CFC of the transactions contemplated hereby and thereby, nor compliance by CFC with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Articles of Incorporation, By-Laws or similar governing documents of CFC, or (ii) (x) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction ("Law") applicable to CFC or any of its properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of CFC under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which CFC is a party, or by which it or any of its properties or assets may be bound or affected. 2.3 Consents and Approvals. No consents or approvals of, or filings ---------------------- registration with, any court, administrative agency or commission or other governmental authority or instrumentality (each a "Governmental Authority") or with any third party are necessary in connection with (a) the execution and delivery of CFC of this Agreement and the other documents and instruments contemplated hereby and (b) the consummation by CFC of the transaction contemplated hereby and thereby. 2.4 Title to Warrant. CFC has, and upon the transfer of the Warrant to CAI in ---------------- accordance with the terms hereof, CAI will have, good, valid and marketable title to the Warrant (in whole and not in part), free and clear of any liens, charges, encumbrances, pledges, options, trusts, voting trusts, restrictions, members or shareholders' agreements, adverse rights or claims and security interests whatsoever ("Liens"). Except for this Agreement, CFC does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase, issuance, transfer or assignment of the Warrant, any interest in the Warrant or the shares of non-voting common stock of CAI purchasable upon exercise of the Warrant. Without limiting the generality of the foregoing, CFC is the Holder (as defined in the Warrant) of the Warrant and there are no other Holders of the Warrant. 2.5 Status of Warrant. ----------------- (a) CFC's election, pursuant to its letter, dated August 13, 1996, to exercise the Warrant has been effectively and irrevocably rescinded and withdrawn for all purposes prior to the effectiveness of such election, pursuant to the letter, dated August 14, 1996, a true, correct and complete copy of which is attached hereto as Exhibit A. (b) Neither CFC nor any other Holder (including, without limitation any prior Holder) has exercised, in whole or in part, the Warrant, and no person or entity (other than CFC in its capacity as Holder) has the right or power to exercise or cause the exercise of the Warrant. Without limiting the generality of the foregoing, neither CFC nor any of its Representatives (as defined herein) has taken any action which has caused (or which, with notice or the passage of time, will cause) any shares of common stock or other securities of CAI to become issuable or to be deemed to have been issued or to have become issuable pursuant to the Warrant for any reason. ARTICLE III REPRESENTATIONS AND WARRANTIES OF CAI CAI hereby represents and warrants to CFC as follows: 3.1 Corporate Organization. CAI is a corporation duly organized, validly ---------------------- existing and in good standing under the laws of the State of Delaware. CAI has the corporate power and authority to own or lease all of its properties and assets and to carry on its business as it is now being conducted and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned or leased by it makes such licensing or qualifications necessary. 3.2 Authority; No Violation. ----------------------- (a) CAI has full corporate power and authority to execute and deliver this Agreement and the other documents and instruments contemplated hereby and to consummate the transactions contemplated hereby and thereby. The execution and delivery by CAI of each of this Agreement and the other documents and instruments contemplated hereby and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of CAI, and no other corporate proceedings on the part of CAI are necessary to consummate the transactions contemplated hereby and thereby. This Agreement has been, and upon execution and delivery thereof by CAI, each of the other documents and instrument contemplated hereby will be, duly and validly executed and delivered by CAI and (assuming due authorization, execution and delivery by CFC) this Agreement constitutes, and upon execution and delivery thereof by CAI, each of the documents and instruments contemplated hereby will constitute, a valid and binding obligation of CAI enforceable against CAI in accordance with its respective terms. (b) Neither the execution and delivery of this Agreement or any other document or instrument contemplated hereby by CAI nor the consummation by CAI of the transactions contemplated hereby and thereby, nor compliance by CAI with any of the terms or provisions hereof or thereof, will (i) violate any provision of the Certificate of Incorporation, By-laws or similar governing documents of CAI, or (ii) (x) violate any Law applicable to CAI or any of its properties or assets, or (y) violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate the performance required by, or result in the creation of any Lien upon any of the respective properties or assets of CAI under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreementt or other instrument or obligation to which CAI is a party, or by which it or any of its properties or assets may be bound or affected. 3.3 Consents and Approvals. No consents or approvals of, or filings or ---------------------- registration with, any Governmental Authority or with any third party are necessary in connection with (a) the execution and delivery by CAI of this Agreement and the other documents and instruments contemplated hereby and (b) the consummation by CAI of the transactions contemplated hereby and thereby. 3.4 Ownership of Shares. ------------------- (a) The Shares are the only shares of CFC Common Stock beneficially owned by CAI. (b) CAI has (except for a lien of Comerica Bank on the Shares, which lien will be paid in full from the Cash Consideration, and upon the transfer of the Shares to CFC in accordance with the terms hereof CFC will have, good, valid and marketable title to the Shares, free and clear of any Liens. CAI does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the purchase, issuance, transfer or assignment of the Shares or any interest in the Shares other than the Comerica Lien. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS Each Shareholder hereby represents and warrants on his own behalf to CFC as follows: 4.1 Execution and Delivery. This Agreement has been, and upon execution and ---------------------- delivery thereof by such Shareholder, each of the other documents and instruments contemplated hereby will be, duly and validly executed and delivered by such Shareholder and (assuming due authorization, execution and delivery by CFC) this Agreement constitutes, and upon execution and delivery thereof by such Shareholder, each of the other documents and instruments contemplated hereby will constitute, a valid and binding obligation of such Shareholder, enforceable against such Shareholder in accordance with its respective terms. 4.2 Ownership of CFC Common Stock. Except for the Shares, such Shareholder ----------------------------- does not beneficially own any shares of CFC Common Stock, other than, with respect to Glackin and Ellis, shares of CFC Common Stock granted to such Shareholder as part of his compensation as a director of CFC. ARTICLE V CERTAIN COVENANTS AND AGREEMENTS 5.1 Forbearances. None of CFC, CAI nor any Shareholder shall take any action ------------ that is intended or may reasonably be expected to result in any of it representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Closing, except, in every case, as required by Law. 5.2 No Exercise or Transfer of Warrant. CFC hereby agrees that from and after ---------------------------------- the date of this Agreement, it shall not (a) exercise, in whole or in part, give any notice of exercise, in whole or in part, or permit or cause any other person or entity to exercise or give any notice of exercise, in whole or in part, of, the Warrant or (b) except as contemplated hereby, sell, assign, convey or otherwise transfer (including, without limitation, through merger or consolidation or otherwise by operation of law), in whole or in part, the Warrant or any interest therein, including, without limitation, any right to acquire, hold or exercise the Warrant or any part thereof. 5.3 Standstill. CAI and each Shareholder hereby agrees that during the ---------- Standstill Period (as defined herein), it shall not, directly or indirectly, (a) acquire, agree to acquire or make any proposal to acquire, the securities of CFC or any of its subsidiaries, any warrant or option to acquire any such securities, any security convertible into or exchangeable for any such securities or any other right to acquire any such securities (except, in the case of Glackin and Ellis, for securities of CFC or any of its subsidiaries issued to such Shareholders as members of the Board of Directors of CFC); (b) seek or propose any merger, consolidation, business combination, tender or exchange offer, sale or purchase of assets or securities, dissolution, liquidation, restructuring, recapitalization or similar transaction of or involving CFC or any of its subsidiaries; and (c) make, or in any way participate in, any "solicitation" of proxies or consents within the meaning of Rule 14a-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to any securities of CFC or any of its subsidiaries, or seek to advise or influence any person with respect to the voting of any securities of CFC or any of its subsidiaries or demand a copy of the stock ledger, list of stockholders or any other books and records of CFC or any of its subsidiaries (except in connection with the enforcement of any claim of CAI or any such Shareholder under this Agreement); (d) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act), with respect to any securities of CFC or any of its subsidiaries; e) otherwise act, alone or in concert with others, to seek to control or influence, in any manner, the management, Board of Directors or policies of CFC or any of its subsidiaries; (f) have any discussions or enter into any arrangements, understandings or agreements (whether written or oral) with, or advise, finance, assist or encourage, any other persons in connection with any of the foregoing; or make any other investment in any other person that engages, or offers or proposes to engage, in any of the foregoing; provided, however, nothing contained herein shall be deemed to prohibit CAI or any Shareholder from acquiring any publicly-traded security (other than any security of CFC or any of its subsidiaries); provided, further, that if the issuer (or any Affiliate thereof) of such publicly-traded security is engaged in any activity otherwise prohibited under this Section 5.5, neither CAI nor any of the Shareholders shall acquire a controlling interest in such issuer or otherwise actively participate in the business activities of such issuer. CAI and each Shareholder also agrees during such period not to make any proposal, statement or inquiry, or disclose any intention, plan or arrangement (whether written or oral) inconsistent with the foregoing, or request CFC, directly or indirectly, to amend, waive or terminate any provision of this Section 5.3 (including this sentence). Notwithstanding anything in this Agreement to the contrary, no restriction or prohibition set forth in this Section 5.3 shall apply to either of Glackin or Ellis in his capacity as a director of CFC or any of its subsidiaries. For purposes of this Agreement, the "Standstill Period" shall mean the period of 60 months beginning on the date of this Agreement. 5.4 Indemnification. CFC hereby agrees to indemnify, defend and hold harmless --------------- CAI and each director, officer and Affiliate (as defined herein) of CAI, including, without limitation, the Shareholders (collectively, the "CAI Group"), from and against all reasonable fees and expenses of counsel incurred by any member of the CAI Group in connection with the defense of any litigation brought against any member of the CAI Group by or on behalf of any shareholder of CFC challenging the validity of this Agreement or the transactions contemplated hereby; provided, that the CAI Group shall reasonably cooperate with CFC in the defense or settlement of any such litigation. The indemnification provided hereunder is not intended to apply to the conduct of any member of the CAI Group outside the scope of this Agreement or the transactions contemplated hereby. Nothing contained herein shall be deemed a waiver of any right of indemnification otherwise available to any member of the CAI Group. 5.5 Waiver and Release. ------------------ (a) CFC, on behalf of itself and its Representatives (as defined herein), for good and sufficient consideration, the receipt and adequacy of which are hereby acknowledged, hereby waives, releases and forever discharges CAI and each Shareholder, and their respective Representatives, from each and every class, individual, or derivative claim, of any kind, known or unknown, from the beginning of the world to the Closing, which CFC or its Representatives had, now have, or may hereafter have, in any capacity, against CAI, the Shareholders and their respective Representatives, or any of them, except for claims arising out of this Agreement. For purposes of this Agreement, "Representatives" shall mean, with respect to a particular party, its officers, directors, employees, shareholders, Affiliates (as such term is defined in Rule 12b-2 under the Exchange Act), and their respective heirs, executors, successors, and administrators. (b) CAI and each Shareholder, on behalf of itself and its respective Representatives, for good and sufficient consideration, the receipt and adequacy of which are hereby acknowledged, hereby waives, releases and forever discharges CFC and its Representatives, from each and every class, individuals, or derivative claim, of any kind, known or unknown, from the beginning of the world to the Closing, which CAI, any Shareholder, or any of their respective Representatives had, now have, or may hereafter have, in any capacity, against CFC and its Representatives, or any of them, except for claims arising out of this Agreement, the Note or the Security Agreement. 5.6 Public Announcements. Promptly following execution of this Agreement, CFC -------------------- shall issue a press release in the form attached hereto as Exhibit B. CFC shall not, and for so long as CFC shall be in compliance with all of its obligations under the Note and the Security Agreement, neither CAI nor any Shareholder shall, (i) make any public statement that is contrary to such press release or (ii) make any public or private statement or issue any press release concerning the subject matter hereof which contains derogatory information or statements regarding the other parties hereto or their Representatives. 5.7 Resignations. At or prior to payment in full of the Note by CFC, each of ------------ Ellis and Glackin shall deliver to CFC a duly executed letter of resignation from the Board of Directors of CFC, substantially in the form of Exhibit C attached hereto. ARTICLE VI MISCELLANEOUS 6.1 Survival of Representations, Warranties and Agreements. Each of the ------------------------------------------------------ representations, warranties, covenants and agreements of the parties contained herein shall survive the Closing indefinitely. 6.2 Expenses. Except as otherwise provided in this Agreement, all costs and -------- expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. 6.3 Notices. All notices and communications required or permitted hereunder ------- shall be in writing, and effective upon receipt, if delivered in person, sent by certified or registered mail (postage prepaid), sent by a nationally recognized overnight courier or sent by means of facsimile with telephone confirmation or receipt as follows (or at such other address or telecopy number for a party as shall be specified by like notice): To CFC: Commercial Federal Corporation P.O. Box 1103 2120 South 72nd Street Omaha, Nebraska 68101 Attention: William A. Fitzgerald Telephone: (402) 554-9200 Telecopy: (402) 390-5256 To the CAI Corporation Shareholders 12770 Coit Road, Suite 902 and CAI: Dallas, Texas 75251 Attention: Robin R. Glackin Telephone: (214) 991-7716 Telecopy: (214) 991-8922 6.4 Modifications; Waivers. The provisions of this Agreement may only be ---------------------- modified by written agreement duly executed by all parties hereto. No waiver of any provision of this Agreement shall be binding unless executed in writing by granting the waiver. No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 6.5 Headings. Captions and headings appearing in this Agreement are for ease -------- of reference only and do not constitute a part of this Agreement. 6.6 GOVERNING LAW. THIS AGREEMENT AND ALL QUESTIONS CONCERNING ITS VALIDITY, ------------- CONSTRUCTION OR PERFORMANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. 6.7 Counterparts. This Agreement may be executed in more than one counterpart, ------------ each of which shall be deemed to be an original, but all of which together shall constitute one and the same document. 6.8 Assignment; Successors and Assigns. This Agreement may not be assigned by ---------------------------------- any party hereto without the prior written consent of CAI, on behalf of itself and the Shareholders, in the case of any assignment by CFC, and CFC, in the case of an assignment by CAI or any Shareholder. This Agreement shall inure to the benefit of, be binding upon, and be enforceable by and against the parties and their respective successors and permitted assigns. 6.9 Entire Agreement. This Agreement constitutes the entire agreement and ---------------- supersedes all prior agreements and understandings, both written and oral, among or between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties have executed this Agreement or caused this Agreement to be executed and delivered by their respective officers or representatives thereunto duly authorized, in each case, as of the date first indicated above. COMMERCIAL FEDERAL CORPORATION CAI CORPORATION By: /s/William A. Fitzgerald By: /s/ Steven M. Ellis William A. Fitzgerald Steven M. Ellis Chairman of the Board and Senior Vice President Chief Executive Officer /s/ Robin R. Glackin Robin R. Glackin /s/ Steven M. Ellis Steven M. Ellis /s/ Byron A. Lax Byron A. Lax EX-10.8 3 EXHIBIT 10.8 Exhibit 10.8 Employment Agreement With William A. Fitzgerald Dated May 15, 1974, As Amended February 14, 1996 EXHIBIT 10.8 AGREEMENT --------- This Agreement, by and between COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION, hereinafter referred to as "Association" and William A. Fitzgerald --------------------- residing in the City of Omaha, Nebraska, hereinafter referred to us as "Fitzgerald". - ------------ WITNESSETH: - ---------- That in consideration of the Agreement hereinafter contained, the parties hereto agree as follows: 1. Fitzgerald has been an employee of the Association since 1955 and shall ---------- ---- continue in the employ of the Association and agrees to serve the Association in such capacity as the Board of Directors of the Association may designate from time to time until terminated by either party on at least 90 days prior to written notice to the other. 2. During the term of his employment, Fitzgerald shall devote his ---------- attention, skill and efforts to the performance of his duties for the good of the Association as he has in the past. 3. The Association shall pay the employee, beginning 5/16/74 and ------- continuing during the term of his employment hereunder, such salary payable monthly, fringe benefits and retirement plan coverage as the Board may from time to time determine, together with deferred compensation payable as provided in paragraph 4 below, unless forfeited by the occurrence of any of the events specified in paragraph 7 below. 4. The benefits to be paid as deferred compensation, unless forfeited as provided herein, shall be paid as follows: A. If Fitzgerald's employment hereunder is terminated on or after he ------------ shall have reached the age of 65, the Association shall pay to him in 120 equal monthly installments, an amount equal to three times the highest annual salary which Fitzgerald received from the Association during the ---------- five-year period ending with the close of the Association's fiscal year in which Fitzgerald attained the age of 65 years. For the purpose of this ---------- agreement, the term "highest annual salary" shall mean the basic compensation paid by the Association to Fitzgerald for such year, excluding ---------- fringe benefits paid for Fitzgerald, contributions to any profit sharing ---------- and pension plans, and any reimbursement for expenses incurred by Fitzgerald on behalf of the Association. If Fitzgerald should die on or ---------- ---------- after his 65th birthday and before the said 120 monthly installments are paid, the unpaid balance shall continue to be paid in installments for the unexpired portion of such 120 month period to such beneficiary as Fitzgerald may designate in writing to the Association. ---------- B. If Fitzgerald's employment is terminated because of disability of ------------ death before he has reach the age of 65, and while he is still in the employ of the Association, then the Association shall pay to Fitzgerald (in ---------- the event of his disability) or his designated beneficiary (in the event of his death), in 120 equal monthly installments an amount equal to three times the highest annual salary which Fitzgerald received from the ---------- Association during the five-year period ending with the close of the Association's fiscal year in which Fitzgerald became disabled or died. If ---------- Fitzgerald should die after his disability and before all of the said 120 ---------- monthly installments are paid, the unpaid balance shall continue to be paid in installments for the expired portion of such 120 month period to such beneficiary as Fitzgerald may designate in writing to the Association. ---------- -1- C. If both Fitzgerald and his designated beneficiary should ---------- die before a total of 120 monthly payments are paid by the Association, then the remaining amount due shall be paid as promptly as possible in one lump sum to the estate of such designated beneficiary. D. The beneficiary referred to in this paragraph may be designated or changed by Fitzgerald (without the consent of any prior ---------- beneficiary) on a form provided by the Association and delivered to the Association before his death. If no such beneficiary shall have been designated, or if no designated beneficiary shall survive Fitzgerald, ---------- the installment payments payable under this paragraph shall be payable to Fitzgerald's estate. ------------ E. Fitzgerald shall be deemed to have become disabled, for ---------- purposes of paragraph 4B above, if the Board of Directors of Association shall find, on the basis of medical evidence satisfactory to such Board, that Fitzgerald is totally disabled, mentally or physically, so as to be ---------- prevented from carrying out the duties of his office to the satisfaction of the Board of Directors and that such disability will be permanent and continuous during the remainder of his life. 5. The installments to be paid to Fitzgerald under paragraph 4A and ---------- 4B above, shall commence on the first day of the month next following the date of the termination of his employment. The said installment payments to be paid to the designated beneficiary under the provision of this paragraph 5 shall commence on a date to be selected by the Association but within one year from the date of death of Fitzgerald. ----------- 6. Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between the Association and Fitzgerald, as designated beneficiary or any other person. To the extent that - ---------- any person acquires the right to receive payments from the Association under this Agreement, such right shall be no longer greater than the right of any unsecured general creditor of the Association. 7. Notwithstanding anything herein contained to the contrary, no payment of any unpaid installment of deferred compensation shall be made and all rights of Fitzgerald, or his designated beneficiary, executors or ---------- administrators, or any other person, to receive payments under this Agreement shall be forfeited if either or all of the following events shall occur: A. Without approval of the Board of Directors of the Association, Fitzgerald has or possesses, directly or indirectly, from ---------- this day forward, any interest in any other Association competing with or inimical to his interest in the Association located within an area 300 miles in any direction from the City of Omaha, Nebraska, all within the determination of the Board of Directors of the Association. B. Fitzgerald shall engage in any activity or conduct which ---------- in the opinion of the Board of Directors of Association is inimical to the best interests of the Association. C. If Fitzgerald's employment by Association is terminated ------------ for any reason other than by retirement, death or disability. 8. Neither Fitzgerald nor his designated beneficiary shall have the ---------- right to commute, encumber or dispose of the right to receive payments hereunder, which payments and the right thereto are expressly declared to be nonassignable and nontransferable, except by which or by the laws of descent and distribution. -2- 9. If the Board of Directors of the Association shall find that any person to whom any payment is payable under this Agreement is unable to care for his affairs because of illness or accident, or is a minor, any payment due (unless a prior claim thereof shall have been made by duly appointed guardian, committee or other legal representative) may be paid to the spouse, child, parent, brother or sister, or to any person deemed by the Board of Directors of the Association may determine. Any such payment shall be a complete discharge of the liabilities of the Association under this Agreement. 10. Nothing contained herein shall be construed as conferring upon Fitzgerald the right to continue the employ of the Association as an executive - ---------- or in any other capacity. 11. Any deferred compensation payable under this Agreement shall not be deemed salary or other compensation to Fitzgerald for the purposes of ---------- computing benefits to which he may be entitled under any pension, profit sharing or other arrangement of the Association for the benefit of its employees. 12. This Agreement shall be binding upon and inure to the benefit of the Association, its successors and assign and Fitzgerald, his heirs, executors, ---------- administrators and legal representatives. 13. The deferred compensation under this Agreement is understood to be in addition to the compensation salary, or other benefits Fitzgerald is now ---------- receiving or such compensation, salary or other benefits as he may be receiving by action of the Board of Directors of the Association up to the date of his retirement pursuant to the terms of this Agreement. 14. This Agreement has been executed in the State of Nebraska and shall be construed in accordance with the laws of the State of Nebraska. Executed this 15th day of May, 1974. COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION, Attest: /s/ Opal M. Wiess By /s/ William F. Fitzgerald - -------------------------------- --------------------------------- Assistant Secretary President /s/ Donald L. Schinzel /s/ William F. Fitzgerald - -------------------------------- ----------------------------------- Witness -3- AMENDMENT NO. 1 TO THE 1974 AGREEMENT ("PLAN") DATED MAY 15,1974 BETWEEN WILLIAM A. FITZGERALD ("FITZGERALD") AND COMMERCIAL FEDERAL SAVINGS & LOAN (n/k/a "COMMERCIAL FEDERAL BANK F.S.B.") ("BANK") The current plan between Fitzgerald and Bank be, and is hereby amended, by adding a new subparagraph 7(a). By virtue of this attachment, Fitgerald will, as the date of this amendment, become fully vested in all benefits provided to him by the Plan. All as of this 14th day of February, 1996. By /s/ James A. Laphen -------------------- Chief Operating Officer of Commercial Federal Bank /s/ William A. Fitzgerald ------------------------- EX-10.9 4 EXHIBIT 10.9 Exhibit 10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, As Amended February 14, 1996 - ------------------------------------------------------------------------------- EXHIBIT 10.9 COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION SURVIVOR INCOME PLAN (Amended and Restated July 1, 1986) Commercial Federal Savings and Loan Association ("Commercial Federal") hereby establishes a survivor income plan for certain of its and its subsidiaries' Key Executives in recognition of the loyalty, length of service and contributions which said employees have made and will make to the success of said companies, as follows: Section 1. Definitions. ----------- The following terms shall have the meanings set forth below: (a) "Base Benefits' shall mean an amount equal to 40% of base salary of a Key Executive (before any reduction for salary reduction or deferral amounts) but not less than $40,000 per year. (b) "Beneficiary" means the person or persons entitled under Section 5 to receive a Survivor Benefit after a Participant's death. (c) "Committee" means the Committee appointed to administer this Plan under Section 7 of this Plan. (d) "Key Executive" means the President, Executive Vice Presidents and Senior Vice Presidents of Commercial Federal Savings and Loan Association, and the Presidents and salaried Chairmen of such of its subsidiaries who adopt the Plan. (e) "Participant" means a present or former Key Executive designated to participate in this Plan on whose account a Survivor Benefit will be payable under Section 3. (f) "Plan" means this Survivor Income Plan, as amended from time to time. (g) "Survivor Benefit" means a benefit payable under Section 3 of this Plan. Section 2. Participation. ------------- All officers of Commercial Federal who are Key Executives shall participate in the Plan. Key Executives of subsidiaries of Commercial Federal appointed by the subsidiaries adopting the Plan also shall participate. A Beneficiary shall be eligible for benefits only as hereinafter provided. Section 3. Survivor Benefit. ---------------- (a) If a Participant's employment ends because of death while he is a Key Executive, his Beneficiary shall receive an annual Survivor Benefit equal to 100% of the Participant's Base Benefit, for a period of 10 years. A Participant shall be considered to be employed while on an authorized leave of absence, as determined by Commercial Federal. (b) If a Participant (i) remains a Key Executive of Commercial Federal until his retirement at normal retirement age (as established from time to time by the Committee), and (ii) dies following such normal retirement, then his Beneficiary shall receive upon his death an annual Survivor Benefit equal to 100% of the Participant's Base Benefit, for a period of 10 years. (c) If a Participant does not satisfy the conditions of Section 3(a) or 3(b) above, no Survivor Benefit shall be payable on his account. Section 4. Payment of Survivor Benefit. --------------------------- (a) The annual Survivor Benefit shall be paid in equal monthly installments, commencing on the first day of the second month following the Participant's death. The monthly installments shall continue for 120 months. The amount of each monthly installment shall be equal to 100% of the Participant's Base Benefit divided by 12. (b) A Participant, with the consent of the Committee, may during his lifetime elect a different method of payment, provided that in all events the Survivor Benefit shall be payable over a period of not less than one month nor more than 180 months. If a Participant elects to have the Survivor Benefit paid in a manner other than 120 equal monthly installments, the actuaries then servicing Commercial Federal shall determine the present value, (using an interest rate determined by the Committee) of the payment method so elected, and the amount of the Survivor Benefit shall be revised accordingly, so that the value of the Survivor Benefit, determined at the time of the Participant's death, is the same as if the standard method of payment was used. Section 5. Beneficiaries. ------------- (a) A Participant may designate one or more Beneficiaries to receive a Survivor Benefit payable on the Participant's account under this Plan. Beneficiaries shall be designated only upon forms made available by or satisfactory to the Committee, and filed by the Participant with the Committee. (b) At any time prior to his death, a Participant may change his designation of Beneficiary by filing a substitute designation of Beneficiary with the Committee. (c) In the absence of an effective designation of Beneficiary, or if all persons so designated shall have predeceased the Participant or shall have died before the Survivor Benefit shall have been fully distributed, the balance of the Survivor Benefit shall be paid to the Participant's surviving spouse, or if none, to the Participant's issue per stripes or, of no issue, to the personal representative of the Participant's estate. Notwithstanding the foregoing, unless the Participant has made a designation to the contrary, if a Participant designates his surviving spouse as primary beneficiary to his Survivor Benefit and if said spouse dies after payments have begun but before all payments have been made, the remaining Survivor Benefit shall be paid to such persons as said spouse may appoint by will, or, in the absence of such appointment, to said spouse's estate. (d) If a Survivor Benefit is payable to a minor or person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct Commercial Federal to pay such Survivor Benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Survivor Benefit. Such distribution shall completely discharge the Committee and Commercial Federal from all liability with respect to such benefit. Section 6. Unfunded Plan. ------------- (a) Benefits to be provided under this Plan are unfunded obligations of Commercial Federal and its subsidiaries. Nothing contained in this Plan shall require Commercial Federal to segregate any monies from its general funds, to create any trust, to make any special deposits, or to purchase any policies of insurance with respect to such obligations. If Commercial Federal or it subsidiaries elect to purchase individual policies of insurance on one or more of the Participants to help finance its obligations under this Plan, such individual policies and the proceeds there-from shall at all times remain the sole property of Commercial Federal or such subsidiaries shall have ownership rights in such policies of insurance. (b) No Participant shall be required or permitted to make contributions to this Plan. Section 7. Plan Administration. ------------------- (a) This Plan shall be administered by a Committee appointed by the Board of Directors of Commercial Federal. The Committee shall be the administrator of this Plan and shall be solely responsible for its general administration and interpretation and for carrying out the respective provisions hereof, and shall have such powers as may be necessary to do so. Commercial Federal may from time to time establish rules for the administration of this Plan and the transaction of its business. Any action by the Committee shall be final, conclusive and binding on each Participant and all persons claiming by, through or under any Participant. (b) Commercial Federal may employ or engage such agents, accountants, actuaries, counsel, other experts and other persons as it shall deem necessary or desirable in connection with the interpretation and administration of this Plan. Commercial Federal shall be entitled to rely upon all certificates made by an accountant or actuary selected by Commercial Federal. Commercial Federal and its committees, officers, directors and employees shall not be liable for any action taken, suffered or omitted by them in good faith in reliance upon the advice or opinion or any counsel, accountant, actuary or other expert and all action so taken, suffered or omitted shall be conclusive upon each of them and upon all other persons interested in this Plan. (c) Commercial Federal may require proof of the death of any Participant and evidence of the right of any person to receive any Survivor Benefit. (d) Claims under this Plan shall be filed with Commercial Federal on its prescribed forms. (e) Commercial Federal shall withhold from benefits paid under this Plan any taxes or other amounts required to be withheld by law. Section 8. Miscellaneous. ------------- (a) No Survivor Benefit shall be subject in any manner to alienation, sale, transfer, assignment, pledge or encumbrance of any kind unless specifically approved in writing in advance by the Committee. Any attempt to alienate, sell, transfer, assign, pledge or otherwise encumber any Survivor Benefit, whether presently or hereafter payable, shall be void unless so approved. Except as required by law, no Survivor Benefit payable under this Plan shall in any manner be subject to garnishment, attachment, execution, or other legal process, or be liable for or subject to the debts or liability of any Participant or Beneficiary. Notwithstanding any Plan provision to the contrary, the Board of Directors of Commercial Federal shall have the right to amend, modify, suspend, or terminate this Plan at any time. No amendment, suspension or termination shall adversely affect the right of a Beneficiary to receive a Survivor Benefit payable as the result of the death of a Participant which occurred prior to the effective date of such amendment, suspension or termination. (c) This document shall be construed in accordance with the laws of the State of Nebraska. (d) Nothing contained in this Plan shall be construed as a contract of employment between any Participant and Commercial Federal or to suggest or create a right in any Participant to be continued in employment as a Key Executive or other employee of Commercial Federal. (e) Commercial Federal and the Committee may impose such other lawful terms and conditions on participation in this Plan as deemed desirable. Members of the Committee may participate in this Plan. (f) This Plan shall become effective as of the 1st day of July, 1986. COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION By /s/ Donald L. Schinzel -------------------------------------------- AMENDMENT NO. 1 TO COMMERCIAL FEDERAL SAVINGS & LOAN SURVIVOR INCOME PLAN Section 2(c) of the Plan shall be amended to read as follows: If a Participant does not satisfy the conditions of Section 3(a) or 3(b) above, no Survivor Benefit shall be payable on his account; provided, however if a Participant terminates employment to his normal retirement date, the Company may, in its sole discretion, grant to the Participant's Beneficiary a Survivor Benefit in such amount and for such period as is determined by the Committee. DATED this 27th day of August 1986. ---- ------ COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION By /s/ Donald L. Schinzel -------------------------------------------- AMENDMENT NO. 2 TO COMMERCIAL FEDERAL SAVINGS PLAN SURVIVOR INCOME PLAN The Plan shall be amended effective July 1, 1987 as follows: 1. Section 4 shall be amended to read as follows: "Section 4. Payment of Survivor Benefit. --------------------------- The annual Survivor Benefit shall be paid in equal monthly installments, commencing on the first day of the second month following the Participant's death. The monthly installments shall continue for 120 months. The amount of each monthly installment shall be equal to 100% of the Participant's Base Benefit divided by 12." 2. Section 5 shall be amended to read as follows: "Section 5. Beneficiaries. ------------- "(a) Upon the death of the Participant the Survivor Benefit shall be paid to the Participants' surviving spouse, if any. If the Participant has no surviving spouse or if said spouse shall have died before the Survivor Benefit shall have been fully distributed, the Benefit shall be distributed to the Participant's issue per stirpes, or if no issue, to the Participant's parents. If there is no beneficiary as listed above, no Benefit will be paid. "(b) If a Survivor Benefit is payable to a minor or person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct Commercial Federal to pay such Survivor Benefit to the guardian, legal representative or person having the care and custody of such minor, incompetent or incapable person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Survivor Benefit. Such distribution shall completely discharge the Committee and Commercial Federal from all liability with respect to such benefit." DATED this 24th day of June 1987. ---- ---- COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION BY /s/ Donald L. Schinzel -------------------------------------------- AMENDMENT NO. 3 TO COMMERCIAL FEDERAL SAVINGS AND LOAN SURVIVOR INCOME PLAN The Plan shall be effective August 31, 1988 amended as follows: 1. Section 1(d) shall be amended to read as follows: "Key Executive" means a member of the group of persons consisting of the President, Executive Vice President and Senior Vice President of Commercial Federal Savings and Loan Association and the Presidents and salaried Chairmen of such of its subsidiaries to adopt the Plan. 2. Section 2 shall be amended to read as follows: Key Executives of Commercial Federal who are designated by the Executive Personnel Committee of the Board of Directors of Commercial Federal as Participants shall participate in the Plan. Key Executives of subsidiaries of Commercial Federal appointed by the subsidiaries adopoting the Plan shall also participate. A Beneficiary shall be eligible for benefits only as hereinafter provided. 3. Amendment No. 1 to Commercial Federal Savings and Loan Survivor Income Plan shall be amended by deleting the reference to "Section 2(c)" and inserting in its place as follows: Dated this 31st day of August 1998. ---- ------ COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION By /s/ Donald L. Schinzel -------------------------------------------- AMENDMENT NO.4 TO COMMERCIAL FEDERAL BANK SURVIVOR INCOME PLAN (f/k/a COMMERCIAL FEDERAL SAVINGS & LOAN) The Commercial Federal Bank Survivor Income Plan ("Plan") is hereby amended as follows: 1. A new paragraph numbered as Section 4 and entitled Vesting Schedule shall be added to the Plan. The terms of such amendment shall be those out in Exhibit I attached to this resolution; 2. In addition, current paragraphs 4,5,6,7 and 8 renumbered as 5,6,7,8 and 9, and 3. The Chief Operating Officer, or his designee, is hereby authorized to take all steps, and do all things necessary to implement this amendment. All as of this 14th day of February, 1996. By /s/ James A. Laphen ---------------------------- Chief Operating Officer of Commercial Federal Bank EX-10.10 5 EXHIBIT 10.10 Exhibit 10.10 Form of Change of Control Executive Severance Agreements entered into with Two First Vice Presidents Dated October 2, 1995 EXHIBIT 10.10 CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT ------------------------------------------------ THIS CHANGE OF CONTROL EXECUTIVE SEVERANCE ("Agreement") is entered into as of the 2nd of October 1995, by and between COMMERCIAL FEDERAL CORPORATION, a --- ------------ Nebraska corporation (the "Corporation"), and its wholly-owned subsidiary, COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK (the "Bank"), referred to collectively as the "Employer," and ____________________ (the "Executive"). RECITALS: A. The Executive is a key member of the management of the Employer. It is in the best interests of the Corporation, its shareholders, and the Bank to provide an inducement to the Executive to remain in the service of the Employer in the event of any proposed or anticipated Change of Control of the Employer as defined herein, as well as to facilitate an orderly transition in the event of a Change of Control. B. The Employer wishes to provide economic security for the Executive in the event of a Change of Control. C. The following provisions have been approved by the Boards of Directors of the Corporation and the Bank (the "Boards"), and apply in the event of a Change of Control: 1. Duration. This Agreement will remain in force until such time as the -------- Employer terminates this Agreement, or the Executive terminates his or her employment, or the Employer terminates the employment of the Executive prior to a Change of Control. The Employer may amend or terminate this Agreement at any time prior to a Change of Control Event, as defined herein. However, if this Agreement is terminated in anticipation of a Change of Control Event, such termination shall be a "Constructive Involuntary Termination" as defined herein. 2. Change of Control. A Change of Control shall be deemed to have ----------------- occurred in each of the following events, referred to herein as a "Change of Control Event": a. At any time a majority of the directors of the Corporation or the Bank are not the persons for whom election proxies have been solicited by the Boards, or persons then serving as directors appointed by the Boards, except where such appointments are necessitated by the removal of directors. b. At any time forty nine percent (49%) or more of the outstanding stock of the Corporation or the Bank is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor thereto) by any person or entity (excluding the Corporation, the Bank, or the Executive) or any combination or persons of entities acting in concert. c. At any time the shareholders of the Corporation or the Bank approve an agreement to merge or consolidate the Corporation or the Bank with or into another corporation, or to sell or otherwise dispose of all, or substantially all of the assets of the Corporation or the Bank. 3. Constructive Involuntary Termination. A Constructive Involuntary ------------------------------------ Termination is deemed to have occurred if, in anticipation of a Change of Control Event, or after such an event has occurred, any of the following occurs: a. This Agreement or the Executive's employment is terminated by Employer in anticipation of a Change of Control, or by the successor corporation after a Change of Control. b. The Executive's compensation level is reduced, the Executive is given diminished responsibilities, or the Executive is given a lower job title. c. The level of the Executive's participation in incentive compensation is reduced or eliminated. d. The Executive's benefit coverage or perquisites are reduced or eliminated, except to the extent such reduction or elimination applies to all other employees. e. The Executive's office location is changed to a location greater than fifty (50) miles from the location of the Executive's office at the time of the Change of Control Event. 4. Termination for Cause. The benefits provided herein shall not be due --------------------- in the event the Executive's employment is terminated for cause. With respect to the Corporation, the term "cause" shall mean, and be limited to any act of personal dishonesty, willful misconduct, or willful violation of law, which act results in substantial loss to the Employer or its reputation. With respect to the Bank, termination for cause shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. 5. Voluntary Termination. The benefits provided herein shall not be due --------------------- in the event of a voluntary termination. A voluntary termination will have occurred if the Executive resigns from the successor corporation after a Change of Control under conditions other than as specified in Section 3. 6. Regulatory Provisions Applicable Only to the Bank. ------------------------------------------------- a. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12U.S.C.(S) 1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended; and (ii) reinstate (in whole or in part) any of its obligations which were suspended. b. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12U.S.C.(S) 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. c. If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. d. All obligations of the Bank under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: i. At the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or ii. At the time the FDIC or the RTC approves a supervisory merger to resolve problems related to operation of the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 7. Severance Award. If, in anticipation of a Change of Control, or after --------------- a Change of Control Event has occurred, the Executive's employment is terminated without cause, or a Constructive Involuntary Termination occurs, the following provisions apply: a. The Executive will continue to receive, in equal monthly payments, the base salary and all commissions and bonuses (including short- and long-term incentive programs and stock options granted pursuant to the Corporation's executive incentive plan) in effect at the time of the involuntary termination for a period of 18 months from the date of termination. For purposes of this paragraph, commissions and bonuses shall be determined by computing the average monthly commission and/or bonus earned by the Executive for the twenty four (24) months immediately preceding the month in which such termination of employment occurs. The amount so determined shall be paid to the Executive each month together with such base salary, during such 18 month period. It is not the intent of the parties to this Agreement that payment hereunder will constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the "Code"). Any payments made by the Bank to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. (S)1828 (K) any regulation promulgated thereunder. All benefits and payments all be reduced, if necessary, to the largest aggregate amount that will result in no portion thereof being subject to federal excise tax or being nondeductible to the Employer for federal income tax purposes. The Executive will determine which payments or benefits are to be reduced, if necessary to conform to this provision. b. During the period of months for which the Executive receives compensation under the preceding paragraph, the Executive will also continue to participate in any health, disability, and life insurance plan to the same extent as if the Executive were an employee of the Employer or any successor corporation. In the event that the executive's participation in any of these plans is prohibited, the Employer or successor corporation, at its sole expense, shall provide the Executive with benefits substantially similar to those which the Executive is entitled to receive under any such plan. The Executive shall remain responsible for that portion of the costs of such plans for which the Executive was responsible prior to termination. c. The Executive will also continue to participate until the end of such period in any perquisite program (auto, country club, dining club, physical, tax planning, etc.) of the Employer or any successor corporation, to the same extent as if the Executive were an employee of the successor corporation. In the event the providing of any such program is not possible, the Employer shall arrange, at its sole cost, to provide an equivalent benefit. The Employer may elect to substitute a cash payment equivalent to the projected value of any perquisite over the transition period. d. In the event the Executive obtains employment during the period salary, commissions, and bonuses are payable under Section 7(a), any amounts received by the Executive as a result of such employment shall be offset against and shall serve to reduce the amount payable by the Employer. In addition, any benefits the Executive receives which are similar to those described in Paragraphs 7(b) and (c) shall relieve the Employer from any obligation to provide such benefits to the Executive. The Executive shall provide to the Employer all federal and state tax returns file for any period in which any amounts are paid pursuant to this Agreement, within fifteen (15) days after such returns are filed, and shall provide such other information the Employer may reasonably require to assure compliance with this paragraph. 8. Legal Fees and Expenses. To the extent not prohibited by law, the ----------------------- Employer shall also pay to the Executive one-half (1/2) of all legal fees and expenses reasonably incurred by the Executive as a result of an involuntary termination, including, but not limited to, fees and expenses incurred in seeking to enforce any right or benefit provided by this Agreement. 9. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors of the Corporation and the Bank. The Executive shall have no right to assign, pledge, or otherwise dispose of or transfer any interest in this Agreement, whether directly or indirectly, or in whole or in part. 10. Joint an Several Liability. It is the intent of the parties hereto -------------------------- that the liability of the Corporation and the Bank hereunder be joint and several. If either such party shall be prohibited for any reason from fulfilling the terms hereof, the other such party shall nevertheless be and remain fully liable. 11. Severability. In the event that any portion of this Agreement is held ------------ to be invalid or unenforceable for any reason, it is hereby agreed that invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms, and conditions shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provisions as to make it valid and enforceable. 12. Governing Law. This Agreement shall be construed in accordance with ------------- the laws of the State of Nebraska, and supersedes any existing Change of Control agreement between the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMMERCIAL FEDERAL CORPORATION By /s/ James A. Laphen ------------------------------- James A. Laphen, President COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK By /s/ James A. Laphen ------------------------------- James A. Laphen, President By /s/ ------------------------------- EX-10.11 6 EXHIBIT 10.11 Exhibit 10.11 Change of Control Executive Severance Agreement entered into with a Vice President Dated October 2, 1995 EXHIBIT 10.11 CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT ----------------------------------------------- THIS CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT ("Agreement") is entered into as of the 2nd day of October, 1995, by and between COMMERCIAL --- ------------- FEDERAL CORPORATION, a Nebraska corporation (the "Corporation"), and its wholly-owned subsidiary, COMMERCIAL FEDERAL BANK, a FEDERAL SAVINGS BANK (the "Bank"), referred to collectively as the "Employer," and STAN R. BLAKEY (the "Executive"). RECITALS: A. The Executive is a key member of the management of the Employer. It is in the best interests of the Corporation, its shareholders, and the Bank to provide an inducement to the Executive to remain in the service of the Employer in the event of any proposed or anticipated Change of Control of the Employer as defined herein, as well as to facilitate an orderly transition in the event of a Change of Control. B. The Employer wishes to provide economic security for the Executive in the event of a Change of Control. C. The following provisions have been approved by the Boards of Directors of the Corporation and the Bank (the "Boards"), and apply in the event of a Change of Control: 1. Duration. This Agreement will remain in force until such time as the -------- Employer terminates this Agreement, or the Executive terminates his or her employment, or the Employer terminates the employment of the Executive prior to a Change of Control. The Employer may amend or terminate this Agreement at any time prior to a Change of Control Event, as defined herein. However, if this Agreement is terminated in anticipation of a Change of Control Event, such termination shall be a "Constructive Involuntary Termination" as defined herein. 2. Change of Control. A Change of Control shall be deemed to have ----------------- occurred in each of the following events, referred to herein as a "Change of Control Event": a. At any time a majority of the directors of the Corporation or the Bank are not the persons for whom election proxies have been solicited by the Boards, or persons then serving as directors appointed by the Boards, except where such appointments are necessitated by the removal of directors. b. At any time forty nine percent (49%) or more of the outstanding stock of the Corporation or the Bank is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor thereto) by any person or entity (excluding the Corporation, the Bank, or the Executive) or any combination of persons or entities acting in concert. c. At any time the shareholders of the Corporation or the Bank approve an agreement to merge or consolidate the Corporation or the Bank with or into another corporation, or to sell or otherwise dispose of all, or substantially all of the assets of the Corporation or the Bank. 3. Constructive Involuntary Termination. A Constructive Involuntary ------------------------------------ Termination is deemed to have occurred if, in anticipation of a Change of Control Event, or after such an event has occurred, any of the following occurs: a. This Agreement or the Executive's employment is terminated by Employer in anticipation of a Change of Control, or by the successor corporation after a Change of Control. b. The Executive's compensation level is reduced, the Executive is given diminished responsibilities, or the Executive is given a lower job title. c. The level of the Executive's participation in incentive compensation is reduced or eliminated. - -------------------------------------------------------------------------------- d. The Executive's benefit coverage or perquisites are reduced or eliminated, except to the extent such reduction or elimination applies to all other employees. e. The Executive's office location is changed to a location greater than fifty (50) miles from the location of the Executive's office at the time of the Change of Control Event. 4. Termination for Cause. The benefits provided herein shall not be due --------------------- in the event the Executive's employment is terminated for cause. With respect to the Corporation, the term "cause" shall mean, and be limited to any act of personal dishonesty, willful misconduct, or willful violation of law, which act results in substantial loss to the Employer or its reputation. With respect to the Bank, termination for cause shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. 5. Voluntary Termination. The benefits provided herein shall not be due --------------------- in the event of a voluntary termination. A voluntary termination will have occurred if the Executive resigns from the successor corporation after a Change of Control under conditions other than as specified in Section 3. 6. Regulatory Provisions Applicable Only to the Bank. ------------------------------------------------- a. If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.(S) 1818(e)(3) or (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended; and (ii) reinstate (in whole or in part) any of its obligations which were suspended. b. If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C.(S) 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. c. If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contacting parties. d. All obligations of the Bank under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: i. At the time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or ii. At the time the FDIC or the RTC approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 7. Severance Award. If, in anticipation of a Change of Control, or after --------------- a Change of Control Event has occurred, the Executive's employment is terminated without cause, or a Constructive Involuntary Termination occurs, the following provisions apply: a. The Executive will continue to receive, in equal monthly payments, the base salary and all commissions and bonuses (including short- and long- term incentive programs and stock options granted pursuant to the Corporation's executive incentive plan) in effect at the time of the involuntary termination for a period of 12 months from the date of termination. For purposes of this paragraph, commissions and bonuses shall be determined by computing the average monthly commission and/or bonus earned by the Executive for the twenty four (24) months immediately) preceding the month in which such termination of employment occurs. The amount so determined shall be paid to the Executive each month together with such base salary, during such 12 month period. It is not the intent of the parties to this Agreement that payment hereunder will constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the "Code"). Any payments made by the Bank to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. S 1828 (K) any regulation promulgated thereunder. All benefits and payments shall be reduced, if necessary, to the largest aggregate amount that will result in no portion thereof being subject to federal excise tax or being nondeductible to the Employer for federal income tax purposes. The Executive will determine which payments or benefits are to be reduced, if necessary to conform to this provision. b. During the period of months for which the Executive receives compensation under the preceding paragraph, the Executive wil also continue to participate in any health, disability, and life insurance plan to the same extent as if the Executive were an employee of the Employer or any successor corporation. In the event that the Executive's participation in any of these plans is prohibited, the Employer or successor corporation, at its sole expense, shall provide the Executive with benefits substantially similar to those which the Executive is entitled to receive under any such plan. The Executive shall remain responsible for that portion of the costs of such plans for which the Executive was responsible prior to termination. c. The Executive will also continue to participate until the end of such period in any perquisite program (auto, country club, dining club, physical, tax planning, etc.) of the Employer or any successor corporation, to the same extent as if the Executive were an employee of the successor corporation. In the event the providing of any such program is not possible, the Employer shall arrange, at its sole cost, to provide an equivalent benefit. The Employer may elect to substitute a cash payment equivalent benefit. The Employer may elect to substitute a cash payment equivalent to the projected value of any perquisite over the transition period. d. In the event the Executive obtains employment during the period salary, commissions, and bonuses are payable under Section 7(a), any amounts received by the Executive as a result of such employment shall be offset against and shall serve to reduce the amount payable by the Employer. In addition, any benefits the Executive receives which are similar to those described in Paragraphs 7(b) and (c) shall relieve the Employer from any obligation to provide such benefits to the Executive. The Executive shall provide to the Employer all federal and state tax returns filed for any period in which any amounts are paid pursuant to this Agreement, within fifteen (15) days after such returns are filed, and shall provide such other information the Employer may reasonably require to assure compliance with this paragraph. 8. Legal Fees and Expenses. To the extent not prohibited by law, the ----------------------- Employer shall also pay to the Executive one-half (1/2) of all legal fees and expenses reasonably incurred by the Executive as a result of an involuntary termination, including, but not limited to, fees and expenses incurred in seeking to enforce any right or benefit provided by this Agreement. 9. Successors and Assigns. This Agreement shall be binding upon and inure ---------------------- to the benefit of the successors of the Corporation and the Bank. The Executive shall have no right to assign, pledge, or otherwise dispose of or transfer any interest in this Agreement, whether directly or indirectly, or in whole or in part. 10. Joint an Several Liability. It is the intent of the parties hereto that -------------------------- the liability of the Corporation and the Bank hereunder be joint and several. If either such party shall be prohibited for any reason form fulfilling the terms hereof, the other such party shall nevertheless be and remain fully liable. - -------------------------------------------------------------------------------- 11. Severability. In the event that any portion of this Agreement is ------------ held to be invalid or unenforceable for any reason, it is hereby agreed that invalidity or unenforceable shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provisions as to make it valid and enforceable. 12. Governing Law. This Agreement shall be construed in accordance ------------- with the laws of the State of Nebraska, and supersedes any existing Change of Control agreement between the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMMERCIAL FEDERAL CORPORATION By /s/ James A. Laphen ----------------------------- James A. Laphen, President COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK By /s/ James A. Laphen ----------------------------- James A. Laphen, President /s/ Stan R. Blakey ----------------------------- STAN R. BLAKEY EX-11 7 EXHIBIT 11 Exhibit 11 Computation of Earnings Per Share COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE Computation of Income per Common and Common Equivalent Shares: - --------------------------------------------------------------------------------
Year Ended June 30, ------------------------------------- 1996 1995(1) 1994(1) ------------ ------------ ------------ Income (loss) before cumulative effects of changes in accounting principles $55,306,241 $31,180,779 $(1,626,577) Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- -- 6,933,271 Postretirement benefits, net of income tax benefit -- -- (336,176) ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- 6,597,095 ----------- ----------- ----------- Net income $55,306,241 $31,180,779 $ 4,970,518 =========== =========== =========== - -------------------------------------------------------------------------------------------------------------- PRIMARY: - -------- Weighted average common shares outstanding 14,626,099 14,188,477 14,047,598 Add shares applicable to stock options and warrants using average market price 221,044 225,123 288,265 ----------- ----------- ----------- Total average common and common equivalent shares outstanding 14,847,143 14,413,600 14,335,863 =========== =========== =========== Income (loss) before cumulative effects of changes in accounting principles $ 3.73 $ 2.16 $ (.11) Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- -- .48 Postretirement benefits, net of income tax benefit -- -- (.02) ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- -- .46 ----------- ----------- ----------- Net income per common and common equivalent share $ 3.73 $ 2.16 $ .35 =========== =========== =========== - -------------------------------------------------------------------------------------------------------------- FULLY DILUTED (2): - ------------------ Weighted average common shares outstanding 14,626,099 14,188,477 14,047,598 Add shares applicable to stock options and warrants using the period-end market price if higher than average market price and other dilutive factors 226,213 228,176 291,447 ----------- ----------- ----------- Total average common and common equivalent shares outstanding assuming full dilution 14,852,312 14,416,653 14,339,045 =========== =========== =========== Income (loss) before cumulative effects of changes in accounting principles $ 3.72 $ 2.16 $ (.11) Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- -- .48 Postretirement benefits, net of income tax benefit -- -- (.02) ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- -- .46 ----------- ----------- ----------- Net income per common share assuming full dilution $ 3.72 $ 2.16 $ .35 =========== =========== =========== - --------------------------------------------------------------------------------------------------------------
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad which was accounted for as a pooling of interests. Accordingly, the Corporation's results of operations, weighted average shares outstanding and earnings (loss) per common share have been restated to include the accounts and operating results of Railroad. (2) This calculation is submitted in accordance with Regulation S-K under Item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3.0%.a - -------------------------------------------------------------------------------- EX-13 8 EXHIBIT 13 Exhibit 13 Annual Report to Stockholders for the Fiscal Year Ended June 30, 1996 Impressive Growth Continues In October 1993, prior to the implementation of a strategic acquisitions and expansion program, Commercial Federal's retail franchise consisted of 49 branch offices in four states - 27 in Nebraska, 20 in Colorado (Metro Denver) and one each in Kansas and Oklahoma. The markets served by these offices are represented by the blue dots on the map below. [MAP OF STATES APPEARS HERE] . Markets served as of October 1993 . Markets added from October 1993 through October 1995 In addition to 24 full-service offices, Commercial Federal operates 71 agency offices located throughout the state of Kansas. Since that time, Commercial Federal has completed six acquisitions--with a seventh acquisition (Heritage Financial) expected to close during October 1996. Through the acquisitions, the Company will have added (upon the close of the Heritage acquisition) 56 branch offices (prior to consolidations) and approximately $1.8 billion of deposits to its franchise. In addition, Commercial Federal has, during this same time frame, added five de novo branches through its expansion program. As a result of its focus on growth, in a 36-month period, Commercial Federal more than doubled its number of retail offices in highly-desirable markets throughout five states, while increasing its deposit base to $4.3 billion. Commercial Federal is a major regional financial services institution that continues to grow in size, reach and strength. The Company's growth is expected to continue during fiscal 1997 and beyond. Successful By All Measures Commercial Federal entered the 1996 fiscal year with the dual objectives of growing its retail franchise and further enhancing shareholder value. As a result of the continued implementation of the Company's strategic operating plans, we are pleased to report that those objectives were successfully met. As your Company continues to achieve new record levels of operating performance, the efforts of each and every Commercial Federal employee continue to be focused on making your Company one of the premier financial services institutions in the country. Our trend of year-over-year improvement indicates that we are well on our way toward that goal. Throughout this annual report to shareholders you will see evidence of your Company's many achievements and successes. As you read this report, be assured that Commercial Federal sees the accomplishments of fiscal 1996 as a stepping stone to even greater future success on your behalf. The Board of Directors, Management & Employees of Commercial Federal [LOGO APPEARS HERE] Creating Growth In A Fast Changing Financial World Highlights Of The 1996 Fiscal Year During the 1996 fiscal year, your Company: . Attained record operating income from its core banking business; . Achieved a 40 percent increase in the market price of the Company's common stock, advancing from $27.25 on June 30, 1995, to $38.25 on June 30, 1996; . Increased stockholders' equity by 22 percent and book value per common share by 16 percent; . Instituted the payment of regular quarterly cash dividends to shareholders; . Increased the size of its retail franchise by 10 percent; . Completed two strategic acquisitions and entered into a definitive acquisition agreement scheduled to close in October 1996; and . Established account relationships with 55,100 new households - a 26 percent increase.
Table of Contents Financial Highlights.......................................... 1 Letter to Shareholders........................................ 2 Board of Directors............................................ 9 Corporate Profile............................................. 10 Financial Information......................................... 11 Investor Information.......................................... 75 Executive Officers and Senior Management...................... 76 Branch Locations.............................................. 77
Financial Highlights - -------------------------------------------------------------------------------- Amounts in thousands except per share data 1996 1995(1) - -------------------------------------------------------------------------------- FOR THE YEAR: Interest income........................................$ 491,092 $ 454,368 Net interest income.................................... 162,775 149,842 Provision for loan losses.............................. (6,107) (6,408) Other income........................................... 49,646 45,066 General and administrative expenses.................... 114,517 102,554 Amortization of goodwill and core value of deposits.... 9,529 10,262 Accelerated amortization of goodwill................... -- 21,357 Income before income taxes............................. 82,268 54,327 Provision for income taxes............................. 26,962 23,146 Net income............................................. 55,306 31,181 Per common share: Net income............................................ 3.73 2.16 Dividends declared.................................... .40 -- Weighted average shares outstanding.................... 14,847 14,414 General and administrative expenses divided by average assets (2).................................... 1.75% 1.62% Return on average assets (2)........................... .84% .49% Return on average equity (2)........................... 14.74% 9.98% - -------------------------------------------------------------------------------- AT JUNE 30: Total assets...........................................$6,607,670 $6,569,579 Cash and investment securities......................... 288,870 335,626 Mortgage-backed securities............................. 1,180,046 1,364,907 Loans receivable, net.................................. 4,813,164 4,540,692 Deposits............................................... 4,304,576 4,011,323 Advances from Federal Home Loan Bank................... 1,350,290 1,787,352 Other borrowings....................................... 439,301 273,676 Stockholders' equity................................... 413,277 337,614 Book value per common share............................ 27.39 23.65 Tangible book value per common share................... 24.69 21.04 Nonperforming assets to total assets................... 1.01% .95% Weighted average interest rates: Yield on interest-earning assets...................... 7.81% 7.71% Rate on interest-bearing liabilities.................. 5.33% 5.50% Net interest rate spread.............................. 2.48% 2.21% Net yield on interest-earning assets.................. 2.68% 2.42% - -------------------------------------------------------------------------------- Regulatory capital ratios of the Bank: Tangible capital...................................... 6.18% 5.16% Core capital.......................................... 6.41% 5.47% Risk-based capital: Tier 1 capital....................................... 12.56% 12.02% Total capital........................................ 13.62% 13.12% - --------------------------------------------------------------------------------
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad Financial Corporation (Railroad). This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements and consolidated financial data have been restated to include the accounts and operating results of Railroad. (2) General and administrative expenses divided by average assets for fiscal year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000 and $901,000, respectively, associated with the Railroad merger and the 1995 proxy contest. Return on average assets and return on average stockholders' equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $2,920,000 and $585,000, respectively, associated with the Railroad merger and the 1995 proxy contest. Return on average assets and return on average stockholders' equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the accelerated amortization of goodwill totaling $21,357,000. - -------------------------------------------------------------------------------- Commercial Federal Corporation Annual Report 1996 1 To Our Shareholders By any measure, fiscal year 1996 was a successful year for your Company and your investment. During the fiscal year, Commercial Federal continued to build on the very beneficial growth trend previously established. As a result of Commercial Federal's emphasis on growth, profitability and shareholder value, we have many very positive developments to share with you in our annual report to shareholders. [PICTURE OF WILLIAM A. FITZGERALD & JAMES A. LAPHEN APPEARS HERE] At the outset, it is important to note that we are not growing the Company simply for the sake CORE OPERATIONS of growth, rather, our designed growth plans are ($ in Millions) a means of increasing the size of our customer base, increasing profitability and, most [BAR GRAPH APPEARS HERE] importantly, increasing the value of your investment in Commercial Federal. We realize $90.9 that it is not the size of our franchise that is $82.5 important, but the size of the returns on the $75.9 investments we have made. As you will note in $60.1 this report, our growth has led to excellent $34.7 bottom-line results on your behalf. 6/92 6/93 6/94 6/95 6/96 OPERATING EARNINGS REACH RECORD LEVEL Commercial Federal reported record operating earnings of $57.6 million, or $3.88 per share, for the fiscal year ended June 30, 1996. This represents a 15 percent increase compared with the previous record high for operating earnings of $50.3 million, or $3.49 per share, attained in fiscal 1995. Operating earnings do not include the effect of nonrecurring income and expenses. Fiscal 1996 marks the fourth consecutive year that Commercial Federal has achieved a record high for operating earnings. Operating earnings are a key measure of profitability in that they reflect the Company's ability to generate income from its core operations - or basic banking business - absent the effect of any one-time or nonrecurring items. Reported net income for fiscal 1996 - which includes the impact of nonrecurring income and expenses - was $55.3 million, or $3.73 per share. The difference between reported net income and operating earnings for fiscal 1996 was the effect of the nonrecurring charges associated with the Company's purchase of Railroad Financial Corporation - which was accounted for as a pooling of interests - and the cost incurred by the Company as a result of the 1995 proxy contest. Together, these nonrecurring charges totaled $3.5 million after-tax, or $.23 per share. In 2 Commercial Federal Corporation Annual Report 1996 addition, the Company realized an income tax benefit of $1.0 million, or $.07 per share, for the final disposition of leases the Company owned in a nuclear generating facility and net after-tax gains of $164,000, or $.01 per share, from the sale of securities classified as available for sale. The fiscal 1996 reported net income compares with reported net income of $31.2 million, or $2.16 per share, for fiscal 1995. The fiscal 1995 net income was negatively affected by the write-off of approximately $21.4 million, or $1.49 per share, related to goodwill acquired prior to 1994. In addition, the fiscal 1995 results reflect income benefits totaling approximately $2.3 million, or $.16 per share, resulting from lower core value amortization and provision for income taxes. CORE PROFITABILITY CONTINUES TO GROW Commercial Federal's core business is focused on acquiring consumer deposits, making loans - primarily single-family mortgage loans and consumer loans - and mortgage loan servicing. As such, the Company's core profitability is closely tied to both its net interest income - the difference between what it earns on interest-earning assets and what it pays on interest-bearing liabilities - as well as its income derived from noninterest sources such as retail fees and loan servicing fees. The Company's growth in both net interest income and noninterest income was exceptionally strong in fiscal 1996 and was the primary reason for Commercial Federal's record operating income for the year. Net interest income, after provision for loan losses, for fiscal 1996 was $156.7 million, an increase of more than 9 percent compared with $143.4 million for the prior fiscal year. Commercial Federal's interest rate spread increased by "Commercial Federal is considerably stronger than its peers in terms of generating noninterest revenue. During the last 12 months, noninterest revenue sources accounted for nearly 23 percent of total revenue while the average for the 20 largest thrifts in the nation was just 15 percent." --Dain Bosworth 27 basis points from June 30, 1995, to June 30, 1996 - a 12 percent year-over- year improvement. The driving factors behind this improvement were the Company's ability to beneficially manage its cost of funds, favorable repricing of adjustable-rate assets and the positive impact of acquisitions. The three primary components of noninterest income - retail fees and charges, loan servicing fees and other operating income - total $48.6 million in fiscal 1996 compared with $41.8 million for fiscal 1995 - a 16 percent increase. Commercial Federal's loan servicing Net Interest Income portfolio, at June 30, 1996, reached $9.8 ($ in Millions) billion, of which $5.9 billion were loans serviced for others. The Company generated [BAR GRAPH APPEARS HERE] a 13 percent increase in loan servicing $156.7 fees in fiscal 1996 compared with the $143.4 previous year. Commercial Federal is not $131.5 only one of the largest loan servicers in $121.9 the Midwest, it is also one of the most $87.4 efficient servicers in the nation with an 6/92 6/93 6/94 6/95 6/96 Commercial Federal Corporation Annual Report 1996 3 average of approximately 1,200 loans serviced per employee compared to a national average of approximately 850 loans. The Company will continue to explore opportunities to further expand this profitable business line. "Over the past two years Commercial Federal has proven itself to be an opportunistic yet disciplined acquirer. We expect management will continue to look for fill-in opportunities but not at the cost of diluting shareholder value." --Joseph K. Morford, Alex Brown The other major source of noninterest income for Commercial Federal is retail fees and charges which grew by 34 percent in fiscal 1996 to reach $12.7 million as compared to the previous year. Management anticipates further increases in the amount of income derived from retail fees and charges in the future. Commercial Federal is well known for providing high-quality customer service. The Company's recent results prove that customer service is a very important factor for consumers when selecting a financial institution. Customers are willing to pay for outstanding service and Commercial Federal will continue to provide its customers with the highest-quality service possible. GROWTH THROUGH EXPANSION AND ACQUISITION Since October 1993, when Commercial Fee Income Federal implemented its latest ($ in Millions) acquisitions program, the Company has doubled, as of June 30, 1996, its number [BAR GRAPH APPEARS HERE] of retail locations to 98 branches in $40.6 five states. Commercial Federal's five $34.3 state market of Nebraska (34 branches), $31.4 Kansas (24), Oklahoma (19), Colorado $26.7 (20) and Iowa (1) provides the Company $23.4 with a meaningful presence in desirable markets throughout the Midwest. Each 6/92 6/93 6/94 6/95 6/96 market is supported by strong economies where unemployment rates are significantly below national averages and property values have remained steady or are increasing. During fiscal 1996, Commercial Federal completed two strategic acquisitions. The first, Railroad Financial Corporation, brought Commercial Federal 18 full- service offices and 71 agency offices throughout Kansas and added approximately $421 million of deposits. In addition, Railroad Financial brought a construction lending expertise to Commercial Federal that will provide a very beneficial income source as this product is added throughout Commercial Federal's system. Construction loans are shorter-term, higher-rate assets that will prove to be a valuable addition to the Company's asset/liability mix. Also during the fiscal year, Commercial Federal completed its acquisition of Conservative Savings Corporation, headquartered in Omaha, Nebraska, which had deposits of approximately $198 million. This transaction brought nine full- service offices (seven in Nebraska and one each in Kansas and Iowa) to Commercial Federal's growing franchise. During the later part of fiscal 1996, Commercial Federal entered into a definitive agreement to acquire Heritage 4 Commercial Federal Corporation Annual Report 1996 Financial, Ltd., the parent company of Hawkeye Federal Savings, headquartered in Boone, Iowa. Once completed - the acquisition is set to close during October 1996 - this transaction will add another six offices in Iowa and approximately $160 million of deposits. As previously explained, it is important to note that we are not undertaking acquisitions simply to grow in size. Each acquisition completed to date has been accretive to earnings, significantly improved our franchise and, most importantly, enhanced shareholder value. In addition to its acquisition activities, Commercial Federal has been adding de novo branches in selected markets where opportunities warrant an enhanced market presence. During the past two years, six new branches have been completed -four in Oklahoma and two in Nebraska - each of which has exceeded growth expectations. The Company currently has five additional locations planned or under consideration - two in Colorado and one each in Kansas, Oklahoma and Iowa-which will, upon completion, further bolster the Company's competitive position in key markets. Management continues to initiate discussions with other financial institutions both within the existing five-state market and contiguous markets regarding potential future acquisition opportunities. There remain numerous potential acquisitions in the midwestern section of the United States. Commercial Federal will remain true to its strategy of completing only those acquisitions which meet the Company's requirements for accretion and franchise enhancement. SALES CULTURE TAKES HOLD One of the benefits of acquisitions activity is that it can significantly enhance the number of customers served by the Company and, therefore, the number of prospects to whom new products and services can be sold. And selling is exactly what Commercial Federal is doing. "While we continue to expect disciplined acquisitions to be a catalyst for future earnings growth, so will improving core fundamentals and the Company's commitment to increasing its consumer loan volume and strengthening its relationship banking (cross-selling) efforts." --Steven R. Schroll, Piper Jaffray During the 1996 fiscal year, Commercial Federal increased the number of households served by 26 percent as compared with the previous year. These new households opened, on average, in excess of 1.5 relationships per household resulting in a total of 54,871 new relationships for Commercial Federal. The Company's sales efforts have Gross Revenues placed a special emphasis on checking ($ in Millions) accounts and consumer loans, two base [BAR GRAPH APPEARS HERE] accounts from which long-term $212.4 relationships can be built. As a result $194.9 of the Company's intensified sales efforts, $173.2 $182.4 Commercial Federal increased its number of $162.5 checking accounts by more than 37 percent year-over-year. The number of consumer loan 6/92 6/93 6/94 6/95 6/96 customers also grew dramatically, Commercial Federal Corporation Annual Report 1996 5 increasing by 39 percent. Consumer loan outstanding balances grew by 47 percent during fiscal 1996. During the latter part of the year, Commercial Federal implemented a Company-wide comprehensive sales training program. The program, entitled Fast Forward, has, in a very short period of time, led to a substantial increase in "Commercial Federal's market share is significant, its asset quality is exceptionally strong, its earnings growth driven by tight cost control and its strategy for growth is sound." --Caren E. Mayer, Montgomery Securities the number of accounts sold to each household served. Our overall cross-sell ratio for new customers has increased by approximately 50 percent in the seven months that Fast Forward has been in place. Commercial Federal will continue to stress sales and cross-selling efforts throughout the Company as a means of building profitable, long-term relationships with its customers. As reported to you in last year's annual Efficiency Ratio report, Commercial Federal has made significant investments in infrastructure designed to in- [BAR GRAPH APPEARS HERE] crease volume capacity and turnaround times for its mortgage loan production. Those 62.6% investments have proven successful. The 56.1% Company's fiscal 1996 mortgage loan volume 53.5% reached $1.4 billion. This represents a 77 53.3% percent increase compared with fiscal 1995 52.1% volume of $797 million - which does not 6/92 6/93 6/94 6/95 6/96 reflect the impact of the pooling of interests accounting treatment of the Railroad Financial acquisition. Mortgage loans can now be approved in as little as two days and closing can be accomplished in as few as 15 days. This competitive service advantage has increased Commercial Federal's market share in each of the markets it serves and bodes well for future increases in mortgage loan volume. CHANGING FACE OF COMMERCIAL FEDERAL Not only is Commercial Federal a growing company, it is a dynamic and evolving company as well. Your Board and management remain attuned to industry changes and customer expectations while ensuring that Commercial Federal is properly positioned to take advantage of marketplace opportunities. To that end, Commercial Federal is undertaking steps designed to alter both its asset and liability portfolios - over time - toward a goal of being better able to meet the financial service needs of its customers. Changes to the asset and liability product mixes will put a greater emphasis on shorter-term, higher- yielding products that reprice more frequently in reaction to interest rate movements. These changes will be undertaken so as to ensure that profitability is continually enhanced along the way. Commercial Federal has also been proactive in the implementation of new consumer-oriented technologies. The Company was one of the first financial institutions in the nation to offer home banking services by providing Microsoft's Money, Intuit's Quicken and America 6 Commercial Federal Corporation Annual Report 1996 Online's BankNow financial software to its customer base. Our customers now have an even wider variety of ways to conduct business with Commercial Federal, including home banking via personal computers, extended evening and weekend branch hours, 24-hour customer service lines and Telephone Bill Paying. Additional information about Commercial Federal and its competitive products now can be accessed through Commercial Federal's "web site" on the internet. Commercial Federal's internet address is: http://www.comfedbank.com. Commercial Federal continues to make strategic investments in infrastructure upgrades. These investments are designed to enhance customer service, increase employee efficiency and ultimately to reduce operating expense. Your Company has, for several years, been one of the most efficiently operated financial institutions in the United States. Management remains focused on ensuring that cost control and operating efficiency continue to be high priorities throughout the Company. We realize that each dollar of operating expense saved represents increased value for you, our shareholders. PENDING ISSUES COULD FAVORABLY IMPACT COMMERCIAL FEDERAL Commercial Federal anticipates that Congress will enact legislation, during fiscal 1997, to merge the Savings Association Insurance Fund and the Bank Insurance Fund. At present, we believe that such legislation will call for a one-time assessment to Commercial Federal, but would dramatically lower Commercial Federal's future insurance premium from the current level of $.23 per $100 of deposits to just $.04 per $100 of deposits. On the basis of Commercial Federal's total deposits at June 30, 1996, of $4.3 billion, this action would result in an additional $5.3 million of annual income for your Company. We anticipate that Congress will also consider legislation that would create a single charter for all financial Stockholders' Equity institutions, effectively doing away ($ in Millions) with the regulatory differences between [BAR GRAPH APPEARS HERE] thrifts and commercial banks. Management believes that, if approved, the single $413.3 charter would further enhance Commercial $337.6 Federal's ability to compete in the $304.6 marketplace and thereby provide $297.8 additional value for shareholders. $253.5 6/92 6/93 6/94 6/95 6/96 In July of 1996, the Supreme Court upheld a lower court decision regarding the validity of claims put forth by thrift institutions against the United Retail Deposits States government related to the ($ in Millions) accounting treatment of supervisory [BAR GRAPH APPEARS HERE] goodwill. Commercial Federal has a supervisory goodwill lawsuit pending and is encouraged by the Supreme Court $4,305 decision. We believe that Commercial $4,011 Federal's case will be heard by the $3,676 courts during fiscal 1997. While the $2,731 outcome of the lawsuit can not be $2,660 predicted, there exists the potential 6/92 6/93 6/94 6/95 6/96 for future benefit to shareholders. Commercial Federal Corporation Annual Report 1996 7 FAVORABLE SUBSEQUENT TRANSACTION In a transaction that has significantly enhanced the value of your investment in Commercial Federal, your Company, on August 21, 1996, announced that it had repurchased 1,250,100 shares of Commercial Federal common stock. At "...we believe the Company has earned a right to independence through its proven ability to build franchise value and to grow its earnings at a faster rate than the rest of the industry." -- Joseph K. Morford, Alex. Brown the time of the transaction, this represented approximately 8.3 percent of the Company's outstanding shares. This purchase will enhance future earnings per share by between 5.0 and 6.0 percent per year. The purchase was consistent with Commercial Federal's policy of completing transactions which will be accretive to earnings and thereby enhance shareholder value. This is an investment in an asset - Commercial Federal stock - that the Board of Directors and management of your Company perceive to be very valuable. Given Commercial Federal's strong financial position and its continued growth prospects, this is a very significant and valuable transaction for shareholders. FUTURE REMAINS BRIGHT Commercial Federal made tremendous strides during fiscal 1996 toward its goal of becoming one of the top Total Assets performing thrift institutions in the ($ in Millions) United States. We believe that we have, [BAR GRAPH APPEARS HERE] in fact, attained that goal. Be assured, however, that we are not content to rest $6,608 on our past achievements. We now will $6,570 strive to ensure that your Company $5,982 becomes one of the premier financial $5,262 institutions - bank or thrift - in this $5,036 country. This is a lofty ambition, but 6/92 6/93 6/94 6/95 6/96 we can not and will not settle for a lesser goal. Our shareholders - the true owners of Commercial Federal - deserve nothing less than our total commitment and effort toward this objective. The Board of Directors, management and employees of Commercial Federal remain focused on the objective of further enhancing the value of your investment in the Company. As you have noted in this report, the Company's results continue to indicate that many successes are being attained on your behalf. And, we remain optimistic about our future. Commercial Federal's emphasis during fiscal 1997 will be to continue to build upon the growth trends established during 1996. That growth will take many forms, but each individual and department goal will be tied to the overall objective of maximizing the value of your Commercial Federal stock. Thank you for your confidence, encouragement and continued support. /s/ William A. Fitzgerald William A. Fitzgerald Chairman of the Board and Chief Executive Officer /s/ James A. Laphen James A. Laphen President and Chief Operating Officer 8 Commercial Federal Corporation Annual Report 1996 Board of Directors [PICTURE WILLIAM A. FITZGERALD - Chairman of the Board and Chief Executive APPEARS Officer of Commercial Federal Corporation and Commercial Federal Bank. HERE] Mr. Fitzgerald joined Commercial in 1955. He was named Vice President in 1968, Executive Vice President in 1973, President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is active in the banking community and participates in numerous industry organizations, including the Heartland Community Bankers Association Board and the board of America's Community Bankers. Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973. Committee memberships: Executive (1990- Present); Finance (1992-Present); Executive Personnel (1985-1987); Stock Option (1984-1985); Personnel (1982-1984). [PICTURE TALTON (TAL) K. ANDERSON - Owner and President of three automobile APPEARS dealerships in Omaha, Nebraska, as well as one in Lincoln, Nebraska. HERE] Mr. Anderson is also the President of a Nebraska-based automobile leasing company and a reinsurance company. He purchased his first dealership in 1984. In 1988, he acquired Southroads Toyota and has been owner of Lexus of Omaha since 1990. In 1993, he bought Lincoln Dodge of Lincoln, Nebraska. Mr. Anderson incorporated Protection Life, a reinsurance company, in 1974. Mr. Anderson also serves on the Board of Trustees for Boys Town and is actively involved with the University of Nebraska at Omaha Alumni Board and the University of Nebraska College of Business Administration Advisory Board. Mr. Anderson joined Commercial Federal's Board of Directors in November 1991. Committee memberships: Executive (1996-Present); Audit (1992-Present); Compensation and Stock Option (1993-Present). [PICTURE ROBERT F. KROHN - Vice Chairman and Chief Executive Officer of PSI APPEARS Group, Inc., a national document processing company based in Omaha, HERE] Nebraska. Mr. Krohn served as Chairman of the Board of Directors for Commercial Federal Corporation from 1990 through 1994. He is the former President and Chief Executive Officer of HDR, Inc., an international architecture, planning and engineering firm. In addition to Commercial Federal's Board of Directors, Mr. Krohn serves on the boards of Ameritas Financial Services, Inc., Streck Laboratories, PSI Group, Inc., and Immanuel Health Care Systems. Mr. Krohn has served on Commercial Federal's Board of Directors since January 1984. Committee memberships: Executive Committee (1990-Present); Audit (1996-Present); Finance (1991-1995); Compensation and Stock Option (1995); Executive Personnel (1986 and 1990); Stock Option (1985 and 1990-1992); Personnel (1985). [PICTURE CHARLES M. LILLIS - President and Chief Executive Officer of US West APPEARS Media Group, the international cellular, directory publishing and HERE] cable television units of US West, Inc. Mr. Lillis has been published in leading academic journals and has been the recipient of numerous awards and recognitions. He currently serves in advisory capacities at the University of Colorado and the University of Oregon. He is also a director of SuperValu, Inc. Mr. Lillis has served on Commercial Federal's Board of Directors since June 1988. Committee memberships: Finance (1992-Present); Compensation and Stock Option (1988-1990 and 1996-Present); Audit (1991); Executive Personnel (1989). [PICTURE CARL G. MAMMEL - Chairman of the Board of Mammel & Associates, a APPEARS consulting firm providing services in executive benefits, employee HERE] benefits planning and wealth transfer planning. Mr. Mammel is considered one of the nation's top experts in the field of employee benefit planning and executive benefits. He is also a managing partner and Executive Vice President of M Financial Corporation, a network of financial service firms throughout the United States. In addition to Commercial Federal's Board of Directors, Mr. Mammel is a member of the boards of M Life, M Financial Management Partnership, the Salvation Army and Childrens Hospital of Omaha. Mr. Mammel joined Commercial Federal's Board of Directors in November 1991. Committee memberships: Finance (1992-Present); Compensation and Stock Option (1993-Present). [PICTURE ROBERT S. MILLIGAN - Chairman of the Board and Chief Executive Officer APPEARS of MI Industries, a protein processing and agri-business company HERE] headquartered in Lincoln, Nebraska, which produces products for pharmaceutical, biological and research markets throughout the world, and President of Oak Grove Farms, a major producer of pork. Mr. Milligan has held positions with the U.S. Department of Justice, the U.S. Office of Trade, the Environmental Protection Agency and the U.S. Department of Commerce. In addition to Commercial Federal, his board memberships include Bryan Memorial Hospital, Nebraska Wesleyan University, Boy Scouts and the Nebraska Council of Economic Education. Mr. Milligan joined Commercial Federal's Board of Directors in June 1987. Committee memberships: Finance (1996-Present); Audit (1990-1995); Executive Committee (1992-1995). [PICTURE JAMES P. O'DONNELL - Senior Vice President and Chief Financial Officer APPEARS of ConAgra, Inc., an Omaha, Nebraska-based international diversified HERE] food company with annual sales of approximately $25 billion. Mr. O'Donnell, a certified management accountant, is responsible for ConAgra's finance, control and reporting, risk management, tax, and internal audit functions. In addition to Commercial Federal, he is a member of several civic boards and currently serves as Chairman of the Board of Quality Living, Inc., an Omaha rehabilitative center. Mr. O'Donnell has served on Commercial Federal's Board of Directors since June 1991. Committee memberships: Executive Committee (1996-Present); Finance (1991-Present); Compensation and Stock Option (1993-Present). Commercial Federal Corporation Annual Report 1996 9 Corporate Profile Commercial Federal Corporation (NYSE: CFB), headquartered in Omaha, Nebraska, is one of the largest retail financial institutions in the Midwest and the 18th largest thrift institution in the country with approximately $6.6 billion in assets. Founded in 1887, Commercial Federal operates 98 retail locations serving the states of Nebraska, Kansas, Oklahoma, Colorado, and Iowa. Commercial Federal also has an acquisition pending which, when completed, will add six offices in Iowa to Commercial Federal's franchise. In addition, Commercial Federal benefits from a network of CASHBOX automated teller machines (ATMs) and belongs to several regional, national and international electronic systems that provide customers access to their accounts at more than 285,000 ATMs in this country and abroad. As a complement to its savings bank, the Company has other major subsidiary operations: Commercial Federal Mortgage Corporation, a mortgage bank with offices in Nebraska, Colorado, Kansas, Oklahoma, and Iowa; Commercial Federal Investment Services, Inc., which provides a full range of brokerage and other investment services to consumers; and Commercial Federal Insurance Corporation, offering a variety of insurance products. Commercial Federal has 1,470 employees. The Company's operations encompass traditional thrift products, mortgage financing, consumer lending, insurance and stock brokerage services. These services are united by a common theme of meeting the financial needs of individuals and families for comprehensive, convenient and cost-effective retail financial services. 10 Commercial Federal Corporation Annual Report 1996
FINANCIAL INFORMATION Selected Consolidated Financial Data............... 12 Management's Discussion and Analysis............... 14 Consolidated Statement of Financial Condition...... 34 Consolidated Statement of Stockholders' Equity..... 35 Consolidated Statement of Operations............... 36 Consolidated Statement of Cash Flows............... 38 Notes to Consolidated Financial Statements......... 40 Management's Report on Internal Controls........... 73 Independent Auditors' Report....................... 74
Commercial Federal Corporation Annual Report 1996 11 SELECTED CONSOLIDATED FINANCIAL DATA - ---------------------------------------------------------------------------------------------------------------- For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1) - ----------------------------------------------------------------------------------------------------------------- Interest income.................................... $ 491,092 $ 454,368 $ 393,854 $ 404,628 $ 447,883 Interest expense................................... 328,317 304,526 256,102 276,584 352,527 -------- -------- -------- -------- -------- Net interest income................................ 162,775 149,842 137,752 128,044 95,356 Provision for loan losses.......................... (6,107) (6,408) (6,248) (6,185) (7,981) Loan servicing fees................................ 27,891 24,731 22,227 18,776 16,029 Retail fees and charges............................ 12,747 9,547 9,155 7,874 7,419 Real estate operations............................. 172 1,490 (1,449) (5,243) (9,373) Gain (loss) on sales of loans...................... 164 (1,695) 1,433 1,194 4,489 Gain (loss) on sales of securities, net............ 253 (41) 220 (231) 37,728 Gain on sale of loan servicing rights.............. 452 3,519 5,929 6,903 12,039 Other operating income............................. 7,967 7,515 7,178 5,169 9,486 General and administrative expenses................ 114,517 102,554 94,115 89,560 80,314 Amortization of goodwill and core value of deposits....................... 9,529 10,262 14,131 10,544 11,389 Valuation adjustment and accelerated amortization of goodwill......................... -- 21,357 52,703 -- -- -------- ------- ------- ------- ------- Income before income taxes, extraordinary items and cumulative effects of changes in accounting principles.............. 82,268 54,327 15,248 56,197 73,489 Provision for income taxes......................... 26,962 23,146 16,875 22,081 27,652 ------- ------- ------- ------- ------- Income (loss) before extraordinary items and cumulative effects of changes in accounting principles................ 55,306 31,181 (1,627) 34,116 45,837 Extraordinary items (2)............................ -- -- -- -- (5,046) Cumulative effects of changes in accounting principles (3)........................ -- -- 6,597 -- -- ------- ------- ------- ------- ------- Net income......................................... $ 55,306 $ 31,181 $ 4,970 $ 34,116 $ 40,791 ======== ======== ======== ======== ======== Earnings per share (fully diluted): Income (loss) before extraordinary items and cumulative effects of changes in accounting principles................. $ 3.72 $ 2.16 $ (.11) $ 2.42 $ 4.68 Extraordinary items (2)............................ -- -- -- -- (.52) Cumulative effects of changes in accounting principles (3)........................ -- -- .46 -- -- -------- -------- -------- -------- -------- Net income......................................... $ 3.72 $ 2.16 $ .35 $ 2.42 $ 4.16 ======== ======== ======== ======== ======== - --------------------------------------------------------------------------------------------------------------- Other data: Net interest rate spread......................... 2.34% 2.26% 2.43% 2.57% 2.03% Net yield on interest-earning assets............. 2.58% 2.46% 2.59% 2.65% 2.01% Return on average assets (4)..................... .84% .49% .09% .67% .79% Return on average equity (4)..................... 14.74% 9.98% 1.54% 12.39% 20.12% Dividend payout ratio (5)........................ 10.75% -- -- -- -- Total number of branches at end of period........ 98 89 73 55 54 - ----------------------------------------------------------------------------------------------------------------
12 Commercial Federal Corporation Annual Report 1996
SELECTED CONSOLIDATED FINANCIAL DATA (continued) - ---------------------------------------------------------------------------------------------------------------- For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1) - ---------------------------------------------------------------------------------------------------------------- Total assets.................................... $6,607,670 $6,569,579 $5,982,307 $5,262,336 $5,035,913 Investment securities (6)....................... 253,643 300,481 290,807 254,889 316,366 Mortgage-backed securities (7).................. 1,180,046 1,364,907 1,350,402 952,539 779,969 Loans receivable, net (8)....................... 4,813,164 4,540,692 3,970,626 3,655,740 3,460,294 Goodwill and core value of deposits............. 40,734 37,263 67,661 87,946 98,490 Deposits........................................ 4,304,576 4,011,323 3,675,825 2,731,127 2,660,489 Advances from Federal Home Loan Bank............ 1,350,290 1,787,352 1,625,456 1,868,779 1,465,062 Securities sold under agreements to repurchase.. 380,755 208,373 157,432 154,862 445,479 Other borrowings................................ 58,546 65,303 66,640 76,966 54,311 Stockholders' equity............................ 413,277 337,614 304,568 297,848 253,528 Book value per common share..................... 27.39 23.65 21.51 21.28 20.95 Tangible book value per common share (9)........ 24.69 21.04 16.73 15.00 12.81 Regulatory capital ratios of the Bank: Tangible capital.............................. 6.18% 5.16% 4.69% 4.62% 2.95% Core capital ................................. 6.41% 5.47% 5.53% 5.93% 4.63% Risk-based capital: Tier 1 capital................................ 12.56% 12.02% 12.18% 11.93% 8.25% Total capital................................. 13.62% 13.12% 13.16% 12.81% 8.87% - ------------------------------------------------------------------------------------------------------------------
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad Financial Corporation (Railroad). This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements and consolidated financial data have been restated for all periods prior to the acquisition to include the accounts and operating results of Railroad. (2) Represents the loss on early extinguishment of debt, net of income tax benefits, less the effect of the utilization of net operating losses carried forward. (3) Represents the cumulative effect of the change in the method of accounting for income taxes less the cumulative effect of the change in accounting for postretirement benefits, net of income tax benefit. (4) Based on daily average balances during fiscal years 1996, 1995 and 1994 and on average monthly balances for fiscal years 1993 and 1992. Return on average assets and return on average stockholders' equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $2,920,000 and $585,000, respectively, associated with the Railroad merger and the 1995 proxy contest. Return on average assets and return on average stockholders' equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the accelerated amortization of goodwill totaling $21,357,000. Return on average assets and return on average stockholders' equity for fiscal year 1994 are .75% and 13.11%, respectively, excluding the after-tax effect of the intangible assets valuation adjustment and the cumulative effects of changes in accounting principles totaling $43,938,000 and $6,597,000, respectively. (5) Represents dividends declared per share divided by net income per share. The Corporation established a quarterly common stock cash dividend policy on October 4, 1995, and declared dividends totaling $5.9 million, or $.40 per common share, during fiscal year 1996. (6) Includes investment securities available for sale totaling $9.9 million, $3.0 million, $5.4 million and $1.3 million, respectively, at June 30, 1996, 1995, 1994 and 1993. No investment securities were available for sale at June 30, 1992. (7) Includes mortgage-backed securities available for sale totaling $263.2 million, $37.0 million, $45.0 million, $41.3 million and $20.8 million, respectively, at June 30, 1996, 1995, 1994, 1993 and 1992. (8) Includes loans held for sale totaling $89.4 million, $113.4 million, $187.7 million, $171.8 million and $158.4 million, respectively, at June 30, 1996, 1995, 1994, 1993 and 1992. (9) Calculated by dividing stockholders' equity, reduced by the amount of goodwill and core value of deposits, by the number of shares of common stock outstanding at the respective dates. - -------------------------------------------------------------------------------- Commercial Federal Corporation Annual Report 1996 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- GENERAL Commercial Federal Corporation (the Corporation) is a unitary non- diversified savings and loan holding company whose primary asset is Commercial Federal Bank, a Federal Savings Bank (the Bank), which is one of the largest retail financial institutions in the Midwest and the 18th largest publicly held thrift holding company in the United States. The Bank is a consumer-oriented financial institution that emphasizes single-family residential real estate lending, consumer lending, retail deposit activities, including demand deposit accounts, and mortgage banking. At June 30, 1996, the Corporation operated 34 branch offices in Nebraska, 24 branch offices in Kansas, 20 branch offices in greater metropolitan Denver, Colorado, 19 branch offices in Oklahoma and one branch office in Iowa. Throughout its 109 year history, the Corporation has emphasized customer service. To serve its customers, the Corporation conducts loan origination activities through its 98 branch office network, loan offices of its wholly-owned mortgage banking subsidiary and a nationwide correspondent network consisting of approximately 375 mortgage loan originators. The Corporation also provides insurance and securities brokerage and other retail financial services. Net income for fiscal year 1996 was $55.3 million, or $3.73 per share, which compares to net income of $31.2 million and $5.0 million, respectively, for fiscal years 1995 and 1994, or $2.16 per share and $.35 per share, respectively. On October 2, 1995, the Corporation consummated its acquisition of Railroad Financial Corporation (Railroad), parent company of Railroad Savings Bank, FSB. This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements have been restated for all periods prior to the acquisition to include the accounts and results of operations of Railroad. Railroad's results of operations were reported on a calendar year basis previous to its merger into the Corporation. However, in restating prior periods, Railroad's accounts and results of operations were conformed to the Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years, Railroad's accounts and results of operations for the six months ended June 30, 1994, including total revenue of $18.1 million and net income totaling $185,000, were excluded from reported results of operations for the restated combined companies but are included in the Corporation's Consolidated Statement of Stockholders' Equity. Fiscal year 1996 operations also include $3.6 million (pre-tax) of merger and transition related expenses from this acquisition. During fiscal year 1996, in addition to Railroad, the Corporation acquired Conservative Savings Corporation (Conservative) headquartered in Omaha, Nebraska. See "Acquisitions During Fiscal Year 1996" for additional information. The Corporation's strategy for growth emphasizes both internal and external growth. Operations focus on increasing deposits, including demand accounts, making loans (primarily single-family mortgage and consumer loans) and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to expand its operations within its market areas either through direct marketing efforts aimed at increasing market share, branch expansions, or opening additional branches. The Corporation's retail strategy will continue to be centered on attracting new customers and selling both new and existing customers multiple products and services. Additionally, the Corporation will continue to build and leverage an infrastructure designed to increase fee and other income. Complementing its strategy of internal growth, the Corporation will continue to grow its five-state franchise through an ongoing program of selective acquisitions of other financial institutions. Acquisition candidates will be selected based on the extent to which the candidates can enhance the Corporation's retail presence in new or existing markets and complement the Corporation's present retail network. ACQUISITIONS DURING FISCAL YEAR 1996 On October 2, 1995, the Corporation consummated its acquisition of Railroad and, pursuant to the terms of the merger agreement, 2,156,232 shares of Railroad's common stock were delivered to the Corporation in exchange for approximately 1,377,617 shares of the Corporation's common stock. Cash was paid for fractional shares. Railroad operated 18 branches and 71 agency offices throughout the state of Kansas and at September 30, 1995, had assets of approximately $602.9 million, deposits of approximately $421.4 million and stockholders' equity of approximately $27.7 million. This acquisition was accounted for as a pooling of interests. On February 1, 1996, the Corporation consummated its acquisition of Conservative, parent company of Conservative Savings Bank, FSB. Under the terms of the 14 Commercial Federal Corporation Annual Report 1996 merger agreement the Corporation acquired all of the outstanding shares of Conservative's common stock (1,844,838 shares) and preferred stock (460,000 shares). Each share of Conservative's common stock was exchanged for $6.34 in cash and .2453 shares of the Corporation's common stock and each share of Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares of the Corporation's common stock. Cash was paid for fractional shares. Based on the Corporation's closing stock price of $36.50 at February 1, 1996, the total consideration for this acquisition approximated $44.1 million. Before purchase accounting adjustments, Conservative had assets of approximately $302.9 million, deposits of approximately $197.9 million and stockholders' equity of approximately $35.1 million. Conservative operated nine branches with seven located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. Three of the former Conservative branches and two branches of the Corporation closed in the consolidation process pursuant to this acquisition. The Conservative acquisition was accounted for as a purchase with core value of deposits and goodwill resulting from this transaction totaling $13.0 million. PENDING ACQUISITION On May 16, 1996, the Corporation entered into a Reorganization and Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank, Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye Federal). Under the terms of the Merger Agreement, the Corporation will acquire all 180,762 of the outstanding shares of Heritage's common stock. As defined in the Merger Agreement, Heritage's common stock will be exchanged for cash and a pro-rata amount of the Corporation's common stock. Based on the Corporation's closing stock price on June 30, 1996, of $38.25, each share of Heritage common stock would be exchanged for $18.73 in cash and 2.559 shares of the Corporation's common stock, resulting in the exchange of approximately 462,570 shares of the Corporation's common stock with a total aggregate value approximating $21.1 million. Cash will be paid in lieu of fractional shares. Additional cash consideration up to approximately $1.2 million may be paid to Heritage shareholders pending the final disposition of an impaired asset of Hawkeye Federal. At June 30, 1996, Heritage had assets of approximately $182.1 million, deposits of approximately $157.9 million and stockholders' equity of approximately $12.9 million. Heritage operates six branches located in Iowa. This pending acquisition is expected to be completed in October 1996. SUBSEQUENT EVENT-REPURCHASE OF COMMON STOCK On August 21, 1996, the Corporation consummated the repurchase of 1,250,100 shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas- based investment company, for an aggregate purchase price of approximately $48.9 million. Such purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of approximately $28.2 million and surrender of a warrant (valued at approximately $20.7 million) which would have enabled the Corporation to purchase 99 shares of non-voting common stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. After repurchase, a total of 13,844,036 shares of common stock remain issued and outstanding as of August 21, 1996. The cash portion of the repurchase was financed in part by a loan from a financial institution secured by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As consideration, the Corporation also reimbursed CAI Corporation for certain expenses totaling $2.2 million incurred in connection with its ownership of the 1,250,100 shares, including costs and expenses incurred in connection with the 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. Concurrent with the close of the repurchase, two directors of the Corporation, who also serve as executive officers of CAI Corporation, resigned from the Corporation's Board of Directors. In addition, CAI Corporation and each of its shareholders agreed to a standstill agreement for a period of 60 months beginning August 21, 1996. CAI Corporation and the Corporation have each agreed to waive and release all claims against the other and the Corporation has agreed to indemnify CAI Corporation and its directors, officers and affiliates against certain derivative claims. Commercial Federal Corporation Annual Report 1996 15 REGULATORY ISSUES The Corporation's savings deposits are insured by the Savings Association Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation (FDIC). The assessment rate currently ranges from 0.23% of deposits for well-capitalized institutions to 0.31% of deposits for undercapitalized institutions. The FDIC also administers the Bank Insurance Fund (BIF), which has the same designated reserve ratios as the SAIF. On August 8, 1995, the FDIC adopted an amendment to the BIF risk-based assessment schedule which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range from 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well-capitalized institutions, which constitute over 90% of BIF-insured institutions. The FDIC amendment became effective September 30, 1995. Subsequently, the FDIC reduced the premium rate for the most highly rated BIF- insured institutions to the statutory minimum of $1,000 per semi-annual period and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27% of insured deposits. The FDIC amendment creates a substantial disparity in the deposit insurance premiums paid by the BIF and SAIF members and places SAIF- insured savings institutions at a significant competitive disadvantage to BIF- insured institutions. A number of proposals have been considered to recapitalize the SAIF in order to eliminate the premium disparity. Any such proposals would require a one time assessment of an amount sufficient to bring the SAIF to a level equal to 1.25% of insured deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995. Recently, the FDIC revised its estimate of the size of the special assessment to 68 basis points of insured deposits to bring the SAIF statutory level to the 1.25% of insured deposits. Any such assessment will depend on the SAIF fund balance once BIF-SAIF legislation has been passed. It would also depend on adjustments in the assessable base provided in legislation, but still would be allocated among institutions on the basis of deposits at March 31, 1995. Assuming a .68% assessment on a $4.2 billion deposit base, the assessment would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge of approximately $18.3 million to the Corporation. Such assessment would have the effect of reducing the Bank's tangible capital to $390.4 million, or 5.92% of adjusted total assets, core capital to $406.6 million, or 6.15% of adjusted total assets, and risk-based capital to $442.3 million, or 13.08% of risk-weighted assets. The Bank would, on a pro forma basis as of June 30, 1996, continue to exceed the minimum requirements to be classified as a "well- capitalized" institution under applicable regulations. If such a special assessment were required and the SAIF as a result was fully recapitalized, it could have the effect of reducing the Bank's deposit insurance premiums to the SAIF, thereby increasing net income in future periods. Also under consideration by Congress are proposals relating to merger of the BIF and SAIF funds and the elimination of the thrift charter. Management of the Corporation is unable to predict accurately at this time whether any of these proposals will be adopted in their current form or the impact of these proposals on the Corporation. ASSET/LIABILITY MANAGEMENT The operations of the Corporation are subject to the risk of interest rate fluctuations to the extent that there is a difference (i.e., a mismatch) between the amount of the Corporation's interest-earning assets and interest-bearing liabilities which mature or reprice in specified periods. Consequently, when interest rates change, to the extent the Corporation's interest-earning assets have longer maturities or effective repricing periods than its interest-bearing liabilities, the interest income realized on the Corporation's interest-earning assets will adjust more slowly than the interest expense on its interest-bearing liabilities. This mismatch in the maturity and interest rate sensitivity of assets and liabilities is commonly referred to as the "gap." A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a specified period exceeds the amount of interest rate sensitive liabilities maturing or repricing during such period, and is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a specified period exceeds the amount of interest rate assets maturing or repricing during such period. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income, and during a period of declining interest rates, a negative gap would result in an increase in net interest income while a positive gap would adversely affect net interest income. The Corporation has historically invested in interest-earning assets that have a longer duration than its interest-bearing liabilities. The shorter duration of the interest-sensitive liabilities indicates that the Corporation is 16 Commercial Federal Corporation Annual Report 1996 exposed to interest rate risk. In a rising rate environment, in addition to reducing the market value of long-term interest-earning assets, liabilities will reprice faster than assets, therefore decreasing net interest income. To mitigate this risk, the Corporation has placed a greater emphasis on shorter- term higher yielding assets that reprice more frequently in reaction to interest rate movements. In addition, the Corporation has continued its concentration of adjustable-rate assets as a percentage of total assets to benefit the one-year cumulative gap as such adjustable-rate assets reprice and are more responsive to the sensitivity of more frequently repricing interest-bearing liabilities. In connection with its asset/liability management program, the Corporation has had interest rate swap agreements and an interest rate cap agreement with other counterparties under terms that provide an exchange of interest payments on the outstanding notional amount of the swap or cap agreement. Such agreements were used to artificially lengthen the maturity of various interest-bearing liabilities. In accordance with these arrangements, the Corporation pays fixed rates and receives variable rates of interest according to a specified index. The Corporation has reduced its level of such swap agreements to a notional principal amount of $10.0 million at June 30, 1996, from balances of $78.5 million and $109.5 million, respectively, at June 30, 1995 and 1994. The interest rate cap agreement, which was assumed in the Railroad merger, has a notional principal amount of $10.0 million which pays interest when the three- month LIBOR exceeds 7.0%. For fiscal years 1996, 1995 and 1994, the Bank recorded $2.3 million, $4.4 million and $8.5 million, respectively, in net interest expense from these interest rate swap and cap agreements. The interest rate cap agreement terminates March 1997 and the swap agreement matures November 1997. The following table represents management's projected maturity and repricing of the Bank's interest-earning assets and interest-bearing liabilities on an unconsolidated basis at June 30, 1996. The amounts of interest-earning assets, interest-bearing liabilities and interest rate risk management instruments presented which mature or reprice within a particular period were determined in accordance with the contractual terms of such assets, liabilities and interest rate swap agreements, except (i) adjustable-rate loans are included in the period in which they are first scheduled to adjust and not in the period in which they mature and are also adjusted for prepayment rates ranging from 6.5% to 33.8% for single-family residential loans and mortgage-backed securities, (ii) prepayment rates ranging from 7.8% to 29.5%, based on the contractual interest rate, were utilized for fixed-rate, single-family residential loans and mortgage-backed securities, (iii) prepayment rates ranging from 1.8% to 8.5%, based on the contractual interest rate, were utilized for commercial real estate and multi-family loans and a prepayment rate of 42.5% was utilized for consumer loans, (iv) passbook deposits and negotiable order of withdrawal ("NOW") accounts totaling $534.8 million, all of which have fixed- rates, are assumed to mature according to the decay rates as defined by regulatory guidelines, which at June 30, 1996, ranged from 14.0% to 32.0%, (v) market bonus savings and commercial money market accounts totaling $104.7 million are assumed to reprice or mature according to the decay rates as defined by regulatory guidelines, which at June 30, 1996, was 31.0%, and (vi) money market rate deposits totaling $528.0 million are deemed to reprice or mature within the one-year category, even though a certain portion of these deposits is not likely to be interest rate sensitive. Management believes that these assumptions approximate actual experience and considers such assumptions reasonable; however, the interest rate sensitivity of the Bank's interest- earning assets and interest-bearing liabilities could vary substantially if different assumptions were used or if actual experience differs from the assumptions used, such as actual prepayment experience varying from estimates, early deposit withdrawals, and caps on adjustable-rate loans and mortgage-backed securities. Commercial Federal Corporation Annual Report 1996 17
- ----------------------------------------------------------------------------------------------------------------------------------- Within 91 Days Over 1 3 Years (Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Fixed-rate mortgage loans (1) (2)...................................... $ 199,958 $ 299,193 $ 698,584 $1,343,949 $2,541,684 Other loans (2) (3)............................................ 1,163,619 1,548,164 714,656 77,514 3,503,953 Investments (4)................................................ 107,188 21,450 102,038 103,829 334,505 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets........................................ 1,470,765 1,868,807 1,515,278 1,525,292 6,380,142 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Savings deposits............................................ 565,603 104,313 187,319 310,240 1,167,475 Other time deposits......................................... 1,017,645 1,353,786 755,610 62,063 3,189,104 Borrowings (5).............................................. 343,063 646,589 740,060 13,124 1,742,836 Impact of interest rate swap agreements........................................... -- (10,000) 10,000 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities................................ 1,926,311 2,094,688 1,692,989 385,427 6,099,415 - ------------------------------------------------------------------------------------------------------------------------------------ Gap position................................................... (455,546) (225,881) (177,711) 1,139,865 280,727 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative gap................................................. $ (455,546) $ (681,427) $ (859,138) $ 280,727 $ 280,727 - ------------------------------------------------------------------------------------------------------------------------------------ Gap as a percentage of the Bank's total assets.......................................... (6.89)% (3.42)% (2.69)% 17.25% 4.25% Cumulative gap as a percentage of the Bank's total assets................................... (6.89)% (10.31)% (13.00)% 4.25% 4.25% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes conventional single-family and multi-family mortgage loans and mortgage-backed securities. (2) Such amounts are, as applicable, before deductions for unamortized discounts and premiums, loans in process, deferred loan fees and allowance for loan losses. (3) Includes adjustable-rate single-family mortgage loans, adjustable-rate mortgage-backed securities and all other types of loans with either fixed or adjustable interest rates. (4) Included in the "Within 90 Days" column are short-term cash investments of $2.4 million and FHLB stock of $79.1 million. (5) Includes advances from the FHLB, securities sold under agreements to repurchase and other borrowings. - -------------------------------------------------------------------------------- The Bank's one-year cumulative gap is a negative $681.4 million, or 10.31% of the Bank's total assets of $6.606 billion at June 30, 1996, contrasted to a negative $161.0 million, or 2.72% of total assets at June 30, 1995. The interest rate risk policy of the Bank authorizes a liability sensitive one-year cumulative gap not to exceed 10.0%. Accordingly, subsequent to June 30, 1996, adjustments have been made so that the one-year cumulative gap falls within such policy guidelines. RESULTS OF OPERATIONS Net income for fiscal year 1996 was $55.3 million, or $3.73 per share. These results compare to net income for fiscal year 1995 of $31.2 million, or $2.16 per share, and to net income for fiscal year 1994 of $5.0 million, or $.35 per share, which includes the net cumulative effects of changes in accounting principles for income taxes and postretirement benefits of $6.6 million, or $.46 per share. The Corporation's emphasis on single-family residential lending and the promotion of retail financial services, along with the Corporation's growth through acquisitions, continues to have positive effects on the Corporation's core operations. Core earnings for fiscal year 1996 increased 10.2% and 19.7%, respectively, over fiscal years 1995 and 1994. Core earnings, defined as operating income before income taxes excluding (i) gains on sales of mortgage- backed securities and loan servicing rights and (ii) amortization expense and valuation adjustment of intangible assets, totaled $90.9 million during fiscal year 1996 compared to $82.5 million and 18 Commercial Federal Corporation Annual Report 1996 $75.9 million, respectively, during fiscal years 1995 and 1994. This improvement in core earnings resulted primarily from increases in net interest income, loan servicing fees and retail fee income. The increase in net income for fiscal year 1996 compared to fiscal year 1995 is primarily due to the following: a $21.4 million nonrecurring charge for accelerated amortization of goodwill recorded in fiscal year 1995 and not incurred in the current fiscal year, an increase of $13.2 million in net interest income after provision for loan losses, increases of $3.2 million each in retail fees and charges and loan servicing fees, an increase of $746,000 in other operating income and a decline of $733,000 in amortization of intangible assets. These increases to net income were partially offset by an increase of $12.0 million in general and administrative expenses, an increase of $3.8 million in the provision for income taxes, a decline of $1.3 million in real estate operations and a decrease of $1.2 million in net gains on the sales of loans and loan servicing rights. The increase in net income for fiscal year 1995 compared to fiscal year 1994 is primarily due to the following: a change of $31.3 million in nonrecurring charges associated with the intangible assets valuation adjustment and the accelerated amortization of goodwill, an increase of $11.9 million in net interest income after provision for loan losses, a decline of $3.9 million in amortization of goodwill and core value of deposits, an improvement of $2.9 million in real estate operations, an increase of $2.5 million in loan servicing fees, an increase of $392,000 in retail fees and charges and a net increase of $76,000 in other operating income. These increases to net income were partially offset by an increase of $8.4 million in total general and administrative expenses, a net decrease of $6.6 million from the cumulative effects of changes in accounting principles, an increase of $6.3 million in the provision for income taxes and a net decrease of $5.5 million in net gains on the sales of loans and loan servicing rights. NET INTEREST INCOME AND INTEREST RATE SPREAD Net interest income was $162.8 million for fiscal year 1996 compared to $149.8 million for fiscal year 1995, an increase of $12.9 million, or 8.6%; and compared to $137.8 million for fiscal year 1994. Based on the portfolios of interest-earning assets and interest-bearing liabilities at the end of the last three fiscal years, interest rate spreads were 2.48%, 2.21% and 2.33%, respectively, at June 30, 1996, 1995 and 1994, an increase of 27 basis points comparing the interest rate spread at June 30, 1996, to the interest rate spread at June 30, 1995, and a decrease of 12 basis points comparing the spreads at June 30, 1995, to June 30, 1994. In addition, during the fiscal years 1996, 1995 and 1994, interest rate spreads were 2.34%, 2.26% and 2.43%, respectively, representing an increase of eight basis points comparing the interest rate spread during fiscal year 1996 to fiscal year 1995 and a decrease of 17 basis points comparing the spread during fiscal year 1995 to 1994. The net yield on interest-earning assets during fiscal years 1996, 1995 and 1994 was 2.58%, 2.46% and 2.59%, respectively, representing an increase of 12 basis points comparing fiscal year 1996 to 1995 and a decrease of 13 basis points comparing fiscal year 1995 to 1994. During fiscal year 1996, in accordance with the one-time reclassification permitted under a special accounting report, and the reassessment of the appropriateness of the classifications of all securities held, management of the Corporation developed an asset/liability management strategy to reclassify substantially all of its 15- and 30-year fixed rate mortgage-backed securities approximating $370.4 million and agency investment securities approximating $49.9 million from held to maturity to available for sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. The purpose of this strategy is to sell such securities and use the proceeds to fund Federal Home Loan Bank of Topeka (FHLB) advances as they become due, and to have the flexibility, should the opportunity arise, to reinvest proceeds into adjustable- rate or shorter duration interest-earning assets. During fiscal year 1996, approximately $230.8 million of such investment and mortgage-backed securities were sold with the proceeds used primarily to pay maturing FHLB advances. The sale of approximately $230.8 million of the securities available for sale and the utilization of such proceeds to repay maturing FHLB advances, the Corporation's favorable asset liability mix (primarily increased levels of adjustable-rate mortgage loans, consumer loans and multi-family commercial real estate loans) and the acquisition of Conservative, have improved the interest rate spreads and yields. Net interest income increased due primarily to average interest-earning assets increasing $210.0 million to $6.311 billion for fiscal year Commercial Federal Corporation Annual Report 1996 19 1996 compared to $6.101 billion for fiscal year 1995. This increase in average interest-earning assets is primarily due to the Conservative acquisition in February 1996 with a higher net interest rate spread than the Corporation and to internal growth moderately offset by the sale of the securities available for sale previously discussed. However, the future trend in interest rate spreads and net interest income will be dependent upon such factors as the composition and size of the Corporation's interest-earning assets and interest-bearing liabilities, the interest rate risk exposure of the Corporation, and the maturity and repricing activity of interest-sensitive assets and liabilities, as influenced by changes in and levels of both short-term and long-term market interest rates. Net interest income increased during fiscal year 1995 compared to fiscal year 1994, even though the interest rate spread and the net yield on interest- earning assets decreased 17 and 13 basis points, respectively, due to average interest-earning assets increasing $775.5 million to $6.101 billion for fiscal year 1995 compared to $5.326 billion for fiscal year 1994. This increase in average interest-earning assets is primarily due to the acquisitions during fiscal years 1995 and 1994 and to internal growth. The following table presents certain information concerning yields earned on interest-earning assets and rates paid on interest-bearing liabilities during and at the end of each of the fiscal years presented.
- ------------------------------------------------------------------------------- For the Year Ended June 30, At June 30, ---------------------- ----------------------- 1996 1995 1994 1996 1995 1994 Weighted average yield on: Loans.......................... 8.29% 8.04% 7.98% 8.19% 8.26% 7.72% Mortgage-backed securities..... 6.45 6.02 5.68 6.73 6.38 5.73 Investments.................... 6.13 6.14 6.42 6.20 6.18 5.95 - ------------------------------------------------------------------------------- Interest-earning assets...... 7.78 7.45 7.39 7.81 7.71 7.13 - ------------------------------------------------------------------------------- Weighted average rate paid on: Savings deposits............... 2.79 3.24 2.16 3.04 3.08 2.74 Other time deposits............ 6.10 5.32 5.12 5.75 5.88 5.00 Advances from FHLB............. 5.79 5.71 5.73 5.66 5.89 5.37 Securities sold under agreement to repurchase.................. 7.14 7.59 6.15 6.51 7.08 6.08 Other borrowings............... 10.89 10.89 10.56 11.05 10.67 10.66 - ------------------------------------------------------------------------------- Interest-bearing liabilities................. 5.44 5.19 4.96 5.33 5.50 4.80 - ------------------------------------------------------------------------------- Net interest rate spread........ 2.34% 2.26% 2.43% 2.48% 2.21% 2.33% - ------------------------------------------------------------------------------- Net yield on interest-earning assets........ 2.58% 2.46% 2.59% 2.68% 2.42% 2.49% - -------------------------------------------------------------------------------
20 Commercial Federal Corporation Annual Report 1996 The following table presents average interest-earning assets and average interest-bearing liabilities, interest income and interest expense, and average yields and rates during the periods indicated. The table below includes nonaccruing loans averaging $35.5 million, $30.9 million and $31.9 million, respectively, for fiscal years 1996, 1995 and 1994 as interest-earning assets at a yield of zero percent.
- -------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, ------------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------------ --------------------------- ---------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans........................ $4,643,401 $384,765 8.29% $4,277,946 $344,109 8.04% $3,843,662 $306,725 7.98% Mortgage-backed securities................. 1,284,448 82,830 6.45 1,402,237 84,404 6.02 1,082,507 61,491 5.68 Investments.................. 383,433 23,497 6.13 421,089 25,855 6.14 399,555 25,638 6.42 - -------------------------------------------------------------------------------------------------------------------------- Interest-earning assets..................... 6,311,282 491,092 7.78 6,101,272 454,368 7.45 5,325,724 393,854 7.39 - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits............. 1,189,619 33,177 2.79 1,037,702 33,638 3.24 809,692 17,492 2.16 Other time deposits.......... 2,966,505 180,863 6.10 2,752,501 146,525 5.32 2,441,971 125,065 5.12 Advances from FHLB........... 1,625,950 94,057 5.79 1,913,467 109,314 5.71 1,679,076 96,216 5.73 Securities sold under agreements to repurchase................. 189,568 13,525 7.14 103,223 7,837 7.59 155,897 9,592 6.15 Other borrowings............. 61,480 6,695 10.89 66,245 7,212 10.89 73,270 7,737 10.56 - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities................ 6,033,122 328,317 5.44 5,873,138 304,526 5.19 5,159,906 256,102 4.96 - -------------------------------------------------------------------------------------------------------------------------- Net earnings balance......... $ 278,160 $ 228,134 $ 165,818 Net interest income.......... $162,775 $149,842 $137,752 Interest rate spread......... 2.34% 2.26% 2.43% - -------------------------------------------------------------------------------------------------------------------------- Net yield on interest - earning assets............. 2.58% 2.46% 2.59% - --------------------------------------------------------------------------------------------------------------------------
During fiscal year 1996, the Corporation's net earnings balance (the difference between average interest-bearing liabilities and average interest- earning assets) improved by $50.0 million compared to fiscal year 1995 primarily from the acquisition of Conservative (which was partially paid for through the issuance of common stock) and net internal growth with earnings retention. The percentage of average interest-earning assets to average interest-bearing liabilities was 104.6% during fiscal year 1996, compared to 103.9% during fiscal year 1995 and to 103.2% during fiscal year 1994. During fiscal year 1995, the Corporation experienced higher costs on interest-bearing liabilities and a lower interest rate spread and yield compared to fiscal year 1994 primarily due to increases in the interest rates offered on certain types of deposit products which were raised in order to maintain savings deposits as an attractive investment vehicle for consumers. The reduced interest rate spread and yield also reflects the fact that the Corporation's incremental growth of interest- earning assets during fiscal year 1995 contained comparatively narrower yields on its interest-earning assets. The net earnings balance improved by $62.3 million for fiscal year 1995 compared to 1994 primarily from internal growth. Commercial Federal Corporation Annual Report 1996 21 The following table presents the dollar amount of changes in interest income and expense for each major component of interest-earning assets and interest-bearing liabilities, respectively, and the amount of change in each attributable to: (i) changes in volume (change in volume multiplied by prior year rate), and (ii) changes in rate (change in rate multiplied by prior year volume). The net change attributable to change in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate. This table demonstrates the effect of the increased volume of interest-earning assets and interest-bearing liabilities, the increasing interest rates and the effect on the interest rate spreads previously discussed.
- --------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, Year Ended June 30, 1996 Compared to 1995 1995 Compared to 1994 ------------------------------- -------------------------------------- (In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to - -------------------------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total - -------------------------------------------------------------------------------------------------------------------------- Interest income: Loans........................... $30,052 $10,604 $40,656 $34,914 $ 2,470 $37,384 Mortgage-backed securities...... (7,364) 5,790 (1,574) 19,064 3,849 22,913 Investments..................... (2,308) (50) (2,358) 1,349 (1,132) 217 - -------------------------------------------------------------------------------------------------------------------------- Interest income............... 20,380 16,344 36,724 55,327 5,187 60,514 - -------------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits................ 4,574 (5,035) (461) 5,814 10,332 16,146 Other time deposits............. 11,969 22,369 34,338 16,383 5,077 21,460 Advances from FHLB.............. (16,616) 1,359 (15,257) 13,391 (293) 13,098 Securities sold under agreements to repurchase................. 6,187 (499) 5,688 (3,689) 1,934 (1,755) Other borrowings................ (519) 2 (517) (759) 234 (525) - -------------------------------------------------------------------------------------------------------------------------- Interest expense................ 5,595 18,196 23,791 31,140 17,284 48,424 - -------------------------------------------------------------------------------------------------------------------------- Effect on net interest income..... $14,785 $(1,852) $12,933 $24,187 $(12,097) $12,090 - --------------------------------------------------------------------------------------------------------------------------
The improvements due to changes in volume between fiscal years 1996 and 1995 reflect the increases in such interest rate spreads and the growth the Corporation has experienced, both internally and from acquisitions. The improvements due to changes in volume between fiscal years 1996, 1995 and 1994 in part reflects the increases in the difference between average interest- bearing liabilities and average interest-earning assets of $50.0 million and $62.3 million, respectively. The decreases in interest rate spreads between fiscal years 1995 and 1994 account for the decrease due to rate increases in fiscal year 1995 over 1994. 22 Commercial Federal Corporation Annual Report 1996 NON-INTEREST INCOME AND EXPENSE PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS The Corporation recorded loan loss provisions of $6.1 million, $6.4 million and $6.2 million in fiscal years 1996, 1995 and 1994, respectively. The loan loss provision decreased even though the net loan portfolio increased approximately $272.5 million at June 30, 1996, compared to June 30, 1995, indicating the improved credit quality of the loan portfolio and the low level of nonperforming loans over the respective periods of time. At June 30, 1996, the Corporation's conventional, FHA and VA loans, including loans held for sale, totaling approximately $4.3 billion, are secured by single-family residential properties located primarily in Nebraska (20%), Colorado (17%), Kansas (7%), Georgia, Oklahoma and Texas (5% each), and the remaining 41% in 44 other states. The commercial real estate loan portfolio at June 30, 1996, totaling $269.7 million is secured by properties located in Colorado (33%), Nebraska (31%), Florida (12%) and the remaining 24% in 18 other states. The allowance for loan losses is based upon management's continuous evaluation of the collectibility of outstanding loans, which takes into consideration such factors as changes in the composition of the loan portfolio and economic conditions that may affect the borrower's ability to pay, regular examinations by the Corporation's credit review group of specific problem loans and of the overall portfolio quality and real estate market conditions in the Corporation's lending areas. The Corporation recorded net income from real estate operations of $172,000 and $1.5 million in fiscal years 1996 and 1995, respectively, and a net loss of $1.4 million in fiscal year 1994. Real estate operations reflect provisions for real estate losses, net real estate operating activity and gains and losses on dispositions of real estate. Fiscal year 1996 reflects a credit to the provision for real estate operations totaling $479,000 compared to real estate loss provisions charged to operations of $199,000 and $1.7 million, respectively, for fiscal years 1995 and 1994. The credit to provision for real estate operations in fiscal year 1996 was primarily due to excess reserves recaptured into income upon settlement of a lawsuit. The decrease in real estate operations of $1.3 million for fiscal year 1996 from fiscal year 1995 is primarily due to a pre-tax gain of $1.2 million recorded in fiscal year 1995 from the sale of an apartment and assisted-care facility located in Dallas, Texas. The improvement in real estate operations of $2.9 million for fiscal year 1995 over fiscal year 1994 is primarily due to the realization of gains on sales of certain commercial properties, lower operating expenses and lower loss provisions. Management believes that the positive results from real estate operations are indicative of the improvements made in the reduction of the Corporation's real estate portfolio and to the improvement in the real estate markets in general. Although the Corporation believes that present levels of allowances for loan losses are adequate to reflect the risks inherent in its portfolios, there can be no assurance that the Corporation will not experience increases in its nonperforming assets, that it will not increase the level of its allowances in the future or that significant provisions for losses will not be required based on factors such as deterioration in market conditions, changes in borrowers' financial conditions, delinquencies and defaults. In addition, regulatory agencies review the adequacy of allowances for losses on loans on a regular basis as an integral part of their examination process. Such agencies may require additions to the allowances based on their judgments of information available to them at the time of their examinations. Commercial Federal Corporation Annual Report 1996 23 Nonperforming assets are monitored on a regular basis by the Corporation's internal credit review and asset workout groups. Nonperforming assets increased by $3.8 million, or 6.1%, at June 30, 1996, compared to June 30, 1995, primarily as a result of net increases of $5.6 million in nonperforming loans and $1.3 million in real estate offset by a decrease of $3.1 million in troubled debt restructurings. Nonperforming assets at June 30 are summarized as follows:
- ------------------------------------------------------------------------------- (Dollars in Thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- Nonperforming loans (1) Residential real estate........................ $34,660 $30,784 $27,470 Commercial real estate......................... 2,357 773 5,613 Consumer....................................... 888 701 409 - ------------------------------------------------------------------------------- Total........................................ 37,905 32,258 33,492 - ------------------------------------------------------------------------------- Real estate (2) Commercial..................................... 8,850 8,795 16,869 Residential.................................... 4,986 3,784 4,566 - ------------------------------------------------------------------------------- Total........................................ 13,836 12,579 21,435 - ------------------------------------------------------------------------------- Troubled debt restructurings (3) Commercial..................................... 13,894 16,566 19,455 Residential.................................... 909 1,294 1,580 - -------------------------------------------------------------------------------- Total........................................ 14,803 17,860 21,035 - ------------------------------------------------------------------------------- Total nonperforming assets....................... $66,544 $62,697 $75,962 - ------------------------------------------------------------------------------- Nonperforming loans to total loans............... .78% .70% .83% Nonperforming assets to total assets............. 1.01% .95% 1.27% - ------------------------------------------------------------------------------- Allowance for loan losses: Other loans (4)................................ $36,513 $33,261 $27,530 Bulk purchased loans (5)....................... 12,765 15,280 17,321 - ------------------------------------------------------------------------------- Total........................................ $49,278 $48,541 $44,851 - ------------------------------------------------------------------------------- Allowance for loan losses to total loans......... 1.01% 1.06% 1.11% Allowance for loan losses to total nonperforming assets.......................................... 74.05% 77.42% 59.04% - --------------------------------------------------------------------------------
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more past due) and accruing loans that are contractually past due 90 days or more. At June 30, 1996, 1995 or 1994, there were no accruing loans contractually past due 90 days or more. (2) Real estate consists of commercial and residential property acquired through foreclosure or repossession (real estate owned and real estate in judgment) and real estate from certain subsidiary operations, and does not include performing real estate held for investment totaling $2.8 million, $4.2 million and $2.9 million, respectively, at June 30, 1996, 1995 and 1994. (3) A troubled debt restructuring is a loan on which the Corporation, for reasons related to the debtor's financial difficulties, grants a concession to the debtor, such as a reduction in the loan's interest rate, a reduction in the face amount of the debt, or an extension of the maturity date of the loan, that the Corporation would not otherwise consider. (4) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. (5) Represents the allowance for loan losses for single-family residential whole loans purchased between January 1991 and June 30, 1992 (bulk purchased loans), which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans to provide for the credit risk associated with such bulk purchased loans. These bulk purchased loans had principal balances of $574.4 million, $701.9 million and $868.0 million, respectively, at June 30, 1996, 1995 and 1994. These allowances are available only to absorb losses associated with respective bulk purchased loans, and are not available to absorb losses from other loans. - ------------------------------------------------------------------------------- 24 Commercial Federal Corporation Annual Report 1996 The ratio of nonperforming loans to total loans was .78% at June 30, 1996, based on loan balances of $4.9 billion, compared to .70% and .83%, respectively, at June 30, 1995 and 1994, which were based on loan balances of $4.6 billion and $4.0 billion. Management believes that these ratios reflect the quality of the Corporation's loan portfolio, which consists primarily of loans secured by single-family residential properties. The ratio of nonperforming assets to total assets of 1.01%, .95% and 1.27%, respectively, at June 30, 1996, 1995 and 1994, which management believes are favorable compared to industry standards, is an indicator of the stabilization of nonperforming assets. The total allowance for loan losses increased to $49.3 million at June 30, 1996, an improvement of $737,000 and $4.4 million, respectively, compared to June 30, 1995 and 1994. The percentage of allowance for loan losses to total loans at June 30, 1996, was 1.01%, compared to the ratios of 1.06% and 1.11%, respectively, at June 30, 1995 and 1994. The total allowance for loan losses to total nonperforming assets of 74.05% and 77.42% at June 30, 1996 and 1995, respectively, compared to 59.04% at June 30, 1994, indicates improved coverage for potential losses. Ratios for both nonperforming loans to total loans and nonperforming assets to total assets increased compared to June 30, 1995, primarily due to a net increase in nonperforming loans of $5.6 million offset slightly by net increases of $273.2 million in total loans and $38.1 million in total assets compared to June 30, 1995. The asset quality ratios comparing June 30, 1995, to June 30, 1994, improved due to net decreases in nonperforming loans and nonperforming assets, primarily from the sale of properties and loan principal payments, combined with increases in both total loans and total assets over the respective fiscal years. Nonperforming loans at June 30, 1996, increased $5.6 million compared to June 30, 1995, primarily due to net increases of $3.9 million, $1.6 million and $187,000 in delinquent residential real estate loans, commercial real estate loans and consumer loans, respectively. The increase of $3.9 million in delinquent residential real estate loans is primarily due to residential construction real estate loans increasing $1.9 million from a balance of $603,000 at June 30, 1995, to $2.5 million at June 30, 1996, primarily due to increased loan volume in residential construction lending. The net increase of $1.3 million in real estate at June 30, 1996, compared to June 30, 1995, is substantially attributable to a net increase of $1.2 million in residential real estate. Real estate is primarily located in Colorado and Nebraska and at June 30, 1996, before allowance for losses, totaled $6.0 million and $5.4 million, respectively, compared to $6.8 million and $5.8 million at June 30, 1995. Troubled debt restructurings decreased $3.1 million at June 30, 1996, compared to June 30,1995, primarily attributable to net decreases of $2.7 million in commercial real estate loans and $385,000 in residential real estate loans with the net decreases due primarily to loan principal repayments. LOAN SERVICING FEES Loan servicing fees, which also include miscellaneous loan fees for late payments and prepayment charges, and assumption and modification fees, totaled $27.9 million, $24.7 million and $22.2 million for fiscal years 1996, 1995 and 1994, respectively. This current year increase over previous fiscal years is primarily due to increases in the size of the Corporation's loan servicing portfolio. Fees from loans serviced for other institutions totaled $22.7 million, $20.9 million and $18.1 million for fiscal years 1996, 1995 and 1994, respectively. The mortgage loan servicing portfolio totaled $5.870 billion, $5.151 billion and $4.636 billion at June 30, 1996, 1995 and 1994, respectively. The value of the Corporation's loan servicing portfolio increases as mortgage interest rates rise and loan prepayments decrease. It is expected that income generated from the Corporation's loan servicing portfolio will increase in such an environment. However, this positive effect on the Corporation's income is offset, in part, by a decrease in additional servicing fee income attributable to new loan originations, which historically decrease in periods of higher, or increasing, mortgage interest rates, and by an increase in expenses from loan production costs since a portion of such costs cannot be deferred due to lower loan originations. Conversely, the value of the Bank's loan servicing portfolio will decrease as mortgage interest rates decline. RETAIL FEES AND CHARGES Retail fees and charges totaled $12.7 million, $9.5 million and $9.2 million for fiscal years 1996, 1995 and 1994, respectively. The primary source of this fee income is customer charges for retail financial services such as checking account fees and service charges, charges for insufficient funds or uncollected funds, stop payment fees, overdraft protection fees and transaction fees for personal Commercial Federal Corporation Annual Report 1996 25 checking and automatic teller machine services. The net increase of $3.2 million from fiscal year 1996 compared to fiscal year 1995 primarily results from increases in certain checking account fees and related ancillary fees for overdraft and insufficient funds charges from the Corporation's expanding retail customer deposit base over the last two fiscal years. As a result of the Corporation's acquisition activity, combined with aggressive checking account promotions, the Corporation's customer account deposit base has increased significantly over the past fiscal year. Such acquisitions account for over $2.5 million of the total retail fees and charges for fiscal year 1996 compared to $1.4 million for fiscal year 1995, an increase of approximately $1.1 million. The increase of $392,000 from fiscal year 1994 to fiscal year 1995 is primarily due to additional fees and charges generated from a larger customer base that resulted primarily from the acquisition of two financial institutions in fiscal year 1995. GAIN (LOSS) ON SALES OF LOANS During fiscal years 1996, 1995 and 1994, the Corporation sold loans to third parties through its mortgage banking operations totaling $667.7 million, $654.4 million and $1.96 billion, respectively, resulting in net pre-tax gains of $164,000 and $1.4 million, respectively, for fiscal years 1996 and 1994, and a net pre-tax loss of $1.7 million for fiscal year 1995. Mortgage loans are generally sold in the secondary market with loan servicing retained and without recourse to the Corporation. The net gain recorded in fiscal year 1996 is attributable to the relatively stable interest rate environment and to the adoption effective July 1, 1995, of the provisions of Statement of Financial Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for Mortgage Servicing Rights," which prescribes accounting methods that generally result in comparatively higher amounts of gains realized from the sales of loans. SFAS No. 122 requires capitalization of internally originated mortgage servicing rights as well as purchased mortgage servicing rights. The net effect of adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre- tax earnings approximately $4.0 million. At June 30, 1996, mortgage servicing rights totaled $45.0 million. SFAS No. 122 also requires that mortgage servicing rights be reported at the lower of cost or fair value. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to loan servicing income. No valuation allowance for capitalized servicing rights was necessary to be established as of June 30, 1996. The future effect of SFAS No. 122 is dependent, among other items, upon the volume and type of loans originated, the general levels of market interest rates and the rate of estimated loan prepayments. Accordingly, management of the Corporation is unable to predict with any reasonable certainty what effect this statement will have on the Corporation's future results of operations or its financial position. The net gains and losses recorded in fiscal years 1995 and 1994 are primarily from mortgage banking operations of the former Railroad Savings Bank which have been combined under the pooling of interests accounting treatment. Such gains and losses were incurred primarily from the sales of loans which were originated pursuant to unhedged commitments. The lower sales activity comparing fiscal year 1995 to 1994 primarily is a result of lower loan originations due to the relatively higher interest rate environment. GAIN ON SALES OF LOAN SERVICING RIGHTS Gain on the sales of loan servicing rights totaled $452,000, $3.5 million and $5.9 million, respectively, for fiscal years 1996, 1995 and 1994. All such sales activity of loan servicing rights was from the mortgage banking operations of the former Railroad Savings Bank which have been combined under the pooling of interests accounting treatment. OTHER OPERATING INCOME Other operating income totaled $8.2 million, $7.5 million and $7.4 million for fiscal years 1996, 1995 and 1994, respectively. The major components of other operating income are brokerage and insurance commissions. Brokerage commission income totaled $3.0 million, $2.6 million and $3.1 million, respectively, for fiscal years 1996, 1995 and 1994. Management believes that investment alternatives more attractive to consumers such as certificates of deposit with higher interest rates have contributed to lower revenues for brokerage commissions, primarily affecting 26 Commercial Federal Corporation Annual Report 1996 annuity commissions. Insurance commission income totaled $1.7 million, $2.4 million and $2.1 million, respectively, for fiscal years 1996, 1995 and 1994. Fiscal year 1996 results are lower than 1995, and management of the Corporation will continue to emphasize insurance and securities brokerage services; however, such commissions are affected to a significant degree by the current interest rate environment in relation to rates on other competing products. Fiscal year 1996 results also include credit life and disability commission income totaling $1.6 million compared to $1.2 million and $629,000 in fiscal years 1995 and 1994, respectively. Other miscellaneous sundry income totaled approximately $1.9 million, $1.3 million and $1.6 million, respectively, for fiscal years 1996, 1995 and 1994. The increase of $600,000 comparing fiscal year 1996 to 1995 is primarily attributable to the recognition of $344,000 in fiscal year 1996 on the disposition of a leasing transaction and $253,000 recorded as net gains on the sales of securities compared to a loss of $41,000 for fiscal year 1995. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses totaled $114.5 million, $102.6 million and $94.1 million for fiscal years 1996, 1995 and 1994, respectively. The efficiency ratio, defined as general and administrative expenses divided by the sum of (i) net interest income before provision for loan losses, (ii) loan servicing fees, (iii) retail fees and charges and (iv) other operating income, has remained favorable even though operating expenses have increased, primarily from acquisitions in each of the last three fiscal years, by approximately $12.0 million during fiscal year 1996 compared to 1995 and approximately $8.4 million during fiscal year 1995 compared to 1994. The Corporation's efficiency ratio for fiscal year 1996 is 54.2% compared to 53.5% and 53.3% for fiscal years 1995 and 1994, respectively. The increase in the efficiency ratio for fiscal year 1996 compared to fiscal year 1995 is due to increases in general and administrative expenses primarily from the acquisitions during the last two fiscal years and nonrecurring expenses totaling $4.5 million associated with the Railroad merger and the 1995 proxy contest. Excluding the effects of such nonrecurring expenses the Corporation's efficiency ratio for fiscal year 1996 is 52.1%. The increase of approximately $12.0 million in general and administrative expenses in fiscal year 1996 compared to fiscal year 1995 was due to increases in compensation and benefits of $1.7 million, occupancy and equipment of $2.6 million, regulatory insurance and assessments of $1.3 million, advertising of $1.9 million, amortization of mortgage servicing rights of $688,000 and $3.8 million in other operating expenses. The net increase of approximately $12.0 million, or 11.7%, comparing fiscal year 1996 to fiscal year 1995 is in part attributable to nonrecurring expenses associated with the Railroad merger and the 1995 proxy contest, expenses associated with loan production, additional branches and increased marketing costs for deposits and other product and image promotions. During fiscal year 1996 total nonrecurring costs and expenses totaled $4.5 million consisting of (i) $3.6 million related to the Railroad merger for accounting, legal, investment banking, severance benefits, advertising and miscellaneous transition and conversion expenses and (ii) $901,000 related to the 1995 proxy contest for consulting services, legal fees, solicitation fees and printing and mailing costs. Other increases in general and administrative expenses for fiscal year 1996 are attributable to loan production costs, primarily compensation and benefits, which exceeded fiscal year 1995 expenses by approximately $3.5 million. Advertising expenditures, up $1.9 million, fluctuate based upon desired levels of product promotion and were higher compared to fiscal year 1995 due to increased campaigns for checking accounts and related products, certificates of deposit, consumer and mortgage lending and image promotion. Amortization of mortgage servicing rights increased by $688,000 over fiscal year 1995 primarily due to an increase of $14.1 million in capitalized mortgage servicing rights. In addition, loans serviced for other institutions increased $718.7 million over fiscal year 1995 resulting in increased staffing levels and related expenses. Other net increases in general and administrative expenses directly resulting from the Corporation's recent acquisitions, excluding Railroad, totaled approximately $400,000 over fiscal year 1995. Such increases in general and administrative expenses result from increased personnel wages and benefits, costs of operating additional branches and higher regulatory insurance assets from deposits acquired. Other expenses were also incurred on an indirect basis attributable to such acquisitions. The Corporation paid FDIC insurance premiums and OTS assessments totaling $10.6 million, $9.3 million and $8.2 million for fiscal years 1996, 1995 and 1994, respectively. The higher levels of such costs recorded during the respective fiscal years are due to the Corporation's increased deposit base resulting from acquisitions and internal growth. Commercial Federal Corporation Annual Report 1996 27 The increase of $8.4 million in general and administrative expenses in fiscal year 1995 compared to fiscal year 1994 was due to increases in compensation and benefits of $6.3 million, occupancy and equipment of $1.8 million, regulatory insurance and assessments of $1.1 million, advertising of $640,000 and amortization of mortgage servicing rights of $652,000, partially offset by a decrease of $2.1 million in other operating expenses. Increases in general and administrative expenses directly resulting from the acquisitions in fiscal years 1995 and 1994 totaled $4.4 million comparing fiscal year 1995 ($7.5 million) to fiscal year 1994 ($3.1 million). Such increases in general and administrative expenses result from increased personnel wages and benefits, costs of operating additional branches and higher regulatory insurance costs from the deposits acquired. Other increases in general and administrative expenses in fiscal year 1995 compared to fiscal year 1994 are attributable to loan production costs, primarily compensation and benefits, which were deferred in fiscal year 1994 when loan production volume was significantly higher than in fiscal year 1995. Such increase in loan production costs expensed in fiscal year 1995 over 1994 totaled $3.7 million. Deferred compensation related to restricted stock totaled $1.2 million and $395,000, respectively, in fiscal years 1995 and 1994, an increase of $778,000 due to additional awards granted. Additionally, amortization of mortgage servicing rights increased $652,000 in fiscal year 1995 over 1994 primarily from the increase of $10.4 million in servicing rights acquired through purchases. GOODWILL AND CORE VALUE OF DEPOSITS Total amortization expense for goodwill and core value of deposits for fiscal years 1996, 1995 and 1994 was $9.5 million, $10.3 million and $14.1 million, respectively. Amortization of goodwill and core value of deposits for fiscal year 1996 was lower than fiscal year 1995 primarily due to a reduction in amortization expense on core value of deposits which is amortized on an accelerated basis partially offset by the $725,000 increase in intangible amortization from the Conservative acquisition as of February 1, 1996. Amortization of goodwill and core value of deposits for fiscal year 1995 was lower than fiscal year 1994 primarily due to a $6.2 million decrease in goodwill amortization comparing the respective fiscal years since the amortization of goodwill was accelerated and completely amortized to expense over the first six months of fiscal year 1995. In addition, the amortization expense on core value of deposits from acquisitions before fiscal year 1994 decreased in the last six months of fiscal year 1995 due to an adjustment totaling $6.8 million that was recorded effective January 1, 1995, as a result of the Corporation's recognition of pre-acquisition tax credits and net operating losses. Such decreases in amortization expenses comparing fiscal year 1995 to 1994 were partially offset by the net increase of $2.4 million in amortization of core value of deposits and goodwill resulting from the acquisitions in fiscal years 1994 and 1995. No impairment adjustment has been made to the intangible assets resulting from the Corporation's acquisitions during fiscal years 1996, 1995 or 1994. Effective June 30, 1994, the Corporation changed its method of valuation of intangible assets incorporating a fair value concept using a lower of cost or market methodology. An appraisal performed by an independent third party of 28 Commercial Federal Corporation Annual Report 1996 the existing intangible assets relating to acquisitions during 1986 through 1988 of five troubled savings institutions located in Colorado, Kansas and Oklahoma resulted in a fair value estimate of $41.0 million. Such fair value estimate resulted in the Corporation recognizing an impairment of recorded intangible assets at June 30, 1994, of $52.7 million. This appraisal of $41.0 million as of June 30, 1994, was classified by management as core value of deposits totaling $19.6 million and goodwill totaling $21.4 million. The $21.4 million of goodwill was completely amortized to expense over the first six months of fiscal year 1995. PROVISION FOR INCOME TAXES For fiscal years 1996, 1995 and 1994 the provision for income taxes was $27.0 million, $23.1 million and $16.9 million, respectively. The effective tax rates for fiscal years 1996, 1995 and 1994 were 32.8%, 42.6% and 110.7%, respectively. The provision for income taxes for fiscal year 1996 was reduced by approximately $1.0 million for an income tax benefit recognized for financial reporting purposes from a leveraged lease settlement. The provision for income taxes for fiscal year 1995 was reduced by $2.3 million due to the recognition of pre-acquisition tax credits and net operating losses that the Corporation was entitled to from a thrift acquired in 1987 and two leasing companies acquired in 1984 and 1986. For the three fiscal years ended June 30, 1996, the effective tax rates vary from the applicable statutory rates primarily due to the nondeductibility of amortization of goodwill and core value of deposits in relation to the level of taxable income for the respective fiscal years. The effective tax rate also varied from the statutory rate of 35.0% for fiscal year 1996 due to the nondeductibility of certain Railroad merger and acquisition costs offset slightly by the aforementioned income tax benefit recognized from the leveraged lease settlement. In addition, the effective tax rate varied from the statutory rate for fiscal years 1995 and 1994 due to the recognition of the pre-acquisition tax credits and net operating losses of $2.3 million in fiscal year 1995 and, in fiscal year 1994, to the intangible assets valuation adjustment of $52.7 million. The effective tax rate for fiscal year 1994 includes a change in the federal tax law enacted in August 1993 that increased the federal corporate marginal tax rate from 34.0% to 35.0%. The effect of this tax rate change on the net deferred income tax liability resulted in the recording of additional income tax expense of $1.2 million in the first quarter of fiscal year 1994. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) require recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These changes will result in the recognition of additional deferred tax liabilities of approximately $103,000 in the first quarter of fiscal year 1997. The remaining unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Included in fiscal year 1994 results of operations was the adoption of the provisions of two accounting statements resulting in the Corporation recording a net $6.6 million in net income, or $.46 per share, from the cumulative effects of these changes in accounting principles. The adoption of the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," resulted in recording $6.9 million in net income, or $.48 per share, while the adoption of the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," resulted in recording a charge to income of $519,000 (net of a tax benefit of $183,000), or $.02 loss per share after tax. Commercial Federal Corporation Annual Report 1996 29
RATIOS The table below sets forth certain performance ratios of the Corporation for the periods indicated. - ------------------------------------------------------------------------------- Year Ended June 30, - ------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Return on average assets:net income divided by average total assets (1) (2).................................. .84% .49% .09% Return on average equity:net income divided by average equity (1) (2).... 14.74 9.98 1.54 Equity-to-assets ratio:average stockholders' equity to average total assets (1)........................... 5.72 4.95 5.74 General and administrative expenses divided by average assets (1)(2)..... 1.75 1.62 1.67 - --------------------------------------------------------------------------------
(1) Based on daily average balances during fiscal years 1996, 1995 and 1994. (2) General and administrative expenses divided by average assets for fiscal year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000 and $901,000, respectively, associated with the Railroad merger and the 1995 proxy contest. Return on average assets and return on average stockholders' equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $2,920,000 and $585,000, respectively, associated with the Railroad merger and the 1995 proxy contest. Return on average assets and return on average stockholders' equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the accelerated amortization of goodwill totaling $21,357,000. - -------------------------------------------------------------------------------- The increase in the operating ratio for general and administrative expenses for fiscal year 1996 compared to fiscal year 1995 is attributable to an increase of approximately $12.0 million in such expenses primarily due to the nonrecurring expenses totaling $4.5 million associated with the Railroad merger and the 1995 proxy contest as well as increases in general and administrative expenses attributable to the Conservative acquisition. The decrease in the operating ratio for general and administrative expenses for fiscal year 1995 compared to fiscal year 1994 is due to an increase of approximately $685.0 million in the Corporation's average total assets from fiscal year 1994 partially offset by an increase of $8.4 million in such expenses over the same time span. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS During fiscal year 1996, the Corporation adopted the provisions of two accounting pronouncements: Statement No. 121 entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Statement No. 122 entitled "Accounting for Mortgage Servicing Rights." See Note 1 to the Consolidated Financial Statements for a discussion of the implementation of the provisions of these new accounting pronouncements and their effect, if any, on the Corporation's financial position and results of operations. LIQUIDITY AND CAPITAL RESOURCES The Corporation's principal asset is its investment in the capital stock of the Bank, and because it does not generate any significant revenues independent of the Bank, the Corporation's liquidity is dependent on the extent to which it receives dividends from the Bank. The Bank's ability to pay dividends to the Corporation is dependent on its ability to generate earnings and is subject to a number of regulatory restrictions and tax considerations. Under capital distribution regulations of the OTS, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed dividend, has total capital that is at least equal to the amount of its fully phased-in capital requirements (a "Tier 1 Association") is permitted to pay dividends during a calendar year in an amount equal to the greater of (i) 75.0% of its net income for the recent four quarters, or (ii) 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk- based capital ratio requirement at the beginning of the calendar year. At June 30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $92.9 million in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law would require 30 Commercial Federal Corporation Annual Report 1996 approval by the OTS of such proposed dividends and, in some cases, would prohibit the payment of dividends. At June 30, 1996, the cash of Commercial Federal Corporation (the parent company) totaled $12.6 million of which $3.5 million is required to be retained under the terms of the Indenture governing the $40.25 million of subordinated notes due December 1999. Due to the parent company's limited independent operations, management believes that the cash balance at June 30, 1996, is currently sufficient to meet operational needs. However, the parent company's ability to make future interest and principal payments on the subordinated notes, and on the $6.9 million of 10.0% senior notes acquired in the Railroad merger, is dependent upon its receipt of dividends from the Bank. Accordingly, during fiscal years 1996 and 1995, the parent company received dividends totaling $9.3 million and $5.7 million, respectively, from the Bank. These dividends from the Bank were made primarily to cover (i) the interest payments on the parent company's subordinated debt and senior notes which amount totaled $4.9 million in the aggregate and (ii) the common stock cash dividends of $4.4 million paid by the parent company to its shareholders through June 30, 1996. On October 4, 1995, the Board of Directors of the Corporation established a policy of paying a regular quarterly cash dividend on its common stock. Prior to such date, the Corporation had never paid dividends. Accordingly, cash dividends totaling $5.9 million, or $.40 per common share, were declared during fiscal year 1996 with $4.4 million paid through June 30, 1996. The payment of dividends on the common stock is subject to the discretion of the Board of Directors of the Corporation and depends on a variety of factors, including operating results and financial condition, liquidity, regulatory capital limitations and other factors. The Bank will continue to pay dividends to the parent company, pursuant to regulatory restrictions, to cover cash dividends on common stock that the parent company intends to pay on a quarterly basis. The parent company also receives cash from the exercise of stock options and the sale of stock under its employee benefit plans which totaled $2.3 million and $1.3 million, respectively, during fiscal years 1996 and 1995. Subsequent to June 30, 1996, the Corporation repurchased on August 21, 1996, 1,250,100 shares of its common stock. Total cash consideration for this transaction, including certain expenses and costs associated with the seller's ownership of such stock, approximated $51.2 million. The sources of cash to consummate this stock repurchase consisted of (i) a short-term note totaling $28.0 million, (ii) a dividend from the Bank totaling $18.0 million and (iii) cash totaling $5.2 million paid directly by the parent company. The Corporation's primary sources of funds are (i) deposits, (ii) principal repayments on loans, mortgage-backed and investment securities, (iii) advances from the FHLB of Topeka, (iv) cash generated from operations and (v) securities sold under agreements to repurchase. As reflected in the Consolidated Statement of Cash Flows, net cash flows used by operating activities for fiscal year 1996 totaled $6.3 million, and net cash flows provided by operating activities for fiscal years 1995 and 1994 totaled $18.9 million and $31.2 million, respectively. Amounts fluctuate from period to period primarily as a result of mortgage banking activity relating to the purchase and origination of loans for resale and the subsequent sale of such loans. The origination of loans for resale totaling $365.5 million for fiscal year 1996 is comparable to the $332.8 million for fiscal year 1995 but considerably lower than the $996.5 million for fiscal year 1994 primarily due to the lower volume of loan refinancing activity attributable to the increase in interest rates over the past two fiscal years. Net cash flows provided by investing activities totaled $253.0 million and $90.7 million for fiscal years 1996 and 1994, respectively, and net cash flows used by investing activities totaled $264.1 million for fiscal year 1995. Amounts fluctuate from period to period primarily as a result of (i) principal repayments on loans and mortgage-backed securities and (ii) the purchase and origination of loans and mortgage-backed securities. The acquisition of Railroad had no material effect on liquidity, except for the cash outlay totaling $3.6 million relating to nonrecurring merger related costs, since such transaction was consummated in an exchange of common stock between companies. The acquisition of Conservative, however, resulted in a cash payment totaling approximately $18.3 million, in addition to the issuance of common stock of the Corporation exchanged for Conservative's common and preferred stock. During fiscal year 1995 the Corporation acquired the assets and liabilities of two financial institutions for which it paid cash totaling $16.5 million and received cash totaling $91.8 million primarily from the acquisition of the deposits and branches of a Kansas institution. In addition, the large amount of cash flows provided by investing activities during fiscal year Commercial Federal Corporation Annual Report 1996 31 1994 is primarily from the acquisition of deposits of two institutions for which the Corporation received cash totaling $784.5 million. The proposed acquisition of Heritage will result in cash paid totaling approximately $3.4 million for Heritage's common stock as well as the exchange of approximately 462,570 shares of the Corporation's common stock. At December 31, 1995, in accordance with the one-time reclassification permitted under the special report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," and the reassessment of the appropriateness of the classifications of all securities held, management of the Corporation developed an asset/liability management strategy to reclassify substantially all of its 15- and 30-year fixed-rate mortgage-backed securities approximating $370.4 million and agency investment securities approximating $49.9 million from held to maturity to available for sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. The purpose of this strategy is to sell such securities and use the proceeds to fund FHLB advances as they become due, and to have the flexibility, should the opportunity arise, to reinvest proceeds into adjustable-rate or shorter duration interest-earning assets. In addition, on February 1, 1996, the Corporation acquired mortgage-backed and investment securities totaling approximately $90.1 million as part of the acquisition of Conservative and classified such securities as available for sale. During fiscal year 1996, approximately $230.8 million of such investment and mortgage-backed securities were sold with the proceeds used primarily to pay maturing FHLB advances. Net cash flows used by financing activities totaled $246.1 million and $129.6 million, respectively, for fiscal years 1996 and 1994 and net cash provided by financing activities totaled $252.8 million for fiscal year 1995. Advances from the FHLB and retail deposits have been the primary sources to balance the Corporation's funding needs during each of the fiscal years presented. The Corporation experienced net increases of $93.8 million, $103.9 million and $121.1 million, respectively, in deposits for the fiscal years ended June 30, 1996, 1995, and 1994, excluding deposits acquired in acquisitions. Such increases in deposits are due to a broadened retail deposit base created from acquisitions, opening new branches and increasing marketing efforts and product promotion. In addition, during fiscal years 1996 and 1995 the Corporation utilized securities sold under agreements to repurchase primarily for liquidity and asset liability management purposes. As a result of the final disposition of a subsidiary's interest in a nuclear generating facility located in Palo Verde, Arizona in February 1996, the Corporation recognized taxable income totaling approximately $154.9 million. Accordingly, such income for tax purposes has resulted in federal and state tax liabilities totaling approximately $51.8 million. These tax payments were paid in June 1996 for the federal tax liability and will be paid in September and October 1996 for the state tax liabilities. While these payments affect the Corporation's cash flow position, they did not and will not have a material adverse impact on the Corporation's financial condition or results of operations. Among the proposals being considered by the FDIC and Congress to eliminate the deposit insurance premium disparity between BIF-insured and SAIF-insured institutions is a reduction in premium rates charged to SAIF-insured institutions as was done for BIF-insured institutions. It is expected that such a reduction would be accompanied by a one-time assessment of SAIF-insured institutions up to .68% of insured deposits to increase the SAIF reserve level to 1.25% of SAIF-insured deposits, which is the same level attained by the BIF prior to the reduction of BIF premium rates. If a special assessment as described above were to be required, it would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge to the Corporation of approximately $18.3 million. If such a special assessment were required and the SAIF as a result was fully recapitalized, it could have the effect of reducing the Corporation's deposit insurance premiums to the SAIF, thereby increasing net income in future periods. The Corporation has considered and will continue to consider possible mergers with and acquisitions of other selected financial institutions. During fiscal year 1996 the Corporation consummated the acquisitions of Railroad and Conservative, and entered into a merger agreement with Heritage. See Notes 2, 3 and 27 to the Consolidated Financial Statements for additional information on these completed and pending acquisitions. Such acquisitions present the Corporation with the opportunity to further expand its retail network in its existing markets; and to increase its earnings potential by increasing its mortgage and consumer loan volumes funded by deposits which generally bear lower rates of interest than alternative sources of funds. The Corporation will continue to grow its five-state franchise through an ongoing program of selective acquisitions of other financial institutions. Acquisition candidates will be selected based on the extent to which the candidate can enhance the Corporation's retail presence in new or existing markets and complement the Corporation's present retail network. At June 30, 1996, the Corporation had issued commitments of $173.6 million to fund and purchase loans as follows: $55.2 million of single-family adjustabl rate mortgage loans, $94.8 million of single-family fixed-rate mortgage loans, $6.0 million of commercial real estate loans and $17.6 million of consumer loan lines of 32 Commercial Federal Corporation Annual Report 1996 credit. In addition, at June 30, 1996, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $9,000. These outstanding loan commitments to extend credit in order to originate loans or fund consumer loan lines of credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn. The Corporation expects to fund these commitments, as necessary, from the sources of funds previously described. The maintenance of an appropriate level of liquid resources to meet not only regulatory requirements but also to provide funding necessary to meet the Corporation's current business activities and obligations is an integral element in the management of the Corporation's assets. The Corporation is required by federal regulation to maintain a minimum average daily balance of cash and certain qualifying liquid investments equal to 5.0% of the aggregate of the prior month's daily average savings deposits and short-term borrowings. The Corporation's liquidity ratio was 7.07% at June 30, 1996. Liquidity levels will vary depending upon savings flows, future loan fundings, cash operating needs, collateral requirements and general prevailing economic conditions. The Corporation does not foresee any difficulty in meeting its liquidity requirements. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related consolidated financial information have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant effect on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. STOCK PRICES AND DIVIDENDS The Corporation's common stock is traded on the New York Stock Exchange under the symbol "CFB." Prior to August 2, 1995, the Corporation's common stock was traded on the Nasdaq Stock Market and quoted on the Nasdaq National Market under the symbol "CFCN." The following table sets forth the high and low closing sales prices for the periods indicated for the common stock of the Corporation.
----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------------- -------------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- Common stock prices: High.................... $38 7/8 $38 7/8 $37 3/4 $37 $31 1/4 $24 7/8 $24 13/16 $27 7/8 Low..................... 36 7/8 35 32 3/8 27 1/8 24 5/8 20 3/8 18 7/8 23 3/4 Dividends declared...... $.10 $.10 $.20 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1996, there were 15,089,701 shares of common stock issued and outstanding which were held by more than 2,215 shareholders of record and 395,520 shares subject to outstanding options. On August 21, 1996, after the repurchase of 1,250,100 shares of common stock from CAI Corporation, a total of 13,844,036 shares remain outstanding. The number of shareholders of record does not reflect the persons or entities who hold their stock in nominee or "street" name. On October 4, 1995, the Board of Directors of the Corporation established a policy of paying a regular quarterly cash dividend on its common stock. Accordingly, cash dividends totaling $5.9 million, or $.40 per common share, were declared during fiscal year 1996. See "Liquidity and Capital Resources" and Note 19 to the Consolidated Financial Statements regarding the payment of future dividends and any possible restrictions thereon. Commercial Federal Corporation Annual Report 1996 33
Commercial Federal Corporation Consolidated Statement of Financial Condition - -------------------------------------------------------------------------------- (Dollars in Thousands) June 30, ASSETS 1996 1995 - -------------------------------------------------------------------------------- Cash (including short-term investments of $2,400 and $6,345) .......................... $ 35,827 $ 35,145 Investment securities available for sale, at fair value ............................... 9,898 2,988 Mortgage-backed securities available for sale, at fair value ............................... 263,206 36,974 Loans held for sale .......................... 89,379 113,385 Investment securities held to maturity (fair value of $239,141 and $294,805) ............. 243,145 297,493 Mortgage-backed securities held to maturity (fair value of $905,034 and $1,319,333) ..... 916,840 1,327,933 Loans receivable, net of allowances of $49,200 and $48,463 ......................... 4,723,785 4,427,307 Federal Home Loan Bank stock ................. 79,113 103,648 Interest receivable, net of reserves of $388 and $352 ............................... 40,683 42,211 Real estate .................................. 16,669 16,786 Premises and equipment ....................... 73,555 67,204 Prepaid expenses and other assets ............ 74,836 61,242 Goodwill and core value of deposits, net of accumulated amortization of $73,742 and $64,213 ..................................... 40,734 37,263 - -------------------------------------------------------------------------------- Total Assets ............................. $6,607,670 $6,569,579 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Liabilities: Deposits ................................... $ 4,304,576 $4,011,323 Advances from Federal Home Loan Bank ....... 1,350,290 1,787,352 Securities sold under agreements to repurchase ................................ 380,755 208,373 Other borrowings ........................... 58,546 65,303 Interest payable ........................... 24,298 24,223 Other liabilities .......................... 75,928 135,391 - -------------------------------------------------------------------------------- Total Liabilities ........................ 6,194,393 6,231,965 - -------------------------------------------------------------------------------- Commitments and contingencies ................ -- -- - -------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued .............. -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 15,089,701 and 14,272,793 shares issued and outstanding .... 151 143 Additional paid-in capital ................... 175,548 146,530 Retained earnings ............................ 240,281 190,855 Unrealized holding gain (loss) on securities available for sale, net .......... (2,703) 86 - -------------------------------------------------------------------------------- Total Stockholders' Equity ............... 413,277 337,614 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 6,607,670 $6,569,579 - --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 34 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Stockholders' Equity - -------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Unrealized Holding Gain (Loss) on Additional Securities Common Paid-in Retained Available Stock Capital Earnings for Sale, Net Total - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1993......... $140 $143,189 $154,519 $ -- $297,848 Issuance of 90,836 shares under certain compensation and employee plans .......... 1 1,021 -- -- 1,022 Issuance of 16,247 shares of common stock upon acquisition of business ................. 1 169 -- -- 170 Restricted stock and deferred compensation plans, net ..... -- 395 -- -- 395 Purchase and retirement of 2,844 shares of treasury stock ....................... -- (35) -- -- (35) Unrealized holding gain on securities available for sale, net .................... -- -- -- 198 198 Net income .................... -- -- 4,970 -- 4,970 Railroad Financial Corporation activity for six months ended June 30, 1994: Issuance of 32,473 shares under certain compensation and employee plans ......... -- 146 -- -- 146 Purchase and retirement of 39,953 shares of treasury stock ...................... -- (590) -- -- (590) Unrealized holding loss on securities available for sale, net .................. -- -- -- (728) (728) Net income .................... -- -- 185 -- 185 - -------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 ....... 142 144,295 159,674 (530) 303,581 Issuance of 111,994 shares under certain compensation and employee plans ........... 1 1,333 -- -- 1,334 Restricted stock and deferred compensation plans, net ...... -- 1,173 -- -- 1,173 Purchase and retirement of 17,759 shares of treasury stock ........................ -- (271) -- -- (271) Unrealized holding gain on securities available for sale, net .................... -- -- -- 616 616 Net income .................... -- -- 31,181 -- 31,181 - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995 ......... 143 146,530 190,855 86 337,614 Issuance of 113,456 shares under certain compensation and employee plans ........... 1 2,290 -- -- 2,291 Issuance of 707,562 shares of common stock upon acquisition of business .................. 7 25,819 -- -- 25,826 Restricted stock and deferred compensation plans, net ...... -- 909 -- -- 909 Unrealized holding loss on securities available for sale, net .................... -- -- -- (2,789) (2,789) Cash dividends declared ($.40 per share) ................... -- -- (5,880) -- (5,880) Net income .................... -- -- 55,306 -- 55,306 - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 $151 $175,548 $240,281 $(2,703) $413,277 - --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. Commercial Federal Corporation Annual Report 1996 35
Commercial Federal Corporation Consolidated Statement of Operations - ---------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Interest Income: Loans receivable ................................ $384,765 $344,109 $306,725 Mortgage-backed securities ...................... 82,830 84,404 61,491 Investment securities ........................... 23,497 25,855 25,638 - ---------------------------------------------------------------------------------------------- Total interest income ........................ 491,092 454,368 393,854 Interest Expense: Deposits ........................................ 214,040 180,163 142,557 Advances from Federal Home Loan Bank ............ 94,057 109,314 96,216 Securities sold under agreements to repurchase .. 13,525 7,837 9,592 Other borrowings ................................ 6,695 7,212 7,737 - ---------------------------------------------------------------------------------------------- Total interest expense ....................... 328,317 304,526 256,102 Net Interest Income .............................. 162,775 149,842 137,752 Provision for Loan Losses ........................ (6,107) (6,408) (6,248) - ---------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses .......................................... 156,668 143,434 131,504 Other Income (Loss): Loan servicing fees ............................. 27,891 24,731 22,227 Retail fees and charges ......................... 12,747 9,547 9,155 Real estate operations .......................... 172 1,490 (1,449) Gain (loss) on sales of loans ................... 164 (1,695) 1,433 Gain on sales of loan servicing rights .......... 452 3,519 5,929 Other operating income .......................... 8,220 7,474 7,398 - ---------------------------------------------------------------------------------------------- Total other income ........................... 49,646 45,066 44,693 Other Expense: General and administrative expenses- Compensation and benefits ...................... 45,413 43,737 37,407 Occupancy and equipment ........................ 23,572 20,925 19,147 Regulatory insurance and assessments ........... 10,642 9,317 8,217 Advertising .................................... 6,451 4,594 3,954 Other operating expenses ....................... 28,439 23,981 25,390 - ---------------------------------------------------------------------------------------------- Total general and administrative expenses .... 114,517 102,554 94,115 Amortization of goodwill and core value of deposits ....................................... 9,529 10,262 14,131 Valuation adjustment and accelerated amortization of goodwill ....................... -- 21,357 52,703 - ---------------------------------------------------------------------------------------------- Total other expense .......................... 124,046 134,173 160,949 - ---------------------------------------------------------------------------------------------- Income Before Income Taxes and Cumulative Effects of Changes in Accounting Principles ............. 82,268 54,327 15,248 Provision for Income Taxes ....................... 26,962 23,146 16,875 - ---------------------------------------------------------------------------------------------- Income (Loss) Before Cumulative Effects of Changes in Accounting Principles ................ 55,306 31,181 (1,627) Cumulative Effects of Changes in Accounting Principles, net ................................. -- -- 6,597 - ---------------------------------------------------------------------------------------------- Net Income ....................................... $ 55,306 $ 31,181 $ 4,970 - ----------------------------------------------------------------------------------------------
36 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Operations (continued) - -------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1996 1995 1994 - -------------------------------------------------------------------------------------------- Earnings Per Common Share: - -------------------------------------------------------------------------------------------- Income (loss) before cumulative effects of changes in accounting principles .............. $3.73 $2.16 $(.11) Cumulative effects of changes in accounting principles .... -- -- .46 - -------------------------------------------------------------------------------------------- Net income ................................................ $3.73 $2.16 $ .35 - --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. Commercial Federal Corporation Annual Report 1996 37
Commercial Federal Corporation Consolidated Statement of Cash Flows - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year Ended June 30, 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................. $ 55,306 $ 31,181 $ 4,970 Adjustments to reconcile net income to net cash provided (used) by operating activities: Amortization of goodwill and core value of deposits ................. 9,529 10,262 14,131 Accelerated amortization of goodwill and valuation adjustment ....... -- 21,357 52,703 Cumulative effects of changes in accounting principles .............. -- -- (6,414) Provisions for loss on loans and real estate ........................ 5,628 6,607 7,912 Depreciation and amortization ....................................... 6,855 5,613 4,768 Accretion of deferred discounts and fees, net ....................... (4,296) (2,476) (9,983) Amortization of mortgage servicing rights ........................... 9,011 8,323 7,671 Amortization of deferred compensation on restricted stock and premiums on other borrowings .................................. 1,365 1,340 948 Deferred tax provision .............................................. (52,591) 14,374 5,078 Gain on sales of real estate, loans and loan servicing rights, net .. (1,574) (4,022) (9,593) Stock dividends from Federal Home Loan Bank ......................... (4,216) -- -- Proceeds from the sale of loans ..................................... 667,847 652,744 1,959,827 Origination of loans for resale ..................................... (365,484) (332,831) (996,518) Purchase of loans for resale ........................................ (317,567) (378,886) (977,624) Increase (decrease) in interest receivable .......................... 3,459 (3,781) (452) Decrease in interest payable and other liabilities .................. (14,016) (9,452) (9,446) Other items, net .................................................... (5,532) (1,493) (16,747) --------- -------- --------- Total adjustments ................................................. (61,582) (12,321) 26,261 --------- -------- --------- Net cash (used) provided by operating activities ................ (6,276) 18,860 31,231 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of loans ..................................................... (576,377) (688,313) (1,117,176) Repayment of loans, net of originations ................................ 411,420 176,911 375,259 Proceeds from sale of mortgage-backed securities available for sale .... 179,041 40,774 20,821 Principal repayments of mortgage-backed securities available for sale... 20,315 -- -- Principal repayments of mortgage-backed securities held to maturity .... 176,225 137,060 263,599 Purchases of mortgage-backed securities held to maturity ............... (50,197) (11,504) (214,811) Maturities and repayments of investment securities held to maturity .... 104,458 24,172 119,185 Purchases of investment securities held to maturity .................... (76,266) (25,000) (153,650) Proceeds from sale of investment securities available for sale ......... 51,770 14,797 -- Maturities and repayments of investment securities available for sale... 2,077 800 460 Purchase of investment securities available for sale ................... -- -- (1,551) Acquisitions, net of cash (paid) received .............................. (15,234) 75,414 785,140 Purchases of mortgage loan servicing rights ............................ (14,034) (9,386) (7,774) Proceeds from sale of loan servicing rights ............................ 452 3,519 5,981 Proceeds from sale of Federal Home Loan Bank stock ..................... 41,085 13,548 8,408 Purchases of Federal Home Loan Bank stock .............................. (4,178) (16,236) (8,078) Proceeds from sale of real estate ...................................... 12,080 12,009 21,568 Payments to acquire real estate ........................................ (1,817) (1,444) (2,773) Purchases of premises and equipment, net ............................... (8,211) (11,241) (4,403) Other items, net ....................................................... 413 -- 504 -------- --------- --------- Net cash provided (used) by investing activities ................ 253,022 (264,120) 90,709 - ----------------------------------------------------------------------------------------------------------------
38 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Cash Flows (continued) - ----------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year Ended June 30, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits .................................................. $ 93,755 $ 103,936 $ 121,062 Proceeds from Federal Home Loan Bank advances ......................... 1,169,500 617,602 885,290 Repayment of Federal Home Loan Bank advances .......................... (1,672,784) (506,392) (1,128,966) Proceeds from securities sold under agreements to repurchase .......... 230,000 195,755 2,570 Repayment of securities sold under agreements to repurchase ........... (57,618) (157,432) -- Proceeds from issuance of other borrowings ............................ -- 4,000 -- Repayment of other borrowings ......................................... (6,836) (5,702) (10,579) Payment of cash dividends on common stock ............................. (4,370) -- -- Issuance of common stock .............................................. 2,291 1,334 1,022 Other items, net ...................................................... (2) (271) (35) ---------- ---------- ------------ Net cash (used) provided by financing activities ............... (246,064) 252,830 (129,636) - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS: Increase (decrease) in net cash position .............................. 682 7,570 (7,696) Balance, beginning of year ............................................ 35,145 27,575 35,271 ---------- ---------- ------------ Balance, end of year .................................................. $ 35,827 $ 35,145 $ 27,575 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest expense .................................................. $ 328,861 $ 306,634 $ 259,705 Income taxes, net ................................................. 73,741 4,179 13,193 Non-cash investing and financing activities: Securities transferred from held to maturity to available for sale, net ........................................................ 410,930 -- -- Loans exchanged for mortgage-backed securities .................... 63,445 189,031 605,490 Loans transferred to real estate .................................. 9,908 7,853 9,345 Loans to facilitate the sale of real estate ....................... 51 583 12,847 Common stock issued in connection with the acquisition of business ......................................................... 25,826 -- -- Reduction in core value of deposits on recognition of pre-acquisition tax credits and net operating losses ............ -- (6,810) -- Increase to assets and liabilities from prior business combinations ..................................................... -- -- 15,195 - -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements Commercial Federal Corporation Annual Report 1996 39 Commercial Federal Corporation Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- (Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts) Note 1. Summary Of Significant Accounting Policies: BASIS OF CONSOLIDATION - The consolidated financial statements are prepared on an accrual basis and include the accounts of Commercial Federal Corporation (the Corporation) and its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank (the Bank), and all majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts for years prior to fiscal year 1996 have been reclassified for comparative purposes. NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and loan holding company whose primary asset is the Bank which is a consumer- oriented financial institution that emphasizes single-family residential real estate lending, consumer lending, retail deposit activities, mortgage banking and other retail financial services. The Bank conducts loan origination activities through its branch office network, loan offices of its wholly-owned mortgage banking subsidiary and a nationwide correspondent network. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. POOLING OF INTERESTS - On October 2, 1995, the Corporation consummated its acquisition of Railroad Financial Corporation (Railroad), parent company of Railroad Savings Bank, fsb. This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements have been restated for all periods prior to the acquisition to include the accounts and results of operations of Railroad. CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and cash equivalents include cash, restricted cash and federal funds sold. Generally, federal funds are purchased and sold for a one-day period. SECURITIES - Securities must be classified in one of three categories and accounted for as follows: (i) debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as "held-to- maturity securities" and reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The Corporation did not hold any trading securities at June 30, 1996 or 1995. Premiums and discounts are amortized over the contractual lives of the related securities on the level yield method. Unrealized losses on securities, if any, reflecting a decline in the fair value of such securities to be other than temporary, are charged against income. Realized gains or losses on securities available for sale are based on the specific identification method and are included in results of operations on the trade date. LOANS - Loans receivable are recorded at the contractual amounts owed by borrowers less unamortized discounts, net of premiums, undisbursed funds on loans in process, deferred loan fees and allowance for loan losses. Interest on loans is accrued to income as earned, except that interest is not accrued on first mortgage loans contractually delinquent three months or more. Any related discounts or premiums on loans purchased are amortized into interest income using the level yield method over the contractual lives of the loans, adjusted for actual prepayments. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the estimated average life of the loan as a yield adjustment. Loans held for sale are carried at the lower of aggregate cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate loan basis. Valuation adjustments, if necessary, to reflect the lower of aggregate cost or market value, are recorded in current operations. 40 Commercial Federal Corporation Annual Report 1996 REAL ESTATE - Real estate includes real estate acquired through foreclosure, real estate in judgment and real estate held for investment, which includes equity in unconsolidated joint ventures and investment in real estate partnerships. Real estate acquired through foreclosure and in judgment are initially recorded at the lower of cost or fair value minus estimated costs to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuation allowances for estimated losses on real estate are provided when the carrying value exceeds the fair value minus estimated costs to sell the property. Real estate held for investment is stated at the lower of cost or net realizable value. Cost includes acquisition costs plus construction costs of improvements, holding costs and costs of amenities incurred to date. Joint venture and partnership investments are carried on the equity method of accounting and, where applicable, are stated at net realizable value. The Corporation's ability to recover the carrying value of real estate held for investment (including capitalized interest) is based upon future sales of land or projects. The ability to affect such sales is subject to market conditions and other factors which may be beyond the Corporation's control. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Corporation's past loan loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral and current economic conditions. Impaired loans except large groups of smaller balance homogeneous loans (such as residential real estate and consumer loans) that are collectively evaluated for impairment and loans that are measured at fair value or the lower of cost or market value, are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the underlying collateral. ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation previously purchased single-family residential whole loan packages (bulk purchased loans) at net discounts. Portions of such discounts are allocated to allowance for losses (credit allowances) relating to the credit risk associated with each mortgage loan package purchased. These credit allowances are available to absorb possible losses on these bulk purchased loans only or are credited to interest income as actual prepayments of individual loans occur. Collectibility is evaluated throughout the life of the acquired loans and if the estimate of total probable collections is increased or decreased, the amount of the allowance on bulk purchased loans (and the corresponding discount to be amortized) is adjusted accordingly. MORTGAGE SERVICING RIGHTS - Mortgage servicing rights represent the cost of acquiring the right to service mortgage loans. Such costs are initially capitalized and subsequently amortized in proportion to, and over the period of, estimated net loan servicing income. As of July 1, 1995, the Corporation adopted, on a prospective basis, the provisions of Statement of Financial Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise recognize as a separate asset the rights to service mortgage loans for unrelated third parties that have been acquired though either the purchase or origination of a loan. Previous to July 1, 1995, only purchased mortgage servicing rights were capitalized as assets. SFAS No. 122 provides that an institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained will allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Additionally, SFAS No. 122 requires that mortgage servicing rights be reported at the lower of cost or fair value. The value of mortgage servicing rights is determined based on the present value of estimated expected future Commercial Federal Corporation Annual Report 1996 41 cash flows, using assumptions as to current market discount rates, prepayment speeds and servicing costs per loan. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Loan types include government, conventional, private, and adjustable-rate mortgage loans. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to loan servicing income. No valuation allowance for capitalized servicing rights was necessary to be established as of June 30, 1996. The net effect of adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre-tax earnings approximately $3,995,000 (after-tax approximately $2,547,000 or $.17 per common share). PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building improvements, leasehold improvements and furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Estimated lives are 10 to 50 years for buildings and three to 15 years for furniture, fixtures and equipment. Leasehold improvements are generally amortized on the straight-line method over the terms of the respective leases. Maintenance and repairs are charged to expense as incurred. INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS - Effective June 30, 1994, the Corporation changed its method of valuation of intangible assets incorporating a fair value concept using a lower of cost or market methodology. This accounting change was considered to be a change in accounting principle inseparable from a change in estimate. Independent valuations of the fair value of the intangibles were completed for fiscal years 1995 and 1994. The Corporation adopted the provisions of Statement of Financial Accounting Standards No. 121 (SFAS No. 121) entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" as of July 1, 1995. SFAS No. 121 establishes accounting standards for the recognition and measurement of the impairment of long-lived assets, certain identifiable intangibles and goodwill. This statement does not apply to core deposit intangibles or mortgage and other servicing rights. The provisions of this statement require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the expected future cash flows (undiscounted and without interest charges) resulting from the use of the asset are estimated and an impairment loss recognized if the sum of such cash flows is less than the carrying amount of the asset. Should such an assessment indicate that the value of a long-lived asset or goodwill may be impaired, an impairment loss is recognized for the difference between the carrying value of the asset and its estimated fair value. The adoption of the provisions of this statement had no effect on the Corporation's financial position or results of operations. Core value of deposits resulting from acquisitions in fiscal years 1994 and later is amortized on an accelerated basis over a period not to exceed 10 years and goodwill is amortized on a straight-line basis over a period not to exceed 20 years. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Corporation enters into sales of securities under agreements to repurchase with primary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to purchase identical securities are collateralized by assets which are held in safekeeping in the name of the Corporation by the dealers who arranged the transaction. Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase such securities are reflected as a liability. The securities underlying the agreements remain in the asset accounts of the Corporation. HEDGING - The Bank has historically invested in interest-earning assets that have a longer duration than its interest-bearing liabilities. The shorter duration of the interest-sensitive liabilities indicates that the Bank is exposed to interest rate risk. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term interest-earning assets and net interest income. To mitigate this risk, interest rate swaps and interest rate caps have been utilized to hedge the interest rate exposure on certain interest-sensitive liabilities. It has been the general policy of the Bank to move toward a natural, 42 Commercial Federal Corporation Annual Report 1996 rather than a synthetic, management of its interest rate risk. Therefore, the Bank has allowed such hedging instruments to expire upon maturity while extending the maturities and locking in fixed interest rates on certain borrowings, primarily advances from the Federal Home Loan Bank, which has helped to reduce the Bank's one-year cumulative gap mismatch. The Bank reports interest rate swaps using settlement accounting whereby the net amount on interest rate swaps is recognized as an adjustment to interest expense. INCOME TAXES - The Corporation files consolidated federal income tax returns. The Corporation and its subsidiaries have entered into a tax-sharing agreement that provides for the allocation and payment of federal and state income taxes. The provision for income taxes of each corporation is computed on a separate company basis, subject to certain adjustments. Effective July 1, 1993, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Railroad's adoption of the provisions of this statement was changed from the year ended December 31, 1992, to the year ended December 31, 1993, to conform to the Corporation's adoption, and therefore is included in the cumulative effect of changes in accounting principles for the fiscal year ended June 30, 1994. This statement supersedes both Accounting Principles Board Opinion No. 11 (APB Opinion No. 11) and the guidance of APB Opinion No. 23 on the tax treatment of savings and loan bad debt reserves. SFAS No. 109 calculates income taxes on the liability method, under which the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various assets and liabilities of the Corporation and gives current recognition to changes in tax rates and laws. The effect of applying the provisions of SFAS No. 109 was a one-time adjustment that increased net income for fiscal year 1994 by $6,933,000 ($.48 per share) recorded as a cumulative effect of a change in accounting principle resulting from increasing the net deferred tax liability by $8,262,000 offset by additional deferred taxes totaling $15,195,000 recorded to adjust the assets and liabilities for prior business combinations from net-of-tax to pre-tax amounts. The principal temporary difference creating this increase to net income is the Bank's reserve for losses on loans and real estate. In addition, valuation allowances were established against certain deferred tax assets recorded for state income tax purposes. EARNINGS PER SHARE - Earnings per common share are calculated on the basis of the weighted average common shares outstanding and those outstanding options and warrants that are dilutive. NOTE 2: ACQUISITION OF RAILROAD FINANCIAL CORPORATION: On October 2, 1995, the Corporation consummated its acquisition of Railroad and, pursuant to the terms of the merger agreement, 2,156,232 shares of Railroad's common stock were delivered to the Corporation in exchange for approximately 1,377,617 shares of the Corporation's common stock (exchange ratio of .6389 based on an average closing price of $35.063). Railroad operated 18 branches and 71 agency offices throughout the state of Kansas and at September 30, 1995, had assets of approximately $602,900,000, deposits of approximately $421,400,000 and stockholders' equity of approximately $27,700,000. This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements have been restated for all periods prior to the acquisition to include the accounts and results of operations of Railroad. Commercial Federal Corporation Annual Report 1996 43 The following table summarizes results of operations of the Corporation and Railroad for the three months ended September 30, 1995, as separately reported prior to the merger, that are included in results of operations for fiscal year 1996.
- ---------------------------------------------------------------------------------------------------------------------------------- Corporation Railroad Combined - ---------------------------------------------------------------------------------------------------------------------------------- Total interest income and other income .............................................. $120,560 $13,531 $134,091 Total interest expense .............................................................. 76,320 8,283 84,603 Net income (loss) ................................................................... 11,859 (615) 11,244 - ----------------------------------------------------------------------------------------------------------------------------------
The following table reconciles revenue and earnings previously reported by the Corporation to give effect to the merger as currently presented in the financial statements for fiscal years 1995 and 1994.
- ---------------------------------------------------------------------------------------------------------------------------------- Corporation Railroad Combined - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal year 1995: Total interest income and other income ............................................ $449,526 $49,908 $499,434 Total interest expense ............................................................ 277,806 26,720 304,526 Net income ........................................................................ 27,535 3,646 31,181 Fiscal year 1994: Total interest income and other income ............................................ $397,814 $40,733 $438,547 Total interest expense ............................................................ 239,950 16,152 256,102 Net income ........................................................................ 158 4,812 4,970 - ----------------------------------------------------------------------------------------------------------------------------------
Railroad's results of operations were reported on a calendar year basis previous to its merger into the Corporation. However, in restating prior periods, Railroad's accounts and results of operations were conformed to the Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years, Railroad's accounts and results of operations for the six months ended June 30, 1994, including total revenue of $18,129,000 and net income totaling $185,000 were excluded from reported results of operations for the restated combined companies but are included in the Corporation's Consolidated Statement of Stockholders' Equity. NOTE 3. PURCHASE ACQUISITION: On February 1, 1996, the Corporation consummated its acquisition of Conservative Savings Corporation (Conservative), parent company of Conservative Savings Bank, FSB. Under the terms of the Reorganization and Merger Agreement the Corporation acquired all of the outstanding shares of Conservative's common stock (1,844,838 shares) and preferred stock (460,000 shares). Each share of Conservative's common stock was exchanged for $6.34 in cash and .2453 shares of the Corporation's common stock. Each share of Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares of the Corporation's common stock. Based on the Corporation's closing stock price of $36.50 at February 1, 1996, the total consideration for this acquisition approximates $44,114,000. At February 1, 1996, before purchase accounting adjustments, Conservative had assets of approximately $302,871,000, deposits of approximately $197,940,000 and stockholders' equity of approximately $35,124,000. The Consolidated Statement of Operations for fiscal year 1996 includes the operating results of Conservative beginning February 1, 1996. Conservative operated nine branches with seven located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. Three of the former Conservative branches and two branches of the Corporation closed in the consolidation process pursuant to this acquisition. This acquisition has been accounted for as a purchase. Core value of deposits resulting from this transaction totaled $6,842,000 and is amortized on an accelerated basis over 10 years; and goodwill totaling $6,158,000 recorded from this transaction is amortized on a straight-line basis over 20 years. The effect of this acquisition on the Corporation's consolidated financial statements as if this acquisition had occurred at the beginning of the fiscal year is not material. 44 Commercial Federal Corporation Annual Report 1996 NOTE 4. INVESTMENT SECURITIES: Investment securities are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1996 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and other Government agency obligations................. $ 6,876 $ 97 $ (63) $ 6,910 Other debt securities................................................. 2,966 22 -- 2,988 - ---------------------------------------------------------------------------------------------------------------------------- $ 9,842 $ 119 $ (63) $ 9,898 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate........................................ 5.50% - ---------------------------------------------------------------------------------------------------------------------------- Held to maturity: U.S. Treasury and other Government agency obligations................. $ 213,800 $ 78 $(3,642) $210,236 States and political subdivisions..................................... 18,642 -- (440) 18,202 Other debt securities................................................. 10,703 -- -- 10,703 - ---------------------------------------------------------------------------------------------------------------------------- $243,145 78 $(4,082) $239,141 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate........................................ 6.06% - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1995 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and other Government agency obligations................. $ 3,001 $ -- $ (13) $ 2,988 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate........................................ 6.64% - ---------------------------------------------------------------------------------------------------------------------------- Held to maturity: U.S. Treasury and other Government agency obligations................. $296,443 $1,078 $(3,743) $293,778 Other debt securities................................................. 1,050 -- (23) 1,027 - ---------------------------------------------------------------------------------------------------------------------------- $297,493 $1,078 $(3,766) $294,805 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate........................................ 6.26% - ----------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, investment securities totaling $494,000 and $659,000, respectively, were pledged to secure public funds. As of June 30, 1996, the Corporation recorded an unrealized gain on securities available for sale as an increase to stockholders' equity totaling $56,000, net of deferred income taxes of $20,000. Commercial Federal Corporation Annual Report 1996 45 The amortized cost and fair value of investment securities by contractual maturity at June 30, 1996, are shown below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
- ----------------------------------------------------------------------------------------------------------- Available for Sale Held to Maturity ----------------------------- ------------------------------ Amortized Fair Amortized Fair Cost Value Cost Value - ----------------------------------------------------------------------------------------------------------- Due in one year or less................... $ -- $ -- $ 46,173 $ 46,170 Due after one year through five years..... 9,842 9,898 167,890 164,327 Due after five years through ten years.... -- -- 14,135 13,845 Due after ten years....................... -- -- 14,947 14,799 - ----------------------------------------------------------------------------------------------------------- $9,842 $9,898 $243,145 $239,141 - -----------------------------------------------------------------------------------------------------------
At December 31, 1995, pursuant to the issuance of a special report by the Financial Accounting Standards Board entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," and the reassessment of the appropriateness of the classifications of all securities held, management of the Corporation reclassified agency-backed investment securities totaling $49,945,000 from securities held to maturity to securities available for sale. Proceeds from the sale of investment securities available for sale totaled $51,770,000 and $14,797,000, respectively, for the fiscal years ended June 30, 1996 and 1995, resulting in net pre-tax losses of $208,000 for fiscal year 1996, which are included in other operating income, and in no gain or loss for fiscal year 1995. During fiscal year 1994 there were no sales of investment securities. NOTE 5. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows: - ------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1996 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation....... $ 17,134 $ 66 $ (376) $ 16,824 Government National Mortgage Association..... 119,424 264 (3,099) 116,589 Federal National Mortgage Association........ 73,456 508 (64) 73,900 Collateralized Mortgage Obligations.......... 57,649 169 (1,925) 55,893 - ------------------------------------------------------------------------------------------------------- $ 267,663 $ 1,007 $ (5,464) $ 263,206 - ------------------------------------------------------------------------------------------------------- Weighted average interest rate............... 7.25% - ------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation....... $ 221,190 $ 1,478 $ (4,517) $ 218,151 Government National Mortgage Association..... 511,834 965 (7,310) 505,489 Federal National Mortgage Association........ 108,473 1,323 (1,949) 107,847 Collateralized Mortgage Obligations.......... 50,715 21 (1,553) 49,183 Privately Issued Mortgage Pool Securities.... 24,628 -- (264) 24,364 - ------------------------------------------------------------------------------------------------------- $ 916,840 $ 3,787 $ (15,593) $ 905,034 - ------------------------------------------------------------------------------------------------------- Weighted average interest rate............... 6.58% - -------------------------------------------------------------------------------------------------------
46 Commercial Federal Corporation Annual Report 1996
- -------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1995 Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation....... $ 21,454 $ 144 $ (89) $ 21,509 Government National Mortgage Association..... 8,982 196 (27) 9,151 Federal National Mortgage Association........ 370 4 -- 374 Collateralized Mortgage Obligations.......... 6,022 5 (87) 5,940 - -------------------------------------------------------------------------------------------------------- $ 36,828 $ 349 $ (203) $ 36,974 - -------------------------------------------------------------------------------------------------------- Weighted average interest rate............... 7.01% - -------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation....... $ 190,136 $ 1,457 $ (2,495) $ 189,098 Government National Mortgage Association..... 778,855 2,045 (10,971) 769,929 Federal National Mortgage Association........ 269,314 3,721 (2,633) 270,402 Collateralized Mortgage Obligations.......... 58,114 29 (1,352) 56,791 Privately Issued Mortgage Pool Securities.... 31,514 1,781 (182) 33,113 - -------------------------------------------------------------------------------------------------------- $1,327,933 $ 9,033 $ (17,633) $1,319,333 - -------------------------------------------------------------------------------------------------------- Weighted average interest rate............... 6.36% - --------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity at June 30 are classified by type of interest payment and contractual maturity term as follows:
- --------------------------------------------------------------------------------------------------------------------- 1996 1995 -------------------------------------- ----------------------------------- Amortized Fair Weighted Amortized Fair Weighted Cost Value Rate Cost Value Rate - --------------------------------------------------------------------------------------------------------------------- Adjustable rate........................ $707,359 $700,300 6.49% $ 780,311 $ 774,262 6.08% Fixed-rate, 5-year term................ 63,663 62,654 6.32 16,274 16,028 6.03 Fixed-rate, 7-year term................ 43,746 42,067 5.99 50,399 49,575 6.29 Fixed-rate, 15-year term............... 12,815 12,264 6.35 308,335 305,954 6.76 Fixed-rate, 30-year term............... 38,542 38,566 10.29 114,501 116,724 7.49 - --------------------------------------------------------------------------------------------------------------------- 866,125 855,851 6.62 1,269,820 1,262,543 6.38 Collateralized mortgage obligations.... 50,715 49,183 5.91 58,113 56,790 5.96 - --------------------------------------------------------------------------------------------------------------------- $916,840 $905,034 6.58% $1,327,933 $1,319,333 6.36% - ---------------------------------------------------------------------------------------------------------------------
As of June 30, 1996, the Corporation recorded an unrealized loss on securities available for sale as a decrease to stockholders' equity totaling $4,276,000, net of a deferred income tax benefit of approximately $1,537,000; and as of June 30, 1995, recorded an unrealized gain on securities available for sale as an increase to stockholders' equity totaling $134,000, net of deferred income taxes of approximately $48,000. At December 31, 1995, pursuant to the issuance of the aforementioned special report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," and the reassessment of the appropriateness of the classifications of all securities held, management of the Corporation reclassified mortgage-backed securities totaling $370,400,000 from securities held to maturity to securities available for sale. Such reclassification consisted of substantially all existing 15- and 30-year fixed- rate mortgage-backed securities held by the Corporation. In addition, approximately $9,415,000 of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. Commercial Federal Corporation Annual Report 1996 47 Proceeds from the sale of mortgage-backed securities available for sale totaled $179,041,000, $40,774,000 and $20,821,000, respectively, for the fiscal years ended June 30, 1996, 1995, and 1994 resulting in net pre-tax gains of $461,000 and $220,000 for fiscal years 1996 and 1994, respectively, and a pre- tax loss of $41,000 for fiscal year 1995, all of which are included in other operating income. At June 30, 1996 and 1995, the Corporation pledged mortgage-backed securities totaling $458,666,000 and $317,701,000, respectively, as collateral for collateralized mortgage obligations, public funds, securities sold under agreements to repurchase, interest rate swap agreements and other borrowings. NOTE 6. LOANS HELD FOR SALE: Loans held for sale from mortgage banking operations at June 30, 1996 and 1995, totaled $89,379,000 and $113,385,000, respectively, with weighted average rates of 7.82% and 8.02%, respectively. Loans held for sale are secured by single-family residential properties consisting of fixed and adjustable rate mortgage loans totaling $89,294,000 and $85,000, respectively, at June 30, 1996, and $83,598,000 and $29,787,000, respectively, at June 30, 1995. NOTE 7. LOANS RECEIVABLE:
Loans receivable at June 30 are summarized as follows: - --------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------- Conventional mortgage loans............................... $3,757,513 $3,583,517 FHA and VA loans.......................................... 291,755 340,864 Commercial real estate loans.............................. 261,046 210,676 Consumer and other loans.................................. 355,777 242,697 Construction loans........................................ 199,088 186,679 - ---------------------------------------------------------------------------------------- 4,865,179 4,564,433 Less: Unamortized premiums (discounts), net..................... 2,794 (5,957) Loans-in-process.......................................... (91,262) (80,211) Deferred loan fees, net................................... (3,726) (2,495) Allowance for loan losses................................. (49,200) (48,463) - ---------------------------------------------------------------------------------------- $4,723,785 $4,427,307 - ---------------------------------------------------------------------------------------- Weighted average interest rate............................ 8.20% 8.26% - ----------------------------------------------------------------------------------------
At June 30, 1996, conventional, FHA and VA loans, including loans held for sale, totaling $4,327,018,000 are secured by single-family residential properties located as follows: 20% in Nebraska, 17% in Colorado, 7% in Kansas, 5% each in Georgia, Oklahoma and Texas, and the remaining 41% in 44 other states. At June 30, 1995, conventional, FHA and VA loans, including loans held for sale, totaling $4,215,956,000 were secured by single-family residential properties located as follows: 19% each in Nebraska and Colorado, 7% in Kansas, 5% each in Texas, Georgia and Oklahoma, and the remaining 40% in 44 other states. The commercial real estate portfolio at June 30, 1996, is secured by properties located as follows: 33% in Colorado, 31% in Nebraska, 12% in Florida and the remaining 24% in 18 other states. The commercial real estate portfolio at June 30, 1995, was secured by properties located as follows: 44% in Colorado, 14% in Nebraska, 12% in Kansas, 8% in Florida and the remaining 22% in 16 other states. Nonperforming loans at June 30, 1996 and 1995, aggregated $37,905,000 and $32,258,000, respectively. Of the nonperforming loans at June 30, 1996, approximately 12% are secured by properties located in California, 9% each in Georgia and Texas, 7% in Colorado, 6% in 48 Commercial Federal Corporation Annual Report 1996 Nebraska, 5% each in Kansas and Missouri, 4% each in Maryland and Oklahoma and the remaining 39% located in 35 other states. Of the nonperforming loans at June 30, 1995, approximately 12% were secured by properties located in California, 11% in Texas, 9% in Colorado, 8% in Georgia, 6% each in Nebraska and Missouri, and the remaining 48% located in 44 other states. Also included in loans receivable at June 30, 1996 and 1995, are loans with carrying values of $14,803,000 and $17,860,000, respectively, the terms of which have been modified in troubled debt restructurings. During the fiscal years ended June 30, 1996 and 1995, the Corporation recognized interest income on these loans aggregating $1,276,000 and $1,677,000, respectively, whereas under their original terms the Corporation would have recognized interest income of $1,515,000 and $1,900,000, respectively. At June 30, 1996, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. At June 30, 1996 and 1995, the Corporation had pledged substantially all single-family residential loans as collateral for Federal Home Loan Bank advances and other borrowings. In addition, at June 30, 1996, the Corporation had also pledged a portion of commercial real estate loans for Federal Home Loan Bank advances. NOTE 8. REAL ESTATE: Real estate at June 30 is summarized as follows:
- -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Real estate owned and in judgment, net of allowance for losses of $3,353 and $4,583.... $ 8,008 $ 7,260 Real estate held for investment, which includes equity in unconsolidated joint ventures and investments in real estate partnerships, net of allowance for losses of $1,090 and $1,391........... 8,661 9,526 - -------------------------------------------------------------------------------- $16,669 $16,786 - --------------------------------------------------------------------------------
Commercial and residential real estate comprise approximately 70% and 30%, respectively, of the total amount of real estate at June 30, 1996, and approximately 77% and 23%, respectively, of the total amount of real estate at June 30, 1995. Real estate located by states at June 30, 1996, is as follows: 42% in Nebraska, 31% in Colorado, 8% in Texas, and the remaining 19% in 23 other states. Real estate located by states at June 30, 1995, was as follows: 48% in Nebraska, 33% in Colorado, 5% in Texas, and the remaining 14% in 18 other states. Commercial Federal Corporation Annual Report 1996 49 NOTE 9. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE:
An analysis of the allowances for losses on loans and real estate is summarized as follows: - ----------------------------------------------------------------------------------------------- Loans Real Estate Total - ----------------------------------------------------------------------------------------------- Balance, June 30, 1993 ...................................... $46,908 $ 5,738 $52,646 - ----------------------------------------------------------------------------------------------- Provision charged to operations ............................. 6,248 1,664 7,912 Charges ..................................................... (4,098) (1,367) (5,465) Recoveries .................................................. 743 337 1,080 Estimated allowance for purchased loans ..................... 39 -- 39 Change in estimate of allowance for purchased loans ......... (4,357) -- (4,357) Charge-offs to allowance for purchased loans ................ (632) -- (632) - ----------------------------------------------------------------------------------------------- Balance, June 30, 1994 (1) .................................. 44,851 6,372 51,223 - ----------------------------------------------------------------------------------------------- Provision charged to operations ............................. 6,408 199 6,607 Charges ..................................................... (3,771) (683) (4,454) Recoveries .................................................. 1,334 152 1,486 Allowances from acquisitions ................................ 1,818 -- 1,818 Railroad activity for the six months ended June 30, 1994, net (58) (66) (124) Change in estimate of allowance for purchased loans ......... (1,705) -- (1,705) Charge-offs to allowance for purchased loans ................ (336) -- (336) - ----------------------------------------------------------------------------------------------- Balance, June 30, 1995 (1) .................................. 48,541 5,974 54,515 - ----------------------------------------------------------------------------------------------- Provision charged (credited) to operations .................. 6,107 (479) 5,628 Charges ..................................................... (5,533) (1,211) (6,744) Recoveries .................................................. 734 159 893 Allowances from acquisitions ................................ 1,944 -- 1,944 Change in estimate of allowance for purchased loans ......... (2,273) -- (2,273) Charge-offs to allowance for purchased loans ................ (242) -- (242) - ----------------------------------------------------------------------------------------------- Balance, June 30, 1996 (1) .................................. $49,278 $ 4,443 $53,721 - -----------------------------------------------------------------------------------------------
(1) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. - -------------------------------------------------------------------------------- Bulk loan purchases acquired at a discount are allocated an estimated allowance for bulk purchased loans that will be available for potential losses in the future on a particular loan package with any excess over the allowance recorded as a discount. At June 30, 1996, 1995 and 1994, $12,765,000, $15,280,000 and $17,321,000, respectively, are included in the allowance for losses on loans presented above. NOTE 10. LOAN SERVICING: The Corporation's mortgage banking subsidiary services real estate loans for investors which are not included in the accompanying consolidated financial statements. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding advance payments by borrowers for taxes and insurance, making inspections as required of the mortgage premises, collecting amounts due from delinquent mortgagors, supervising foreclosures in the event of unremedied defaults and generally administering the loans for the investors to whom they have been sold. The amount of loans serviced for other institutions at June 30, 1996, 1995 and 1994, was $5,869,800,000, $5,151,100,000 and $4,635,945,000, respectively. The mortgage servicing portfolio is covered by servicing agreements pursuant to the mortgage-backed securities programs of the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the 50 Commercial Federal Corporation Annual Report 1996 Corporation may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Corporation cannot charge any interest on such advance funds, the Corporation typically recovers the advances within a reasonable number of days upon receipt of the borrower's payment, or in the absence of such payment, advances are recovered through FHA insurance or VA guarantees or FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. The amount of funds advanced by the Corporation pursuant to servicing agreements is not material. Custodial escrow balances maintained in connection with loan servicing totaled approximately $101,671,000 and $110,714,000, at June 30, 1996 and 1995, respectively. Mortgage servicing rights are included in the Consolidated Statement of Financial Condition under the caption "Prepaid expenses and other assets." The activity of mortgage servicing rights at June 30 is summarized as follows:
- ------------------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------- Beginning balance....................................... $36,236 $34,128 $34,025 Purchases of mortgage servicing rights.................. 14,034 9,386 7,774 Mortgage servicing rights from purchase acquisitions.... 38 1,045 -- Mortgage servicing rights capitalized through loan originations.................. 3,673 -- -- Amortization expense.................................... (9,011) (8,323) (7,671) - ------------------------------------------------------------------------------------------- Ending balance.......................................... $44,970 $36,236 $34,128 - -------------------------------------------------------------------------------------------
At June 30, 1996, the fair value of the Corporation's mortgage servicing rights totaled approximately $77,500,000 and no valuation allowance was necessary to be established. Outstanding commitments to purchase mortgage loan servicing rights totaled $9,000 and $521,000, respectively, at June 30, 1996 and 1995. There was no commitment to sell any bulk packages of mortgage servicing rights at June 30, 1996. NOTE 11. PREMISES AND EQUIPMENT:
Premises and equipment at June 30 are summarized as follows: - ------------------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------- Land.............................................................. $ 11,998 $ 10,681 Buildings and improvements........................................ 58,307 54,177 Leasehold improvements............................................ 2,875 2,640 Furniture, fixtures and equipment................................. 62,596 56,336 - ------------------------------------------------------------------------------------------- 135,776 123,834 Less accumulated depreciation and amortization.................... 62,221 56,630 - ------------------------------------------------------------------------------------------- $ 73,555 $ 67,204 - -------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment, included in occupancy and equipment expenses, totaled $6,855,000, $5,613,000 and $4,768,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. The Bank has operating lease commitments on certain premises and equipment. Rent expense totaled $2,834,000, $2,939,000 and $2,690,000 for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. Annual minimum operating lease commitments as of June 30, 1996, are as follows: 1997 - $1,628,000; 1998 - $1,084,000; 1999 - $892,000; 2000 - $597,000; 2001 - $389,000; 2002 and thereafter - $4,643,000. Commercial Federal Corporation Annual Report 1996 51 NOTE 12. GOODWILL AND CORE VALUE OF DEPOSITS:
An analysis of goodwill and core value of deposits is summarized as follows: - ------------------------------------------------------------------------------------------- Core Value Goodwill of Deposits Total - ------------------------------------------------------------------------------------------- Balance, June 30, 1993 .................................. $ 57,725 $ 30,221 $ 87,946 Additions relating to acquisitions ...................... 359 28,674 29,033 Adoption of SFAS No. 109 for prior business combinations. -- 15,692 15,692 Valuation adjustment .................................... (29,267) (20,763) (50,030) Amortization expense .................................... (6,241) (7,890) (14,131) Sale of an investment in a subsidiary ................... (849) -- (849) - ------------------------------------------------------------------------------------------- Balance, June 30, 1994 .................................. 21,727 45,934 67,661 - ------------------------------------------------------------------------------------------- Additions relating to acquisitions, net ................. 1,510 6,521 8,031 Accelerated amortization expense ........................ (21,357) -- (21,357) Write-off due to recognition of pre-acquisition tax credits and net operating losses ................... -- (6,810) (6,810) Amortization expense .................................... (48) (10,214) (10,262) - ------------------------------------------------------------------------------------------- Balance, June 30, 1995 .................................. 1,832 35,431 37,263 - ------------------------------------------------------------------------------------------- Additions relating to acquisitions ...................... 6,158 6,842 13,000 Amortization expense .................................... (218) (9,311) (9,529) - ------------------------------------------------------------------------------------------- Balance, June 30, 1996 .................................. $ 7,772 $ 32,962 $ 40,734 - -------------------------------------------------------------------------------------------
An appraisal performed in fiscal year 1994 by an independent third party of the existing intangible assets relating to acquisitions during 1986 through 1988 of five troubled savings institutions located in Colorado, Kansas and Oklahoma resulted in a fair value estimate of $41,000,000, and therefore, recognition of an impairment of recorded intangible assets of $52,703,000 at June 30, 1994. The appraisal of $41,000,000 was classified as core value of deposits totaling $19,643,000 and goodwill totaling $21,357,000. The effect of this accounting change was a charge to fiscal year 1994 results of operations totaling $52,703,000, with an income tax benefit of $8,765,000, resulting in a loss of $43,938,000. Effective July 1, 1994, the remaining $19,643,000 of identifiable intangible assets classified as core value of deposits is being amortized on a straight-line basis over the remaining respective lives, of which all were original 10 year terms, with the primary amount to be fully amortized as of April 30, 1997. Goodwill of $21,357,000 was amortized over the first six months of fiscal year 1995. No impairment adjustment has been made to the intangible assets resulting from the Corporation's acquisitions during fiscal years 1996, 1995 or 1994. 52 Commercial Federal Corporation Annual Report 1996 NOTE 13. DEPOSITS:
Deposits at June 30 are summarized as follows: - ------------------------------------------------------------------------------------------------------------ 1996 1995 ------------------------ -------------------------- Description and interest rates Amount % Amount % - ------------------------------------------------------------------------------------------------------------ Passbook accounts (average of 4.24% and 4.38%) ...... $ 623,505 14.5% $ 549,857 13.7% NOW accounts (average of .63% and .93%) ............. 332,233 7.7 296,552 7.4 Market rate savings (average of 3.34% and 3.36%) .... 159,672 3.7 190,994 4.8 - ------------------------------------------------------------------------------------------------------------ Total savings (no stated maturities) ................ 1,115,410 25.9 1,037,403 25.9 - ------------------------------------------------------------------------------------------------------------ Certificates of deposit: Less than 3.00% .................................... 8,848 .2 11,846 .3 3.00% - 3.99% ..................................... 19,978 .5 67,404 1.7 4.00% - 4.99% ..................................... 285,083 6.6 518,061 12.9 5.00% - 5.99% ..................................... 1,948,836 45.3 1,017,841 25.4 6.00% - 6.99% ..................................... 606,704 14.1 1,026,035 25.5 7.00% - 7.99% ..................................... 300,040 7.0 290,950 7.2 8.00% - 8.99% ..................................... 15,090 .3 34,798 .9 9.00% and over .................................... 4,587 .1 6,985 .2 - ------------------------------------------------------------------------------------------------------------ Total certificates of deposit (fixed maturities; average of 6.10% and 5.33%) ........................ 3,189,166 74.1 2,973,920 74.1 - ------------------------------------------------------------------------------------------------------------ $4,304,576 100.0% $4,011,323 100.0% - ------------------------------------------------------------------------------------------------------------
Interest expense on deposit accounts for the years ended June 30 is summarized as follows: - ------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Passbook accounts ........................................... $ 24,702 $ 23,696 $ 8,729 NOW accounts ................................................ 2,766 2,586 2,882 Market rate savings ......................................... 5,709 7,356 5,881 Certificates of deposit ..................................... 180,863 146,525 125,065 - ------------------------------------------------------------------------------------------------------------ $214,040 $180,163 $142,557 - ------------------------------------------------------------------------------------------------------------
Certificates of deposit in amounts of $100,000 or more totaled $278,839,000 and $203,077,000, respectively, at June 30, 1996 and 1995. There were no brokered certificates of deposit at June 30, 1996 or 1995. Commercial Federal Corporation Annual Report 1996 53
At June 30, 1996, scheduled maturities of certificates of deposit are as follows: - ------------------------------------------------------------------------------------------------------------------------- Year Ending June 30, ------------------------------------------------------------------------------------ Rate 1997 1998 1999 2000 2001 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------- Less than 3.00% .................... $ 6,806 $ 102 $ 82 $ 45 $ 3 $ 1,810 $ 8,848 3.00% - 3.99% ..................... 16,184 2,998 627 148 -- 21 19,978 4.00% - 4.99% ..................... 253,113 28,892 2,321 75 3 679 285,083 5.00% - 5.99% ..................... 1,444,851 344,870 129,100 14,745 10,000 5,270 1,948,836 6.00% - 6.99% ..................... 444,704 113,751 28,486 12,631 3,022 4,110 606,704 7.00% - 7.99% ..................... 201,526 74,116 14,471 8,971 587 369 300,040 8.00% - 8.99% ..................... 4,216 8,421 1,519 767 162 5 15,090 9.00% and over .................... 103 4,320 130 19 -- 15 4,587 - ------------------------------------------------------------------------------------------------------------------------- $2,371,503 $577,470 $176,736 $37,401 $13,777 $12,279 $3,189,166 - -------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, deposits of certain state and municipal agencies and other various non-retail entities were collateralized by mortgage-backed securities with carrying values of $7,765,000 and $44,132,000, respectively, and investment securities with carrying values of $494,000 and $659,000, respectively. In accordance with regulatory requirements, at June 30, 1996 and 1995, the Corporation maintained $13,633,000 and $11,197,000, respectively, in cash on hand and deposits at the Federal Reserve Bank in noninterest earning reserves against certain transaction checking accounts and nonpersonal certificates of deposit. NOTE 14. ADVANCES FROM THE FEDERAL HOME LOAN BANK: The Corporation was indebted to the Federal Home Loan Bank of Topeka on notes maturing as follows:
- ---------------------------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------- ------------------------ Weighted Weighted Interest Average Average Scheduled Maturities Due: Rate Range Rate Amount Rate Amount - ---------------------------------------------------------------------------------------------------------- Within 1 year...................... 4.61% - 9.43% 5.59% $ 825,691 6.15% $ 766,214 Over 1 year to 2 years............. 5.06 - 7.90 5.74 502,844 5.67 721,633 Over 2 years to 3 years............ 5.31 - 6.21 5.54 10,705 5.74 252,797 Over 3 years to 4 years............ 6.78 6.78 10,000 5.70 35,608 Over 4 years to 5 years............ -- -- -- -- 6.79 10,350 Over 5 years....................... 6.55 - 7.19 6.76 1,050 6.55 750 - ---------------------------------------------------------------------------------------------------------- 4.61% - 9.43% 5.66% $1,350,290 5.89% $1,787,352 - ----------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, the Corporation had pledged a portion of its real estate loans and mortgage-backed securities as well as Federal Home Loan Bank stock as collateral for outstanding advances. At June 30, 1996 and 1995, there were no commitments for advances from the Federal Home Loan Bank. 54 Commercial Federal Corporation Annual Report 1996 NOTE 15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: At June 30, 1996 and 1995, securities sold under agreements to repurchase identical securities totaled $380,755,000 and $208,373,000, respectively, with weighted average interest rates of 6.51% and 7.08%, respectively. There were no securities sold under agreements to repurchase substantially identical securities at June 30, 1996 or 1995. An analysis of securities sold under agreements to repurchase identical securities for the years ended June 30 is summarized as follows:
- ------------------------------------------------------------------------------- 1996 1995 - ------------------------------------------------------------------------------- Maximum month-end balance............................. $380,755 $208,373 - ------------------------------------------------------------------------------- Average balance....................................... $187,563 $103,223 - ------------------------------------------------------------------------------- Weighted average interest rate during the period...... 7.14% 7.59% Weighted average interest rate at end of period....... 6.51% 7.08% - -------------------------------------------------------------------------------
At June 30, 1996, securities sold under agreements to repurchase had maturities ranging from September 1996 to January 1998 with a weighted average maturity at June 30, 1996, of 372 days. At June 30, 1996 and 1995, mortgage- backed securities with carrying values totaling $410,527,000 and $247,413,000, respectively, and market values totaling $405,521,000 and $244,772,000, respectively, were pledged as collateral for securities sold under agreements to repurchase. It is the Corporation's policy to enter into repurchase agreements only with major brokerage firms that are primary dealers in government securities. At June 30, 1996, no repurchase agreements were at risk in excess of 10.0% of stockholders' equity. NOTE 16. OTHER BORROWINGS: Other borrowings at June 30 consist of the following:
- ----------------------------------------------------------------------------------- 1996 1995 - ----------------------------------------------------------------------------------- Subordinated notes, interest 10.25%, due December 15, 1999.... $40,250 $40,250 Collateralized mortgage obligations........................... 8,867 12,454 Senior notes, interest 10.00%, due January 31, 1999........... 6,900 6,900 Other borrowings.............................................. 2,529 5,699 - ----------------------------------------------------------------------------------- $58,546 $65,303 - -----------------------------------------------------------------------------------
The subordinated notes pay interest semi-annually on June 15 and December 15. The subordinated notes have been redeemable since December 15, 1995, at the election of the Corporation, in whole or in part, at par plus accrued interest to the date of redemption. The subordinated notes have no sinking fund, are unsecured general obligations of the Corporation, and are subordinated to all existing and future senior indebtedness of the Corporation. The Note Indenture, among other provisions, restricts the ability of the Corporation and its subsidiaries, under certain circumstances, to incur additional indebtedness and restricts the Corporation's ability to pay cash dividends or to make other capital distributions. The Corporation is also required to maintain not less than $3,500,000 in cash and cash equivalents under the terms of the Note Indenture. At June 30, 1996, the remaining two notes issued in conjunction with collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due in varying amounts contractually through September 1, 2015. The notes are secured by FNMA mortgage-backed securities Commercial Federal Corporation Annual Report 1996 55 with a book value of approximately $14,540,000. As the principal balance on the collateral on these notes repay, the notes are correspondingly repaid. The senior notes pay interest monthly and have been redeemable since February 1, 1995, at the election of the Corporation, in whole or in part, at par plus accrued interest to the date of redemption. The senior notes have no sinking fund, are unsecured general obligations of the Corporation, and are senior to all existing and future indebtedness of the Corporation other than debt obligations secured by certain liens. Senior noteholders do not have priority over depositors and other creditors of the Bank. The Note Indenture, among other provisions, restricts the ability of the Corporation and its subsidiaries, under certain circumstances, to incur additional indebtedness and restricts the Corporation's ability to pay cash dividends or to make other capital distributions. Other borrowings are collateralized by unencumbered first mortgage loans with unpaid principal balances of approximately $5,714,000 at June 30, 1996. Principal maturities of other borrowings as of June 30, 1996, for the next five fiscal years are as follows: 1997 - $3,326,000; 1998 - $2,899,000; 1999 - $9,495,000; 2000 - $41,004,000; 2001 - $240,000 and thereafter - $1,582,000. NOTE 17. INTEREST RATE HEDGING:
The following summarizes the Corporation's interest rate hedging agreements at June 30: - ---------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Interest rate swap agreements: Notional principal amount, fixed rate agreements.................... $ 10,000 $ 78,500 $109,500 Weighted average fixed rate paid ................................... 11.10% 10.40% 9.62% Weighted average variable rate received ............................ 5.97% 5.63% 3.55% Net interest expense ............................................... $ 2,280 $ 4,345 $ 8,485 Range of remaining terms ........................................... 17 mos. 3-29 mos. 1-41 mos. - ----------------------------------------------------------------------------------------------------------------
Net interest expense, as disclosed in the above table, also represents gross interest expense since no interest income on these interest rate swap agreements has been received during the three fiscal years presented. The Corporation is not involved in any derivative activities nor has the Corporation terminated any contracts during the fiscal years ended June 30, 1996, 1995 and 1994. The interest rate swap agreements were collateralized at June 30, 1996 and 1995, by mortgage-backed securities with carrying values of $15,721,000 and $18,817,000, respectively. The swap agreement totaling $10,000,000 will mature November 1997. Entering into interest rate swap agreements involves the credit risk of dealing with intermediary and primary counterparties and their ability to meet the terms of the respective contracts. The Corporation is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swaps if the Corporation is in a net interest receivable position at the time of potential default by the counterparties. However, at June 30, 1996, the Corporation was in a net interest payable position. The Corporation does not anticipate nonperformance by the counterparties. At June 30, 1996 and 1995, the Corporation also had one outstanding interest rate cap agreement totaling $10,000,000 which pays interest when the three-month LIBOR exceeds 7.00% and a termination date of March 9, 1997. The Corporation will receive interest based on a floating rate with interest payments settled quarterly. Through June 30, 1996 and 1995, the Corporation was not owed any interest from its counterparts for such quarterly interest settlement. The premium paid on March 9, 1995 (the effective date of this agreement) totaled $115,000 with $58,000 and $19,000, respectively, amortized to interest expense for the fiscal years ended June 30, 1996 and 1995. The unamortized premium totaled $38,000 at June 30, 1996. This interest rate cap agreement is unsecured. 56 Commercial Federal Corporation Annual Report 1996 NOTE 18. INCOME TAXES:
The following is a comparative analysis of the provision for federal and state taxes on income: - -------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, ------------------------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Current: Federal ............................................................................ $75,927 $ 7,816 $10,980 State .............................................................................. 3,626 956 817 - -------------------------------------------------------------------------------------------------------------------------------- 79,553 8,772 11,797 - -------------------------------------------------------------------------------------------------------------------------------- Deferred: Federal ............................................................................ (45,316) 14,123 4,992 State .............................................................................. (7,275) 251 86 - -------------------------------------------------------------------------------------------------------------------------------- (52,591) 14,374 5,078 - -------------------------------------------------------------------------------------------------------------------------------- Total provision for income taxes ..................................................... $26,962 $23,146 $16,875 - -------------------------------------------------------------------------------------------------------------------------------- The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate: - -------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, ------------------------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate .................................................... 35.0% 35.0% 35.0% Amortization of discounts, premiums and intangible assets from acquisitions ................................................ 0.1 13.8 81.4 Income tax credits ................................................................... (0.7) (3.1) (3.3) Bad debt deduction ................................................................... (0.2) (2.9) (13.3) State income taxes, net of federal income tax benefit................................. (2.0) 1.6 4.1 Effect of change in enacted tax rate ................................................. -- -- 7.8 Other items, net ..................................................................... 0.6 (1.8) (1.0) - -------------------------------------------------------------------------------------------------------------------------------- Effective tax rate ................................................................... 32.8% 42.6% 110.7% - --------------------------------------------------------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 57
The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at June 30 are as follows: - --------------------------------------------------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Finance lease contracts treated as operating leases for income tax purposes ............................................................... $ -- $55,847 Federal Home Loan Bank stock ............................................................ 9,666 10,779 Differences between book and tax basis of premises and equipment ........................ 6,761 6,444 Core value of acquired deposits ......................................................... 4,595 3,931 Basis differences arising from acquisitions ............................................. 4,134 1,937 Other items ............................................................................. 5,681 3,479 - --------------------------------------------------------------------------------------------------------------------- 30,837 82,417 - --------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for losses on loans and real estate not currently deductible .................. 14,565 14,277 Tax credit carryforwards ................................................................ 136 4,035 Collateralized mortgage obligations ..................................................... 3,046 3,402 State operating loss carryforwards ...................................................... 2,167 2,724 Basis differences between tax and financial reporting arising from acquisitions ............................................................. 4,620 2,585 Accretion of discount on purchased loans ................................................ 2,301 2,371 Employee benefits ....................................................................... 2,095 1,977 Other items ............................................................................. 2,430 2,022 - --------------------------------------------------------------------------------------------------------------------- 31,360 33,393 Valuation allowance ....................................................................... 2,279 2,659 - --------------------------------------------------------------------------------------------------------------------- 29,081 30,734 - --------------------------------------------------------------------------------------------------------------------- Net deferred tax liability ................................................................ $ 1,756 $51,683 - ---------------------------------------------------------------------------------------------------------------------
The valuation allowance of $2,279,000 at June 30, 1996, decreased from $2,659,000 at June 30, 1995, primarily due to a decrease in state net operating losses available for income tax purposes. Savings institutions that meet certain definitional tests and other conditions prescribed by the Internal Revenue Code are allowed to deduct, within limitations, a bad debt deduction computed as a percentage of taxable income before such deduction. The deduction percentage is 8.0% for fiscal years ended June 30, 1996, 1995 and 1994. Alternatively, a qualified savings institution may compute its bad debt deduction based upon actual loan loss experience (i.e., experience method). The bad debt deduction for fiscal years 1996 and 1995 was computed under the percentage of taxable income method since it yielded a greater deduction than did the experience method. In fiscal year 1994 the Bank computed its bad debt deduction utilizing the experience method. In accordance with provisions of SFAS No. 109, a deferred tax liability has not been recognized for the bad debt reserves of the Bank created in the tax years which began prior to December 31, 1987 (the base year). At June 30, 1996, the amount of these reserves totaled approximately $87,512,000 with an unrecognized deferred tax liability associated with such reserves totaling approximately $31,288,000. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) require recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These changes will result in the recognition of additional deferred tax liabilities of approximately $103,000 in the first quarter of fiscal year 1997. The remaining unrecognized 58 Commercial Federal Corporation Annual Report 1996 deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. NOTE 19. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS: On December 19, 1988, the Board of Directors of the Corporation adopted a Shareholder Rights Plan and declared a dividend of stock purchase rights consisting of one primary right and one secondary right for each outstanding share of common stock on December 30, 1988, and with respect to each share of common stock issued by the Corporation at any time after such date and prior to the earlier of the occurrence of certain events or expiration of such rights. These rights are attached to and trade only together with the common stock shares. The provisions of the Shareholder Rights Plan are designed to protect the interests of the stockholders of record in the event of an unsolicited or hostile attempt to acquire the Corporation at a price or on terms that are not fair to all shareholders. Unless rights are exercised, holders have no rights as a stockholder of the Corporation (other than rights resulting from such holder's ownership of common shares), including, without limitation, the right to vote or to receive dividends. With certain exceptions, the rights expire December 31, 1998, unless earlier redeemed by the Corporation. At June 30, 1996, no such rights were exercised. The Corporation is authorized to issue 10,000,000 shares of preferred stock having a par value of $.01 per share. None of the shares of the authorized preferred stock has been issued. The Board of Directors is authorized to establish and state voting powers, designation preferences, and other special rights of such shares and the qualifications, limitations and restrictions thereof. The preferred stock may rank prior to the common stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. Under the Office of Thrift Supervision's (OTS) capital distribution regulations, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed dividend, has total capital that is at least equal to the amount of its fully phased-in capital requirements (a "Tier 1 Association") is permitted to pay dividends during a calendar year in an amount equal to the greater of (i) 75.0% of its net income for the recent four quarters, or (ii) 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk-based capital ratio requirement at the beginning of the calendar year. At June 30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $92,947,000 in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law and certain other federal regulations would require prior approval of such proposed dividends and, in some cases, would prohibit the payment of dividends. On October 4, 1995, the Board of Directors established a quarterly dividend policy and, on the same day, declared a cash dividend of $.10 per share on the Corporation's common stock. Accordingly, cash dividends totaling $5,880,000 ($.40 per share) were declared during fiscal year 1996 with $4,370,000 paid through June 30, 1996. The Corporation had not paid cash dividends to its common stock shareholders before October 4, 1995. Commercial Federal Corporation Annual Report 1996 59 NOTE 20. REGULATORY CAPITAL REQUIREMENTS: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial position and results of operations. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the following tables of tangible, core and total risk-based capital. Prompt Corrective Action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) require specific supervisory actions as capital levels decrease. To be considered well-capitalized under the regulatory framework for Prompt Corrective Action provisions under FDICIA, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk- based capital ratios as set forth in the following tables. At June 30, 1996 and 1995, the Bank exceeded the minimum requirements for the well-capitalized category. The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements.
- ----------------------------------------------------------------------------------------------------------------------- As of June 30, 1996 ------------------------------------------------------ Actual Capital Required Capital ------------------------- --------------------------- Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------------- OTS Capital Adequacy: Tangible capital ............................................. $408,708 6.18% $ 99,137 1.50% Core capital (Tier 1 capital) ................................ 424,909 6.41 198,760 3.00 Risk-based capital (Total capital)............................ 460,674 13.62 270,629 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital .................................... 424,909 6.41 331,266 5.00 Tier 1 risk-based capital .................................. 424,909 12.56 202,971 6.00 Total risk-based capital ................................... 460,674 13.62 338,286 10.00 - ----------------------------------------------------------------------------------------------------------------------- As of June 30, 1995 ------------------------------------------------------ Actual Capital Required Capital ------------------------- --------------------------- Amount Ratio (1) Amount (1) Ratio (1) - ----------------------------------------------------------------------------------------------------------------------- OTS Capital Adequacy: Tangible capital ............................................. $337,451 5.16% $ 98,017 1.50% Core capital (Tier 1 capital) ................................ 358,881 5.47 196,677 3.00 Risk-based capital (Total capital)............................ 391,656 13.12 238,844 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital ...................................... 358,881 5.47 327,796 5.00 Tier 1 risk-based capital .................................... 358,881 12.02 179,133 6.00 Total risk-based capital ..................................... 391,656 13.12 298,555 10.00 - -----------------------------------------------------------------------------------------------------------------------
60 Commercial Federal Corporation Annual Report 1996 As of June 30, 1996, the most recent notification from the OTS categorized the Bank as "well-capitalized" under the regulatory framework for Prompt Corrective Action provisions under FDICIA. There are no conditions or events since such notification that management believes have changed the Bank's classification. NOTE 21. COMMITMENTS AND CONTINGENCIES: The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees on certain loans sold with recourse and on other contingent obligations. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contractual amounts of these instruments represent the maximum credit risk to the Corporation. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At June 30, 1996, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $173,551,000 as follows: $94,679,000 to originate loans, $61,264,000 to purchase loans and $17,608,000 to provide consumers unused lines of credit. At June 30, 1995, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $150,651,000 as follows: $76,675,000 to originate loans, $33,723,000 to purchase loans, $15,000,000 to purchase investment securities, $8,761,000 to purchase mortgage-backed securities and $16,492,000 to provide consumers unused lines of credit. In addition, at June 30, 1996 and 1995, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $9,000 and $521,000, respectively. Loan commitments, which are funded subject to certain limitations, extend over various periods of time. Generally, unused loan commitments are canceled upon expiration of the commitment term as outlined in each individual contract. These outstanding loan commitments to extend credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn upon. The Corporation evaluates each customer's credit worthiness on a separate basis and requires collateral based on this evaluation. Collateral consists mainly of residential family units and personal property. At June 30, 1996 and 1995, the Corporation had approximately $126,377,000 and $82,376,000, respectively, in mandatory forward delivery commitments to sell residential mortgage loans. At June 30, 1996 and 1995, loans sold subject to recourse provisions totaled approximately $39,340,000 and $49,678,000, respectively, which represents the total potential credit risk associated with these particular loans. Such credit risk would, however, be offset by the value of the single-family residential properties which collateralize these loans. The Corporation is subject to a number of lawsuits and claims for various amounts which arise out of the normal course of its business. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Corporation's financial position or results of operations. On September 13, 1994, the Bank commenced litigation against the United States in the United States Court of Federal Claims seeking to recover monetary relief for the government's refusal to honor certain contracts between the Bank and the Federal Savings and Loan Insurance Corporation. The suit alleges that such governmental action constitutes breach of contract and an unlawful taking of property by the United States without just compensation or due process in violation of the Constitution of the United States. The litigation status and process of the multiple legal actions, such as that instituted by the Bank with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank uncertain as to ultimate outcome, and contingent on a number of factors and future events which are beyond the control of the Bank, both as to substance, timing and the dollar amount of damages which may be awarded to the Bank if it finally prevails in this litigation. NOTE 22. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS: RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred savings 401(k) plan covering substantially all employees. The Corporation's matching contributions are equal to 100.0% of the first 8.0% of participant contributions (up to 3.0% of participant contributions for the plan sponsored by Railroad). Participants vest immediately in their own contributions and over a five-year period for Corporation contributions (over Commercial Federal Corporation Annual Report 1996 61 a three-year period for company contributions for the plan sponsored by Railroad). Contribution expense was $1,653,000, $1,684,000 and $1,434,000 for the years ended June 30, 1996, 1995 and 1994, respectively. STOCK OPTION AND INCENTIVE PLAN - The Corporation's 1984 Stock Option and Incentive Plan, as amended (the Plan), permits the granting of stock options, restricted stock awards and stock appreciation rights. Stock options are generally 100% exercisable on the date of grant over a period not to exceed 10 years from the date of grant with the option price equal to market value on the date of grant. However, non-incentive stock options granted to executives on June 13, 1996, vest one-third on the date of grant (and one-third as of both June 13, 1997 and 1998) for 35,000 options and vest 60.0% on the date of grant (and 20.0% as of both June 13, 1997 and 1998) for 45,450 options. Recipients of restricted stock have the usual rights of a shareholder, including the rights to receive dividends and to vote the shares; however, the common stock will not be vested until certain restrictions are satisfied. The term of the Plan extends to July 31, 2002. Railroad had three stock option and incentive plans for certain employees and its directors (collectively referred to as "Railroad's Plans") under which such options generally became exercisable when granted and exercised within a 10-year period after the date of grant. On October 2, 1995, Railroad's Plans were terminated with any outstanding options converted into Commercial Federal Corporation options pursuant to the merger agreement.
The following table presents the activity of the stock options for the fiscal years ended June 30, 1996, 1995 and 1994: - -------------------------------------------------------------------------------------------------------------------------- Stock Option Option Price Aggregate Shares Per Share Amount - -------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1993 ............................................ 432,284 $ 2.50 -- $19.13 $ 2,539 Granted ........................................................... 3,738 13.57 -- 19.69 64 Exercised ......................................................... (64,291) 2.50 -- 15.26 (342) Canceled .......................................................... (302) 9.31 (3) Railroad activity for the six months ended June 30, 1994: Granted ........................................................... 60,951 14.09 -- 15.07 864 Exercised ......................................................... (32,473) 3.80 -- 13.57 (146) Canceled .......................................................... -- -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 ............................................ 399,907 2.50 -- 19.69 2,976 Granted ........................................................... 62,612 14.48 -- 27.31 1,696 Exercised ......................................................... (87,740) 2.50 -- 19.69 (505) Canceled .......................................................... (4,783) 5.67 -- 17.48 (65) - -------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 ............................................ 369,996 2.50 -- 27.31 4,102 Granted ........................................................... 123,093 38.75 4,770 Exercised ......................................................... (95,979) 2.50 -- 27.31 (1,191) Canceled .......................................................... (1,590) 14.09 -- 27.31 (40) - -------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 ............................................ 395,520 $ 2.50 -- $38.75 $ 7,641 - -------------------------------------------------------------------------------------------------------------------------- Shares available for future grants at June 30, 1996 ................. 198,127 - --------------------------------------------------------------------------------------------------------------------------
On June 30, 1996 and 1995, stock options for 123,093 shares and 61,462 shares, respectively, of the Corporation's common stock were granted to executives and managers of the Corporation in accordance with a management incentive plan pursuant to the attainment of certain operating goals of the Corporation for the respective fiscal years. Management incentive plans were initially adopted in fiscal year 1993 with restricted stock to be granted for awards earned each fiscal year. Accordingly, on June 30, 1996, 1995 and 1994 (the grant dates), the Corporation issued 1,116 shares, 28,417 shares and 59,660 shares, respectively, of restricted stock with an aggregate market value of $45,000, $776,000 and $1,525,000, respectively. 62 Commercial Federal Corporation Annual Report 1996 The awards of restricted stock vest 20.0% on each anniversary of the grant date, provided that the employee has completed the specified service requirement, or earlier if the employee dies or is permanently and totally disabled or upon a change in control. Total deferred compensation on the unvested restricted stock totaled $1,068,000, $1,951,000 and $2,480,000, at June 30, 1996, 1995 and 1994, respectively, and is recorded as a reduction of stockholders' equity. The value of the restricted shares will be amortized to compensation expense over the five-year vesting period. Compensation expense applicable to the restricted stock totaled $909,000, $1,173,000 and $395,000 for fiscal years 1996, 1995 and 1994 respectively. POSTRETIREMENT BENEFITS - Effective July 1, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." The provisions of this statement changed the method of accounting for postretirement benefits other than pensions from a cash to an accrual basis. Under SFAS No. 106, the determination of the accrual liability requires a calculation of the accumulated postretirement benefit obligation (APBO). The APBO represents the actuarial present value of postretirement benefits other than pensions to be paid out in the future (such as health care benefits to be paid to retirees) that have been earned as of the end of the year. The Corporation elected to recognize the cumulative effect of the initial APBO immediately resulting in an increase in accrued postretirement health care costs of $519,000 and a decrease in net income of $336,000 ($.02 per share), net of an income tax benefit of $183,000 which was recorded as a cumulative effect of a change in accounting principle as of July 1, 1993.
The Corporation's postretirement benefit plan is unfunded. The following table reconciles the status of the plan with the amounts recognized in the Consolidated Statement of Financial Condition at June 30: - ------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees ...................................................................................... $ 487 $ 260 $177 Fully eligible active plan participants ....................................................... 120 118 51 Other active plan participants ................................................................ 766 581 369 - ------------------------------------------------------------------------------------------------------------------------------ 1,373 959 597 Unrecognized net loss ........................................................................... (783) (426) (42) - ------------------------------------------------------------------------------------------------------------------------------ Accrued postretirement benefit cost included in other liabilities ............................... $ 590 $ 533 $555 - ------------------------------------------------------------------------------------------------------------------------------ The following sets forth the components of the net periodic postretirement benefit cost for the fiscal years ended June 30: - ------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Service cost - benefits earned during the fiscal year ........................................... $ 74 $ 61 $ 56 Interest cost on accumulated postretirement benefit obligation .................................. 69 43 39 Amortization of net loss ........................................................................ 29 -- -- - ------------------------------------------------------------------------------------------------------------------------------ Net periodic postretirement benefit expense ................................................... $ 172 $ 104 $ 95 - ------------------------------------------------------------------------------------------------------------------------------ Postretirement benefit claims paid for the year, net of retiree contributions of $85, $72, and $57 ............................................. $ 115 $ 126 $ 59 - ------------------------------------------------------------------------------------------------------------------------------
The weighted average discount rate used to determine the APBO was 7.5% for fiscal years ended June 30, 1996, 1995 and 1994. The assumed health care cost trend rate used in measuring the APBO as of July 1, 1995, was 8.0% decreasing gradually until it reaches 5.0% in 2008, when it remains constant. A one- percentage-point increase in the assumed health care cost trend rate for each year would increase the APBO as of June 30, 1996, by $134,000 and the aggregate of the service and interest cost components of the net periodic postretirement cost for fiscal year 1996 by $28,000. Commercial Federal Corporation Annual Report 1996 63 The Corporation also maintains an unfunded postretirement survivor income plan for certain key executives that provides benefits to beneficiaries based upon the death of such executives and their employment status at the time of death (i.e., normal retirement, termination or death prior to retirement). The Corporation began to recognize these postretirement benefits in fiscal year 1996. At June 30, 1996, the accrued postretirement benefit cost included in other liabilities and the net postretirement benefit cost charged to operations totaled $33,000. The weighted average discount rate used to determine the APBO was 7.5% and the assumed rate of increase for compensation was 3.0% annually. NOTE 23. FINANCIAL INFORMATION (PARENT COMPANY ONLY): CONDENSED STATEMENT OF FINANCIAL CONDITION
- -------------------------------------------------------------------------------- June 30, ASSETS 1996 1995 - -------------------------------------------------------------------------------- Cash ............................................... $ 12,562 $ 10,546 Other assets ....................................... 2,387 3,996 Equity in Commercial Federal Bank .................. 447,817 374,021 - -------------------------------------------------------------------------------- Total Assets ....................................... $462,766 $388,563 - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Liabilities: Other liabilities ................................ $ 2,339 $ 799 Note payable ..................................... -- 3,000 Senior notes ..................................... 6,900 6,900 Subordinated notes ............................... 40,250 40,250 - -------------------------------------------------------------------------------- Total liabilities .................................. 49,489 50,949 Total stockholders' equity ......................... 413,277 337,614 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity ......... $462,766 $388,563 - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------------- Year Ended June 30, 1996 1995 1994 - -------------------------------------------------------------------------------------- Dividend income from the Bank ...................... $ 9,290 $ 5,660 $ 5,740 Interest income .................................... 691 600 426 Interest expense ................................... (5,384) (5,310) (5,186) Operating expenses ................................. (1,742) (576) (1,200) - -------------------------------------------------------------------------------------- Income (loss) before income taxes, cumulative effect of change in accounting principles and equity in undistributed earnings of subsidiaries .. 2,855 374 (220) Income tax benefit ................................. (2,117) (1,882) (2,212) - -------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principles and equity in undistributed earnings of subsidiaries ........................... 4,972 2,256 1,992 Cumulative effect of change in accounting principles -- -- (198) - -------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries ...................................... 4,972 2,256 1,794 Equity in undistributed earnings of subsidiaries ... 50,334 28,925 3,176 - -------------------------------------------------------------------------------------- Net income ......................................... $ 55,306 $ 31,181 $ 4,970 - --------------------------------------------------------------------------------------
64 Commercial Federal Corporation Annual Report 1996
CONDENSED STATEMENT OF CASH FLOWS - -------------------------------------------------------------------------------------- Year Ended June 30, 1996 1995 1994 - -------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ......................................... $ 55,306 $ 31,181 $ 4,970 Adjustments to reconcile net income to net cash provided (used) by operating activities: Cumulative effect of change in accounting principles ................................... -- -- 198 Equity in earnings of subsidiaries ............. (50,334) (28,925) (3,176) Other items, net ............................... 2,321 1,100 93 -------- -------- ------- Total adjustments ............................ (48,013) (27,825) (2,885) -------- -------- ------- Net cash provided by operating activities .. 7,293 3,356 2,085 - -------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of stock of and cash distributions into the Bank .......................................... -- (3,850) (5,098) Other items, net ................................... -- (245) (244) -------- -------- ------- Net cash used by investing activities ...... -- (4,095) (5,342) - -------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options and other employee plans .............................. 2,093 1,334 1,022 Payment of cash dividends on common stock .......... (4,370) -- -- Proceeds from issuance of notes payable ............ -- 4,000 -- Payment of notes payable ........................... (3,000) (1,000) -- Purchase of treasury stock ......................... -- (271) (35) -------- -------- ------- Net cash (used) provided by financing activities ............................... (5,277) 4,063 987 - -------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS: Increase (decrease) in net cash position ........... 2,016 3,324 (2,270) Balance, beginning of year ......................... 10,546 7,222 9,492 -------- -------- ------- Balance, end of year ............................... $ 12,562 $ 10,546 $ 7,222 - -------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest expense ................................. $ 4,913 $ 4,816 $ 4,816 Income tax payments (refunds), net ............... 72,972 (3,670) (1,100) Non-cash investing activities: Increase to assets and liabilities for prior business combinations ............................ -- -- 368 - --------------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 65 NOTE 24. SEGMENT INFORMATION: The Corporation and its subsidiaries operate primarily in the savings and loan and mortgage banking industries. Savings and loan operations (financial institution) involve a variety of traditional banking and financial services. Mortgage banking operations (mortgage banking) involve the origination and purchase of mortgage loans, sale of mortgage loans in the secondary mortgage market, servicing of mortgage loans and the purchase and origination of rights to service mortgage loans. Segment information at and for the fiscal years ended June 30 is summarized as follows:
- ------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------ Interest income: Financial institution ............................. $ 483,888 $ 446,747 $ 381,316 Mortgage banking .................................. 7,204 7,621 12,538 --------- --------- --------- Total .......................................... 491,092 454,368 393,854 --------- --------- --------- Intersegment interest income: Financial institution ............................. (10,115) (6,601) (5,087) Mortgage banking .................................. 10,201 6,417 5,345 --------- --------- --------- 86 (184) 258 Intersegment elimination .......................... (86) 184 (258) --------- --------- --------- Total .......................................... -- -- -- --------- --------- --------- Total interest income: Financial institution ............................. 473,773 440,146 376,229 Mortgage banking .................................. 17,405 14,038 17,883 Intersegment elimination .......................... (86) 184 (258) --------- --------- --------- Total .......................................... $ 491,092 $ 454,368 $ 393,854 - ------------------------------------------------------------------------------------------------ Other income: Financial institution - loan servicing fees........ $ 429 $ 146 $ 78 Financial institution - other income .............. 21,918 20,317 21,853 Mortgage banking - loan servicing fees ............ 27,462 24,585 22,149 Mortgage banking - other income (loss) ............ (163) 18 613 --------- --------- --------- Total .......................................... 49,646 45,066 44,693 --------- --------- --------- Intersegment other income: Financial institution - loan servicing fees........ -- -- -- Financial institution - other income .............. -- -- -- Mortgage banking - loan servicing fees ............ 14,516 12,218 11,428 Mortgage banking - other income ................... -- -- -- --------- --------- --------- 14,516 12,218 11,428 Intersegment elimination .......................... (14,516) (12,218) (11,428) --------- --------- --------- Total .......................................... -- -- -- --------- --------- --------- Total other income: Financial institution - loan servicing fees........ 429 146 78 Financial institution - other income ...... 21,918 20,317 21,853 Mortgage banking - loan servicing fees .... 41,978 36,803 33,577 Mortgage banking - other income (loss) .... (163) 18 613 Intersegment elimination .................. (14,516) (12,218) (11,428) --------- --------- --------- Total ..................................... $ 49,646 $ 45,066 $ 44,693 - ------------------------------------------------------------------------------------------------
66 Commercial Federal Corporation Annual Report 1996
- -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Operating profit (1): Financial institution .............. $63,385 $45,664 $ 6,618 Mortgage banking ................... 26,009 14,518 14,960 ------- ------- ------- 89,394 60,182 21,578 Less: General corporate expenses ......... 1,742 545 1,144 Corporate interest expense ......... 5,384 5,310 5,186 ------- ------- ------- Total ............................ $82,268 $54,327 $15,248 - -------------------------------------------------------------------------------- (1) Operating profit is income before income taxes, extraordinary items and cumulative effects of changes in accounting principles. Operating profit for banking operations includes the effect of the intangible assets valuation adjustment totaling $52.7 million for fiscal year 1994. - -------------------------------------------------------------------------------- Identifiable assets: Financial institution ............ $ 6,591,381 $ 6,478,017 $ 5,831,476 Mortgage banking ................. 171,399 171,415 221,037 Eliminations ..................... (155,110) (79,853) (70,206) ----------- ----------- ----------- Total .......................... $ 6,607,670 $ 6,569,579 $ 5,982,307 - -------------------------------------------------------------------------------- Additions to premises and equipment: Financial institution ............ $ 6,587 $ 5,863 $ 3,823 Mortgage banking ................. 1,624 5,378 580 ----------- ----------- ----------- Total .......................... $ 8,211 $ 11,241 $ 4,403 - -------------------------------------------------------------------------------- Depreciation and amortization: Financial institution ............ $ 5,404 $ 4,568 $ 4,159 Mortgage banking ................. 1,451 1,045 609 ----------- ----------- ----------- Total .......................... $ 6,855 $ 5,613 $ 4,768 - --------------------------------------------------------------------------------
Beginning in fiscal year 1994, the mortgage banking operations expanded its loan program whereby certain costs normally paid by the borrower were paid by the mortgage banking operations in return for a higher interest rate charged on the loan to the borrower. The mortgage banking operations sold loans to the Bank at par and incurred losses equal to expenses paid for borrowers net of fees collected. Such losses approximating $986,000, $1,236,000 and $5,900,000 were incurred during fiscal years 1996, 1995 and 1994, respectively. In addition, for fiscal years 1995 and 1994, Railroad mortgage loans were not assessed charges for servicing its loans from its mortgage banking operation and, therefore, no loan servicing fees on such loans are included in the section captioned intersegment other income. Commercial Federal Corporation Annual Report 1996 67 NOTE 25. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the last three fiscal years ended June 30: - ------------------------------------------------------------------------------------------------------------- Quarter Ended June 30 March 31 December 31 September 30 - ------------------------------------------------------------------------------------------------------------- FISCAL 1996: Total interest income .................................. $ 123,134 $ 122,899 $ 122,357 $ 122,702 Net interest income .................................... 43,490 42,561 38,625 38,099 Provision for loan losses .............................. (1,508) (1,508) (1,508) (1,583) Gain on sales of securities, loans and loan servicing rights ............................ 183 64 318 304 Net income ............................................. 15,844 16,354 11,864 11,244 Earnings per share ..................................... 1.04 1.09 .82 .77 Dividends declared per share ........................... .10 .10 .20 -- - ------------------------------------------------------------------------------------------------------------- FISCAL 1995: Total interest income .................................. $ 120,330 $ 114,876 $ 111,913 $ 107,249 Net interest income .................................... 37,513 37,671 37,697 36,961 Provision for loan losses .............................. (1,583) (1,584) (1,658) (1,583) Gain on sales of securities, loans and loan servicing rights ............................ 426 699 481 177 Accelerated amortization of goodwill ................... -- -- 10,678 10,679 Net income ............................................. 12,699 15,033 2,181 1,268 Earnings per share ..................................... .88 1.04 .15 .09 - ------------------------------------------------------------------------------------------------------------- FISCAL 1994: Total interest income .................................. $ 100,708 $ 98,370 $ 98,185 $ 96,591 Net interest income .................................... 35,354 35,335 33,457 33,606 Provision for loan losses .............................. (1,508) (1,544) (1,613) (1,583) Gain on sales of securities, loans and loan servicing rights ............................ 2,231 1,885 1,817 1,649 Intangible assets valuation adjustment ................. (52,703) -- -- -- Income (loss) before cumulative effects of changes in accounting principles ............................. (31,919) 10,627 10,318 9,347 Cumulative effects of changes in accounting principles . -- -- -- 6,597 Net income (loss) ...................................... (31,919) 10,627 10,318 15,944 Earnings (loss) per share (fully diluted): Income (loss) before cumulative effects of changes in accounting principles ........................... (2.22) .74 .72 .65 Cumulative effects of changes in accounting principles -- -- -- .46 Net income (loss) .................................... (2.22) .74 .72 1.11 - -------------------------------------------------------------------------------------------------------------
68 Commercial Federal Corporation Annual Report 1996 NOTE 26. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS No. 107), requires that the Corporation disclose estimated fair value amounts of its financial instruments. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Corporation as of June 30, 1996 and 1995, as more fully described in the following table. It should be noted that the operations of the Corporation are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Corporation's inherent value is the Bank's capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values which follow. The following presents the carrying value and fair value of the specified assets and liabilities held by the Corporation at June 30, 1996 and 1995. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors.
- -------------------------------------------------------------------------------------------------------------- 1996 1995 ------------------------ ------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------------------------------------- SELECTED ASSETS - -------------------------------------------------------------------------------------------------------------- Cash (including short-term investments)........... $ 35,827 $ 35,827 $ 35,145 $ 35,145 Investment securities............................. 253,043 249,039 300,481 297,793 Mortgage-backed securities........................ 1,180,046 1,168,240 1,364,907 1,356,307 Loans receivable, net............................. 4,813,164 4,833,778 4,540,692 4,574,506 Federal Home Loan Bank stock...................... 79,113 79,113 103,648 103,648 - -------------------------------------------------------------------------------------------------------------- SELECTED LIABILITIES - -------------------------------------------------------------------------------------------------------------- Deposits Passbook accounts............................... 623,505 623,505 549,857 549,857 Market rate savings accounts.................... 159,672 159,672 190,994 190,994 NOW checking accounts........................... 332,233 332,233 296,552 296,552 Certificates of deposit......................... 3,189,166 3,182,810 2,973,920 2,979,513 ---------- ---------- ---------- ---------- Total deposits................................ 4,304,576 4,298,220 4,011,323 4,016,916 Advances from Federal Home Loan Bank.............. 1,350,290 1,344,122 1,787,352 1,774,577 Securities sold under agreements to repurchase.... 380,755 379,585 208,373 209,390 Other borrowings.................................. 58,546 59,886 65,303 67,212 - -------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET INSTRUMENTS - -------------------------------------------------------------------------------------------------------------- Interest rate swap and cap agreements............. -- (1,646) -- (2,409) Commitments....................................... -- -- -- -- - --------------------------------------------------------------------------------------------------------------
The following sets forth the methods and assumptions used in determining the fair value estimates for the Corporation's financial instruments at June 30, 1996 and 1995. Cash and short-term investments: The book value of cash and short-term investments is assumed to approximate the fair value of such assets. Investment securities: Quoted market prices or dealer quotes were used to determine the fair value of investment securities. Mortgage-backed securities: For mortgage-backed securities available for sale and held to maturity the Corporation has utilized quotes for similar or identical securities in an actively traded market, Commercial Federal Corporation Annual Report 1996 69 where such a market exists, or has obtained quotes from independent security brokers to determine the fair value of such assets. Loans receivable: The fair value of loans receivable was estimated by discounting the future cash flows using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and conditions and discounted at a target rate at which similar loans would be made to borrowers as of June 30, 1996 and 1995, respectively. The fair value of loans held for sale is determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate loan basis. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit issues. Federal Home Loan Bank stock: The fair value of such stock approximates book value since the Corporation is able to redeem this stock with the Federal Home Loan Bank at par value. Deposits: The fair value of savings deposits were determined as follows: (i) for passbook accounts, market rate savings accounts and NOW checking accounts, since such deposits are immediately withdrawable, fair value is determined to approximate the carrying value (the amount payable on demand); (ii) for certificates of deposit, the fair value has been estimated by discounting expected future cash flows by derived current market rates as of June 30, 1996 and 1995, offered on certificates of deposit with similar maturities. In accordance with provisions of SFAS No. 107, no value has been assigned to the Corporation's long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under SFAS No. 107. Advances from Federal Home Loan Bank: The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates as of June 30, 1996 and 1995, for advances with similar terms and remaining maturities. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 1996 and 1995, over the contractual maturity of such borrowings. Other borrowings: Subordinated notes and senior notes with carrying values of $40,250,000 and$6,900,000, respectively, are included in other borrowings with the fair value of such notes based on dealer quoted market prices as of June 30, 1996 and 1995. The fair value of other borrowings, excluding the subordinated and senior notes, was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 1996 and 1995, over the contractual maturity of such other borrowings. Commitments: The commitments to originate and purchase loans have terms that are consistent with current market terms. Since all outstanding commitments are short-term or adjustable rate, the fair value of the commitments is not significant. Interest rate swap agreements: The fair value of interest rate swap agreements is the estimated amount that would be paid to terminate the swap agreements at June 30, 1996 and 1995, respectively, taking into consideration current interest rates as of June 30, 1996 and 1995. Limitations: It must be noted that fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Corporation's entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Corporation's financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various 70 Commercial Federal Corporation Annual Report 1996 financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates as of June 30, 1996 and 1995, are not intended to represent the underlying value of the Corporation, on either a going concern or a liquidation basis. NOTE 27. PENDING ACQUISITION: On May 16, 1996, the Corporation entered into a Reorganization and Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank, Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye Federal). Under the terms of the Merger Agreement, the Corporation will acquire all 180,762 of the outstanding shares of Heritage's common stock. As defined in the Merger Agreement, Heritage's common stock will be exchanged for cash and the Corporation's common stock based on the average closing price of such stock for the twenty-fifth through the sixth trading days preceding the effective date of the proposed merger. Based on the Corporation's closing stock price on June 30, 1996, of $38.25, each share of Heritage common stock would be exchanged for $18.73 in cash and 2.559 shares of the Corporation's common stock, resulting in the exchange of approximately 462,570 shares of the Corporation's common stock with a total aggregate value approximating $21,079,000. Cash will be paid in lieu of fractional shares. Additional cash consideration up to approximately $1.2 million may be paid to Heritage shareholders pending the final disposition of an impaired asset of Hawkeye Federal. At June 30, 1996, Heritage had assets of approximately $182,099,000, deposits of approximately $157,898,000 and stockholders' equity of approximately $12,945,000. Heritage operates six branches located in Iowa. This pending acquisition, which is subject to the approval of Heritage's shareholders, is expected to be completed by October 31, 1996. This acquisition will be accounted for as a purchase with core value of deposits resulting from this transaction to be amortized on an accelerated basis over a period not to exceed 10 years and goodwill, if any, to be amortized on a straight line basis over a period not to exceed 20 years. NOTE 28. CURRENT ACCOUNTING PRONOUNCEMENTS: Accounting for Stock-Based Compensation: In October 1995, Statement of Financial Accounting Standards No. 123 entitled "Accounting for Stock-Based Compensation" (SFAS No. 123) was issued. SFAS No. 123 applies to all transactions in which an entity acquires goods or services by issuing equity instruments or by incurring liabilities where the payment amounts are based upon the entity's common stock price, except for employee stock ownership plans. SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation arrangements with employees, rather than the intrinsic value based method that is contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). This statement encourages all entities to adopt its method of accounting for all employee stock compensation plans. However, SFAS No. 123 does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. Entities electing to retain the accounting treatment under APB No. 25 must make pro forma footnote disclosures of net income and earnings per share as if the fair value based method of accounting defined in this statement has been applied. The disclosure requirements of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995, or effective as of July 1, 1996, for the Corporation. Management of the Corporation intends to continue to use the APB No. 25 method of accounting for stock-based compensation and include pro forma disclosures when presenting complete financial statement footnotes in the future. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In June 1996, Statement of Financial Accounting Standards No. 125, entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) was issued. This statement, among other things, applies a "financial-components approach" that focuses on control, whereby an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of Commercial Federal Corporation Annual Report 1996 71 financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management of the Corporation does not believe that the adoption of SFAS No. 125 will have a material effect on the Corporation's financial position, liquidity or results of operations. NOTE 29. SUBSEQUENT EVENT - REPURCHASE OF COMMON STOCK: On August 21, 1996, the Corporation consummated the repurchase of 1,250,100 shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas- based investment company, for an aggregate purchase price of approximately $48,910,000. Such purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of approximately $28,227,000 and surrender of a warrant (valued at approximately $20,683,000) which would have enabled the Corporation to purchase 99 shares of non-voting common stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. After repurchase, a total of 13,844,036 shares of common stock remain issued and outstanding as of August 21, 1996. The cash portion of the repurchase was financed in part by a loan from a financial institution secured by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As consideration, the Corporation also reimbursed CAI Corporation for certain expenses totaling $2,200,000 incurred in connection with its ownership of the 1,250,100 shares, including costs and expenses incurred in connection with the 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. Concurrent with the close of the repurchase, two directors of the Corporation, who also serve as executive officers of CAI Corporation, resigned from the Corporation's Board of Directors. In addition, CAI Corporation and each of its shareholders agreed to a standstill agreement for a period of 60 months beginning August 21, 1996. CAI Corporation and the Corporation have each agreed to waive and release all claims against the other and the Corporation has agreed to indemnify CAI Corporation and its directors, officers and affiliates against certain derivative claims. 72 Commercial Federal Corporation Annual Report 1996 MANAGEMENT'S REPORT ON INTERNAL CONTROLS Management of Commercial Federal Corporation (the Corporation) is responsible for the preparation, integrity, and fair presentation of its published consolidated financial statements and all other information presented in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on informed judgments and estimates made by Management. Management is responsible for establishing and maintaining an effective internal control structure over financial reporting in conformity with both generally accepted accounting principles and the Office of Thrift Supervision instructions for Thrift Financial Reports. The internal control structure contains monitoring mechanisms and actions are taken to correct any deficiencies identified. There are inherent limitations in the effectiveness of any structure of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to financial statements preparation. Further, because of changes in conditions, the effectiveness of an internal control structure may vary over time. Management assessed the Corporation's internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and Thrift Financial Report instructions as of June 30, 1996. This assessment was based on the criteria for effective internal control described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, Management believes that the Corporation maintained an effective internal control structure over financial reporting as of June 30, 1996. /s/ Willam A. Fitzgerald /s/ James A. Laphen William A. Fitzgerald James A. Laphen Chairman of the Board and President, Chief Operating Officer Chief Executive Officer and Chief Financial Officer Commercial Federal Corporation Annual Report 1996 73 Independent Auditors' Report To the Board of Directors and Shareholders Commercial Federal Corporation Omaha, Nebraska We have audited the accompanying consolidated balance sheets of Commercial Federal Corporation and subsidiaries (the "Corporation") as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1996. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements give retroactive effect to the merger of Commercial Federal Corporation and Railroad Financial Corporation, which has been accounted for as a pooling of interests as described in Note 2 to the consolidated financial statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Federal Corporation and subsidiaries as of June 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Corporation changed its method of accounting for mortgage servicing rights to conform with Statement of Financial Accounting Standards No. 122 in fiscal year 1996. As discussed in Notes 1 and 22 to the consolidated financial statements, in fiscal year 1994 the Corporation changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109, its method of accounting for postretirement benefits to conform with Statement of Financial Accounting Standards No. 106 and its method of accounting for intangible assets. /s/ Deloitte & Touche LLP August 23, 1996 Omaha, Nebraska 74 Commercial Federal Corporation Annual Report 1996 INVESTOR INFORMATION CORPORATE HEADQUARTERS Commercial Federal Corporation Commercial Federal Tower 2120 S. 72nd Street Omaha, NE 68124 GENERAL COUNSEL Fitzgerald, Schorr, Barmettler, Brennan 1000 Woodmen Tower Omaha, NE 68102 WASHINGTON COUNSEL Housley Kantarian & Bronstein, P.C. 1220 19th Street, N.W. Suite 700 Washington, D.C. 20036 INDEPENDENT AUDITORS Deloitte & Touche LLP 2000 First National Center Omaha, NE 68102 SHAREHOLDER SERVICES AND INVESTOR RELATIONS Shareholders desiring to change the address or ownership of stock, report lost certificates or to consolidate accounts should contact: Shareholder Communications Team Harris Trust and Savings Bank P.O. Box A3504 Chicago, IL 60690-9502 Telephone (312) 360-5100 Analysts, investors and others seeking a copy of the Form 10-K without charge or other financial information should contact: Investor Relations Department Attn: Stan Blakey Commercial Federal Corporation 2120 S. 72nd Street Omaha, NE 68124 Telephone (402) 390-6553 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday, November 19, 1996. The meeting will be held at the Holiday Inn Central Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C" Meeting Room. Further information with regard to this meeting can be found in the proxy statement. STOCK LISTING Commercial Federal Corporation's common stock is traded on the New York Stock Exchange (NYSE) using the common stock symbol "CFB." The Wall Street Journal publishes daily trading information for the stock under the abbreviation "Comrcl Fed" in the NYSE listings. Commercial Federal Corporation Annual Report 1996 75 EXECUTIVE OFFICERS OF THE CORPORATION WILLIAM A. FITZGERALD Chairman of the Board and Chief Executive Officer JAMES A. LAPHEN President and Chief Operating Officer GARY L. MATTER Senior Vice President, Controller and Secretary JOY J. NARZISI Senior Vice President and Treasurer SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES MARGARET E. ASH MELISSA M. BEUMLER Senior Vice President First Vice President Retail Operations Marketing GARY L. BAUGH MICHAEL C. BRUGGEMAN Senior Vice President First Vice President State Director - Kansas Human Resources ROGER L. LEWIS RONALD P. CHEFFER Senior Vice President First Vice President Marketing Credit Administration JON W. STEPHENSON JOHN J. GRIFFITH Senior Vice President First Vice President State Director - Oklahoma Specialized Lending TERRY A. TAGGART DAVID E. GUNTER, JR. Senior Vice President First Vice President of the Bank and State Director - Colorado President of Commercial Federal Service Corp. GARY D. WHITE KEVIN C. PARKS Senior Vice President First Vice President State Director - Nebraska/Iowa Internal Audit RONALD A. AALSETH THOMAS N. PERKINS First Vice President of the Bank First Vice President and President of Commercial Federal Acquisitions and Expansion Investment Services, Inc. and Commercial Federal Insurance Corp. DENNIS R. ZIMMERMAN First Vice President R. HAL BAILEY Information Systems First Vice President Construction Lending
76 Commercial Federal Corporation Annual Report 1996 BRANCH LOCATIONS NEBRASKA (34) KANSAS (24) OKLAHOMA (19) Omaha (17) Kansas City (3) Oklahoma City (5) Lincoln (7) Wichita (3) Ada (2) Beatrice Arkansas City Ponca City (2) Bellevue Colby Tulsa (2) Columbus Derby Ardmore Fremont Fredonia Bartlesville Grand Island Garden City Bixby Kearney Greensburg Cushing LaVista/Papillion Hutchinson Edmond Norfolk Iola Enid North Platte Larned Norman South Sioux City Lawrence Seminole Lyndon COLORADO (20) McPherson IOWA (1) * Denver (6) Newton Harlan Arapahoe County (2) Oberlin Lakewood (2) Osage City Arvada Ottawa Aurora Wamego Broomfield Wellington Englewood Greeley Jefferson County Longmont Loveland Northglenn Wheat Ridge * Commercial Federal expects to close its previously announced acquisition of six full-service retail offices from Heritage Financial in October 1996. These offices are located in Boone, Carrol, Lake City, Madrid, Manning, and Ogden, all in the state of Iowa. Commercial Federal Corporation Annual Report 1996 77 EX-21 9 EXHIBIT 21 Exhibit 21 Subsidiaries of the Corporation EXHIBIT 21. PARENTS AND SUBSIDIARIES - -------------------------------------
PERCENT STATE OF PARENT COMPANY SUBSIDIARIES OWNED INCORPORATION - ---------------------------------- --------------------------- --------- ------------- COMMERCIAL FEDERAL COMMERCIAL FEDERAL BANK, 100% NEBRASKA CORPORATION A FEDERAL SAVINGS BANK COMMERCIAL INVESTMENT 100% NEBRASKA SUBSIDIARY, INC. (1) COMMERCIAL FEDERAL COMMERCIAL FEDERAL SERVICE 100% NEBRASKA BANK, A FEDERAL CORPORATION SAVINGS BANK TRAMPE AND ASSOCIATES COMPANY 100% NEBRASKA COMMERCIAL FEDERAL MORTGAGE 100% NEBRASKA CORPORATION COMMERCIAL MARKETING, INC. (1) 100% NEBRASKA COMMERCIAL FEDERAL INVESTMENT 100% NEBRASKA CORPORATION COMMERCIAL FEDERAL INVESTMENT 100% NEBRASKA SERVICES, INC. COMMERCIAL FINANCIAL INVESTMENT 100% NEBRASKA ASSOCIATES, INC. (1) ESL CORPORATION (1) 100% COLORADO COMMERCIAL FEDERAL INSURANCE 100% NEBRASKA CORPORATION EMPIRE CAPITAL CORPORATION I 100% COLORADO ROXBOROUGH ACQUISITION CORP. 100% NEBRASKA CF WOODLANDS PROPERTIES, INC. 100% NEBRASKA CFT COMPANY 100% NEBRASKA PROVIDENT INVESTMENT, INC. 100% NEBRASKA RAILROAD SAVINGS SERVICE CORPORATION 100% KANSAS
- -------------------------------------------------------------------------------- (1) SUBSIDIARY WAS LEGALLY DISSOLVED IN JULY 1996. EXHIBIT 21. PARENTS AND SUBSIDIARIES - -------------------------------------
PERCENT STATE OF PARENT COMPANY SUBSIDIARIES OWNED INCORPORATION - ---------------------------------- --------------------------- --------- ------------- COMMERCIAL FEDERAL COMMERCIAL FEDERAL REALTY 100% NEBRASKA SERVICE CORP. INVESTORS CORPORATION C.H.E., INC. (1) 100% NEBRASKA COMMERCIAL FEDERAL AFFORDABLE 100% NEBRASKA HOUSING, INC. COMMERCIAL FEDERAL METRO TITLE AND 100% NEBRASKA MORTGAGE CORP. ESCROW COMPANY, INC. COMMERCIAL SYSTEMS MARKETING, INC. (1) 100% ARIZONA MARKETING, INC. C.H.E., INC. COMMERCIAL HOSPITALITY, INC. (1) 100% TEXAS COMMERCIAL HOSPITALITY 100% FLORIDA ENTERPRISES, INC. (1) SYSTEMS MARKETING, FINANCIAL INVESTMENT 100% ILLINOIS INC. ASSOCIATES INCORPORATED (1) COMMERCIAL FEDERAL COMFED INSURANCE SERVICES 100% BRITISH INSURANCE CORP. COMPANY, LIMITED VIRGIN ISLANDS
- -------------------------------------------------------------------------------- (1) SUBSIDIARY WAS LEGALLY DISSOLVED IN JULY 1996. NOTE: ALL OF THE MATERIAL ACCOUNTS OF THE ABOVE LISTED COMPANIES ARE CONSOLIDATED IN THE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS. ALL SIGNIFICANT INTERCOMPANY BALANCES AND TRANSACTIONS HAVE BEEN ELIMINATED. EX-23 10 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------- INDEPENDENT AUDITORS' CONSENT - ----------------------------- WE CONSENT TO THE INCORPORATION BY REFERENCE IN REGISTRATION STATEMENT NOS. 33-36708, 33-5616, 33-39762, 33-31685, 33-60448 AND POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NOS. 33-1333 AND 33-10396 OF COMMERCIAL FEDERAL CORPORATION ON FORM S-8 OF OUR REPORT DATED AUGUST 23, 1996, INCORPORATED BY REFERENCE IN THE ANNUAL REPORT ON FORM 10-K OF COMMERCIAL FEDERAL CORPORATION FOR THE YEAR ENDED JUNE 30, 1996. /S/ DELOITTE & TOUCHE LLP OMAHA, NEBRASKA SEPTEMBER 26, 1996 EX-27.1 11 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 1 33,427 0 2,400 0 273,104 1,159,985 1,144,175 4,813,164 49,278 6,607,670 4,304,576 979,772 100,226 809,819 0 0 151 413,126 6,607,670 384,765 106,327 0 491,092 214,040 328,317 162,775 6,107 253 124,046 82,268 55,306 0 0 55,306 3.73 3.72 2.58 37,905 0 14,803 0 48,541 5,533 734 49,278 12,765 0 36,513
EX-27.2 12 EXHIBIT 27.2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED RESTATED FINANCIAL STATEMETN FOR THE FISCAL YEAR ENDED jUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1995 JUL-01-1994 JUN-30-1995 28,800 0 6,345 0 39,962 1,625,426 1,614,138 4,540,692 48,541 6,569,579 4,011,323 828,901 159,614 1,232,127 0 0 143 337,471 6,569,579 344,109 110,259 0 454,368 180,163 304,526 149,842 6,408 (41) 134,173 54,327 31,181 0 0 31,181 2.16 2.16 2.46 32,258 0 17,860 0 44,851 3,771 1,334 48,541 15,280 0 33,261
EX-27.3 13 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED RESTATED INTERIM STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1995. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1995 JUN-01-1994 MAR-31-1995 29,438 0 3,788 0 44,910 1,643,105 1,587,467 4,343,628 47,596 6,385,122 3,849,537 738,947 140,587 1,332,200 0 0 143 323,708 6,385,122 252,396 81,642 0 334,038 130,159 221,709 112,329 4,825 (37) 105,453 35,830 35,830 0 0 18,482 1.28 1.28 2.36 31,024 0 22,055 0 44,851 2,782 1,279 47,596 15,747 0 31,791
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