-----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, IPhvRlBh9bCNCLZFm3Prcu8M/5wXlFjBpwLB1JBmEeoEr53iHU/IQPQtygYtrwgT QhlQjmnSH71OgqIzdfg76w== 0000950130-95-001946.txt : 19951004 0000950130-95-001946.hdr.sgml : 19951004 ACCESSION NUMBER: 0000950130-95-001946 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950928 DATE AS OF CHANGE: 19951003 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL FEDERAL CORP CENTRAL INDEX KEY: 0000744778 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 470658852 STATE OF INCORPORATION: NE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11515 FILM NUMBER: 95577182 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-K405 1 FORM 10-K405 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, 1995, 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.[ X ] 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 22, 1995, was $364,353,954. As of September 22, 1995, there were issued and outstanding 12,912,416 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, 1995. (Parts I, II and IV) 2. Portions of the Proxy Statement relating to the 1995 Annual Meeting of Stockholders. (Part III) 1 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 $40.25 million of subordinated 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 Bank presently pays dividends to the Corporation on a semi-annual basis primarily to cover the amount of the interest payable to the subordinated debt noteholders. 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 400. 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, 1995, the Corporation had assets of $6.0 billion and stockholders' equity of $309.5 million, and through the Bank operated 30 branch offices in Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 16 branch offices in Oklahoma, and five branches in Kansas. The increase in branches over fiscal year 1994 was the result of two acquisitions during fiscal year 1995. On July 15, 1994, the Corporation acquired Home Federal Savings and Loan ("Home Federal") of Ada, Oklahoma (two branches and total assets of $100.2 million at acquisition). On April 3, 1995, the Corporation acquired Provident Federal Savings Bank ("Provident") of Lincoln, Nebraska (five branches and total assets of $96.5 million at acquisition). As of June 30, 1995, the Bank was the largest depository institution headquartered in Nebraska, and, based upon total assets at June 30, 1995, the Corporation was the 18th largest publicly-held thrift institution holding company in the United States. In addition, CFMC serviced a loan portfolio totaling $7.8 billion at June 30, 1995, with $4.6 billion in loans serviced for third parties and $3.2 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 1995 Annual Report to Stockholders (the "Annual Report") which is incorporated herein by reference. The Corporation will seek to continue its growth through expansion of the Corporation's operations in its market areas, consisting of Nebraska, Colorado, Oklahoma and Kansas, and may seek to enter markets in other adjoining states. The Corporation will also seek to expand its operations both through competition for market share within its market areas and through mergers with and acquisitions of other selected financial institutions. Management of the Corporation believes that its emphasis on operating acquired entities as consumer-oriented financial institutions is attractive to potential acquisition candidates and is advantageous in competing with larger banks for acquisitions of selected financial institutions. 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 - - ------------------- Regulatory Issues. - - ------------------ Deposit Insurance Premiums. The Bank's savings deposits are insured by the - - --------------------------- SAIF, which is administered by 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. The FDIC amended the BIF risk-based assessment schedule effective September 30, 1995, which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range of 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 amendment creates a substantial disparity in the deposit insurance premiums paid by BIF and SAIF members and could place SAIF-insured savings institutions at a significant competitive disadvantage to BIF-insured institutions. Among the proposals being considered by the FDIC and Congress to eliminate this premium disparity is a similar reduction in premium rates charged to SAIF- insured institutions. Such a reduction would be accompanied by a one-time assessment of SAIF-insured institutions up to .90% 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. Under this proposal, the BIF and SAIF would be merged into one fund as soon as practicable after they both reach their designated reserve ratios, but no later than January 1, 1998. It is unknown whether this particular proposal or any other proposal will be implemented or that premiums for either BIF or SAIF members will be adjusted in the future by the FDIC or by legislative action. If a special assessment as described above were to be required, it would result, on a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of approximately $20.4 million (assuming such charge would be tax deductible). Such assessment would have the effect of, on a pro forma basis as of June 30, 1995, reducing the Bank's tangible capital to $283.1 million, or 4.80% of adjusted total assets, core capital to $304.5 million, or 5.14% of adjusted total assets, and risk-based capital to $335.3 million, or 12.68% of risk- weighted assets. If such a special assessment were required and the 3 SAIF as a result was fully recapitalized, it could have the effect of reducing the Bank's annual deposit insurance premiums to the SAIF, thereby increasing net income in future periods. Change in Charter Proposal. An additional proposal under consideration by - - --------------------------- Congress would require savings associations to convert their charters to that of commercial banks in connection with a merger of the BIF and the SAIF. Under current tax laws, a savings association converting to a commercial bank charter must recapture into taxable income the amount of its tax bad debt reserve that would not have been allowed if the savings association had operated as a commercial bank. The tax associated with the recapture of all or part of its tax bad debt reserve would immediately reduce the capital of the savings association even though such tax would actually be paid out over the succeeding years. Management of the Corporation cannot predict if this proposal or the foregoing proposal would be adopted in their current form. Acquisitions Subsequent to Fiscal Year. - - --------------------------------------- On September 22, 1995, the stockholders of Railroad Financial Corporation ("Railroad") approved a merger with the Corporation with the closing expected in October 1995. Railroad is headquartered in Wichita, Kansas and operates 18 branches and 71 agency offices throughout the state of Kansas. This acquisition was approved by the OTS on September 13, 1995. Under the terms of the Reorganization and Merger Agreement (the "Agreement"), dated April 18, 1995, the Corporation will exchange a pro-rata amount of its common stock for all of the outstanding common stock of Railroad. Based on the Corporation's closing stock price on September 22, 1995, of $35.75, each share of Railroad common stock would be exchanged for .6389 shares of the Corporation's common stock, resulting in the exchange of approximately 1,361,222 shares of the Corporation's common stock with an aggregate value approximating $48.7 million. Cash will be paid in lieu of fractional shares. At June 30, 1995, Railroad had assets of $615.3 million, deposits of $421.7 million and stockholders' equity of $28.1 million. It is anticipated that this acquisition will be accounted for as a pooling of interests. Also, on August 15, 1995, the Corporation entered into a Reorganization and Merger Agreement (the "Merger Agreement") by and among the Corporation, the Bank, Conservative Savings Corporation ("Conservative") and Conservative Savings Bank, FSB. Under the terms of the Merger Agreement, the Corporation will acquire all 1,846,005 outstanding shares of Conservative's common stock and all 460,000 outstanding shares of preferred stock. As defined in the Merger Agreement, Conservative's common and preferred 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 September 22, 1995, of $35.75, the transaction has a per share value of $15.37 for the common stock and $34.73 for the preferred stock with an aggregate value of approximately $44.3 million for all outstanding common and preferred stock of Conservative. The Corporation also announced that it has entered into a stock option agreement with Conservative under which the Corporation has been granted an option to purchase 19.9% of Conservative's outstanding shares of common stock under certain circumstances provided in the agreement in the event the transaction is terminated. At June 30, 1995, Conservative had assets of $383.4 million, deposits of $198.1 million and stockholders' equity of $34.8 million. Conservative operates nine branches with seven located in Nebraska (five in Omaha, Nebraska and two in Columbus, Nebraska), one in Overland Park, Kansas and one in Harlan, Iowa. This proposed acquisition, which is subject to regulatory approvals and the approval of Conservative's shareholders, is expected to be completed by March 31, 1996, but no later than June 30, 1996, unless extended by mutual agreement of both parties. This acquisition will be accounted for as a purchase with core value of deposits resulting from this transaction amortized on an accelerated basis over a period not to exceed 10 years and goodwill, if any, amortized on a straight-line basis over a period not to exceed 20 years. 4 Acquisitions During Fiscal Year 1995. - - ------------------------------------- On April 3, 1995, the Corporation consummated the acquisition of Provident by purchasing all 140,000 outstanding shares of Provident's common stock at $53.75 per share for approximately $7.5 million in cash. Provident operated a traditional thrift operation with five branches located in the Lincoln, Nebraska metropolitan area. At April 3, 1995, Provident had assets totaling $96.5 million, deposits totaling $58.1 million and stockholders' equity approximating $4.6 million. This acquisition has been accounted for as a purchase. Core value of deposits totaling $2.6 million resulting from this transaction is being amortized using an accelerated method over 10 years and goodwill totaling $713,000 is being amortized on a straight-line basis over 20 years. On July 15, 1994, the Corporation consummated the acquisition of Home Federal by purchasing all 236,212 outstanding shares of Home Federal's common stock at $38.17 per share for approximately $9.0 million in cash. Home Federal operated two branches in Ada, Oklahoma. At July 15, 1994, Home Federal had assets totaling $100.2 million, deposits totaling $87.3 million and stockholders' equity totaling $8.7 million. This acquisition has been accounted for as a purchase. Core value of deposits totaling $1.3 million resulting from this transaction is being amortized on an accelerated basis over 10 years. In fiscal year 1995 the Corporation also acquired four branches and the related equipment of the former Franklin Federal Savings Association of Kansas ("Franklin Federal") at a cost of $876,000. Previously, on June 10, 1994, the Corporation had acquired $255.7 million of insured deposits of Franklin Federal from the Resolution Trust Corporation ("RTC") at a cost of $7.7 million. This acquisition has been accounted for as a purchase. Core value of deposits totaling approximately $8.0 million and goodwill totaling $451,000 were recorded from this transaction. Core value of deposits resulting from these acquisitions is amortized on an accelerated basis over 10 years and goodwill is amortized on a straight-line basis over 20 years. Acceleration of Goodwill Amortization. - - -------------------------------------- A significant event affecting the results of operations for fiscal year 1995 was the accelerated amortization of goodwill totaling $21.4 million. This accelerated amortization of goodwill resulted from the fact that, 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. An appraisal performed 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 $41.0 million, and therefore, recognition of an impairment of recorded intangible assets of $52.7 million at June 30, 1994. The effect of this accounting change was a pre-tax charge to results of operations for fiscal year 1994 totaling $52.7 million, with an income tax benefit of $8.8 million, resulting in a loss of $43.9 million. The appraisal of $41.0 million was classified as core value of deposits totaling $19.6 million and goodwill totaling $21.4 million. Effective July 1, 1994, the remaining $19.6 million 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. The $21.4 million of goodwill was completely amortized to expense over the first six months of fiscal year 1995, and for reporting purposes separately disclosed in the Consolidated Statement of Operations. Excluding the accelerated amortization of goodwill of $21.4 million, fiscal year 1995 earnings per share would have been $3.75 per share compared to the $2.11 per share reported, and return on average assets and return on average stockholders' equity would have been .85% and 17.04%, respectively, compared to reported results of .48% and 9.60%, respectively. The valuation did not decrease the book value of the intangible assets resulting from the Corporation's acquisitions in fiscal year 1994. An independent valuation was also performed at June 30, 1995, of the Corporation's total unamortized balance of goodwill and core value of deposits resulting in no impairment. 5 Regulatory Capital Compliance. - - ------------------------------ At June 30, 1995, 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, 1995.
(Dollars in Thousands) Amount Ratio ------- ------ Tangible capital $303,479 5.12% (1) Tangible capital requirement 88,849 1.50 -------- --------- Excess $214,630 3.62% - - ------------------------------------ -------- --------- Core capital (Tier 1 capital) $324,909 5.47% (2) Core capital requirement 178,341 3.00 -------- --------- Excess $146,568 2.47% - - ------------------------------------ -------- --------- Risk-based capital (Total capital) $355,733 13.45% (3) Risk-based capital requirement 211,525 8.00 -------- --------- Excess $144,208 5.45% - - ------------------------------------ -------- ---------
(1) Based on adjusted total assets totaling $5,923,283. (2) Based on adjusted total assets totaling $5,944,713. (3) Based on risk-weighted assets totaling $2,644,066. 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 1.00% to 2.00%, as 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. Effective July 1, 1994, the OTS amended its risk-based capital standards that included an interest rate risk component. The amendment requires thrifts with interest rate risk in excess of certain levels to maintain additional capital. Based on the Bank's interest rate risk profile and the level of interest rates at June 30, 1995, as well as the Bank's level of risk-based capital at the same date, management does not believe that this change will have a material adverse effect on the Bank's level of required risk-based capital. 6 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 the institution's regulatory capital declines. At June 30, 1995, the Bank exceeded the minimum requirements for the well-capitalized category as shown in the following table.
(Dollars in Thousands) Tier 1 Capital Tier 1 Capital Total Capital to Adjusted to Risk- to Risk- Total Assets Weighted Assets Weighted Assets ------------ --------------- --------------- Actual capital $324,909 $324,909 $355,733 Percentage of adjusted assets 5.47% 12.29% 13.45% Minimum requirements to be classified well-capitalized 5.00% 6.00% 10.00%
See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to Consolidated Financial Statements in the Annual Report for additional information. 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. Effects of New Accounting Pronouncements. - - ----------------------------------------- During fiscal year 1995, the Corporation adopted the provisions of four accounting pronouncements: "Accounting by Creditors for Impairment of a Loan," which was subsequently amended by "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," "Accounting for Certain Investments in Debt and Equity Securities" and "Disclosures on Derivative Financial Instruments and Fair Value of Financial Instruments." See Note 1 of Notes to the Consolidated Financial Statements for a discussion of the implementation of the provisions of these new accounting pronouncements, none of which had a material effect on the Corporation's financial position or results of operations. See Note 26 of Notes to the Consolidated Financial Statements for a discussion of newly issued accounting pronouncements as yet not implemented by the Corporation. Other Information. - - ------------------ Additional information concerning the general development of the business of the Corporation during fiscal year 1995 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, consumer loans and home improvement loans. As a result of a renewed emphasis on consumer-oriented operations, including single-family residential lending and mortgage-banking activities, the origination of residential loans during fiscal years 1994 and 1993 increased significantly over previous fiscal years. However, during fiscal year 1995, due to a relatively higher interest rate environment, such loan origination activity declined significantly compared to fiscal year 1994. 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. In the past, the Corporation relied solely on its mortgage banking subsidiary to originate real estate loans through the offices of such mortgage banking subsidiary and therefore did not develop an origination capability in the branch offices of the Bank. Beginning in fiscal year 1992, in an attempt to increase the volume of single-family residential loan originations and take advantage of its extensive branch network in Nebraska and in greater metropolitan Denver, Colorado, and, beginning in fiscal year 1994 in Oklahoma, the Corporation reorganized the lending operations in the Bank branch office system. The Corporation's mortgage banking subsidiary has continued and will continue to originate real estate loans through the Bank's various loan offices located in Nebraska, Colorado, Oklahoma and Kansas and through its nationwide correspondent network. At June 30, 1995, the Corporation's total loan and mortgage-backed securities portfolio was $5.3 billion, representing over 89.0% of its $6.0 billion of total assets at that date. Mortgage-backed securities totaled $1.3 billion at June 30, 1995, representing 25.0% of the Corporation's total loan and mortgage- backed securities portfolio at such date. Over 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 $180.7 million or 3.3% of the total loan and mortgage-backed securities portfolio at June 30, 1995, compared to $195.9 million or 4.0% of such total portfolio at June 30, 1994. These loans are secured by various types of commercial properties including office buildings, shopping centers, warehouses and other income producing properties. At June 30, 1995, 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 $33.7 million, or .6% of the total loan portfolio, compared to $43.4 million or .9% at June 30, 1994. 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. 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. 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. 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. The Corporation has begun, however, beginning fiscal year 1994, to initiate 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. 8 In addition to real estate loans, the Corporation originates consumer, home improvement, savings account and commercial business loans (collectively, "consumer loans") through the Bank'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, 1995, all loans to one borrower were within the Bank's limitation of $53.7 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 and mortgage-backed securities held for sale) as of the dates indicated:
June 30, ---------------------------------------------------------------------------------------- 1995 1994 1993 1992 ----------------- --------------------- --------------------- ------------------- 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 $3,256,172 60.6% $2,814,748 57.0% $2,520,264 58.5% $2,359,988 59.7% Multi-family residential 33,338 .6 43,379 .9 60,935 1.4 75,233 1.9 Land 7,257 .1 9,080 .2 9,322 .2 10,356 .3 Commercial real estate 167,800 3.1 185,213 3.8 237,656 5.5 256,303 6.5 ---------- --- ---------- ---- ---------- ----- --------- ---- Total 3,464,567 64.4 3,052,420 61.9 2,828,177 65.6 2,701,880 68.4 Construction loans - Single-family residential 10,544 .2 363 -- 492 -- 4,842 .1 Multi-family residential 380 -- -- -- -- -- -- -- Land 1,600 -- 1,640 -- -- -- 1,581 -- Commercial real estate 3,995 .1 -- -- -- -- 4,810 .1 ---------- --- ---------- ---- ---------- ----- --------- ---- Total 16,519 .3 2,003 -- 492 -- 11,233 .2 FHA and VA loans 336,639 6.3 393,149 8.0 454,536 10.6 353,312 9.0 Mortgage-backed securities 1,321,018 24.6 1,293,807 26.2 887,741 20.6 762,452 19.3 ---------- --- ---------- ---- ---------- ----- --------- ---- Total real estate loans 5,138,743 95.6 4,741,379 96.1 4,170,946 96.8 3,828,877 96.9 Consumer and other loans - Home improvement and other consumer loans 224,589 4.2 183,859 3.7 124,602 2.9 110,139 2.8 Savings account loans 9,087 .2 8,312 .2 7,753 .2 8,574 .2 Other loans -- -- 1,322 -- 3,696 .1 3,845 .1 ---------- --- ---------- ---- ---------- ----- --------- ---- Total consumer and other loans 233,676 4.4 193,493 3.9 136,051 3.2 122,558 3.1 ---------- --- ---------- ---- ---------- ----- --------- ---- Total loans $5,372,419 100.0% $4,934,872 100.0% $4,306,997 100.0% $3,951,435 100.0% ========== ===== ========== ===== ========== ===== ========= ===== June 30, --------------------- 1991 ---------------------- Amount Percent ------- -------- (Dollars in Thousands) LOAN PORTFOLIO - - --------------------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $2,033,037 54.0% Multi-family residential 73,684 2.0 Land 9,695 .3 Commercial real estate 295,975 7.9 ---------- ----- Total 2,412,391 64.2 Construction loans - Single-family residential 15,957 .4 Multi-family residential -- -- Land 2,480 .1 Commercial real estate 8,774 .2 ---------- ----- Total 27,211 .7 FHA and VA loans 205,318 5.4 Mortgage-backed securities 979,601 26.0 ---------- ----- Total real estate loans 3,624,521 96.3 Consumer and other loans - Home improvement and other consumer loans 116,947 3.2 Savings account loans 8,715 .2 Other loans 12,170 .3 ---------- ----- Total consumer and other loans 137,832 3.7 ---------- ----- Total loans $3,762,353 100.0% ========== =====
(Continued on next page) 10 Composition of Loan Portfolio (continued): - - ------------------------------------------
June 30, --------------------------------------------------------------------------------------- 1995 1994 1993 1992 -------------------- --------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ -------- ------ ------- ------ ------- (Dollars in Thousands) Balance forward of total loans $5,372,419 100.0% $4,934,872 100.0% $4,306,997 100.0% $3,951,435 100.0% ===== ===== ===== ===== Less: Unamortized discounts, net of premiums 8,164 12,713 (4,941) (17,290) Deferred loan fees, net (2,495) (1,505) (6,826) (8,033) Loans in process (6,263) (2,922) (1,194) (1,121) Allowance for loan losses (46,567) (42,926) (45,106) (48,964) Allowance for losses on mortgage- backed securities (1) (1,837) (1,860) (1,890) (2,007) ---------- ---------- ------- ------- Loan portfolio $5,323,421 $4,898,372 $4,247,040 $3,874,020 ========== ========== ========== ========== June 30, ----------------- 1991 ------ ------- Amount Percent ------ ------- Balance forward of total loans $3,762,353 100.0% ===== Less: Unamortized discounts, net of premiums (37,436) Deferred loan fees, net (6,573) Loans in process (3,670) Allowance for loan losses (53,142) Allowance for losses on mortgage- backed securities (1) -- ---------- Loan portfolio $3,661,532 ==========
(1) During fiscal year 1992, certain adjustable-rate single-family residential loans acquired through the bulk purchased loan restructuring process during fiscal years 1992 and 1991 were securitized through a privately issued mortgage pool placement. Accordingly, the estimated allowance amount has been provided for the potential credit risk associated with this private placement. 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 (including loans held for sale 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, ------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - - ---------------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- Dollars in Thousands) ---------------------------- Nebraska $ 835,050 21.9% $ 767,937 22.3% $ 654,788 19.9% $ 403,062 13.1% $ 357,582 13.5% Colorado 728,333 19.1 731,016 21.2 767,123 23.4 647,327 21.1 671,408 25.4 Texas 208,814 5.5 171,755 5.0 177,486 5.4 176,755 5.8 156,296 5.9 Georgia 202,331 5.3 210,299 6.1 241,286 7.3 303,321 9.9 21,380 .8 Oklahoma 186,755 4.9 133,285 3.9 88,786 2.7 74,198 2.4 35,660 1.3 Missouri 172,855 4.5 156,622 4.5 195,911 6.0 247,796 8.1 532,913 20.2 New Jersey 119,223 3.1 110,267 3.2 38,027 1.2 42,685 1.4 -- -.- Virginia 111,081 2.9 81,290 2.3 67,821 2.1 47,849 1.6 8,895 .3 Maryland 100,762 2.6 76,333 2.2 69,735 2.1 77,767 2.5 3,524 .1 Florida 99,991 2.6 92,531 2.7 96,760 2.9 95,249 3.1 61,766 2.3 Connecticut 79,482 2.1 80,948 2.3 85,204 2.6 92,321 3.0 11,912 .5 Kansas 78,790 2.1 77,709 2.3 82,521 2.5 93,490 3.0 120,283 4.6 Illinois 76,041 2.0 54,371 1.6 65,312 2.0 88,991 2.9 112,069 4.2 Iowa 70,474 1.9 65,273 1.9 65,418 2.0 35,560 1.2 25,681 1.0 California 64,487 1.7 70,052 2.0 82,765 2.5 112,315 3.7 109,758 4.2 Arizona 63,288 1.7 60,895 1.8 77,248 2.4 84,366 2.8 79,259 3.0 Pennsylvania 53,234 1.4 43,223 1.3 30,372 .9 38,716 1.3 5,269 .2 Washington 48,189 1.3 40,558 1.2 37,294 1.1 29,057 1.0 15,460 .6 Ohio 47,421 1.2 36,894 1.1 14,082 .4 9,090 .3 11,140 .4 Michigan 45,784 1.2 46,119 1.3 10,233 .3 11,315 .3 11,044 .4 Massachusetts 43,734 1.1 16,506 .5 5,007 .1 4,816 .2 4,318 .2 New York 39,409 1.0 27,700 .8 13,014 .4 16,725 .5 17,658 .7 Alabama 38,147 1.0 38,604 1.1 43,126 1.3 53,700 1.8 73,149 2.8 Minnesota 32,780 .9 23,233 .7 30,683 .9 16,695 .5 16,258 .6 South Carolina 25,402 .7 27,163 .8 13,792 .4 15,451 .5 5,129 .2 Indiana 25,048 .7 13,645 .4 7,548 .2 6,082 .2 3,362 .1 North Carolina 23,260 .6 19,683 .6 20,404 .6 22,277 .7 3,674 .1 Tennessee 22,709 .6 20,434 .6 24,256 .7 31,831 1.0 28,974 1.1 Other States 174,851 4.4 153,227 4.3 177,203 5.7 187,618 6.1 141,099 5.3 ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- $3,817,725 100.0% $3,447,572 100.0% $3,283,205 100.0% $3,066,425 100.0% $2,644,920 100.0% ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
12 The following table presents the composition of the Corporation's total real estate portfolio (including loans held for sale 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, 1995:
Residential Multi- Land Commercial % of State 1-4 Units Family Loans Loans FHA/VA Total Total - - ------------------------ ------------ -------- ------- ----------- --------- ----------- ------ (Dollars in Thousands) ------------------------ Nebraska $ 745,716 $ 7,905 $ 181 $ 30,947 $ 50,301 $ 835,050 21.9% Colorado 591,469 13,421 8,675 89,065 25,703 728,333 19.1 Texas 170,161 9,730 -- 4,260 24,663 208,814 5.5 Georgia 186,613 -- -- 3,232 12,486 202,331 5.3 Oklahoma 159,232 945 1 5,808 20,769 186,755 4.9 Missouri 150,180 546 -- -- 22,129 172,855 4.5 New Jersey 117,851 -- -- -- 1,372 119,223 3.1 Virginia 93,885 -- -- -- 17,196 111,081 2.9 Maryland 90,447 -- -- -- 10,315 100,762 2.6 Florida 67,252 -- -- 16,746 15,993 99,991 2.6 Connecticut 79,368 -- -- -- 114 79,482 2.1 Kansas 59,637 -- -- 1,498 17,655 78,790 2.1 Illinois 61,637 -- -- -- 14,404 76,041 2.0 Iowa 55,343 1,151 -- 1,049 12,931 70,474 1.9 California 52,773 20 -- 6,717 4,977 64,487 1.7 Arizona 50,996 -- -- -- 12,292 63,288 1.7 Pennsylvania 51,560 -- -- -- 1,674 53,234 1.4 Washington 40,686 -- -- -- 7,503 48,189 1.3 Ohio 40,381 -- -- -- 7,040 47,421 1.2 Michigan 44,018 -- -- -- 1,766 45,784 1.2 Massachusetts 43,456 -- -- -- 278 43,734 1.1 New York 37,963 -- -- 726 720 39,409 1.0 Alabama 28,144 -- -- 2,516 7,487 38,147 1.0 Minnesota 27,098 -- -- -- 5,682 32,780 .9 South Carolina 21,811 -- -- -- 3,591 25,402 .7 Indiana 20,137 -- -- -- 4,911 25,048 .7 North Carolina 17,732 -- -- -- 5,528 23,260 .6 Tennessee 16,636 -- -- -- 6,073 22,709 .6 Other States 144,534 -- -- 9,231 21,086 174,851 4.4 ---------- ------- ------ -------- -------- ---------- ----- Total $3,266,716 $33,718 $8,857 $171,795 $336,639 $3,817,725 100.0% ========== ======= ====== ======== ======== ========== ===== % of Total 85.6% .9% .2% 4.5% 8.8% 100.0% ========== ======= ====== ======== ======== ==========
13 Contractual Principal Repayments. The following table sets forth certain - - --------------------------------- information at June 30, 1995, 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 potential 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, --------------------------------- 1997- After 1996 2000 2000 Total -------- ---------- ---------- ---------- Principal Repayments (In Thousands) - - -------------------- REAL ESTATE LOANS: Single-family residential (1) Fixed-rate $ 66,572 $ 347,632 $1,651,109 $2,065,313 Adjustable-rate 24,172 117,960 1,385,366 1,527,498 Multi-family residential, land and commercial real estate Fixed-rate 12,180 51,372 23,050 86,602 Adjustable-rate 23,756 98,024 13 121,793 -------- ---------- ---------- ---------- 126,680 614,988 3,059,538 3,801,206 -------- ---------- ---------- ---------- Construction, adjustable-rate 1,097 5,486 9,936 16,519 -------- ---------- ---------- ---------- MORTGAGE-BACKED SECURITIES: Fixed-rate 33,751 140,959 307,182 481,892 Adjustable-rate 13,383 62,686 763,057 839,126 -------- ---------- ---------- ---------- 47,134 203,645 1,070,239 1,321,018 -------- ---------- ---------- ---------- CONSUMER AND OTHER LOANS: Fixed-rate 44,253 161,265 -- 205,518 Adjustable-rate 12,592 15,566 -- 28,158 -------- ---------- ---------- ---------- 56,845 176,831 -- 233,676 -------- ---------- ---------- ---------- PRINCIPAL REPAYMENTS $231,756 $1,000,950 $4,139,713 $5,372,419 ======== ========== ========== ==========
(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, 1996, 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 $1,998,741 $1,503,326 $3,502,067 Multi-family residential, land and commercial 74,422 98,037 172,459 Construction loans -- 15,422 15,422 Mortgage-backed securities 448,141 825,743 1,273,884 Consumer and other loans 161,265 15,566 176,831 ---------- ---------- ---------- Principal repayments due after June 30, 1996 $2,682,569 $2,458,094 $5,140,663 ========== ========== ==========
LOAN ORIGINATIONS - - ----------------- Residential Loans. The Corporation, through the Bank's branches and CFMC's - - ------------------ 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. In prior years, the Corporation provided interim construction financing for single-family dwellings. Currently, the Corporation is not actively pursuing construction loans, but will provide interim construction financing that will be tied to permanent real estate mortgage loans. Management expects construction lending to increase over fiscal year 1995, although not significantly. During fiscal years 1995 and 1994, the Corporation originated $10.9 million and $470,000, respectively, of residential construction loans. There were no construction loans originated in fiscal year 1993. Commercial Real Estate and Land Loans. The Corporation originated commercial - - -------------------------------------- real estate loans totaling $7.3 million, $12.8 million and $14.8 million, respectively, during fiscal years 1995, 1994 and 1993. Substantially all commercial real estate loan originations for fiscal years 1993 and 1994 consisted of loans made to borrowers on purchases of commercial real estate property previously foreclosed. 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. See "Asset Quality" herein. 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. 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 $1.423 billion at June 30, 1995. 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 1995, 1994 and 1993, the Corporation originated $158.3 million, $156.3 million and $109.1 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 increased its secured consumer lending activities beginning fiscal year 1994 to meet its customers' financial needs and will continue to emphasize such lending activities in the future. 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. Commercial Business Loans. Federal savings institutions are authorized to make - - -------------------------- secured or unsecured commercial, corporate, business or agricultural loans up to 10.0% of total regulatory assets. The Corporation had no commercial business and corporate loans at June 30, 1995. Currently, the Corporation does not originate any new commercial business loans. 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 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, 1995, 1994 and 1993, the aggregate principal balance of these bulk purchased loans associated with such restructuring was $701.9 million, $868.0 million and $1.3 billion, 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, 1995, 1994 and 1993, $15.3 million, $17.3 million and $22.3 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, 1995, 1994 and 1993, $17.8 million, $17.5 million and $18.1, 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 1995, 1994 and 1993, the Corporation purchased $461.3 million, $545.8 million and $186.8 million, respectively, of other loan packages not associated with the aforementioned restructuring efforts. 17 Loan Sales. In addition to originating loans for the Bank'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 1995, 1994 and 1993, the Corporation sold an aggregate of $405.7 million, $691.9 million and $407.4 million, respectively, in mortgage loans resulting in net losses of $596,000, $392,000 and $352,000, respectively, in such fiscal years. Of the amount of mortgage loans sold during fiscal year 1995, $404.9 million were sold in the secondary market, of which 92.5% were converted into GNMA securities, 7.4% 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, 1995, the carrying value of loans held for sale totaled $36.4 million. 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, 1995, the remaining balance of such loans sold with recourse totaled $49.7 million. 18 Set forth below is a table showing the Corporation's loan and mortgage-backed securities activity for the fiscal years indicated:
1995 1994 1993 ---- ---- ---- (In Thousands) LOANS ORIGINATED: Real estate loans - Residential loans (1) $ 182,804 $ 548,291 $ 630,493 Construction loans 10,862 470 -- Commercial real estate and land loans 7,257 12,818 14,843 Consumer loans 158,330 156,333 109,113 ---------- ---------- ---------- Loans originated $ 359,253 $ 717,912 $ 754,449 ========== ========== ========== LOANS PURCHASED: Conventional mortgage loans - Residential loans 603,635 $1,069,584 $ 777,559 Bulk loan purchases 461,299 545,823 186,790 Mortgage-backed securities 11,504 205,222 121,584 ---------- ---------- ---------- Loans purchased $1,076,438 $1,820,629 $1,085,933 ========== ========== ========== LOANS SECURITIZED: Conventional mortgage loans securitized into mortgage-backed securities $ 137,936 $ 468,564 $ 222,457 ========== ========== ========== ACQUISITIONS: Residential real estate $ 101,067 $ 771 $ -- Consumer loans 11,995 19,027 -- Mortgage-backed securities 42,648 -- -- ---------- ---------- ---------- Loans from acquisitions $ 155,710 $ 19,798 $ -- ========== ========== ========== LOANS SOLD: Conventional mortgage loans $ 405,687 $ 691,935 $ 407,421 Mortgage-backed securities 34,756 12,672 -- ---------- ---------- ---------- Loans sold $ 440,443 $ 704,607 $ 407,421 ========== ========== ==========
(1) Includes single-family and multi-family residential loans and FHA and VA loans. In addition, includes loans refinanced of $31,308, $329,438 and $453,224 for fiscal years 1995, 1994 and 1993, 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 its own portfolio or sold in the secondary market), thereby generating ongoing loan servicing fees. The Corporation also periodically purchases mortgage servicing rights. At June 30, 1995, the Bank's mortgage banking subsidiary was servicing approximately 85,100 loans and participations for others with principal balances aggregating $4.6 billion, compared to 77,500 loans with principal balances totaling $4.0 billion at June 30, 1994. At June 30, 1995, adjustable-rate mortgage loans represented 30.4% 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 23 - 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 year 1995 compared to .43% for fiscal year 1994. 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, 1995, was 7.76% compared to 7.55% at June 30, 1994. At June 30, 1995, 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 1995, the average amount of funds advanced by the Corporation pursuant to servicing agreements was approximately $900,000. In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise capitalize the cost of rights to service loans for others that were acquired through either purchase or origination. The total cost of loans being sold should be allocated to the mortgage servicing rights and the loans based on their relative fair values. The mortgage servicing rights should be amortized in proportion to, and over the period of, estimated net servicing income and should be evaluated for impairment based on their fair value. The Corporation currently sells certain of its loan originations with servicing retained. SFAS No. 122 is effective for fiscal years beginning after December 15, 1995, or effective as of July 1, 1996, for the Corporation. The 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. Management of the Corporation is currently reviewing the provisions of this statement to determine its implementation date and has not as of this date determined the effect of such implementation. 20 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 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 to 19.0% per annum by Nebraska law and 21.0% by Oklahoma law, although loans in excess of $25,000 and $45,000 in Nebraska and Oklahoma, 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 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, 1995, the Corporation had issued commitments of - - ----------------- $84.0 million, excluding undisbursed portion of loans in process, to fund and purchase loans. These commitments are expected to settle within four months following June 30, 1995. 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 $58.4 million decreased by $5.6 million, or 8.8%, at June 30, 1995, compared to June 30, 1994, primarily as a result of net decreases of $3.0 million in troubled debt restructurings, $1.7 million in nonperforming loans and $894,000 in real estate. 22 The following table sets forth information with respect to the Bank's nonperforming assets at June 30 as follows:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Dollars in Thousands) Loans accounted for on a nonaccruing basis: (1) Real estate - Residential $28,002 $25,516 $28,990 $ 32,002 $ 13,028 Commercial 773 5,228 1,377 11,937 13,299 Consumer 442 192 120 70 112 ------- ------- ------- -------- -------- Total 29,217 30,936 30,487 44,009 26,439 ------- ------- ------- -------- -------- Accruing loans which are contractually past due 90 days or more - -- -- -- -- -- ------- ------- ------- -------- -------- Total nonperforming loans 29,217 30,936 30,487 44,009 26,439 ------- ------- ------- -------- -------- Real estate: (2) Commercial 8,795 9,808 16,721 45,799 75,395 Residential 3,383 3,264 5,169 6,625 17,770 ------- ------- ------- -------- -------- Total 12,178 13,072 21,890 52,424 93,165 ------- ------- ------- -------- -------- Troubled debt restructurings: (3) Commercial 15,708 18,445 38,828 39,283 64,328 Residential 1,294 1,580 2,164 3,233 3,764 ------- ------- ------- -------- -------- Total 17,002 20,025 40,992 42,516 68,092 ------- ------- ------- -------- -------- Nonperforming assets $58,397 $64,033 $93,369 $138,949 $187,696 ======= ======= ======= ======== ======== Nonperforming loans to total loans (4) .72% .85% .89% 1.38% .95% Nonperforming assets to total assets .98% 1.16% 1.92% 2.99% 3.70% - - ----------------------------------------- ------- ------- ------- -------- -------- Allowance for loan losses: Other loans $31,287 $25,605 $22,835 $ 19,233 $ 20,866 Bulk purchased loans (5) 15,280 17,321 22,271 29,731 32,276 ------- ------- ------- -------- -------- Total $46,567 $42,926 $45,106 $ 48,964 $ 53,142 ======= ======= ======= ======== ======== Allowance for bulk purchased loan losses to bulk purchased loans (5) 2.18% 2.00% 1.69% 1.89% 2.68% Allowance for loan losses (other loans) to total loans (less bulk purchased loans) .93% .92% 1.09% 1.19% 1.32% Allowance for loan losses to total loans (4) 1.15% 1.18% 1.32% 1.54% 1.91% Allowance for loan losses to total nonperforming assets 79.74% 67.04% 48.31% 35.24% 28.31% Allowance for loan losses (other loans) to total nonperforming loans (less nonperforming bulk purchased loans) (6) 275.03% 189.86% 184.88% 73.04% 85.48%
(Continued on next page) 23 (1) During fiscal years 1995, 1994 and 1993, 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 $1.9 million, $2.0 million and $2.0 million, respectively. (2) Real estate as a component of nonperforming assets does not include performing real estate held for investment, which totaled $4.2 million and $2.9 million, respectively, at June 30, 1995 and 1994. At June 30, 1993, there was no performing real estate held for investment. (3) During fiscal years 1995, 1994 and 1993, the Bank recognized interest income on these loans classified as troubled debt restructurings aggregating $1.5 million, $1.8 million and $3.9 million, respectively, whereas under their original terms the Bank would have recognized interest income of $1.6 million, $1.9 million and $4.6 million, respectively. At June 30, 1995, the Bank 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) Between January 1991 and June 30, 1992, the Bank purchased $2.5 billion of primarily single-family residential whole loans (bulk purchased loans) at varying amounts of discounts that totaled $54.6 million in the aggregate through June 30, 1992. At June 30, 1995, 1994 and 1993, $15.3 million, $17.3 million and $22.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Bank'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 $701.9 million, $868.0 million and $1.3 billion, respectively, at June 30, 1995, 1994 and 1993. 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, $17.5 million and $18.1 million, respectively, at June 30, 1995, 1994 and 1993, 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 $5.6 million decrease in nonperforming assets during the fiscal year ended June 30, 1995, 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:
State 1995 1994 1993 1992 1991 - - ----- ------- ------- ------- ------- ------- (In Thousands) Texas $ 3,561 $ 4,317 $ 3,222 $ 3,189 $ 1,764 Georgia 2,559 2,355 3,273 2,870 53 Colorado 2,191 4,163 2,260 10,078 13,311 Nebraska 2,037 1,551 2,237 3,607 2,700 Missouri 1,864 1,689 2,334 2,991 359 California 1,842 2,986 2,309 4,377 511 New Jersey 1,680 1,361 793 551 571 Florida 1,553 1,148 1,268 2,355 -- Illinois 1,234 1,457 1,976 1,835 218 Oklahoma 1,019 472 609 1,189 289 New York 855 407 366 189 -- Washington 745 841 465 376 -- Maryland 743 613 -- 105 -- Pennsylvania 715 823 967 388 13 Connecticut 643 37 385 594 -- Arizona 539 569 2,061 2,894 314 North Carolina 455 237 220 178 -- Virginia 446 790 552 332 -- Indiana 411 145 113 9 -- Kansas 389 761 1,156 1,422 3,820 Other states 3,736 4,214 3,921 4,480 2,516 ------- ------- ------- ------- ------- Nonperforming loans $29,217 $30,936 $30,487 $44,009 $26,439 ======= ======= ======= ======= =======
Nonperforming loans at June 30, 1995, consisted of 780 loans with an average balance of $37,458. Nonperforming loans totaling $29.2 million at June 30, 1995, consisted of $773,000 (3 loans) collateralized by commercial real estate, $28.0 million (661 loans) collateralized by residential real estate and $442,000 (116 loans) of consumer loans. The geographic concentration of nonperforming real estate at June 30 was follows:
State 1995 1994 1993 1992 1991 - - ----- -------- -------- -------- -------- -------- (In Thousands) Colorado $ 6,823 $ 4,027 $ 8,871 $17,390 $38,780 Nebraska 5,770 6,868 8,241 8,727 11,230 Texas 999 801 1,337 12,970 22,071 Georgia 391 1,348 1,016 561 -- Oklahoma 326 351 362 555 1,435 Pennsylvania 280 90 -- -- -- New Jersey 262 219 -- -- -- Missouri 197 115 551 535 612 Florida 129 248 653 4,083 3,222 Iowa 119 -- 23 -- 49 Tennessee 109 64 -- 1,979 6,767 California 81 1,457 1,946 2,638 3,930 Kansas -- -- 1,135 1,258 3,125 Other states 624 1,484 774 3,674 7,146 Unallocated reserves (3,932) (4,000) (3,019) (1,946) (5,202) ------- ------- ------- ------- ------- Nonperforming real estate $12,178 $13,072 $21,890 $52,424 $93,165 ======= ======= ======= ======= =======
At June 30, 1995, total commercial real estate was $8.8 million (23 properties) or 72.2% of the $12.2 million in total nonperforming real estate (consisting of 97 properties), and the remaining $3.4 million (74 properties) consisted of residential real estate. The Bank's commercial real estate at June 30, 1995, is located primarily in Colorado and Nebraska. 25 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." 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. On the basis of managemental review of the Corporation's portfolio at June 30, 1995, the Corporation had $25.5 million in assets classified as special mention, $47.2 million in assets classified as substandard, no assets classified as doubtful and $307,000 in assets classified 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, 1995, 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, 1995, 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 (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. 26 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 COMMERCIAL REAL ESTATE LOANS: Current 1.00 Classified special mention 2.00 90 days delinquent (or classified substandard) 10.00 CONSTRUCTION LOANS: Current 1.00 90 days delinquent 12.50 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. 27 The following table sets forth the activity in the Bank's allowance for loan losses for the fiscal years ended June 30 as indicated:
1995 1994 1993 1992 1991 -------- -------- -------- --------- --------- (Dollars in Thousands) Allowance for losses on loans at beginning of year $42,926 $45,106 $48,964 $ 53,142 $ 24,099 ------- ------- ------- -------- -------- Loans charged-off: Single-family residential (903) (774) (1,097) (1,542) (4,109) Multi-family residential and commercial real estate (842) (2,083) (1,264) (6,098) (6,394) Consumer (1,758) (1,073) (1,033) (2,134) (2,908) ------- ------- ------- -------- -------- Loans charged-off (3,503) (3,930) (3,394) (9,774) (13,411) ------- ------- ------- -------- -------- Recoveries: Single-family residential 64 71 -- -- -- Multi-family residential and commercial real estate 815 164 857 -- 6 Consumer 455 432 404 760 1,035 ------- ------- ------- -------- -------- Recoveries 1,334 667 1,261 760 1,041 ------- ------- ------- -------- -------- Net loans charged-off (2,169) (3,263) (2,133) (9,014) (12,370) Provision charged to operations 6,033 6,033 5,735 7,381 9,137 ------- ------- ------- -------- -------- Estimated allowance added for bulk purchased loans (1) 1,818 39 173 17,268 32,347 Change in estimate of allowance for bulk purchased loans (1)(2) (1,705) (4,357) (5,334) (18,728) (49) Charge off to allowance for bulk purchased loans(1) (336) (632) (2,299) (1,085) (22) ------- ------- ------- -------- -------- Allowance for losses on loans at end of year $46,567 $42,926 $45,106 $ 48,964 $ 53,142 ======= ======= ======= ======== ======== Ratio of net loans charged-off to average loans outstanding during the year .07% .11% .13% .33% .61%
(1) Between January 1991 and June 30, 1992, the Bank purchased $2.5 billion of primarily single-family residential whole loans (bulk purchased loans) at varying amounts of discounts that totaled $54.6 million in the aggregate through June 30, 1992. At June 30, 1995, 1994 and 1993, $15.3 million, $17.3 million and $22.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Bank's purchase of these loans, was included in the total allowance for loan losses. Such bulk purchased loans had balances of $701.9 million, $868.0 million and $1.3 billion, respectively, at June 30, 1995, 1994 and 1993. 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. 28 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, 1995, the Bank had total average liquid assets of $356.8 million, which consisted of $21.6 million in cash, $2.4 million in federal funds and $332.8 million in agency-backed securities. The Corporation's liquidity and short-term liquidity ratios were 8.52% and 1.69%, respectively, at June 30, 1995. 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:
1995 1994 1993 -------- -------- -------- (Dollars in Thousands) Investment securities held to maturity: U.S. Treasury and other Government agency obligations $294,187 $280,550 $246,990 Obligations of states and political subdivisions -- -- 806 Other securities 50 50 50 -------- -------- -------- Total investment securities held to maturity 294,237 280,600 247,846 Cash on deposit 3,100 500 1,300 -------- -------- -------- Total Investments $297,337 $281,100 $249,146 ======== ======== ========
29 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, 1995:
One Year Over One Within Over Five Within More Than or Less Five Years Ten Years Ten Years ------------------ ------------------ ----------------- ------------------ Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------ --------- ------- --------- ------ --------- ----- (Dollars in Thousands) Investment securities held to maturity: U.S. Treasury and other Government agency obligations $44,953 7.86% $228,244 5.97% $20,990 6.16% --$ --% Other securities -- -- 50 5.75 -- -- -- -- --------- ------- -------- ----- --------- ----- --------- --- Investment securities held to maturity $44,953 7.86% $228,294 5.96% $20,990 6.16% --$ --% ========= ======= ======== ===== ========= ===== ========= === Total ---------------------------- Amortized Market Average Cost Value Yield ------- -------- ------- Investment securities held to maturity: U.S. Treasury and other Government agency obligations $294,187 $291,601 6.27% Other securities 50 50 5.75 --------- -------- ---- Investment securities held to maturity $294,237 $291,651 6.27% ========= ======== ====
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. 30 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. Also, during fiscal year 1993, net proceeds totaling approximately $75.8 million from common stock and subordinated debt offerings were another significant source of funds. 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 1995 the Corporation consummated the acquisitions of Home Federal and Provident, and entered into a merger agreement with Railroad. In addition, on August 15, 1995, the Bank entered into a merger agreement with Conservative. See Notes 2 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 Oklahoma, 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 1995, NOW accounts increased $19.4 million, from $254.4 million at June 30, 1994, to $273.8 million at June 30, 1995. In addition, during fiscal year 1995 passbook accounts increased $69.9 million, from $468.3 million at June 30, 1994 to $538.2 million at June 30, 1995. Rates on deposits are priced based on investment opportunities as the Bank 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 Bank and at June 30, 1995, represented 72.7% of the Bank's total deposits compared to 71.9% and 74.2%, respectively, at June 30, 1994 and 1993. The Bank offers certificate accounts with terms ranging from one month to 120 months. Total deposits increased $235.6 million during fiscal year 1995 from $3.356 billion at June 30, 1994, to $3.591 billion at June 30, 1995. This increase is primarily from the acquisitions of Provident and Home Federal with deposits of $58.1 million and $87.3 million, respectively. The additional amount of the increase is attributable to (i) this larger franchise base from such acquisitions the last two fiscal years which has broadened the Corporation's retail deposit base and (ii) to an increase in Colorado and Oklahoma deposits due to increased marketing efforts and product promotion. 31 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, 1995 June 30, 1994 June 30, 1993 ------------------------------------ ---------------------------------- ------------------ % of Increase % of Increase % of Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits -------- -------- --------- ------ --------- ---------- ------- -------- (Dollars in Thousands) Passbook accounts $ 538,207 15.0% $ 69,899 $ 468,308 13.9% $255,507 $ 212,801 8.9% NOW accounts 273,809 7.6 19,367 254,442 7.6 18,107 236,335 9.9 Market rate savings 169,892 4.7 (50,358) 220,250 6.6 51,845 168,405 7.0 Certificates of deposit 2,609,267 72.7 196,670 2,412,597 71.9 638,705 1,773,892 74.2 ---------- ----- -------- ---------- ----- -------- ---------- ----- Total Deposits $3,591,175 100.0% $235,578 $3,355,597 100.0% $964,164 $2,391,433 100.0% ========== ===== ======== ========== ===== ======== ========== =====
32 The following table shows the composition of average deposit balances and average rates for the fiscal years indicated.
Year Ended June 30, ------------------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Average Avg. Average Avg. Average Avg. Balance Rate Balance Rate Balance Rate ---------- ----- ---------- ----- ---------- ----- (Dollars in Thousands) Passbook accounts $ 532,032 4.41% $ 290,293 2.93% $ 195,677 2.78% NOW accounts 262,882 .93 280,406 .96 260,651 .99 Market rate savings 197,365 3.31 185,073 2.76 181,985 2.97 Certificates of deposit 2,473,211 5.37 2,167,273 5.19 1,748,304 6.13 ---------- ---- ---------- ---- ---------- ---- Average deposit accounts $3,465,490 4.77% $2,923,045 4.40% $2,386,617 5.06% ========== ==== ========== ==== ========== ====
The following table sets forth the Corporation's certificates of deposit (fixed maturities) classified by rates as of the dates indicated.
June 30, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- (In Thousands) Rate - - --------------- Less than 3.00% $ 11,846 $ 15,876 $ 11,146 3.00% - 3.99% 66,337 577,067 273,034 4.00% - 4.99% 442,559 788,261 753,844 5.00% - 5.99% 865,932 708,786 440,711 6.00% - 6.99% 906,923 195,676 155,992 7.00% - 7.99% 276,934 79,846 96,893 8.00% - 8.99% 32,415 35,830 22,589 9.00% and over 6,321 11,255 19,683 ---------- ---------- ---------- Certificates of deposit $2,609,267 $2,412,597 $1,773,892 ========== ========== ==========
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, - - --------------- ------------------------- 1995 1994 1993 ---- ----- ---- (In Thousands) Three months or less $ 62,771 $ 34,887 $ 35,921 Over three through six months 36,742 23,070 27,662 Over six through twelve months 35,079 44,339 39,244 Over twelve months 63,027 64,391 33,465 -------- -------- -------- Total $197,619 $166,687 $136,292 ======== ======== ========
For further information regarding the Corporation's deposits, see Note 12 to the Notes to Consolidated Financial Statements in the Annual Report. 33 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, 1995, the Corporation had pledged a portion of its real estate loans and its FHLB stock of $97.1 million. At June 30, 1995, the Corporation had advances totaling approximately $1.7 billion from the FHLB of Topeka at interest rates ranging from 4.61% to 10.75% and at a weighted average rate of 5.87%. At June 30, 1994, such advances from the FHLB totaled $1.5 billion at interest rates ranging from 4.27% to 12.00% and at a weighted average rate of 5.51%. The Corporation also borrows funds under repurchase agreements. However, as shown in the table below, the Corporation has reduced its reliance on these borrowings. 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, 1995, the Corporation's repurchase agreements aggregated $195.8 million at an average rate of 7.04%. The Corporation's repurchase agreements were collateralized by $234.2 million of mortgage-backed securities at June 30, 1995. At June 30, 1995, these repurchase agreements had maturities ranging from January 1996 to June 1997 with a weighted average maturity of 491 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, -------------------------- 1995 1994 1993 ---- ---- ---- (In Thousands) Balance at end of year $195,755 $157,432 $154,862 Maximum month-end balance $195,755 $157,432 $419,076 Average balance $101,924 $155,897 $255,101 Weighted average interest rate during the year 7.61% 6.15% 6.90% Weighted average interest rate at end of year 7.04% 6.08% 6.05%
For further information regarding the Corporation's FHLB advances and securities sold under agreements to repurchase, see Notes 13 and 14 to the Notes to the Consolidated Financial Statements in the Annual Report. 34 Customer Services. The Corporation aggressively 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. At June 30, 1995, there were 86 strategically located proprietary automatic teller machines ("ATMs") 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, 1995, the Bank was authorized to invest up to $178.3 million in the stock of, or loans to, service corporations (based upon the 3.0% limitation). As of June 30, 1995, the Bank's investment in capital stock in its service corporations and their wholly-owned subsidiaries was $45.9 million and unsecured loans including conforming loans to those entities totaled $1,000. 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 at 40.0% of such investment until July 1, 1996, when the deduction will be 100.0%. See "Regulation -- Regulatory Capital Requirements." At June 30, 1995, $1.7 million of the $4.3 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. The Bank has fourteen 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 Bank's real estate lending, secondary marketing, mortgage servicing and foreclosure activities are conducted primarily through CFMC. At June 30, 1995, CFMC serviced 55,800 loans for the Bank and 85,100 loans for others. See "Loan Originations -- Loan Servicing." 35 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 Bank'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 Bank. 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, 1995, the Corporation and its wholly-owned subsidiaries had 1,144 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 offers a deferred compensation plan (401(k) plan) for employees. The Corporation considers its employee relations to be good. EXECUTIVE OFFICERS - - ------------------ For certain information concerning the Registrant's directors and executive officers, 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 western Iowa and, for loan originations, includes Nebraska, Colorado, Kansas and Oklahoma. 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. 36 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, 1995, 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, 1995:
Percent of Amount Assets (1) -------- --------- (Dollars in Thousands) Tangible Capital $303,479 5.12% Tangible Capital Requirement 88,849 1.50 -------- ----- Excess $214,630 3.62% ======== ===== Core Capital (Tier 1 Capital) $324,909 5.47% Core Capital Requirement (2) 178,341 3.00 -------- ----- Excess $146,568 2.47% ======== ===== Risk-Based (Total Capital) $355,733 13.45% Risk-Based Capital Requirement (3) 211,525 8.00 -------- ----- Excess $144,208 5.45% ======== =====
(1) Based on adjusted total assets for purposes of the tangible and core capital requirements, and risk-weighted assets for purpose of the risk- based capital requirement. (2) The core capital requirement applicable to the Bank may increase if the OTS amends its capital regulations, as it has proposed, in response to the more stringent leverage ratio adopted by the Office of the Comptroller of the Currency for national banks. (3) Represents the total capital required at June 30, 1995. As discussed in further detail in this section, the OTS has adopted an interest rate risk component amendment to the risk-based capital requirement. Management of the Bank believes that such an amendment, based on the Bank's interest-rate risk profile and the level of interest rates at June 30, 1995, as well as the Bank's level of risk-based capital, will not have a material adverse effect on the Bank's compliance with its risk-based capital requirements. 37 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 and, through December 31, 1994, also included a portion of a savings association's qualifying supervisory goodwill. 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 $324.9 million at June 30, 1995, includes no qualifying supervisory goodwill and $21.4 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 40.0% until July 1, 1995, and will remain at 60.0% until July 1, 1996, when the deduction will be 100.0%. Accordingly, at June 30, 1995, the Bank had $4.3 million of debt and equity invested in service corporations engaged in activities not permissible for national banks, 40.0% ($1.7 million) of which was deducted from capital in accordance with the OTS approved delayed phase-in schedule previously discussed. See "Business -- Subsidiaries." 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. 38 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 $729,000 at June 30, 1995, 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, which requires savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. A savings institution's interest rate risk is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution is considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. A savings institution with a "greater than normal" interest rate risk is required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The interest rate risk component is to be computed quarterly and the resulting capital requirement has an effective time lag of two quarters (e.g., the July 1, 1995, calculation would use December 31, 1994, data). Based on the Bank's interest rate risk profile and the level of interest rates at June 30, 1995, as well as the Bank's level of risk-based capital at June 30, 1995, 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 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." 39 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, 1995, with an investment in FHLB of Topeka stock totaling $97.1 million compared to a required amount of $83.0 million. During fiscal years 1995, 1994 and 1993, the Bank received income from its investment in FHLB stock totaling $5.4 million, $6.2 million and $7.1 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, 1995, the Bank had advances of $1.7 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, 1995, were 8.52% and 1.69%, 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 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). 40 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, 1995 approximately 95.8% 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. 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 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. 41 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, compared to the .26% premium rate it was assessed all of fiscal year 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"). As a result of such action, most BIF-insured financial institutions will pay an annual deposit insurance assessment of 0.04% of insured deposits. No similar reduction was approved for institutions, such as the Bank, that are members of the SAIF. This amendment creates a substantial disparity in the deposit insurance premiums paid by BIF and SAIF members and could place SAIF-insured savings institutions at a significant competitive disadvantage to BIF-insured institutions. Among the proposals being considered by the FDIC and Congress to eliminate this premium disparity is a similar reduction in premium rates charged to SAIF- insured institutions. Such a reduction would be accompanied by a one-time assessment of SAIF-insured institutions up to .90% 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. Under this proposal, the BIF and SAIF would be merged into one fund as soon as practicable after they both reach their designated reserve ratios, but no later than January 1, 1998. It is unknown whether this particular proposal or any other proposal will be implemented or that premiums for either BIF or SAIF members will be adjusted in the future by the FDIC or by legislative action. If a special assessment as described above were to be required, it would result, on a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of approximately $20.4 million (assuming such charge would be tax deductible). Such assessment would have the effect of reducing the Bank's tangible capital to $283.1 million, or 4.80% of adjusted total assets, core capital to $304.5 million, or 5.14% of adjusted total assets, and risk-based capital to $335.3 million, or 12.68% of risk-weighted assets. 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 annual deposit insurance premiums to the SAIF, thereby increasing net income in future periods. 42 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 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. 43 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 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. 44 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 does not anticipate 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 reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered. The Bank has reviewed the Policy Statement and does not believe that it will adversely effect the level of the Bank's allowances for loan losses. 45 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 MACRO 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 MACRO 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 MACRO rating category. The Bank is classified as "well capitalized" under the OTS regulations. 46 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 already meets substantially all the standards adopted in the interagency guidelines, and therefore does not believe that implementation of these regulatory standards will 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 $51.9 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, 1995, 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, and (iv) the aggregate amount of loans made under this authority does not exceed 150.0% of unimpaired capital and surplus. At June 30, 1995, the Bank's loan to one borrower limitation was $89.5 million and all loans to one borrower were within such limitation. 47 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 $1.4 billion. At June 30, 1995 the Bank's nonresidential real property loans totaled $180.7 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. 48 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. 49 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 1995 and the experience method in fiscal years 1988 to 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") is currently 8.0%. 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, 1995, 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. 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 (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, 1995, the Bank had $5.3 million of Excess and supplemental reserves. However, at June 30, 1995, the Bank has an estimated $80.6 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. 50 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, 1995, 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. For further information regarding federal income taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated Financial Statements. Item 2. Properties - - ------------------ At June 30, 1995, the Bank conducted business through 30 offices in Nebraska, 20 offices in Colorado, five offices in Kansas and sixteen offices in Oklahoma. One additional branch located in Oklahoma was subsequently added on July 17, 1995. See Item 1. Business - "Recent Developments--Acquisitions Subsequent to Fiscal Year End" for additional branches to be added pursuant to pending and proposed acquisitions. At June 30, 1995, the Bank owned the buildings for 54 of its branch offices and leased the remaining 17 offices under leases expiring (not assuming exercise of renewal options) between November 1995 and August 2031. The Bank has 86 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas and Oklahoma. At June 30, 1995, the total net book value of land, office properties and equipment owned by the Corporation was $62.7 million. Management believes that the Bank'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, 1995. 51 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 sections "Stock Prices" and "Dividends" appearing on page 35 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, 1991 through 1995 is included in the "Selected Consolidated Financial Data" section appearing on pages 14 and 15 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 1995 compared to fiscal year 1994 and fiscal year 1994 compared to fiscal year 1993 are included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section appearing on pages 16 through 35 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 36 through 76 of the Annual Report are incorporated herein by reference. ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ------------------------------------------------ None. 52 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 1995 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. 53 The executive officers of the Corporation and the Bank are as follows:
Age at Name June 30, 1995 Current Position(s) ------------- ------------------- William A. Fitzgerald 57 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank James A. Laphen 47 President, Chief Operating Officer and Chief Financial Officer of the Corporation and the Bank Gary L. Matter 50 Senior Vice President, Controller and Secretary of the Corporation and of the Bank Joy J. Narzisi 39 Treasurer of the Corporation and Senior Vice President, Treasurer and Assistant Secretary of the Bank Margaret E. Ash 42 Senior Vice President and Assistant Secretary of the Bank Jon W. Stephenson 47 Senior Vice President of the Bank Terry A. Taggart 40 Senior Vice President of the Bank Gary D. White 50 Senior Vice President of the Bank Ronald A. Aalseth 39 First Vice President of the Bank Michael C. Bruggeman 47 First Vice President of the Bank David E. Gunter, Jr. 57 First Vice President of the Bank John L. Laughlin 54 First Vice President of the Bank Roger L. Lewis 45 First Vice President and Assistant Secretary of the Bank Kevin C. Parks 40 First Vice President of the Bank Thomas N. Perkins 43 First Vice President of the Bank Dennis R. Zimmerman 44 First Vice President of the Bank
54 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. 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 and Kansas 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. 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. 55 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. John L. Laughlin, has been First Vice President of Consumer Lending since March - - ---------------- 1984. Mr. Laughlin joined the Bank in August 1980 as Director of Consumer Loans and has 35 years of experience in the consumer loan industry. Prior to 1980, he was Vice President of Omaha National Bank. 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, 1995 and 1994. Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1995, 1994 and 1993. Consolidated Statement of Operations for the Years Ended June 30, 1995, 1994 and 1993. Consolidated Statement of Cash Flows for the Years Ended June 30, 1995, 1994 and 1993. 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 Railroad Financial Corporation and Railroad Savings Bank, fsb, dated April 18, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 2.2 Reorganization and Merger Agreement by and among Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank and Conservative Savings Corporation and Conservative Savings Bank, FSB, dated August 15, 1995 (incorporated by reference to the Registrant's Form 8-K Current Report Dated August 16, 1995) 2.3 Stock Option Agreement dated August 16, 1995, between Commercial Federal Corporation and Conservative Savings Corporation (incorporated by reference to the Registrant's Form 8-K Current Report Dated August 16, 1995) 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 Agreements 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) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1995 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) (b) Reports on Form 8-K: The registrant filed a Current Report on Form 8-K dated April 25, 1995 reporting the Corporation entering into, on April 18, 1995, a Reorganization and Merger Agreement (the Agreement) by and among the registrant, the Bank, Railroad Financial Corporation (Railroad) and Railroad Savings Bank, F.S.B. Under the terms of the Agreement, the Corporation will exchange a pro-rata amount of its common stock for all of the outstanding common stock of Railroad. On September 22, 1995 the stockholders of Railroad approved a merger with the Corporation with the closing expected in October 1995. Railroad is headquartered in Wichita, Kansas and operates 18 branches and 71 agency offices throughout the state of Kansas. At June 30, 1995 Railroad had assets of $615.3 million, deposits of $421.7 million and stockholders' equity of $28.1 million. (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 1995 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, 1995 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, 1995 By: /s/ William A. Fitzgerald ------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: Date: September 27, 1995 By: /s/ James A. Laphen ------------------- James A. Laphen President, Chief Operating Officer and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: Date: September 27, 1995 By: /s/ Gary L. Matter ------------------ Gary L. Matter Senior Vice President, Controller and Secretary DIRECTORS: Date: September 27, 1995 By: /s/ Robert F. Krohn ------------------- Robert F. Krohn Director Date: September 27, 1995 By: /s/ Talton K. Anderson ---------------------- Talton K. Anderson Director 60 Date: September 27, 1995 By: /s/ Charles M. Lillis --------------------- Charles M. Lillis Director Date: September 27, 1995 By: /s/ Carl G. Mammel ------------------ Carl G. Mammel Director Date: September 27, 1995 By: /s/ Sharon G. Marvin -------------------- Sharon G. Marvin Director Date: September 27, 1995 By: /s/ Robert S. Milligan ---------------------- Robert S. Milligan Director Date: September 27, 1995 By: /s/ James P. O'Donnell ---------------------- James P. O'Donnell Director Date: September 27, 1995 By: /s/ Michael T. O'Neil --------------------- Michael T. O'Neil 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 Railroad Financial Corporation and Railroad Savings Bank, fsb, dated April 18, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 2.2 Reorganization and Merger Agreement by and among Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank and Conservative Savings Corporation and Conservative Savings Bank, FSB, dated August 15, 1995 (incorporated by reference to the Registrant's Form 8-K Current Report Dated August 16, 1995) 2.3 Stock Option Agreement dated August 16, 1995, between Commercial Federal Corporation and Conservative Savings Corporation (incorporated by reference to the Registrant's Form 8-K Current Report Dated August 16, 1995) 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 Agreements 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) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1995 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedule EX-11 2 EXHIBIT 11 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, ----------------------------------------------- 1995 1994 1993 ------------------- ------------- ----------- Income (loss) before cumulative effects of changes in accounting principles $27,534,779 $(5,644,577) $30,778,702 Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- 6,139,271 -- Postretirement benefits, net of income tax benefit -- (336,176) -- ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- 5,803,095 -- ----------- ----------- ----------- Net income $27,534,779 $ 158,518 $30,778,702 =========== =========== =========== PRIMARY: - - -------- Weighted average common shares outstanding 12,830,975 12,689,297 11,510,136 Add shares applicable to stock options and warrants using average market price 193,019 231,403 1,137,227 ----------- ----------- ----------- Total average common and common equivalent shares outstanding 13,023,994 12,920,700 12,647,363 =========== =========== =========== Income (loss) before cumulative effects of changes in accounting principles $ 2.11 $ (.44) $ 2.43 Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- .48 -- Postretirement benefits, net of income tax benefit -- (.03) -- ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- .45 -- ----------- ----------- ----------- Net income per common and common equivalent share $ 2.11 $ .01 $ 2.43 =========== =========== =========== FULLY DILUTED (1): - - ------------------ Weighted average common shares outstanding 12,830,975 12,689,297 11,510,136 Add shares applicable to stock options and warrants using the period-end market price if higher than average market price and other dilutive factors 194,634 232,669 1,171,415 ----------- ----------- ----------- Total average common and common equivalent shares outstanding assuming full dilution 13,025,609 12,921,966 12,681,551 =========== =========== =========== Income (loss) before cumulative effects of changes in accounting principles $ 2.11 $ (.44) $ 2.43 Cumulative effects of changes in accounting principles: Change in method of accounting for income taxes -- .48 -- Postretirement benefits, net of income tax benefit -- (.03) -- ----------- ----------- ----------- Total cumulative effects of changes in accounting principles -- .45 -- ----------- ----------- ----------- Net income per common share assuming full dilution $ 2.11 $ .01 $ 2.43 =========== =========== ===========
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%. EX-13 3 EXHIBIT 13 EXHIBIT 13 Shareholder and Company Objectives Are Being Met and Exceeded Commercial Federal began the 1995 fiscal year with the dual objectives of further increasing our core profitability and continuing to enhance the long- term value of our shareholders' investment in the Company. We are pleased to report that by all measures we exceeded our goals. As you read this annual report to shareholders, you will note that in achieving these goals, Commercial Federal generated record income from its core banking business. In addition, the Company has undertaken several new initiatives that bode well for our future growth and clearly demonstrate Commercial Federal's commitment to maximize shareholder value. Fiscal 1995 was a very successful year for Commercial Federal. The Company once again demonstrated that it will not be content to rest on the laurels of past accomplishments. Your Company remains focused on the goals of further increasing core profitability quarter-to-quarter and year-to-year and on taking proactive steps to maximize the value of your investment in the Company's stock. The Board of Directors and management of Commercial Federal invite you to read this fiscal 1995 report to shareholders to learn more about the Company's successes, its continuing momentum and our commitment to providing shareholders with above average returns.
Table of Contents Financial Highlights...................................... 1 Letter to Shareholders.................................... 2 Board of Directors........................................ 10 Corporate Profile......................................... 12 Financial Information..................................... 13 Investor Information...................................... 77 Executive Officers and Senior Management.................. 78 Branch Locations.......................................... 79
- - -------------------------------------------------------------------------------- Financial Information Selected Consolidated Financial Data....................................... 14 Management's Discussion and Analysis....................................... 16 Consolidated Statement of Financial Condition.............................. 36 Consolidated Statement of Stockholders' Equity............................. 37 Consolidated Statement of Operations....................................... 38 Consolidated Statement of Cash Flows....................................... 40 Notes to Consolidated Financial Statements................................. 42 Management's Report on Internal Controls................................... 75 Independent Auditors' Report............................................... 76
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Selected Consolidated Financial Data - - ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1995 1994 1993 1992 1991 - - ----------------------------------------------------------------------------------------------------------------------------- Interest income................................... $ 411,929 $ 365,474 $ 372,778 $ 412,239 $ 482,552 Interest expense.................................. 277,806 239,950 256,468 327,190 427,419 ---------- ---------- ---------- ---------- ---------- Net interest income............................... 134,123 125,524 116,310 85,049 55,133 Provision for loan losses......................... (6,033) (6,033) (5,735) (7,381) (9,137) Loan servicing fees............................... 22,535 20,426 17,070 15,010 12,738 Retail fees and charges........................... 8,971 7,992 7,199 6,949 6,396 Real estate operations............................ (662) (2,324) (5,232) (9,288) (20,150) Gain (loss) on sales of loans..................... (596) (392) (352) 1,655 930 Loss on sales of investment securities............ -- -- -- (452) (2,230) Gain on sales of mortgage-backed securities....... -- -- -- 37,188 47,496 Gain on sale of loan servicing rights............. -- -- -- 8,376 -- Other operating income............................ 7,349 6,638 4,592 9,061 7,610 General and administrative expenses and minority interest of subsidiary............ 85,852 76,458 72,725 67,427 61,971 Amortization of goodwill and core value of deposits..................... 10,211 14,084 10,508 11,352 12,465 Accelerated amortization of goodwill.............. 21,357 -- -- -- -- Intangible assets valuation adjustment............ -- 52,703 -- -- -- ---------- ---------- ---------- ---------- ---------- Income before income taxes, extraordinary items and cumulative effects of changes in accounting principles............ 48,267 8,586 50,619 67,388 24,350 Provision for income taxes........................ 20,732 14,231 19,841 25,103 15,222 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effects of changes in accounting principles............... 27,535 (5,645) 30,778 42,285 9,128 Extraordinary items (1)........................... -- -- -- (5,046) 11,699 Cumulative effects of changes in accounting principles (2)...................... -- 5,803 -- -- -- ---------- ---------- ---------- ---------- ---------- Net income........................................ $ 27,535 $ 158 $ 30,778 $ 37,239 $ 20,827 ========== ========== ========== ========== ========== Earnings per share (fully diluted): Income (loss) before extraordinary items and cumulative effects of changes in accounting principles............ $ 2.11 $ (.44) $ 2.43 $ 5.03 $ 1.19 Extraordinary items (1)........................ -- -- -- (.60) 1.52 Cumulative effects of changes in accounting principles (2)................... -- .45 -- -- -- ---------- ---------- ---------- ---------- ---------- Net income..................................... $ 2.11 $ .01 $ 2.43 $ 4.43 $ 2.71 ========== ========== ========== ========== ========== - - ----------------------------------------------------------------------------------------------------------------------------- Other data: Net interest rate spread during period......... 2.23% 2.39% 2.53% 1.98% 1.42% Net yield on interest-earning assets........... 2.42% 2.55% 2.61% 1.94% 1.11% Interest rate spread at end of period.......... 2.16% 2.30% 2.55% 2.18% 1.76% Return on average assets (3)................... .48% --% .65% .78% .38% Return on average equity (3)................... 9.60% .05% 11.97% 19.75% 14.25% Total number of branches at end of period...... 71 65 49 49 50 - - -----------------------------------------------------------------------------------------------------------------------------
14
Selected Consolidated Financial Data (continued) - - ------------------------------------------------------------------------------------------------------------------------------- For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1995 1994 1993 1992 1991 - - ------------------------------------------------------------------------------------------------------------------------------- Total assets.......................................... $5,954,308 $5,521,340 $4,871,362 $4,640,996 $5,077,940 Investment securities................................. 294,237 280,600 247,846 312,231 240,505 Mortgage-backed securities (4)........................ 1,331,783 1,305,434 892,361 764,547 975,025 Loans receivable, net (5)............................. 3,991,638 3,592,938 3,354,679 3,109,473 2,686,507 Goodwill and core value of deposits................... 33,712 67,185 87,782 98,290 109,642 Deposits.............................................. 3,591,175 3,355,597 2,391,433 2,300,641 2,249,245 Advances from Federal Home Loan Bank.................. 1,656,602 1,524,516 1,853,779 1,455,062 1,325,087 Securities sold under agreements to repurchase........ 195,755 157,432 154,862 445,479 1,101,583 Other borrowings...................................... 55,403 59,740 70,066 53,514 89,300 Stockholders' equity.................................. 309,501 279,451 278,011 236,933 165,630 Book value per common share........................... 23.97 21.86 21.95 22.02 22.98 Tangible book value per common share (6).............. 21.36 16.60 15.02 12.89 7.77 Regulatory capital ratios of the Bank: Tangible capital................................... 5.12% 4.54% 4.46% 2.85% 1.15% Core capital (Tier 1 capital)...................... 5.47% 5.45% 5.88% 4.67% 3.18% Risk-based capital (Total capital)................. 13.45% 13.13% 12.75% 8.92% 6.62% - - -------------------------------------------------------------------------------------------------------------------------------
(1) For fiscal year 1992, 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; and for fiscal year 1991, represents the utilization of net operating losses carried forward that were not previously recognized for financial reporting purposes. (2) 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. (3) Based on daily average balances during fiscal years 1995 and 1994 and on average monthly balances for fiscal years 1993, 1992 and 1991. Return on average assets and return on average stockholders' equity for fiscal year 1995 is .85% and 17.04%, 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 is .73% and 12.77%, 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 $5,803,000, respectively. (4) Includes mortgage-backed securities available for sale totaling $10.3 million, $12.2 million, $15.6 million, $20.8 million and $500.9 million, respectively, at June 30, 1995, 1994, 1993, 1992 and 1991. (5) Includes loans held for sale totaling $36.4 million, $74.3 million, $98.2 million, $39.5 million and $112.7 million, respectively, at June 30, 1995, 1994, 1993, 1992 and 1991. (6) 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. - - -------------------------------------------------------------------------------- 15 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). 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. At June 30, 1995, the Bank operated 30 branch offices in Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 16 branch offices in Oklahoma and five branches in Kansas. The Bank also conducts loan origination activities through its 71 branch office network, loan offices of its wholly-owned mortgage banking subsidiary and a nationwide correspondent network consisting of approximately 400 loan originators. The Bank also provides insurance and securities brokerage and other retail financial services. Net income for fiscal year 1995 was $27.5 million, or $2.11 per share, which compares to net income of $158,000 and $30.8 million, respectively, for fiscal years 1994 and 1993, or $.01 per share and $2.43 per share, respectively. Fiscal year 1994 net income included a charge to operations from the write-off of intangible assets totaling $52.7 million, with an income tax benefit of $8.8 million resulting in a loss of $43.9 million, and an increase to earnings from the cumulative effects of changes in accounting principles for income taxes and postretirement benefits totaling a net $5.8 million, or $.45 per share. A significant event affecting the results of operations for fiscal year 1995 was the accelerated amortization of goodwill totaling $21.4 million. This accelerated amortization of goodwill resulted from the adoption by the Corporation of an accounting change incorporating a fair value concept on the valuation of its intangible assets during fiscal year 1994. As such, an independent appraisal was performed resulting in the Corporation's intangible assets valued at $41.0 million and classified as core value of deposits for $19.6 million and goodwill for $21.4 million at June 30, 1994. Such valuation resulted in the aforementioned charge to operations of $52.7 million from the write-off of intangible assets in excess of $41.0 million. In addition to the adoption of the change in method of valuation of intangible assets, it was also determined that effective July 1, 1994, the $21.4 million of goodwill would be amortized over the first six months of fiscal year 1995 and the remaining $19.6 million of core value of deposits would be amortized over the next 34 months. The valuation did not decrease the book value of the intangible assets resulting from the Corporation's acquisitions in fiscal year 1994. An independent valuation was also performed at June 30, 1995, of the Corporation's total unamortized balance of goodwill and core value of deposits resulting in no impairment. Excluding the accelerated amortization of goodwill of $21.4 million, fiscal year 1995 earnings per share would have been $3.75 per share compared to the $2.11 per share reported, and return on average assets and return on average stockholders' equity would have been .85% and 17.04%, respectively, compared to reported results of .48% and 9.60%, respectively. The Corporation's emphasis on single-family residential lending and the promotion of retail financial services, along with the Corporation's continued growth through acquisitions, continues to have positive effects on the Corporation's core operations. Core earnings for fiscal year 1995 increased 5.9% and 30.6%, respectively, over fiscal years 1994 and 1993. 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 $79.8 million during fiscal year 1995 compared to $75.4 million and $61.1 million, respectively, during fiscal years 1994 and 1993. This increase in core earnings resulted from increases in net interest income, increases in loan servicing and retail fee income and reductions in nonperforming assets. Net interest income increased 6.9% or $8.6 million to $134.1 million during fiscal year 1995 compared to $125.5 million during fiscal year 1994. Net interest income for fiscal year 1994 increased $9.2 million compared to $116.3 million during fiscal year 1993. Loan servicing fees increased 10.3%, to $22.5 million during fiscal year 1995 compared to $20.4 million during fiscal year 1994, which increased 19.7%, from $17.1 million during fiscal year 1993. In addition, retail fees and charges increased to $9.0 million during fiscal year 1995 compared to $8.0 million and $7.2 million, respectively, during fiscal years 1994 and 1993. Nonperforming assets declined from $93.4 million and $64.0 million, respectively, at June 30, 1993 and 1994, to $58.4 million at June 30, 1995, representing reductions of 37.5% and 8.8%, respectively. These substantial improvements are reflected in the Corporation's results of operations as total provision for loan losses and real estate operations declined to $6.7 million during fiscal year 1995 compared to $8.4 million and $11.0 million during fiscal years 1994 and 1993, respectively. 16 - - -------------------------------------------------------------------------------- The efficiency ratio is 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. Such ratio has remained favorable even though operating expenses have increased, primarily from acquisitions in fiscal years 1994 and 1995, to $85.9 million during fiscal year 1995 compared to $76.5 million and $72.7 million during fiscal years 1994 and 1993, respectively. The Corporation's efficiency ratio for fiscal year 1995 was 49.6% compared to 47.6% and 50.0% for fiscal years 1994 and 1993, respectively. The increase in the efficiency ratio for fiscal year 1995 compared to fiscal year 1994 is due to loan production costs expensed, instead of being deferred, as current year loan production has declined compared to fiscal year 1994 and due to increases in general and administrative expenses primarily from the acquisitions during the last two fiscal years. During fiscal year 1995, the Corporation acquired Home Federal Savings and Loan (Home Federal) in Ada, Oklahoma and Provident Federal Savings Bank of Lincoln, Nebraska (Provident). See "Acquisitions During Fiscal Year 1995" for additional information. The Corporation will seek to continue its growth through expansion of the Corporation's operations in its market areas, consisting of Nebraska, Colorado, Oklahoma and Kansas, and may seek to enter markets in other adjoining states. The Corporation will also seek to expand its operations both through competition for market share within its market areas and through mergers with and acquisitions of other selected financial institutions. Management of the Corporation believes that its emphasis on operating acquired entities as consumer-oriented financial institutions is attractive to potential acquisition candidates and is advantageous in competing with larger banks for acquisitions of selected financial institutions. ACQUISITIONS DURING FISCAL YEAR 1995 On April 3, 1995, the Corporation consummated the acquisition of Provident by purchasing all 140,000 outstanding shares of Provident's common stock at $53.75 per share for approximately $7.5 million in cash. Provident operated a traditional thrift operation with five branches located in the Lincoln, Nebraska metropolitan area. At April 3, 1995, Provident had assets totaling $96.5 million, deposits totaling $58.1 million and stockholders' equity approximating $4.6 million. This acquisition has been accounted for as a purchase. Core value of deposits totaling $2.6 million resulting from this transaction is being amortized using an accelerated method over 10 years and goodwill totaling $713,000 is being amortized on a straight-line basis over 20 years. On July 15, 1994, the Corporation consummated the acquisition of Home Federal by purchasing all 236,212 outstanding shares of Home Federal's common stock at $38.17 per share for approximately $9.0 million in cash. Home Federal operated two branches in Ada, Oklahoma. At July 15, 1994, Home Federal had assets totaling $100.2 million, deposits totaling $87.3 million and stockholders' equity totaling $8.7 million. This acquisition has been accounted for as a purchase. Core value of deposits totaling $1.3 million resulting from this transaction is being amortized on an accelerated basis over 10 years. ACQUISITIONS SUBSEQUENT TO FISCAL YEAR END On September 22, 1995, the stockholders of Railroad Financial Corporation (Railroad) approved a merger with the Corporation with the closing expected in October 1995. Railroad is headquartered in Wichita, Kansas and operates 18 branches and 71 agency offices throughout the state of Kansas. Under the terms of the Reorganization and Merger Agreement (the Agreement), dated April 18, 1995, the Corporation will exchange a pro-rata amount of its common stock for all of the outstanding common stock of Railroad. Based on the Corporation's closing stock price on September 22, 1995, of $35.75, each share of Railroad common stock would be exchanged for .6389 shares of the Corporation's common stock, resulting in the exchange of approximately 1,361,222 shares of the Corporation's common stock with an aggregate value approximating $48.7 million. Cash will be paid in lieu of fractional shares. At June 30, 1995, Railroad had assets of $615.3 million, deposits of $421.7 million and stockholders' equity of $28.1 million. It is anticipated that this acquisition will be accounted for as a pooling of interests. Also, on August 15, 1995, the Corporation entered into a Reorganization and Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank, Conservative Savings Corporation (Conservative) and Conservative Savings Bank, FSB. Under the terms of the Merger Agreement, the Corporation will acquire all 1,846,005 outstanding shares of Conservative's common stock and all 460,000 outstanding shares of preferred stock. As defined in the Merger Agreement, Conservative's common and preferred 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 September 22, 1995, of $35.75, the transaction has a per 17 - - -------------------------------------------------------------------------------- share value of $15.37 for the common stock and $34.73 for the preferred stock with an aggregate value of approximately $44.3 million for all outstanding common and preferred stock. At June 30, 1995, Conservative had assets of $383.4 million, deposits of $198.1 million and stockholders' equity of $34.8 million. Conservative operates nine branches with seven located in Nebraska (five in Omaha, Nebraska and two in Columbus, Nebraska), one in Overland Park, Kansas and one in Harlan, Iowa. This proposed acquisition, which is subject to regulatory approvals and the approval of Conservative's shareholders, is expected to be completed by March 31, 1996, but no later than June 30, 1996, unless extended by mutual agreement of both parties. This acquisition will be accounted for as a purchase with core value of deposits resulting from this transaction amortized on an accelerated basis over a period not to exceed 10 years and goodwill, if any, amortized on a straight- line basis over a period not to exceed 20 years. REGULATORY CAPITAL At June 30, 1995, the Bank exceeded all minimum regulatory capital requirements. The following table sets forth information relating to the Bank's regulatory capital compliance at June 30, 1995.
- - -------------------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio - - -------------------------------------------------------------------------------- Tangible capital................................... $303,479 5.12% (1) Tangible capital requirement....................... 88,849 1.50 - - -------------------------------------------------------------------------------- Excess.......................................... $214,630 3.62% - - -------------------------------------------------------------------------------- Core capital (Tier 1 capital)...................... $324,909 5.47% (2) Core capital requirement........................... 178,341 3.00 - - -------------------------------------------------------------------------------- Excess.......................................... $146,568 2.47% - - -------------------------------------------------------------------------------- Risk-based capital (Total capital)................. $355,733 13.45% (3) Risk-based capital requirement..................... 211,525 8.00 - - -------------------------------------------------------------------------------- Excess.......................................... $144,208 5.45% - - --------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $5,923,283,000. (2) Based on adjusted total assets totaling $5,944,713,000. (3) Based on risk-weighted assets totaling $2,644,066,000. - - -------------------------------------------------------------------------------- Effective July 1, 1994, the Office of Thrift Supervision (OTS) amended its risk-based capital standards that included an interest rate risk component. The amendment requires thrifts with interest rate risk in excess of certain levels to maintain additional capital. Based on the Bank's interest rate risk profile and the level of interest rates at June 30, 1995, as well as the Bank's level of risk-based capital at the same date, management does not believe that these changes will have a material adverse effect on the Bank's level of required risk-based capital. 18 - - -------------------------------------------------------------------------------- The Federal Deposit Insurance Corporation Improvement Act of 1991 established five regulatory capital categories 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 the institution's regulatory capital declines. At June 30, 1995, the Bank exceeded the minimum requirements for the well-capitalized category, which is the highest regulatory capital category, as shown in the following table.
- - ---------------------------------------------------------------------------------------------- (Dollars in Thousands) Tier 1 Capital Tier 1 Capital Total Capital to Adjusted to Risk- to Risk- Total Assets Weighted Assets Weighted Assets - - ---------------------------------------------------------------------------------------------- Actual capital........................ $324,909 $324,909 $355,733 Percentage of adjusted assets......... 5.47% 12.29% 13.45% Minimum requirements to be classified well-capitalized........ 5.00% 6.00% 10.00% - - ----------------------------------------------------------------------------------------------
REGULATORY ISSUES The Bank'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. The FDIC amended the BIF risk- based assessment schedule effective September 30, 1995, which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range of 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 amendment creates a substantial disparity in the deposit insurance premiums paid by BIF and SAIF members and could place SAIF- insured savings institutions at a significant competitive disadvantage to BIF- insured institutions. Among the proposals being considered by the FDIC and Congress to eliminate this premium disparity is a similar reduction in premium rates charged to SAIF- insured institutions. Such a reduction would be accompanied by a one-time assessment of SAIF-insured institutions up to .90% 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. Under this proposal, the BIF and SAIF would be merged into one fund as soon as practicable after they both reach their designated reserve ratios, but no later than January 1, 1998. It is unknown whether this particular proposal or any other proposal will be implemented or that premiums for either BIF or SAIF members will be adjusted in the future by the FDIC or by legislative action. If a special assessment as described above were to be required, it would result, on a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of approximately $20.4 million (assuming such charge would be tax deductible). Such assessment would have the effect of reducing the Bank's tangible capital to $283.1 million, or 4.80% of adjusted total assets, core capital to $304.5 million, or 5.14% of adjusted total assets, and risk-based capital to $335.3 million, or 12.68% of risk-weighted assets. 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 annual deposit insurance premiums to the SAIF, thereby increasing net income in future periods. An additional proposal under consideration by Congress would require savings associations to convert their charters to that of commercial banks in connection with a merger of the BIF and the SAIF. Under current tax laws, a savings association converting to a commercial bank charter must recapture into taxable income the amount of its tax bad debt reserve that would not have been allowed if the savings association had operated as a commercial bank. The tax associated with the recapture of all or part of its tax bad debt reserve would immediately reduce the capital of the savings association even though such tax would actually be paid out over the succeeding years. Management of the Corporation cannot predict if any of the foregoing proposals would be adopted in their current form. 19 - - -------------------------------------------------------------------------------- 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 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 Bank has utilized certain financial instruments to hedge the interest rate exposure on certain interest-sensitive liabilities. However, it has been the general policy of the Bank to move toward a natural, rather than a synthetic, management of its interest rate risk. The Bank has allowed these financial 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 (FHLB). Such strategy has helped to reduce the Bank's one-year cumulative gap mismatch. In addition, the Bank's continued concentration of adjustable-rate assets as a percentage of total assets benefits 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 Bank has interest rate swap agreements with other counterparties under terms that provide an exchange of interest payments on the outstanding notional amount of the swap. Such agreements have been used to artificially lengthen the maturity of various interest-bearing liabilities. In accordance with these arrangements, the Bank pays fixed rates and receives variable rates of interest according to a specified index. The Bank has reduced its level of such swap agreements to a notional principal amount of $78.5 million at June 30, 1995, from balances of $109.5 million and $194.5 million, respectively, at June 30, 1994 and 1993. For fiscal years 1995, 1994 and 1993, the Bank recorded $4.3 million, $8.5 million and $12.2 million, respectively, in net interest expense from its interest rate swap agreements. During fiscal year 1996, $68.5 million of these swap agreements mature. 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, 1995. 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 12.2% to 28.1% for single-family residential loans and mortgage- backed securities, (ii) prepayment rates ranging from 8.5% to 20.0%, 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 fixed-rate commercial real estate and multi-family loans and a prepayment rate of 30.0% was utilized for consumer loans, (iv) passbook deposits and negotiable order of withdrawal ("NOW") accounts totaling $490.5 million, all of which have fixed-rates, are assumed to mature according to the decay rates as defined by 20 - - -------------------------------------------------------------------------------- regulatory guidelines, which at June 30, 1995, ranged from 14.0% to 37.0%, (v) market bonus savings and commercial money market accounts totaling $115.1 million are assumed to reprice or mature according to the decay rates as defined by regulatory guidelines, which at June 30, 1995, ranged from 31.0% to 79.0%, and (vi) money market rate deposits totaling $439.6 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 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.
- - ------------------------------------------------------------------------------------------------------------------------ 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 single-family mortgage loans (1) (2)............ $ 140,323 $ 313,580 $ 735,805 $1,329,341 $2,519,049 Other loans (2) (3).................. 940,357 1,355,099 338,518 153,535 2,787,509 Investments (4)...................... 130,511 14,651 138,178 111,107 394,447 - - ------------------------------------------------------------------------------------------------------------------------ Interest-earning assets.............. 1,211,191 1,683,330 1,212,501 1,593,983 5,701,005 - - ------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Savings deposits..................... 517,958 163,406 166,447 197,411 1,045,222 Other time deposits.................. 565,487 1,087,870 808,372 138,334 2,600,063 Borrowings (5)....................... 313,933 416,840 1,106,221 29,825 1,866,819 Impact of interest rate swap agreements................... (45,000) 35,000 10,000 -- -- - - ------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities......... 1,352,378 1,703,116 2,091,040 365,570 5,512,104 - - ------------------------------------------------------------------------------------------------------------------------ Gap position............................ (141,187) (19,786) (878,539) 1,228,413 188,901 - - ------------------------------------------------------------------------------------------------------------------------ Cumulative gap.......................... $ (141,187) $ (160,973) $(1,039,512) $ 188,901 $ 188,901 - - ------------------------------------------------------------------------------------------------------------------------ Gap as a percentage of the Bank's total assets ................. (2.38)% (.34)% (14.82)% 20.73% 3.19% Cumulative gap as a percentage of the Bank's total assets........... (2.38)% (2.72)% (17.54)% 3.19% 3.19% - - ------------------------------------------------------------------------------------------------------------------------
(1) Includes conventional single-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 is short-term cash investments of $3.1 million and Federal Home Loan Bank stock of $97.1 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 $161.0 million, or 2.72% of the Bank's total assets of $5.925 billion at June 30, 1995, contrasted to a negative $141.8 million, or 2.58% of total assets at June 30, 1994. The interest rate risk policy of the Bank authorizes a liability sensitive one-year cumulative gap not to exceed 10.0%. 21 - - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Net income for fiscal year 1995 was $27.5 million, or $2.11 per share. These results compare to net income for fiscal year 1994 of $158,000, or $.01 per share, which includes the cumulative effects of changes in accounting principles for income taxes and postretirement benefits of $5.8 million, or $.45 per share, and to net income in fiscal year 1993 of $30.8 million, or $2.43 per share. The increase in net income for fiscal year 1995 compared to fiscal year 1994 is primarily due to the following: an improvement of $52.7 million in the intangible assets valuation adjustment, an increase of $8.6 million in net interest income, a decline of $3.9 million in amortization of goodwill and core value of deposits, an increase of $2.1 million in loan servicing fees, an improvement of $1.7 million in real estate operations, an increase of $1.0 million in retail fees and charges and a net increase of $500,000 in other miscellaneous income. These increases to net income were partially offset by accelerated amortization of goodwill of $21.4 million, an increase of $9.4 million in total general and administrative expenses, an increase of $6.5 million in the provision for income taxes and a net decrease of $5.8 million from the cumulative effects of changes in accounting principles. The decrease in net income for fiscal year 1994 compared to fiscal year 1993 is primarily due to the following: the intangible assets valuation adjustment totaling $52.7 million, an increase of $3.7 million in total general and administrative expenses, an increase of $3.6 million in amortization of goodwill and core value of deposits and an increase of approximately $300,000 in the provision for loan losses. These decreases to net income were offset by an increase of $9.2 million in net interest income, a net increase of $5.8 million from the cumulative effects of changes in accounting principles, a decrease of $5.6 million in the provision for income taxes, an increase of $3.4 million in loan servicing fees, a decrease of $2.9 million in the costs and expenses involved in real estate operations, a net increase of approximately $2.0 million in other miscellaneous income and an increase of approximately $800,000 in retail fees and charges. NET INTEREST INCOME AND INTEREST RATE SPREAD Net interest income was $134.1 million for fiscal year 1995 compared to $125.5 million for fiscal year 1994, an increase of $8.6 million, or 6.9%; and compared to $116.3 million for fiscal year 1993. 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 2.16%, 2.30% and 2.55%, respectively, at June 30, 1995, 1994 and 1993, a decrease of 14 basis points comparing the interest rate spread at June 30, 1995, to the interest rate spread at June 30, 1994, and a decrease of 25 basis points comparing the spreads at June 30, 1994, to June 30, 1993. In addition, during the fiscal years 1995, 1994 and 1993, interest rate spreads were 2.23%, 2.39% and 2.53%, respectively, representing a decrease of 16 basis points comparing the interest rate spread during fiscal year 1995 to fiscal year 1994 and a decrease of 14 basis points comparing the spread during fiscal year 1994 to 1993. The net yield on interest- earning assets during fiscal years 1995, 1994 and 1993 was 2.42%, 2.55% and 2.61%, respectively, representing a decrease of 13 basis points comparing fiscal year 1995 to 1994 and a decrease of six basis points comparing fiscal year 1994 to 1993. The current interest rate environment has put pressure on the Corporation's interest rate spreads and yields and the resulting net interest income. 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 the differential between short and long-term 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 16 and 13 basis points, respectively, due to average interest-earning assets increasing $624.2 million to $5.553 billion for fiscal year 1995 compared to $4.929 billion for fiscal year 1994. 22 - - -------------------------------------------------------------------------------- This increase in average interest-earning assets is primarily due to the acquisitions during fiscal years 1995 and 1994 and to internal growth. Although the net yield on interest-earning assets decreased six basis points during fiscal year 1994 compared to fiscal year 1993, average interest- earning assets increased $477.9 million to $4.929 billion for the fiscal year ended June 30, 1994, compared to $4.451 billion for the fiscal year ended June 30, 1993, which accounted for the increase in net interest income for fiscal year 1994 compared to fiscal year 1993. 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, ------------------------------ ---------------------------- 1995 1994 1993 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------------------- Weighted average yield on: Loans.......................................... 8.05% 8.03% 8.96% 8.23% 7.80% 8.59% Mortgage-backed securities..................... 6.01 5.65 6.24 6.36 5.74 6.05 Investments.................................... 6.17 6.49 7.76 6.20 6.00 7.00 - - ------------------------------------------------------------------------------------------------------------------------- Interest-earning assets..................... 7.42 7.41 8.37 7.66 7.16 7.98 - - ------------------------------------------------------------------------------------------------------------------------- Weighted average rate paid on: Savings deposits............................... 3.27 2.16 2.10 3.11 2.76 2.05 Other time deposits............................ 5.37 5.19 6.13 5.94 5.05 5.66 Advances from FHLB............................. 5.71 5.79 6.62 5.87 5.51 6.11 Securities sold under agreements to repurchase............................... 7.61 6.15 6.91 7.04 6.08 6.05 Other borrowings............................... 11.17 10.68 10.26 10.79 10.78 10.46 - - ------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities................... 5.19 5.02 5.84 5.50 4.86 5.43 - - ------------------------------------------------------------------------------------------------------------------------- Interest rate spread.............................. 2.23% 2.39% 2.53% 2.16% 2.30% 2.55% - - ------------------------------------------------------------------------------------------------------------------------- Net yield on interest-earning assets.............. 2.42% 2.55% 2.61% 2.37% 2.46% 2.70% - - -------------------------------------------------------------------------------------------------------------------------
23 - - -------------------------------------------------------------------------------- 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 $28.5 million, $29.5 million and $36.4 million, respectively, for fiscal years 1995, 1994 and 1993 as interest-earning assets at a yield of zero percent.
- - -------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, ----------------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------------- ------------------------------- ------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans.................... $3,800,432 $306,033 8.05% $3,518,910 $282,607 8.03% $3,290,436 $294,732 8.96% Mortgage-backed securities............ 1,360,267 81,691 6.01 1,028,859 58,136 5.65 792,606 49,496 6.24 Investments.............. 392,493 24,205 6.17 381,272 24,731 6.49 368,063 28,550 7.76 - - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets................ 5,553,192 411,929 7.42 4,929,041 365,474 7.41 4,451,105 372,778 8.37 - - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits......... 992,279 32,427 3.27 755,772 16,308 2.16 638,313 13,431 2.10 Other time deposits...... 2,473,211 132,697 5.37 2,167,273 112,383 5.19 1,748,304 107,258 6.13 Advances from FHLB.................. 1,724,733 98,499 5.71 1,635,904 94,716 5.79 1,695,075 112,187 6.62 Securities sold under agreements to repurchase............ 101,924 7,758 7.61 155,897 9,592 6.15 255,101 17,632 6.91 Other borrowings......... 57,526 6,425 11.17 65,067 6,951 10.68 58,116 5,960 10.26 - - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities........... 5,349,673 277,806 5.19 4,779,913 239,950 5.02 4,394,909 256,468 5.84 - - -------------------------------------------------------------------------------------------------------------------------------- Net earnings balance........ $ 203,519 $ 149,128 $ 56,196 Net interest income......... $134,123 $125,524 $116,310 Interest rate spread........ 2.23% 2.39% 2.53% - - -------------------------------------------------------------------------------------------------------------------------------- Net yield on interest - earning assets........... 2.42% 2.55% 2.61% - - --------------------------------------------------------------------------------------------------------------------------------
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. The Corporation, and most of its competitors in its deposit markets, raised interest rates on deposits during fiscal year 1995 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 Bank's incremental growth of interest-earning assets during fiscal year 1995 yielded comparatively lower spread. The net earnings balance (the difference between average interest-bearing liabilities and average interest- earning assets) improved by $54.4 million for fiscal year 1995 compared to 1994 primarily from internal growth. In fiscal year 1994 interest rate spreads compressed as adjustable-rate interest-earning assets repriced, high-coupon loans were refinanced, and cash proceeds from non-earning asset dispositions and loan pay-offs were reinvested in assets yielding a lower rate of interest than previously. Although interest rate spreads and yields declined comparing fiscal 24 - - -------------------------------------------------------------------------------- year 1994 to fiscal year 1993 due to this reinvestment in lower yielding interest-earning assets, an increase in the difference between average interest- bearing liabilities and average interest-earning assets improved by $92.9 million. During fiscal year 1994, approximately $90.0 million of investment securities were called resulting in the recognition of approximately $271,000 in unamortized discounts, net of premiums, recorded to interest income compared to approximately $1.0 million recorded during fiscal year 1993 from approximately $157.1 million of investment securities called. Residential mortgage loan prepayments totaling approximately $272.3 million during fiscal year 1994 from the bulk purchased loans acquired in fiscal years 1992 and 1991 resulted in the recognition of $4.4 million of the net discount associated with such loans. Such recognition in fiscal year 1994 compares to $5.9 million recognized in fiscal year 1993. The interest rate spread during fiscal year 1994 was also negatively affected as the Corporation received cash of $533.4 million in October 1993 from the acquisition of the Heartland Federal Savings and Loan (Heartland) deposits but initially invested the cash in short-term interest-earning assets at yields lower than first mortgage real estate loans and paid down advances from the FHLB. 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 decline in interest spreads previously discussed.
- - --------------------------------------------------------------------------------------------------------------------- Year Ended June 30, Year Ended June 30, 1995 Compared to 1994 1994 Compared to 1993 ----------------------------------- ---------------------------------- (In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to - - --------------------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total - - --------------------------------------------------------------------------------------------------------------------- Interest income: Loans............................... $22,668 $ 758 $23,426 $19,615 $(31,740) $(12,125) Mortgage-backed securities.......... 19,711 3,844 23,555 13,690 (5,050) 8,640 Investments......................... 715 (1,241) (526) 995 (4,814) (3,819) - - --------------------------------------------------------------------------------------------------------------------- Interest income.................. 43,094 3,361 46,455 34,300 (41,604) (7,304) - - --------------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits.................... 6,096 10,023 16,119 2,527 350 2,877 Other time deposits................. 16,306 4,008 20,314 23,286 (18,161) 5,125 Advances from FHLB.................. 5,087 (1,304) 3,783 (3,809) (13,662) (17,471) Securities sold under agreements to repurchase.................... (3,788) 1,954 (1,834) (6,269) (1,771) (8,040) Other borrowings.................... (832) 306 (526) 735 256 991 - - --------------------------------------------------------------------------------------------------------------------- Interest expense................. 22,869 14,987 37,856 16,470 (32,988) (16,518) - - --------------------------------------------------------------------------------------------------------------------- Effect on net interest income.......... $20,225 $(11,626) $ 8,599 $17,830 $ (8,616) $ 9,214 - - ---------------------------------------------------------------------------------------------------------------------
The decreases in interest rates between fiscal years 1995, 1994 and 1993 account for the decreases in interest rate spreads. The improvements due to changes in volume in part reflects the increases in the difference between average interest-bearing liabilities and average interest-earning assets of $54.4 million and $92.9 million, respectively, between fiscal years 1995, 1994 and 1993. The percentage of average interest-earning assets to average interest- bearing liabilities was 103.8% during fiscal year 1995, compared to 103.1% during fiscal year 1994 and to 101.3% during fiscal year 1993. The improvements in fiscal years 1995 and 1994 are primarily due to internal growth and, in addition for fiscal year 1994, the continued reduction of nonperforming assets. 25 - - -------------------------------------------------------------------------------- NON-INTEREST INCOME AND EXPENSE PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS The Corporation recorded loan loss provisions of $6.0 million, $6.0 million and $5.7 million in fiscal years 1995, 1994 and 1993, respectively. The loan loss provisions remained stable even though the net loan portfolio increased approximately $398.7 million at June 30, 1995, compared to June 30, 1994, 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, 1995, the Corporation's conventional, FHA and VA loans, including loans held for sale, totaling approximately $3.6 billion, are secured by single-family residential properties located primarily in Nebraska (22%), Colorado (18%), Texas (6%), Georgia, Missouri and Oklahoma (5% each), and the remaining 39% in 44 other states. The commercial real estate loan portfolio at June 30, 1995, totaling $167.8 million is secured by properties located in Colorado (52%), Nebraska (18%), Florida (10%) and the remaining 20% in 12 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 losses on real estate operations of $662,000, $2.3 million and $5.2 million in fiscal years 1995, 1994 and 1993, respectively. These charges to operations reflect provisions for real estate losses, net real estate operations, and gains and losses on dispositions of real estate. Real estate loss provisions charged to operations totaled $399,000, $1.6 million and $1.2 million, respectively, for fiscal years 1995, 1994 and 1993. The improvements in real estate operations of $1.7 million over fiscal year 1994 and $4.6 million over fiscal year 1993 are primarily due to the realization of gains on sales of certain commercial properties, lower operating expenses and lower loss provisions. Management believes that such improvements in 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. 26 - - -------------------------------------------------------------------------------- Nonperforming assets are monitored closely on a regular basis by the Corporation's internal credit review and asset workout groups. Nonperforming assets decreased by $5.6 million, or 8.8%, at June 30, 1995, compared to June 30, 1994, primarily as a result of net decreases of $3.0 million in troubled debt restructurings, $1.7 million in nonperforming loans and $894,000 in real estate. Nonperforming assets at June 30 are summarized as follows:
- - ---------------------------------------------------------------------------------------------- (Dollars in Thousands) 1995 1994 1993 - - ---------------------------------------------------------------------------------------------- Nonperforming loans (1) Residential real estate........................ $28,002 $25,516 $28,990 Commercial real estate......................... 773 5,228 1,377 Consumer....................................... 442 192 120 - - ---------------------------------------------------------------------------------------------- Total....................................... 29,217 30,936 30,487 - - ---------------------------------------------------------------------------------------------- Real estate (2) Commercial..................................... 8,795 9,808 16,721 Residential.................................... 3,383 3,264 5,169 - - ---------------------------------------------------------------------------------------------- Total....................................... 12,178 13,072 21,890 - - ---------------------------------------------------------------------------------------------- Troubled debt restructurings (3) Commercial..................................... 15,708 18,445 38,828 Residential.................................... 1,294 1,580 2,164 - - ---------------------------------------------------------------------------------------------- Total....................................... 17,002 20,025 40,992 - - ---------------------------------------------------------------------------------------------- Total nonperforming assets........................ $58,397 $64,033 $93,369 - - ---------------------------------------------------------------------------------------------- Nonperforming loans to total loans................ .72% .85% .89% Nonperforming assets to total assets.............. .98% 1.16% 1.92% - - ---------------------------------------------------------------------------------------------- Allowance for loan losses: Other loans (4)................................ $31,287 $25,605 $22,835 Bulk purchased loans (5)....................... 15,280 17,321 22,271 - - ---------------------------------------------------------------------------------------------- Total....................................... $46,567 $42,926 $45,106 - - ---------------------------------------------------------------------------------------------- Allowance for loan losses to total loans.......... 1.15% 1.18% 1.32% Allowance for loan losses to total nonperforming assets........................... 79.74% 67.04% 48.31% - - ----------------------------------------------------------------------------------------------
(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, 1995, 1994 or 1993, 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 $4.2 million and $2.9 million, respectively, at June 30, 1995 and 1994. At June 30, 1993, there was no performing real estate held for investment. (3) A troubled debt restructuring is a loan on which the Bank, 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 Bank would not otherwise consider. (4) Includes $78,000 and $206,000, respectively, at June 30, 1995 and 1994, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. At June 30, 1993, there was no allowance for losses 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 Bank'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 $701.9 million, $868.0 million and $1.3 billion, respectively, at June 30, 1995, 1994 and 1993. These allowances are available only to absorb losses associated with respective bulk purchased loans, and are not available to absorb losses from other loans. 27 - - -------------------------------------------------------------------------------- The ratio of nonperforming loans to total loans was .72% at June 30, 1995, based on loan balances of $4.0 billion, compared to .85% and .89%, respectively, at June 30, 1994 and 1993, which were based on loan balances of $3.6 billion and $3.4 billion. Management believes that these ratios reflect the quality of the Bank's loan portfolio, which consists primarily of loans secured by single- family residential properties. The ratio of nonperforming assets to total assets of .98% at June 30, 1995, which management believes is favorable compared to industry standards, is one of several indicators of the continued improvement made in reducing nonperforming assets as reflected in the higher ratios at June 30, 1994 and 1993, of 1.16% and 1.92%, respectively. The total allowance for loan losses increased to $46.6 million at June 30, 1995, an improvement of $3.6 million and $1.5 million, respectively, compared to June 30, 1994 and 1993. However, the percentage of allowance for loan losses to total loans at June 30, 1995, was 1.15%, compared to the ratios of 1.18% and 1.32%, respectively, at June 30, 1994 and 1993, a decrease of three and 17 basis points due to net increases of $398.7 million and $637.0 million, respectively, in total loans over the same fiscal years. The total allowance for loan losses to total nonperforming assets of 79.74% at June 30, 1995, also indicates improved coverage for potential losses as compared to the ratios of 67.04% and 48.31%, respectively, at June 30, 1994 and 1993. The asset quality ratios have 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, 1995, decreased $1.7 million compared to June 30, 1994, primarily due to a net decrease in delinquent commercial real estate loans totaling $4.5 million partially offset by a net increase in delinquent residential real estate loans totaling $2.5 million. Nonperforming loans at June 30, 1994, increased by $449,000 compared to June 30, 1993, with such an increase primarily attributable to a net increase in nonperforming commercial real estate loans totaling $3.9 million (primarily three loans) offset by a net decrease in nonperforming residential real estate loans totaling $3.5 million. The net decrease of $894,000 in real estate at June 30, 1995, compared to June 30, 1994, is substantially attributable to the sale of real estate properties. At June 30, 1995, real estate, before allowance for losses, totaling $6.8 million and $5.8 million, respectively, was located in Colorado and Nebraska. The net decrease of $8.8 million in real estate at June 30, 1994, compared to June 30, 1993, is attributable to the decrease of $7.9 million primarily due to the sale of certain commercial real estate properties during fiscal year 1994, a net decrease of $1.9 million in residential real estate and a $1.0 million net increase primarily in the allowance for losses. Offsetting these decreases was an increase in commercial real estate resulting from the addition of four properties approximating $1.9 million. At June 30, 1994, real estate, before allowance for losses, totaling $6.9 million and $4.0 million, respectively, was located in Nebraska and Colorado. Troubled debt restructurings decreased $3.0 million at June 30, 1995, compared to June 30, 1994, primarily attributable to net decreases of $2.7 million in commercial real estate loans and $300,000 in residential real estate loans. The net decrease in commercial real estate loans is due to a reclassification of such loans totaling $5.1 million to loans receivable and loan principal repayments totaling $800,000, partially offset by additions of $3.2 million. The net decrease of $300,000 in residential real estate loans is due to loan principal repayments. The net decrease in troubled debt restructurings of $21.0 million at June 30, 1994, compared to June 30, 1993, is attributable to net decreases of $20.4 million in commercial real estate loans and $584,000 in residential real estate loans. The net decrease in commercial real estate loans is primarily due to the reclassification of 11 such loans totaling $13.1 million to loans receivable, loan principal repayments totaling $5.9 million, and transfers to nonperforming loans totaling $2.4 million. The net change in residential real estate loans is attributable to loan principal repayments. LOAN SERVICING FEES Loan servicing fees, which also includes miscellaneous loan fees for late payments and prepayment charges, and assumption and modification fees, totaled $22.5 million, $20.4 million and $17.1 million for fiscal years 1995, 1994 and 1993, 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 others totaled $18.7 million, $16.3 million and $13.9 million for fiscal years 1995, 1994 and 1993, respectively. The mortgage loan servicing portfolio totaled $4.6 billion, $4.0 billion and $3.7 billion at June 30, 1995, 1994 and 1993, 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 28 - - -------------------------------------------------------------------------------- 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. In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise capitalize the cost of rights to service loans for others that were acquired through either purchase or origination. The total cost of loans being sold should be allocated to the mortgage servicing rights and the loans based on their relative fair values. The mortgage servicing rights should be amortized in proportion to, and over the period of, estimated net servicing income and should be evaluated for impairment based on their fair value. The Corporation currently sells certain of its loan originations with servicing retained. SFAS No. 122 is effective for fiscal years beginning after December 15, 1995, or effective as of July 1, 1996, for the Corporation. The 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. Management of the Corporation is currently rewiewing the provisions of this Statement to determine its implementation date and has not as of this date determined the effect of such implementation. RETAIL FEES AND CHARGES Retail fees and charges totaled $9.0 million, $8.0 million and $7.2 million for fiscal years 1995, 1994 and 1993, 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 checks or uncollected funds, stop payment fees, overdraft protection fees and transaction fees for personal checking and automatic teller machine services. The net increase of $979,000 from fiscal year 1995 compared to fiscal year 1994 primarily results from the Corporation's expanding retail customer deposit base from the acquisitions in 1995 and 1994. Such acquisitions account for over $1.4 million of the total retail fees and charges for fiscal year 1995 compared to $768,000 for fiscal year 1994, an increase of approximately $675,000. The increase of $793,000 from fiscal year 1993 to fiscal year 1994 is primarily due to additional fees and charges generated due to a larger customer base that resulted primarily from the acquisition of Heartland deposits during fiscal year 1994. LOSS ON SALES OF LOANS During fiscal years 1995, 1994 and 1993, the Corporation sold to third parties, through its mortgage banking operations, loans totaling $405.7 million, $691.9 million and $407.4 million, respectively, resulting in net pre-tax losses of $596,000, $392,000 and $352,000, respectively. 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. OTHER OPERATING INCOME Other operating income totaled $7.3 million, $6.6 million and $4.6 million for fiscal years 1995, 1994 and 1993, respectively. The major components of other operating income are brokerage and insurance commissions. Brokerage commission income totaled $2.6 million, $2.8 million and $2.7 million, respectively, for fiscal years 1995, 1994 and 1993. Investment alternatives more attractive to consumers such as certificates of deposit with higher interest rates have contributed to lower revenues for brokerage commissions. Insurance commission income totaled $2.4 million, $2.1 million and $2.2 million, respectively, for fiscal years 1995, 1994 and 1993. Management of the Bank 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 1995 results also include credit life and disability commission income totaling $1.2 million compared to $629,000 and $319,000 in fiscal years 1994 and 1993, respectively. Fiscal year 1994 results include a pre-tax gain of $385,000 on the sale of an equity ownership interest in a minority subsidiary and gains totaling $180,000 on the sales of fixed assets. Other various miscellaneous income increased by approximately $600,000 during fiscal year 1994 compared to fiscal year 1993. Losses from leasing operations improved by $355,000 during fiscal year 1994 from the $400,000 loss in fiscal year 1993. Such 29 - - -------------------------------------------------------------------------------- improvement is the result of reversing certain reserves established for estimated losses on leasing operations which ceased during fiscal year 1993. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses totaled $85.9 million, $76.5 million and $72.7 million for fiscal years 1995, 1994 and 1993, respectively. The increase of $9.4 million in general and administrative expenses in fiscal year 1995 compared to fiscal year 1994 was due to increases in compensation and benefits of $7.1 million, occupancy and equipment of $1.3 million, regulatory insurance and assessments of $1.1 million, amortization of purchased mortgage servicing rights of $745,000 and advertising of $671,000, partially offset by a decrease of $1.5 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 purchased mortgage servicing rights increased $745,000 in fiscal year 1995 over 1994 primarily from the increase of $10.4 million in servicing rights acquired through purchases and an acquisition. The Bank paid FDIC premiums which totaled $8.6 million and $7.5 million for fiscal years 1995 and 1994, respectively. The higher levels of such costs recorded during fiscal year 1995 is primarily attributable to a $542.4 million, or 18.6%, increase in the average balance of deposits during fiscal year 1995 compared to 1994. Effective September 30, 1995, the FDIC amended the BIF risk- based assessment schedule which will lower the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range of from 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well- capitalized institutions. The amendment creates a substantial disparity in the deposit insurance premiums paid by BIF and SAIF members and could place SAIF- insured savings institutions at a significant competitive disadvantage to BIF- insured institutions. Among the proposals being considered by the FDIC and Congress to eliminate this premium disparity is a similar reduction in premium rates charged to SAIF-insured institutions. Such a reduction would be accompanied by a one-time assessment of SAIF-insured institutions up to .90% 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. It is unknown whether this particular proposal or any other proposal will be implemented or that premiums for either BIF or SAIF members will be adjusted in the future by the FDIC or by legislative action. If a special assessment as described above were to be required, it would result, on a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of approximately $20.4 million (assuming such charge would be tax deductible). 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 $3.8 million increase in general and administrative expenses in fiscal year 1994 compared to fiscal year 1993 is primarily attributable to the 1994 acquisitions which resulted in additional expenses of $3.1 million incurred during fiscal year 1994 with Heartland accounting for $3.0 million of such increase. The addition of 16 branches and retail personnel as well as the insured deposits acquired was the primary reason for increases to all categories of general and administrative expenses comparing fiscal year 1994 results to fiscal year 1993. Deferred compensation related to the fiscal year 1993 award of restricted stock from certain management incentive plans totaling $395,000 was amortized to compensation expense during fiscal year 1994. Additionally, amortization of purchased mortgage servicing rights increased $1.8 million during fiscal year 1994 over the previous fiscal year as a result of the purchase of $7.3 million in servicing rights. Offsetting these increases to fiscal year 1994 general and administrative expenses over fiscal year 1993 was a $1.0 million decrease in expenses relating to the Corporation's loan servicing portfolio and a decrease of $492,000 in data processing charges. 30 - - -------------------------------------------------------------------------------- GOODWILL AND CORE VALUE OF DEPOSITS Goodwill and core value of deposits resulted from acquisitions over the years of various savings institutions and several other non-financial companies. 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 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, with an income tax benefit of $8.8 million, resulting in a net loss of $43.9 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, and for reporting purposes separately disclosed in the Consolidated Statement of Operations. Total amortization expense for goodwill and core value of deposits for fiscal years 1995, 1994 and 1993 was $10.2 million, $14.1 million and $10.5 million, respectively. 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, completely amortized to expense over the first six months of fiscal year 1995 and separately reported. 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. See "Provision for Income Taxes" for additional information. Accordingly, amortization expense on the core value of deposits from acquisitions before fiscal year 1994 totaled $5.4 million for fiscal year 1995. The remaining balance of core value of deposits from these acquisitions before fiscal year 1994 totaled $7.4 million at June 30, 1995, and will be amortized on a straight-line basis over the remaining 22 months. Such decreases in amortization expense 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. The increase of $3.6 million in amortization expense in fiscal year 1994 compared to fiscal year 1993 was primarily due to (i) additional amortization expense of $2.5 million from the core value of deposits added from the fiscal year 1994 acquisitions and (ii) amortization expense of $1.8 million from the adoption of Statement of Financial Accounting Standards No. 109 which increased core deposit intangibles from prior business combinations by $15.6 million. PROVISION FOR INCOME TAXES For fiscal years 1995, 1994 and 1993 the provision for income taxes was $20.7 million, $14.2 million and $19.8 million, respectively. The effective tax rates for fiscal years 1995, 1994 and 1993 were 43.0%, 165.7% and 39.2%, respectively. 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. These tax credits and net operating losses were created prior to the acquisition of such companies and were not previously considered available to the Corporation. The recognition of such pre-acquisition tax credits and net operating losses also resulted in a reduction of core value of deposits totaling $6.8 million as of January 1, 1995. See "Goodwill and Core Value of Deposits" for additional information. For the three fiscal years ended June 30, 1995, 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. In addition, the effective tax rate varied from the statutory rate of 35.0% 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. 31 - - -------------------------------------------------------------------------------- CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES Included in fiscal year 1994 results of operations is the adoption of the provisions of two accounting statements resulting in the Corporation recording a net $5.8 million in net income, or $.45 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 $6.1 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 $.03 loss per share after tax. RATIOS The table below sets forth certain performance ratios of the Corporation for the periods indicated.
- - ------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, - - ------------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------------------------ Return on average assets: net income divided by average total assets (1) (2)............. .48% --% .65% Return on average equity: net income divided by average equity (1) (2)................... 9.60 .05 11.97 Equity-to-assets ratio: average stockholders' equity to average total assets (1)......... 4.97 5.75 5.44 General and administrative expenses divided by average assets (1)........................ 1.49 1.47 1.54 - - ------------------------------------------------------------------------------------------------------------------------------
(1) Based on daily average balances during fiscal years 1995 and 1994 and on average monthly balances during fiscal year 1993. (2) Return on average assets and return on average stockholders' equity for fiscal year 1995 is .85% and 17.04%, 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 is .73% and 12.77% respectively, excluding the after-tax effect of the intangible assets valuation adjustment and the cumulative effects of changes in accounting principles totaling $43.9 million and $5.8 million, respectively. - - -------------------------------------------------------------------------------- The increase in the operating ratio for general and administrative expenses for fiscal year 1995 compared to fiscal year 1994 is attributable to an increase of $9.4 million in such expenses offset significantly by an increase of approximately $550.0 million in the average total assets from fiscal year 1994. The decrease in the operating ratio for general and administrative expenses for fiscal year 1994 compared to fiscal year 1993 is due to a substantial increase in the Corporation's average total assets over the same time span (primarily from the Heartland acquisition) partially offset by an increase of $3.7 million in general and administrative expenses which was also primarily attributable to the Heartland acquisition. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS During fiscal year 1995, the Corporation adopted the provisions of four accounting pronouncements: "Accounting by Creditors for Impairment of a Loan," which was subsequently amended by "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," "Accounting for Certain Investments in Debt and Equity Securities" and "Disclosures on Derivative Financial Instruments and Fair Value of Financial Instruments." See Note 1 to the Consolidated Financial Statements for a discussion of the implementation of the provisions of these new accounting pronouncements, none of which had a material effect on the Corporation's financial position or 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 32 - - -------------------------------------------------------------------------------- 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, 1995, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $81.3 million in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law would require approval by the OTS of such proposed dividends and, in some cases, would prohibit the payment of dividends. At June 30, 1995, the cash of Commercial Federal Corporation (the parent company) totaled $10.5 million of which $3.5 million is required to be retained under the terms of the Indenture governing the subordinated notes due December 1999. Due to the parent company's limited independent operations, management believes that the cash balance at June 30, 1995, is currently sufficient to meet operational needs. However, the parent company's ability to make future interest and principal payments on the subordinated notes is dependent upon its receipt of dividends from the Bank. Accordingly, during fiscal years 1995 and 1994, the parent company received dividends and cash proceeds totaling $4.4 million and $5.5 million, respectively, all of which were from the Bank except for $460,000 received from another wholly-owned subsidiary on its sale proceeds of an equity ownership interest during fiscal year 1994. These dividends from the Bank were made primarily to cover the semi-annual interest payments on the parent company's subordinated debt. The parent company also receives cash from the exercise of stock options and the sale of stock under its employee benefit plans which totaled $1.3 million and $887,000, respectively, during fiscal years 1995 and 1994. In June 1994, the parent company contributed $5.0 million to the capital of the Bank to strengthen further the Bank's regulatory capital ratios so that the Bank would be better positioned to pursue its strategy of growth through expansion of existing operations and through mergers and acquisitions of other financial institutions. 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 and (iv) cash generated from operations. As reflected in the Consolidated Statement of Cash Flows, net cash flows provided by operating activities for fiscal years 1995 and 1994 totaled $54.9 million and $72.2 million, respectively, while net cash flows used by operating activities totaled $271.8 million for fiscal year 1993. 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 $46.0 million for fiscal year 1995 is considerably lower than the $164.0 million and $127.1 million, respectively, for fiscal years 1994 and 1993 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 used by investing activities totaled $269.9 million for fiscal year 1995 and net cash flows provided by investing activities totaled $111.7 million and $12.9 million, respectively, for fiscal years 1994 and 1993. 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. During fiscal year 1995 the Corporation acquired the assets and liabilities of Home Federal and Provident for which it paid cash totaling $16.5 million. In addition, the large amount of cash flows provided by investing activities during fiscal year 1994 is primarily from the acquisition of deposits of two institutions for which the Corporation received cash totaling $784.5 million. The acquisition of Railroad will have no material effect on liquidity since such transaction will be consummated as an exchange of common stock between companies. The proposed acquisition of Conservative, however, will result in cash paid totaling approximately $18.3 million for Conservative's common and preferred stock. Net cash flows provided by financing activities totaled $223.1 million and $253.7 million, respectively, for fiscal years 1995 and 1993 and net cash used by financing activities totaled $196.2 million for fiscal year 1994. 33 - - -------------------------------------------------------------------------------- Advances from the FHLB and retail deposits have been the primary sources to balance the Bank's funding needs during each of the fiscal years presented. In addition, during fiscal year 1995 the Corporation utilized securities sold under agreements to repurchase primarily for liquidity and asset liability management purposes. Decreases in securities sold under agreements to repurchase experienced for fiscal year 1993 were, at that time, in accordance with the Corporation's intent to reduce its reliance on these borrowings. The net increase of $91.4 million in deposits for fiscal year 1995 was lower compared to the net increase of $140.5 million for fiscal year 1994 primarily due to the change in the interest rate environment which has increased competition for retail deposits. Deposits increased during fiscal year 1994 over fiscal year 1993 due to increased market expansion. In addition, during fiscal year 1993, $78.7 million in net proceeds were received from the Corporation's sale of 4,025,000 shares of common stock, the issuance of $40.25 million of subordinated debt and the exercise of warrants for 1,250,000 shares of the Corporation's common stock. The Corporation has considered and will continue to consider possible mergers with and acquisitions of other selected financial institutions. During fiscal year 1995 the Corporation consummated the acquisitions of Home Federal and Provident, and entered into a merger agreement with Railroad. In addition, on August 15, 1995, the Corporation entered into a merger agreement with Conservative. See Notes 2 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 Oklahoma, 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 prepay advances from the FHLB and to originate and purchase primarily single-family residential loans. The Corporation will seek to continue its growth through expansion of the Corporation's operations in its market areas and may seek to enter markets in other adjoining states. The Corporation will also seek to expand its operations both through competition for market share within its market areas and through mergers with and acquisitions of other selected financial institutions. Management of the Corporation believes that its emphasis on operating acquired entities as consumer-oriented financial institutions is attractive to potential acquisition candidates and is advantageous in competing with larger banks for acquisitions of selected financial institutions. At June 30, 1995, the Corporation had issued commitments of $103.8 million to fund and purchase loans and to purchase investment and mortgage-backed securities as follows: $31.4 million of single-family adjustable-rate mortgage loans, $31.0 million of single-family fixed-rate mortgage loans, $5.1 million of commercial real estate loans, $15.0 million of investment securities, $4.8 million of adjustable-rate mortgage-backed securities and $16.5 million of consumer loan lines of credit. In addition, at June 30, 1995, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $521,000. 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 average liquidity ratio increased to 8.52% at June 30, 1995, from 7.64% at June 30, 1994, resulting primarily from an increase of $50.3 million over last fiscal year in the level of total liquid assets. 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. 34 - - -------------------------------------------------------------------------------- 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 The Corporation's common stock is currently 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 common stock of the Corporation for the periods indicated on the Nasdaq Stock Market.
- - -------------------------------------------------------------------------------------------------------------------- 1995 1994 - - ---------------------------------------------------------------------- ------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - - -------------------------------------------------------------------------------------------------------------------- Common stock prices: High................. $31 1/4 $24 7/8 $24 13/16 $27 7/8 $25 3/4 $21 5/8 $26 3/4 $27 3/4 Low.................. 24 5/8 20 3/8 18 7/8 23 3/4 17 7/8 17 7/8 19 1/4 24 1/8 - - --------------------------------------------------------------------------------------------------------------------
As of June 30, 1995, there were 12,909,849 shares of common stock issued and outstanding which were held by more than 1,800 shareholders of record, and 288,653 shares subject to outstanding options. The shareholders of record number does not reflect the persons or entities who hold their stock in nominee or "street" name. DIVIDENDS The Corporation has not paid a cash dividend on its common stock through June 30, 1995. The payment of dividends on the common stock would be subject to determination and declaration by the Board of Directors of the Corporation and the availability of funds. At the present time, the only significant independent sources of funds available for the payment of dividends by the Corporation are dividends paid by the Bank and the Corporation's unrestricted cash which totaled $7.0 million at June 30, 1995. Future payment of dividends by the Corporation will depend on the Corporation's consolidated earnings, financial condition, liquidity, capital and other factors, including economic conditions and any regulatory restrictions. 35
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) June 30, ASSETS 1995 1994 - - ----------------------------------------------------------------------------------------------------------------------------- Cash (including short-term investments of $3,100 and $500).................................. $ 29,330 $ 21,208 Mortgage-backed securities available for sale, at fair value................................ 10,322 12,171 Loans held for sale......................................................................... 36,382 74,321 Investment securities held to maturity (fair value of $291,651 and $273,601)................ 294,237 280,600 Mortgage-backed securities held to maturity (fair value of $1,312,958 and $1,240,299)....... 1,321,461 1,293,263 Loans receivable, net of allowances of $46,489 and $42,720.................................. 3,955,256 3,518,617 Federal Home Loan Bank stock................................................................ 97,110 90,913 Interest receivable, net of reserves of $197 and $406....................................... 38,761 34,621 Real estate................................................................................. 16,385 16,011 Premises and equipment...................................................................... 62,716 54,534 Prepaid expenses and other assets........................................................... 58,636 57,896 Goodwill and core value of deposits, net of accumulated amortization of $135,683 and $104,115................................. 33,712 67,185 - - ----------------------------------------------------------------------------------------------------------------------------- Total Assets.......................................................................... $5,954,308 $5,521,340 - - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - - ----------------------------------------------------------------------------------------------------------------------------- Liabilities: Deposits................................................................................. $3,591,175 $3,355,597 Advances from Federal Home Loan Bank..................................................... 1,656,602 1,524,516 Securities sold under agreements to repurchase........................................... 195,755 157,432 Other borrowings......................................................................... 55,403 59,740 Interest payable......................................................................... 22,703 26,076 Other liabilities........................................................................ 123,169 118,528 - - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities..................................................................... 5,644,807 5,241,889 - - ----------------------------------------------------------------------------------------------------------------------------- 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; 12,909,849 and 12,783,684 shares issued and outstanding............................... 129 128 Additional paid-in capital............................................................... 139,728 137,293 Unrealized holding gain on securities available for sale, net............................ 79 -- Retained earnings, substantially restricted.............................................. 169,565 142,030 - - ----------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity............................................................ 309,501 279,451 - - ----------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity............................................ $5,954,308 $5,521,340 - - -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 36
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity - - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Net Unrealized Unrealized Holding Gain Retained Depreciation Additional on Securities Earnings on Marketable Common Common Paid-in Available (Substantially Equity Stock Stock Capital for Sale, Net Restricted) Securities Subscribed Total - - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1992.................... $ 73 $ 94,019 $-- $111,094 $(390) $ 32,137 $236,933 Issuance of 3,500,000 shares of common stock subscribed.................... 35 32,102 -- -- -- (32,137) -- Issuance of 525,000 shares of common stock under over-allotment option............... 5 4,816 -- -- -- -- 4,821 Issuance of 132,233 shares under certain compensation and employee plans.................. 1 1,001 -- -- -- -- 1,002 Issuance of 1,250,000 shares on exercise of warrants............. 12 2,834 -- -- -- -- 2,846 Restricted stock and deferred compensation plans, net............. 1 1,240 -- -- -- -- 1,241 Net change in value of marketable equity securities........ -- -- -- -- 390 -- 390 Net income............................. -- -- -- 30,778 -- -- 30,778 - - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1993.................... 127 136,012 -- 141,872 -- -- 278,011 Issuance of 59,244 shares under certain compensation and employee plans.................. 1 886 -- -- -- -- 887 Restricted stock and deferred compensation plans, net............. -- 395 -- -- -- -- 395 Net income............................. -- -- -- 158 -- -- 158 - - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994.................... 128 137,293 -- 142,030 -- -- 279,451 Issuance of 102,733 shares under certain compensation and employee plans.................. 1 1,262 -- -- -- -- 1,263 Restricted stock and deferred compensation plans, net............. -- 1,173 -- -- -- -- 1,173 Unrealized holding gain on securities available for sale, net....................... -- -- 79 -- -- -- 79 Net income............................. -- -- -- 27,535 -- -- 27,535 - - --------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995.................... $129 $139,728 $79 $169,565 $ -- $ -- $309,501 - - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 37
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Operations - - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1995 1994 1993 - - ----------------------------------------------------------------------------------------------------------------------------- Interest Income: Loans receivable........................................................... $306,033 $282,607 $294,732 Mortgage-backed securities................................................. 81,691 58,136 49,496 Investment securities...................................................... 24,205 24,731 28,550 - - ----------------------------------------------------------------------------------------------------------------------------- Total interest income................................................... 411,929 365,474 372,778 Interest Expense: Deposits................................................................... 165,124 128,691 120,689 Advances from Federal Home Loan Bank....................................... 98,499 94,716 112,187 Securities sold under agreements to repurchase............................. 7,758 9,592 17,632 Other borrowings........................................................... 6,425 6,951 5,960 - - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense.................................................. 277,806 239,950 256,468 Net Interest Income........................................................... 134,123 125,524 116,310 Provision for Loan Losses..................................................... (6,033) (6,033) (5,735) - - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses........................... 128,090 119,491 110,575 Other Income (Loss): Loan servicing fees........................................................ 22,535 20,426 17,070 Retail fees and charges.................................................... 8,971 7,992 7,199 Real estate operations..................................................... (662) (2,324) (5,232) Loss on sales of loans..................................................... (596) (392) (352) Other operating income..................................................... 7,349 6,638 4,592 - - ----------------------------------------------------------------------------------------------------------------------------- Total other income...................................................... 37,597 32,340 23,277 Other Expense: General and administrative expenses- Compensation and benefits............................................... 34,421 27,341 26,001 Occupancy and equipment................................................. 18,593 17,254 16,763 Regulatory insurance and assessments.................................... 8,572 7,463 6,356 Advertising............................................................. 4,174 3,504 2,743 Amortization of purchased mortgage loan servicing rights................ 8,293 7,548 5,768 Other operating expenses................................................ 11,799 13,348 15,094 - - ----------------------------------------------------------------------------------------------------------------------------- Total general and administrative expenses............................ 85,852 76,458 72,725 Amortization of goodwill and core value of deposits........................ 10,211 14,084 10,508 Accelerated amortization of goodwill....................................... 21,357 -- -- Intangible assets valuation adjustment..................................... -- 52,703 -- - - ----------------------------------------------------------------------------------------------------------------------------- Total other expense.................................................. 117,420 143,245 83,233 Income Before Income Taxes and Cumulative Effects of Changes in Accounting Principles........................................... 48,267 8,586 50,619 Provision for Income Taxes.................................................... 20,732 14,231 19,841 - - ----------------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Cumulative Effects of Changes in Accounting Principles... 27,535 (5,645) 30,778 Cumulative Effects of Changes in Accounting Principles: Change in method of accounting for income taxes............................ -- 6,139 -- Postretirement benefits, net of income tax benefit of $183................. -- (336) -- - - ----------------------------------------------------------------------------------------------------------------------------- Total cumulative effects of changes in accounting principles......... -- 5,803 -- - - ----------------------------------------------------------------------------------------------------------------------------- Net Income.................................................................... $ 27,535 $ 158 $ 30,778 - - -----------------------------------------------------------------------------------------------------------------------------
38
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Operations (continued) - - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1995 1994 1993 - - ----------------------------------------------------------------------------------------------------------------------------- Earnings Per Common Share: - - ----------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effects of changes in accounting principles................................ $2.11 $(.44) $2.43 Cumulative effects of changes in accounting principles................ -- .45 -- - - ----------------------------------------------------------------------------------------------------------------------------- Net income............................................................ $2.11 $ .01 $2.43 - - -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 39
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows - - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year Ended June 30, 1995 1994 1993 - - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 27,535 $ 158 $ 30,778 Adjustments to reconcile net income to net cash provided (used) by operating activities: Accelerated amortization of goodwill.................................... 21,357 -- -- Amortization of goodwill and core value of deposits..................... 10,211 14,084 10,508 Intangible assets valuation adjustment.................................. -- 52,703 -- Cumulative effects of changes in accounting principles.................. -- (5,620) -- Provisions for loss on loans and real estate............................ 6,432 7,647 6,901 Depreciation and amortization........................................... 4,970 4,265 4,143 Accretion of deferred discounts and fees................................ (3,009) (10,846) (10,532) Amortization of purchased mortgage loan servicing rights................ 8,293 7,548 5,768 Amortization of deferred compensation on restricted stock and premiums........................................ 1,340 948 1,740 Deferred tax provision.................................................. 13,630 5,100 11,590 (Gain) loss on sale of real estate, net................................. (899) (1,781) 3,751 Loss on sales of loans, net............................................. 596 392 352 Proceeds from the sale of loans......................................... 405,091 691,543 407,069 Origination of loans for resale......................................... (45,974) (163,960) (127,074) Purchase of loans for resale............................................ (378,496) (503,296) (595,142) (Increase) decrease in interest receivable.............................. (2,739) (887) 4,866 Decrease in interest payable............................................ (3,677) (11,854) (10,074) (Decrease) increase in other liabilities................................ (7,563) 3,632 (27,326) Other items, net........................................................ (2,167) (17,533) 10,842 --------- ----------- --------- Total adjustments.................................................... 27,396 72,085 (302,618) --------- ----------- --------- Net cash provided (used) by operating activities.................. 54,931 72,243 (271,840) - - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal repayments of loans and mortgage-backed securities.................. 719,471 1,196,830 1,049,822 Purchases of loans............................................................ (686,438) (1,112,111) (369,207) Origination of loans.......................................................... (312,696) (541,134) (612,408) Proceeds from sale of mortgage-backed securities available for sale........... 34,756 12,672 -- Purchases of investment securities............................................ (25,000) (149,637) (109,101) Maturities and repayments of investment securities............................ 23,426 117,185 169,060 Purchases of mortgage-backed securities....................................... (11,504) (205,222) (121,584) Proceeds from sale of investment securities available for sale................ 14,797 -- -- Acquisitions, net of cash (paid) received..................................... (11,906) 785,540 -- Purchases of premises and equipment, net...................................... (10,542) (3,659) (2,178) Purchases of mortgage loan servicing rights................................... (9,386) (7,270) (20,873) Proceeds from sale of real estate............................................. 9,017 18,016 25,373 Purchases of Federal Home Loan Bank stock..................................... (2,600) (8,078) (8,414) Payments to acquire real estate............................................... (1,310) (1,461) -- Proceeds from sale of Federal Home Loan Bank stock............................ -- 10,000 3,000 Other items, net.............................................................. -- -- 9,444 --------- ----------- --------- Net cash (used) provided by investing activities.................. (269,915) 111,671 12,934 - - -----------------------------------------------------------------------------------------------------------------------------
40
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows (continued) - - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Year Ended June 30, 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deposits............................................................. $ 91,380 $ 140,528 $ 90,792 Proceeds from Federal Home Loan Bank advances.................................... 512,720 799,350 1,154,032 Repayment of Federal Home Loan Bank advances..................................... (415,878) (1,128,966) (756,602) Proceeds from securities sold under agreements to repurchase..................... 195,755 2,570 143,864 Repayment of securities sold under agreements to repurchase...................... (157,432) -- (434,481) Proceeds from issuance of other borrowings....................................... -- -- 38,841 Repayment of other borrowings.................................................... (4,702) (10,579) (23,193) Issuance of common stock......................................................... 1,263 887 40,806 Other items, net................................................................. -- -- (346) --------- ----------- ---------- Net cash provided (used) by financing activities........................ 223,106 (196,210) 253,713 - - --------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS: Increase (decrease) in net cash position......................................... 8,122 (12,296) (5,193) Balance, beginning of year....................................................... 21,208 33,504 38,697 --------- ----------- ---------- Balance, end of year............................................................. $ 29,330 $ 21,208 $ 33,504 - - --------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest expense.............................................................. $ 281,152 $ 243,583 $ 265,322 Income taxes, net............................................................. 2,983 10,731 3,937 Non-cash investing and financing activities: Loans exchanged for mortgage-backed securities................................ 137,936 468,564 222,457 Loans transferred to real estate.............................................. 7,853 7,550 16,620 Loans to facilitate the sale of real estate................................... 583 12,818 14,967 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. 41 Commercial Federal Corporation and Subsidiaries 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 1995 have been reclassified for comparative purposes. 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. CHANGE IN METHOD OF ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES - As of July 1, 1994, the Corporation implemented the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are classified in 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. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting method. Accordingly, as permitted by SFAS No. 115, the Corporation classified its investment and mortgage-backed securities as of July 1, 1994, to held to maturity securities and available for sale securities as applicable. The Corporation did not hold any trading securities at June 30, 1995. 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. INVESTMENT SECURITIES HELD TO MATURITY - Premiums and discounts are amortized over the contractual lives of the related securities on the level yield method. Unrealized losses on investment securities held to maturity, if any, reflecting a decline in the fair value of such securities to be other than temporary, would be charged against income. MORTGAGE-BACKED SECURITIES HELD TO MATURITY - Mortgage-backed securities are designated as held to maturity because the Corporation has the positive intent and ability to hold the securities to maturity. Mortgage-backed securities represent participating interests in pools of single-family residential first mortgage loans. Collateralized mortgage obligations are debt securities that are secured by mortgage loans or other mortgage-backed securities. A portion of the mortgage-backed securities portfolio also consists of pools of mortgage loans originated by the Corporation and exchanged for mortgage-backed securities ("securitized loans"). These mortgage-backed securities are carried at the Corporation's net investment in the underlying pool of mortgage loans at the time of the exchange. Mortgage-backed securities held to maturity are recorded at cost adjusted for amortization of premium and accretion of discount. Such discounts and premiums are accreted and amortized into interest income using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. 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. 42 - - -------------------------------------------------------------------------------- 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 to operations. 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 being serviced for others at June 30, 1995, 1994 and 1993, was $4,605,900,000, $4,042,300,000 and $3,647,400,000, respectively. The servicing portfolio is subject to reduction by reason of normal amortization and prepayment or liquidation of outstanding mortgage loans. Fees earned for servicing loans are reported as income when the related mortgage loan payments are collected. Loan servicing costs are charged to expense as incurred. 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 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 Federal Housing Authority (FHA) insurance or Veteran's Administration (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. 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 stated at the lower of cost or fair value minus estimated costs to sell. 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. PROVISIONS FOR LOSSES - As of July 1, 1994, the Corporation implemented the provisions of Statement of Financial Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan," which has been amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -Income Recognition and Disclosures." SFAS No. 114 addresses the accounting by creditors for impairment of loans and applies to all loans, except large groups of smaller balance homogeneous loans (such as residential real estate and consumer loans) that are collectively evaluated for impairment, loans that are measured at fair value or the lower of cost or fair value, leases and debt securities. SFAS No. 114 requires that impaired loans within its scope be 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. The adoption of the provisions of these statements had no material effect on the Corporation's financial position or results of operations. In addition to providing valuation allowances on specific assets where an impairment has been identified, the Corporation establishes general valuation allowances 43 - - -------------------------------------------------------------------------------- for losses based upon the overall portfolio composition and prior loss experience. Provisions for loan losses are recognized in current operations and are added to the balance of allowances for losses. Recoveries are credited to the allowance. Provisions for losses include charges to reduce the recorded balances of real estate to their estimated net realizable value or fair value, as applicable. Provisions for losses are incurred when the carrying value of real estate acquired through foreclosure and in judgment exceeds its fair value minus estimated costs to sell, and when the net realizable value for real estate held for investment is lower than the cost of such real estate. Specific losses on real estate are provided when any permanent decline in value occurs. These specific losses are based on independent third party appraisals, sales contract values, and individual assets and their related cash flow forecasts. Therefore, the value used to determine the provision for losses is subject to the reasonableness of these estimates. ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation periodically purchases single-family residential seasoned 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 and 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. The adjusted discount is amortized over the remaining life of the mortgage loans, adjusted for actual prepayments. 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 are performed annually. Core value of deposits resulting from acquisitions in fiscal years 1994 and 1995 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. PURCHASED MORTGAGE LOAN SERVICING RIGHTS - Purchased mortgage loan servicing rights represent the cost of acquiring the right to service mortgage loans. Such costs are capitalized and amortized in proportion to, and over the period of, estimated net loan servicing income. Subsequent to acquisition, servicing rights are valued at the lower of amortized cost or the present value of estimated future net servicing revenue, discounted at a rate implicit at the date of acquisition. Purchased mortgage loan servicing rights are periodically evaluated in relation to the present value of estimated future net servicing revenues and such carrying values are adjusted for indicated impairments based on management's best estimate of remaining cash flows. Such estimates may vary from actual cash flows due to prepayments of the underlying mortgage loans and increases in servicing costs. 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. 44 - - -------------------------------------------------------------------------------- To mitigate this risk, interest rate swaps, interest rate caps and put options on Eurodollar future contracts have historically been utilized to hedge the interest rate exposure on certain interest-sensitive liabilities. It has been the general direction of the Bank to move toward a natural, 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. Effective June 30, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 119 (SFAS No. 119), "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments," which requires disclosures about amounts, nature and terms of derivative financial instruments (such as futures; forward, swap and option contracts; and other financial instruments with similar characteristics). Because this statement requires only disclosures about derivative financial instruments and does not require adjustments to any such instruments, the provisions of SFAS No. 119 do not affect the Corporation's financial position or results of operations. 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 Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." 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 $6,139,000 ($.48 per share) recorded as a cumulative effect of a change in accounting principle resulting from increasing the net deferred tax liability by $9,056,000 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. Acquisitions: PROVIDENT FEDERAL SAVINGS BANK - On April 3, 1995, the Corporation consummated the acquisition of Provident Federal Savings Bank of Lincoln, Nebraska (Provident) by purchasing all 140,000 outstanding shares of Provident's common stock at $53.75 per share for $7,525,000 in cash. Provident operated a traditional thrift operation with five branches located in the Lincoln metropolitan area. At April 3, 1995, Provident had assets totaling approximately $96,500,000, deposits totaling approximately $58,100,000 and stockholders' equity approximating $4,600,000. This acquisition has been accounted for as a purchase. Core value of deposits totaling $2,591,000 and goodwill totaling $713,000 were recorded from this transaction. HOME FEDERAL SAVINGS AND LOAN - On July 15, 1994, the Corporation consummated the acquisition of Home Federal Savings and Loan (Home Federal) by purchasing all 236,212 outstanding shares of Home Federal's common stock at $38.17 per share for approximately $9,016,000 in cash. Home Federal operated two branches in Ada, Oklahoma. At July 15, 1994, Home Federal had assets totaling $100,200,000, deposits totaling $87,300,000 and stockholders' equity totaling $8,700,000. This acquisition has been accounted for as a purchase. Core value of deposits totaling $1,331,000 was recorded. 45 - - -------------------------------------------------------------------------------- FRANKLIN FEDERAL SAVINGS ASSOCIATION - On June 10, 1994, the Corporation acquired $255,735,000 of insured deposits of the former Franklin Federal Savings Association of Kansas (Franklin Federal) from the Resolution Trust Corporation at a cost of $7,674,000. In fiscal year 1995 the Corporation also acquired four branches and the related equipment of Franklin Federal at a cost of $876,000. This acquisition has been accounted for as a purchase. Core value of deposits totaling $8,049,000 and goodwill totaling $451,000 were recorded from this transaction. Core value of deposits resulting from these acquisitions is amortized on an accelerated basis over 10 years and goodwill is amortized on a straight-line basis over 20 years. Note 3. Investment Securities Held to Maturity: Investment securities held to maturity are summarized as follows: - - ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1995 Cost Gains Losses Value - - ----------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other Government agency obligations...... $294,187 $1,078 $(3,664) $291,601 Other securities........................................... 50 -- -- 50 - - ----------------------------------------------------------------------------------------------------------------------------- $294,237 $1,078 $(3,664) $291,651 - - ----------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate............................. 6.27% - - ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1994 Cost Gains Losses Value - - ----------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and other Government agency obligations...... $280,550 $2,178 $(9,177) $273,551 Other securities........................................... 50 -- -- 50 - - ----------------------------------------------------------------------------------------------------------------------------- $280,600 $2,178 $(9,177) $273,601 - - ----------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate............................. 6.16% - - -----------------------------------------------------------------------------------------------------------------------------
At June 30, 1995 and 1994, investment securities totaling $659,000 and $4,999,000, respectively, were pledged to secure public funds. The amortized cost and fair value of investment securities by contractual maturity at June 30, 1995, 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. - - -------------------------------------------------------------------------------- 1995 ---------------------- Amortized Fair Cost Value - - -------------------------------------------------------------------------------- Due in one year or less................................ $ 44,953 $ 44,976 Due after one year through five years.................. 228,294 226,156 Due after five years through ten years................. 20,990 20,519 Due after ten years.................................... -- -- - - -------------------------------------------------------------------------------- $294,237 $291,651 - - --------------------------------------------------------------------------------
46 - - -------------------------------------------------------------------------------- During the fiscal years ended June 30, 1995 and 1994, there were no sales of investment securities held to maturity. During fiscal year 1995 the Corporation acquired investment securities totaling approximately $14,797,000 as part of the acquisition of Home Federal and Provident. These securities were sold shortly after acquisition at their fair market values resulting in no gain or loss. Proceeds from the sales of marketable equity securities totaled $4,705,000 for the fiscal year ended June 30, 1993, with gross (and net) realized losses totaling $295,000 which is included in other operating income. Note 4. Mortgage-Backed Securities Available For Sale: Mortgage-backed securities available for sale at fair value are summarized as follows: - - --------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1995 Cost Gains Losses Value - - --------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation.......... $ 9,829 $119 $ -- $ 9,948 Federal National Mortgage Association........... 370 4 -- 374 - - --------------------------------------------------------------------------------------------------------- $10,199 $123 $ -- $10,322 - - --------------------------------------------------------------------------------------------------------- Weighted average interest rate.................. 6.26% - - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1994 Cost Gains Losses Value - - --------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corporation.......... $11,930 $ 5 $181 $11,754 Federal National Mortgage Association........... 419 1 3 417 - - --------------------------------------------------------------------------------------------------------- $12,349 $ 6 $184 $12,171 - - --------------------------------------------------------------------------------------------------------- Weighted average interest rate.................. 5.81% - - ---------------------------------------------------------------------------------------------------------
As of June 30, 1995, the Corporation recorded an unrealized gain on securities available for sale as an increase to stockholders' equity totaling $123,000, net of a deferred income tax benefit of approximately $44,000. Proceeds from the sale of mortgage-backed securities available for sale totaled $34,756,000 and $12,672,000, respectively, for the fiscal years ended June 30, 1995 and 1994, resulting in no gain or loss. During fiscal year 1995 the Corporation acquired mortgage-backed securities as part of the acquisition of Home Federal and Provident which were sold shortly after acquisition at their fair market values resulting in no gain or loss. Sales during fiscal year 1994 were through the Corporation's mortgage banking operations resulting from originated residential loans that were subsequently securitized. There were no mortgage-backed securities sold during the fiscal year ended June 30, 1993. At June 30, 1995, no mortgage-backed securities available for sale were pledged as collateral, and at June 30, 1994, mortgage-backed securities totaling $10,482,000 were pledged to secure public funds and securities sold under agreements to repurchase. 47
- - ----------------------------------------------------------------------------------------------------------------------------- Note 5. Mortgage-Backed Securities Held to Maturity: Mortgage-backed securities held to maturity are summarized as follows: - - ----------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1995 Cost Gains Losses Value - - ------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation.................... $ 187,492 $1,448 $ (2,436) $ 186,504 Government National Mortgage Association.................. 778,855 2,045 (10,971) 769,929 Federal National Mortgage Association..................... 269,246 3,715 (2,633) 270,328 Collateralized Mortgage Obligations....................... 54,354 29 (1,299) 53,084 Privately Issued Mortgage Pool Securities................. 31,514 1,781 (182) 33,113 - - ------------------------------------------------------------------------------------------------------------------------------ $1,321,461 $9,018 $(17,521) $1,312,958 - - ------------------------------------------------------------------------------------------------------------------------------ Weighted average interest rate............................ 6.36% - - ------------------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair June 30, 1994 Cost Gains Losses Value - - ------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation.................... $ 214,848 $1,920 $ (6,197) $ 210,571 Government National Mortgage Association.................. 678,927 2 (40,106) 638,823 Federal National Mortgage Association..................... 299,449 2,245 (9,330) 292,364 Collateralized Mortgage Obligations....................... 59,491 -- (2,991) 56,500 Privately Issued Mortgage Pool Securities................. 40,548 1,786 (293) 42,041 - - ----------------------------------------------------------------------------------------------------------------------------- $1,293,263 $5,953 $(58,917) $1,240,299 - - ----------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate............................ 5.74% - - -----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity at June 30 are classified by type of interest payment and contractual maturity term as follows:
- - ----------------------------------------------------------------------------------------------------------------------------- 1995 1994 --------------------------------------- ----------------------------------- Amortized Fair Weighted Amortized Fair Weighted Cost Value Rate Cost Value Rate - - ----------------------------------------------------------------------------------------------------------------------------- Adjustable rate.............................. $ 778,173 $ 772,182 6.08% $ 714,562 $ 686,421 5.07% Fixed-rate, 5-year term...................... 15,913 15,665 5.98 17,374 16,639 5.61 Fixed-rate, 7-year term...................... 50,362 49,538 6.29 54,868 51,815 5.97 Fixed-rate, 15-year term..................... 308,335 305,954 6.76 315,236 299,056 6.65 Fixed-rate, 30-year term..................... 114,324 116,535 7.48 131,732 129,868 7.34 - - ----------------------------------------------------------------------------------------------------------------------------- 1,267,107 1,259,874 6.38 1,233,772 1,183,799 5.76 Collateralized mortgage obligations.......... 54,354 53,084 5.94 59,491 56,500 5.21 - - ----------------------------------------------------------------------------------------------------------------------------- $1,321,461 $1,312,958 6.36% $1,293,263 $1,240,299 5.74% - - -----------------------------------------------------------------------------------------------------------------------------
48 - - -------------------------------------------------------------------------------- At June 30, 1995 and 1994, the Corporation pledged mortgage-backed securities totaling $317,701,000 and $216,928,000, respectively, as collateral for collateralized mortgage obligations, securities sold under agreements to repurchase, Federal Home Loan Bank advances, interest rate swap agreements and other borrowings. Note 6. Loans Held For Sale: Loans held for sale from mortgage banking operations at June 30, 1995 and 1994, totaled $36,382,000 and $74,321,000, respectively, with weighted average rates of 8.06% and 7.43%, respectively. Loans held for sale are secured by single-family residential properties consisting of fixed and adjustable rate mortgage loans totaling $36,195,000 and $187,000, respectively, at June 30, 1995, and $45,700,000 and $28,621,000, respectively, at June 30, 1994. Proceeds from the sales of loans totaled $405,091,000, $691,543,000 and $407,069,000, respectively, for the fiscal years ended June 30, 1995, 1994 and 1993. For the fiscal years ended June 30, 1995, 1994 and 1993, gross realized gains on the sales of loans totaled $1,307,000, $3,018,000 and $742,000, respectively, and gross realized losses totaled $1,903,000, $3,410,000 and $1,094,000, respectively. Note 7. Loans Receivable: Loans receivable at June 30 are summarized as follows: - - ------------------------------------------------------------------------------------------- 1995 1994 - - ------------------------------------------------------------------------------------------- Conventional mortgage loans.............................. $3,282,607 $2,850,356 FHA and VA loans......................................... 314,613 335,686 Commercial real estate loans............................. 167,800 186,535 Consumer and other loans................................. 233,676 192,171 Construction loans....................................... 16,484 2,003 - - ------------------------------------------------------------------------------------------ 4,015,180 3,566,751 Less: Unamortized discounts, net of premiums................ 4,677 987 Loans-in-process...................................... 6,263 2,922 Deferred loan fees, net............................... 2,495 1,505 Allowance for loan losses............................. 46,489 42,720 - - ------------------------------------------------------------------------------------------ $3,955,256 $3,518,617 - - ------------------------------------------------------------------------------------------ Weighted average interest rate........................... 8.23% 7.81% - - ------------------------------------------------------------------------------------------
At June 30, 1995, conventional, FHA and VA loans, including loans held for sale, totaling $3,645,930,000 are secured by single-family residential properties located as follows: 22% in Nebraska, 18% in Colorado, 6% in Texas, 5% each in Georgia, Missouri and Oklahoma, and the remaining 39% in 44 other states. At June 30, 1994, conventional, FHA and VA loans, including loans held for sale, totaling $3,262,359,000 are secured by single-family residential properties located as follows: 23% in Nebraska, 19% in Colorado, 6% in Georgia, 5% each in Missouri and Texas, and the remaining 42% in 45 other states. The commercial real estate portfolio at June 30, 1995, is secured by properties located as follows: 52% in Colorado, 18% in Nebraska, 10% in Florida and the remaining 20% in 12 other states. The commercial real estate portfolio at June 30, 1994, is secured by properties located as follows: 59% in Colorado, 12% in Nebraska, 11% in Florida and the remaining 18% in 13 other states. Nonperforming loans at June 30, 1995 and 1994, aggregated $29,217,000 and $30,936,000, respectively. Of the nonperforming loans at June 30, 1995, approximately 12% are secured by properties located in Texas, 9% in 49 - - -------------------------------------------------------------------------------- Georgia, 8% in Colorado, 7% in Nebraska, 6% each in California, Missouri and New Jersey, 5% in Florida, 4% in Illinois and the remaining 37% located in 31 other states. Of the nonperforming loans at June 30, 1994, approximately 14% are secured by properties located in Colorado and Texas, 10% in California, 8% in Georgia, 5% each in Missouri, Nebraska, and Illinois and the remaining 39% located in 32 other states. Also included in loans receivable at June 30, 1995 and 1994, are loans with carrying values of $17,002,000 and $20,025,000, respectively, the terms of which have been modified in troubled debt restructurings. During the fiscal years ended June 30, 1995 and 1994, the Corporation recognized interest income on these loans aggregating $1,492,000 and $1,788,000, respectively, whereas under their original terms the Corporation would have recognized interest income of $1,556,000 and $1,890,000, respectively. At June 30, 1995, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. At June 30, 1995 and 1994, the Corporation had pledged substantially all single-family residential loans as collateral for Federal Home Loan Bank advances, securities sold under agreements to repurchase and other borrowings. Note 8. Real Estate: Real estate at June 30 is summarized as follows: - - ------------------------------------------------------------------------------------------------- 1995 1994 - - ------------------------------------------------------------------------------------------------- Real estate owned and in judgment, net of allowance for losses of $4,508 and $4,567................................. $ 6,859 $ 6,273 Real estate held for investment, which includes equity in unconsolidated joint ventures and investments in real estate partnerships, net of allowance for losses of $1,391 and $1,416....................... 9,526 9,738 - - ------------------------------------------------------------------------------------------------- $16,385 $16,011 - - -------------------------------------------------------------------------------------------------
Commercial and residential real estate comprise approximately 79% and 21%, respectively, of the total amount of real estate at June 30, 1995, and approximately 80% and 20%, respectively, of the total amount of real estate at June 30, 1994. Real estate located by states at June 30, 1995, is as follows: 49% in Nebraska, 34% in Colorado, 5% in Texas, and the remaining 12% in 17 other states. Real estate located by states at June 30, 1994, is as follows: 49% in Nebraska, 20% in Colorado, 7% each in California and Georgia and the remaining 17% in 14 other states. 50 - - -------------------------------------------------------------------------------- Note 9. Allowance for Losses on Loans and Real Estate:
An analysis of the allowance for losses on loans and real estate is summarized as follows: - - ---------------------------------------------------------------------------------------------------------------------- Loans Real Estate Total - - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1992................................................... $ 48,964 $ 4,045 $ 53,009 - - -------------------------------------------------------------------------------------------------------------------------- Provision charged to operations.......................................... 5,735 1,166 6,901 Charges.................................................................. (3,394) (873) (4,267) Recoveries............................................................... 1,261 832 2,093 Estimated allowance for purchased loans.................................. 173 -- 173 Change in estimate of allowance for purchased loans...................... (5,334) -- (5,334) Charge-offs to allowance for purchased loans............................. (2,299) -- (2,299) - - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1993................................................... 45,106 5,170 50,276 - - --------------------------------------------------------------------------------------------------------------------------- Provision charged to operations.......................................... 6,033 1,614 7,647 Charges.................................................................. (3,930) (1,138) (5,068) Recoveries............................................................... 667 337 1,004 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)............................................... 42,926 5,983 48,909 - - --------------------------------------------------------------------------------------------------------------------------- Provision charged to operations.......................................... 6,033 399 6,432 Charges.................................................................. (3,503) (635) (4,138) Recoveries............................................................... 1,334 152 1,486 Allowances from acquisitions............................................. 1,818 -- 1,818 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)............................................... $46,567 $5,899 $52,466 - - ---------------------------------------------------------------------------------------------------------------------------
(1) At June 30, 1995 and 1994, includes $78,000 and $206,000, respectively, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. At June 30, 1993, there was no allowance for losses on loans held for sale. Bulk loan purchases acquired at a discount are allocated an estimated allowance for 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, 1995, 1994 and 1993, $15,280,000, $17,321,000 and $22,271,000, respectively, has been allocated from these discount amounts to provide for the credit risk associated with such purchased loans. This estimated allowance for purchased loans is available only to absorb losses associated with the respective purchased loan packages, and is not available to absorb losses from other loans. 51 - - -------------------------------------------------------------------------------- Note 10. Premises And Equipment: Premises and equipment at June 30 are summarized as follows: - - -------------------------------------------------------------------------------------------- 1995 1994 - - -------------------------------------------------------------------------------------------- Land.......................................................... $ 9,671 $ 9,265 Buildings and improvements.................................... 51,733 47,203 Leasehold improvements........................................ 2,034 2,128 Furniture, fixtures and equipment............................. 51,718 43,829 - - -------------------------------------------------------------------------------------------- 115,156 102,425 Less accumulated depreciation and amortization................ 52,440 47,891 - - -------------------------------------------------------------------------------------------- $ 62,716 $ 54,534 - - --------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment, included in occupancy and equipment expenses, totaled $4,970,000, $4,265,000 and $4,143,000 for the fiscal years ended June 30, 1995, 1994 and 1993, respectively. The Bank has operating lease commitments on certain premises and equipment. Rent expense totaled $1,998,000, $1,906,000 and $1,643,000 for the fiscal years ended June 30, 1995, 1994 and 1993, respectively. Annual minimum operating lease commitments as of June 30, 1995, are as follows: 1996 - $1,433,000; 1997 - $1,054,000; 1998 - $942,000; 1999 - $833,000; 2000 - $652,000; 2001 and thereafter - $5,243,000. 52 - - -------------------------------------------------------------------------------- Note 11. 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, 1992........................................ $ 64,508 $ 33,782 $ 98,290 Amortization expense.......................................... (6,806) (3,702) (10,508) - - -------------------------------------------------------------------------------------------------------------- Balance, June 30, 1993........................................ 57,502 30,080 87,782 - - -------------------------------------------------------------------------------------------------------------- Additions from acquisitions................................... -- 28,674 28,674 Adoption of SFAS No. 109 for prior business combinations...... -- 15,692 15,692 Valuation adjustment.......................................... (29,267) (20,763) (50,030) Amortization expense.......................................... (6,229) (7,855) (14,084) Sale of an investment in a subsidiary......................... (849) -- (849) - - -------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994........................................ 21,357 45,828 67,185 - - -------------------------------------------------------------------------------------------------------------- Additions from acquisitions, net.............................. 1,164 3,741 4,905 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.......................................... (32) (10,179) (10,211) - - -------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995........................................ $ 1,132 $ 32,580 $ 33,712 - - --------------------------------------------------------------------------------------------------------------
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 has been amortized over the first six months of fiscal year 1995. No adjustment was made to the intangible assets resulting from the Corporation's acquisitions during fiscal year 1994. 53 - - -------------------------------------------------------------------------------- Note 12. Deposits: Deposits at June 30 are summarized as follows: - - ------------------------------------------------------------------------------------------------------------------------- 1995 1994 ------------------------- ---------------------- Description and interest rates Amount % Amount % - - ------------------------------------------------------------------------------------------------------------------------- Passbook accounts (average of 4.41% and 2.93%)................. $ 538,207 15.0% $ 468,308 13.9% NOW accounts (average of .93% and .96%)........................ 273,809 7.6 254,442 7.6 Market rate savings (average of 3.31% and 2.76%)............... 169,892 4.7 220,250 6.6 - - -------------------------------------------------------------------------------------------------------------------------- Total savings (no stated maturities)........................... 981,908 27.3 943,000 28.1 - - -------------------------------------------------------------------------------------------------------------------------- Certificates of deposit: Less than 3.00%............................................ 11,846 .3 15,876 .5 3.00% - 3.99%............................................ 66,337 1.9 577,067 17.2 4.00% - 4.99%............................................ 442,559 12.3 788,261 23.5 5.00% - 5.99%............................................ 865,932 24.1 708,786 21.1 6.00% - 6.99%............................................ 906,923 25.3 195,676 5.8 7.00% - 7.99%............................................ 276,934 7.7 79,846 2.4 8.00% - 8.99%............................................ 32,415 .9 35,830 1.1 9.00% and over........................................... 6,321 .2 11,255 .3 - - -------------------------------------------------------------------------------------------------------------------------- Total certificates of deposit (fixed maturities; average of 5.37% and 5.19%)................................. 2,609,267 72.7 2,412,597 71.9 - - -------------------------------------------------------------------------------------------------------------------------- $3,591,175 100.0% $3,355,597 100.0% - - --------------------------------------------------------------------------------------------------------------------------
Interest expense on deposit accounts for the years ended June 30 is summarized as follows: - - -------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------------------------- Passbook accounts.............................................. $ 23,448 $ 8,509 $ 5,445 NOW accounts................................................... 2,440 2,698 2,569 Market rate savings............................................ 6,539 5,101 5,417 Certificates of deposit........................................ 132,697 112,383 107,258 - - -------------------------------------------------------------------------------------------------------------------------- $165,124 $128,691 $120,689 - - --------------------------------------------------------------------------------------------------------------------------
54 - - ------------------------------------------------------------------------------------------------------------------------- At June 30, 1995, scheduled maturities of certificates of deposit are as follows: - - ------------------------------------------------------------------------------------------------------------------------- Year Ending June 30, -------------------------------------------------------------------------------------------- Rate 1996 1997 1998 1999 2000 Thereafter Total - - -------------------------------------------------------------------------------------------------------------------------- Less than 3.00%........ $ 9,061 $ 426 $ 95 $ 18 $ 11 $2,235 $ 11,846 3.00% - 3.99%....... 61,612 4,014 684 27 -- -- 66,337 4.00% - 4.99%....... 401,169 33,037 6,237 1,743 68 305 442,559 5.00% - 5.99%....... 588,538 133,784 56,064 80,593 3,944 3,009 865,932 6.00% - 6.99%....... 550,243 243,396 82,478 22,621 6,606 1,579 906,923 7.00% - 7.99%....... 26,891 162,085 71,598 11,728 4,002 630 276,934 8.00% - 8.99%....... 18,238 4,130 7,943 1,266 753 85 32,415 9.00% and over...... 2,243 99 3,940 39 -- -- 6,321 - - -------------------------------------------------------------------------------------------------------------------------- $1,657,995 $580,971 $229,039 $118,035 $15,384 $7,843 $2,609,267 - - --------------------------------------------------------------------------------------------------------------------------
At June 30, 1995 and 1994, deposits of certain state and municipal agencies and other various non-retail entities were collateralized by mortgage-backed securities with carrying values of $44,132,000 and $11,374,000, respectively, and investment securities with carrying values of $659,000 and $4,999,000, respectively. In accordance with regulatory requirements, at June 30, 1995 and 1994, the Corporation maintained $10,196,000 and $10,639,000, 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 13. Advances From The Federal Home Loan Bank: At June 30 the Corporation was indebted to the Federal Home Loan Bank of Topeka on notes maturing as follows: - - -------------------------------------------------------------------------------------------------------------------------- 1995 1994 ------------------------------------------------------------------------------------ Weighted Weighted Interest Average Average Year Ending June 30, Rate Range Rate Amount Rate Amount - - -------------------------------------------------------------------------------------------------------------------------- 1995............................ 5.64% $ 454,347 1996............................ 4.72% - 10.75% 6.14% $ 667,714 6.05 243,672 1997............................ 4.61 - 9.25 5.67 721,633 5.15 580,115 1998............................ 5.06 - 7.90 5.69 231,297 5.59 221,077 1999............................ 5.25 - 6.21 5.70 35,608 5.51 25,305 2000............................ 7.19 7.19 350 - - -------------------------------------------------------------------------------------------------------------------------- 4.61% - 10.75% 5.87% $1,656,602 5.51% $1,524,516 - - --------------------------------------------------------------------------------------------------------------------------
At June 30, 1995 and 1994, 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, 1995 and 1994, there were no commitments for advances from the Federal Home Loan Bank. 55 - - -------------------------------------------------------------------------------- Note 14. Securities Sold Under Agreements to Repurchase: At June 30, 1995 and 1994, securities sold under agreements to repurchase identical securities totaled $195,755,000 and $157,432,000, respectively, with weighted average interest rates of 7.04% and 6.08%, respectively. There were no securities sold under agreements to repurchase substantially identical securities at June 30, 1995 or 1994. An analysis of securities sold under agreements to repurchase identical securities for the years ended June 30 is summarized as follows: - - -------------------------------------------------------------------------------------------- 1995 1994 - - -------------------------------------------------------------------------------------------- Maximum month-end balance...................................... $195,755 $157,432 - - -------------------------------------------------------------------------------------------- Average balance................................................ $101,924 $155,897 - - -------------------------------------------------------------------------------------------- Weighted average interest rate during the period............... 7.61% 6.15% Weighted average interest rate at end of period................ 7.04% 6.08% - - --------------------------------------------------------------------------------------------
At June 30, 1995, securities sold under agreements to repurchase had maturities ranging from January 1996 to June 1997 with a weighted average maturity at June 30, 1995, of 491 days. At June 30, 1995 and 1994, mortgage- backed securities with carrying values totaling $234,176,000 and $172,467,000, respectively, and market values totaling $231,360,000 and $168,506,000, 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, 1995, the Corporation had repurchase agreements with two such dealers with the amount at risk in excess of 10.0% of stockholders' equity with Morgan Stanley & Co. Incorporated and the Federal Home Loan Mortgage Corporation totaling $160,755,000 and $35,000,000, respectively, with weighted average maturities of 444 and 707 days, respectively. Note 15. Other Borrowings: Other borrowings at June 30 consist of the following: - - ------------------------------------------------------------------------------------------------ 1995 1994 - - ------------------------------------------------------------------------------------------------ Subordinated notes, interest 10.25%, due December 15, 1999......... $40,250 $40,250 Collateralized mortgage obligations................................ 12,454 16,567 Other borrowings................................................... 2,699 2,923 - - ------------------------------------------------------------------------------------------------ $55,403 $59,740 - - ------------------------------------------------------------------------------------------------
The subordinated notes pay interest semi-annually on June 15 and December 15. The subordinated notes are not redeemable prior to December 15, 1995; thereafter, such notes are redeemable, 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. 56 - - -------------------------------------------------------------------------------- At June 30, 1995, 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 with a book value of approximately $17,023,000. As the principal balance on the collateral on these notes repay, the notes are correspondingly repaid. Other borrowings are collateralized by unencumbered first mortgage loans with unpaid principal balances of approximately $6,959,000 at June 30, 1995. Principal maturities of other borrowings as of June 30, 1995, for the next five fiscal years are as follows: 1996 - $3,869,000; 1997 - $3,314,000; 1998 - $2,888,000; 1999 - $2,535,000; 2000 - $40,975,000; and thereafter -$1,822,000. Note 16. Interest Rate Hedging: The following table summarizes the Bank's interest rate hedging agreements at June 30: - - --------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - --------------------------------------------------------------------------------------------------------------------- Interest rate swap agreements: Notional principal amount, fixed rate agreements................ $ 78,500 $109,500 $194,500 Weighted average fixed rate paid................................ 10.40% 9.62% 8.75% Weighted average variable rate received......................... 5.63% 3.55% 3.56% Net interest expense............................................ $ 4,345 $ 8,485 $ 12,196 Range of remaining terms........................................ 3-29 mos. 1-41 mos. 2-53 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 Bank is not involved in any derivative activities nor has the Bank terminated any contracts during the fiscal years ended June 30, 1995, 1994 and 1993. The interest rate swap agreements were collateralized at June 30, 1995 and 1994, by mortgage- backed securities with carrying values of $18,817,000 and $22,500,000, respectively. Swap agreements totaling $68,500,000 will mature in the next fiscal year. 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 Bank is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swaps if the Bank is in a net interest receivable position at the time of potential default by the counterparties. However, at June 30, 1995, the Bank was in a net interest payable position. The Bank does not anticipate nonperformance by the counterparties. 57 - - -------------------------------------------------------------------------------- Note 17. Income Taxes: The following is a comparative analysis of the provision for federal and state taxes on income: - - ------------------------------------------------------------------------------------------------------ Year Ended June 30, --------------------------------------------------- 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------ Current: Federal.................................. $ 6,432 $ 8,921 $ 7,445 State.................................... 670 210 806 - - ------------------------------------------------------------------------------------------------------ 7,102 9,131 8,251 - - ------------------------------------------------------------------------------------------------------ Deferred: Federal.................................. 13,491 5,012 11,286 State.................................... 139 88 304 - - ------------------------------------------------------------------------------------------------------ 13,630 5,100 11,590 - - ------------------------------------------------------------------------------------------------------ Total provision for income taxes............ $20,732 $14,231 $19,841 - - ------------------------------------------------------------------------------------------------------
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was passed, which raised the corporate income tax rate from 34.0% to 35.0% retroactive to January 1, 1993. The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate: - - ---------------------------------------------------------------------------------------------------------- Year Ended June 30, ------------------------------------- 1995 1994 1993 - - ----------------------------------------------------------------------------------------------------------- Statutory federal income tax rate............................... 35.0% 35.0% 34.0% Amortization of discounts, premiums and intangible assets from acquisitions.......................... 15.5 144.5 6.6 Income tax credits.............................................. (3.5) (5.8) (.4) Bad debt deduction.............................................. (3.2) (23.5) (1.3) State income taxes, net of federal income tax benefit........... 1.2 2.6 1.4 Tax exempt interest income...................................... (.2) (1.4) (.3) Effect of change in enacted tax rate............................ -- 13.9 -- Other items, net................................................ (1.8) .4 (.8) - - ----------------------------------------------------------------------------------------------------------- Effective tax rate.............................................. 43.0% 165.7% 39.2% - - -----------------------------------------------------------------------------------------------------------
58 - - -------------------------------------------------------------------------------- The tax effect of temporary differences that gave rise to significant portions of deferred tax assets and liabilities at June 30 are as follows: - - ------------------------------------------------------------------------------------------------------------------------- 1995 1994 - - -------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Finance lease contracts treated as operating leases for income tax purposes.......... $55,847 $46,962 Federal Home Loan Bank stock......................................................... 10,716 10,321 Differences between book and tax basis of premises and equipment..................... 6,234 6,008 Core value of acquired deposits...................................................... 3,911 6,946 Basis differences between tax and financial reporting arising from acquisition....... 1,937 -- Other items.......................................................................... 2,137 1,797 - - -------------------------------------------------------------------------------------------------------------------------- 80,782 72,034 - - -------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for losses on loans and real estate not currently deductible............... 13,286 11,147 Tax credit carryforwards............................................................. 4,035 10,974 Collateralized mortgage obligations.................................................. 3,402 3,401 State operating loss carryforwards................................................... 2,724 2,892 Basis differences between tax and financial reporting arising from acquisitions...... 2,585 1,397 Accretion of discount on purchased loans............................................. 2,372 2,063 Employee benefits.................................................................... 1,807 1,485 Other items.......................................................................... 1,832 2,358 - - -------------------------------------------------------------------------------------------------------------------------- 32,043 35,717 Valuation allowance..................................................................... (2,659) (2,753) - - -------------------------------------------------------------------------------------------------------------------------- 29,384 32,964 - - -------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability.............................................................. $51,398 $39,070 - - --------------------------------------------------------------------------------------------------------------------------
The valuation allowance of $2,659,000 at June 30, 1995, decreased from $2,753,000 at June 30, 1994, primarily due to a decrease in state net operating losses available for income tax purposes. At June 30, 1995, the Corporation had federal alternative minimum tax credit carryforwards available approximating $2,827,000 which will carry forward indefinitely. Under APB Opinion No. 11, the components of the deferred income tax provision for fiscal year 1993 is as follows: - - -------------------------------------------------------------------------------------------------- Finance lease contracts treated as operating leases for income tax purposes........ $10,044 Utilization of net operating loss carryforward..................................... 5,264 Utilization of alternative minimum tax credit carryforward......................... (1,636) FHLB stock dividends, net of redemptions........................................... (357) Provision for losses on real estate held for investment, net....................... (136) Collateralized mortgage obligations................................................ (665) Options and hedging activities..................................................... 97 Other items, net................................................................... (1,021) - - -------------------------------------------------------------------------------------------------- $11,590 - - --------------------------------------------------------------------------------------------------
59 - - -------------------------------------------------------------------------------- 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, 1995, 1994 and 1993. 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 year 1995 was computed under the percentage of taxable income method since it yielded a greater deduction than did the experience method. In fiscal years 1994 and 1993 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, 1995, the amount of these reserves totaled approximately $79,660,000 with an unrecognized deferred tax liability associated with such reserves totaling approximately $28,367,000. Such deferred tax liability could be recognized in the future, in whole or in part, if (i) the tax bad debt reserves exceed the base year amount, (ii) there is a change in federal tax law, (iii) the Bank fails to meet the definition of a "qualified savings institution," (iv) certain distributions are made with respect to the stock of the Bank or (v) the bad debt reserves are used for any purpose other than absorbing bad debt losses. Note 18. Stockholders' Equity And Regulatory Restrictions: On December 31, 1984, the Bank completed its conversion from mutual to stock ownership and became a wholly-owned subsidiary of Commercial Federal Corporation. Federal regulations require that, upon conversion from mutual to stock form of ownership, a "liquidation account" be established by restricting a portion of net worth for the benefit of eligible savings account holders who maintain their savings accounts with the Bank after conversion. In the event of complete liquidation, and only in such event, each savings account holder who continues to maintain his savings account shall be entitled to receive a distribution from the liquidation account after payment to all creditors but before any liquidation distribution with respect to common stock. This account will be proportionately reduced for any subsequent reduction in the eligible holder's savings accounts. Except for the repurchase of stock and payment of dividends by the Corporation, the existence of the liquidation account will not restrict use or application of the Corporation's net worth. On December 19, 1988, the Board of Directors of the Corporation adopted a Shareholder Rights Plan and declared a distribution of stock purchase rights consisting of one primary right and one secondary right for each outstanding share of common stock payable on December 30, 1988, to stockholders of record on that date. 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, 1995, 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 fix 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. On June 30, 1992, the Corporation sold 3,500,000 shares of its common stock in a public offering with the shares priced at $10.00 per share ($.01 par value). At June 30, 1992, the Corporation recorded the subscription of the common stock to stockholders' equity which totaled $32,137,000 after deducting the underwriter discount and expenses associated with the offering. An additional 525,000 shares of common stock from the overallotment option were exercised subsequently in July 1992. The cash proceeds on the total sale of the 4,025,000 shares after deducting the underwriter discount and expenses associated with the offering totaled $36,958,000 and were paid to the Corporation on July 9, 1992. In addition, on May 4, 1993, warrants for 1,250,000 shares of the Corporation's common stock were exercised (1,000,000 shares at $2.00 per share and 250,000 shares at $3.625 per share) resulting in net proceeds totaling $2,846,000 from the issuance of such shares. 60 - - -------------------------------------------------------------------------------- Under the Office of Thrift Supervision's (OTS's) 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, 1995, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $81,268,000 in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law would require prior approval of such proposed dividends and, in some cases, would prohibit the payment of dividends. Under certain other federal regulations, the Bank is not permitted to pay dividends on its capital stock if its net worth is or would thereby be reduced below the applicable net worth regulatory capital requirements prescribed for insured institutions or reduced below the amount required for the liquidation account established in connection with the conversion. The Corporation has not paid cash dividends to its common stock shareholders as of June 30, 1995. Note 19. Regulatory Capital Requirements: At June 30, 1995, the Bank's estimates of its capital amounts and the capital levels required under OTS capital regulations are as follows: - - ----------------------------------------------------------------------------------------------------------------------- Actual Requirement Excess - - ----------------------------------------------------------------------------------------------------------------------- Bank's stockholder's equity.............................................. $336,545 Less unrealized holding gain on securities available for sale, net....... (79) Less intangible assets................................................... (31,283) Less phase-out of investments in non-includable subsidiaries............. (1,704) - - ----------------------------------------------------------------------------------------------------------------------- Tangible capital......................................................... $303,479 $ 88,849 $214,630 - - ----------------------------------------------------------------------------------------------------------------------- Tangible capital to adjusted assets (1).................................. 5.12% 1.50% 3.62% - - ----------------------------------------------------------------------------------------------------------------------- Tangible capital......................................................... $303,479 Plus certain restricted amounts of other intangible assets............... 21,430 - - ----------------------------------------------------------------------------------------------------------------------- Core capital (Tier 1 capital)............................................ $324,909 $178,341 $146,568 - - ----------------------------------------------------------------------------------------------------------------------- Core capital to adjusted assets (2)...................................... 5.47% 3.00% 2.47% - - ----------------------------------------------------------------------------------------------------------------------- Core capital............................................................. $324,909 Plus general loan loss allowances........................................ 31,553 Less that portion of land loans and non-residential construction loans in excess of an 80.0% loan-to-value ratio.......... (729) - - ----------------------------------------------------------------------------------------------------------------------- Risk-based capital (Total capital)....................................... $355,733 $211,525 $144,208 - - ----------------------------------------------------------------------------------------------------------------------- Risk-based capital to risk-weighted assets (3)........................... 13.45% 8.00% 5.45% - - -----------------------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $5,923,283,000. (2) Based on adjusted total assets totaling $5,944,713,000. (3) Based on risk-weighted assets totaling $2,644,066,000. - - -------------------------------------------------------------------------------- 61 - - -------------------------------------------------------------------------------- The OTS, as the primary federal regulator of savings institutions, has broad supervisory and enforcement powers. The Bank is also subject to regulatory and supervisory enforcement authority under the Federal Deposit Insurance Corporation (FDIC) with respect to certain activities that may pose a risk to the deposit insurance fund. At periodic intervals, both the OTS and the FDIC routinely examine the Bank's financial statements as part of their legally prescribed oversight of the savings and loan industry. Based on these examinations, the regulators can direct the Bank's financial statements be adjusted in accordance with their findings. 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. Effective July 1, 1994, the OTS amended its risk-based capital standards that included 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. Based on the Bank's interest rate risk profile and the level of interest rates at June 30, 1995, as well as the Bank's level of risk-based capital at June 30, 1995, management does not believe that these changes will have a material adverse effect on the Bank's level of required risk-based capital. The Federal Deposit Insurance Corporation Improvement Act of 1991 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. At June 30, 1995, 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 - - -------------------------------------------------------------------------------------------------------------- Actual capital........................ $324,909 $324,909 $355,733 Percentage of adjusted assets......... 5.47% 12.29% 13.45% Minimum requirements to be classified well-capitalized........ 5.00% 6.00% 10.00% - - --------------------------------------------------------------------------------------------------------------
62 - - -------------------------------------------------------------------------------- Note 20. 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, 1995, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $103,781,000 as follows: $33,805,000 to originate loans, $33,723,000 to purchase loans, $15,000,000 to purchase investment securities, $4,761,000 to purchase mortgage- backed securities and $16,492,000 to provide consumers unused lines of credit. At June 30, 1994, the Corporation had commitments, excluding undisbursed portions of loans in process, of approximately $156,052,000 as follows: $36,277,000 to originate loans, $76,218,000 to purchase loans, $28,816,000 to purchase mortgage-backed securities and $14,741,000 to provide consumers unused lines of credit. In addition, at June 30, 1995 and 1994, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $521,000 and $1,557,000, 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 Bank 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, 1995 and 1994, the Corporation had approximately $66,496,000 and $121,880,000, respectively, in mandatory forward delivery commitments to sell residential mortgage loans. At June 30, 1995 and 1994, loans sold subject to recourse provisions totaled approximately $49,678,000 and $58,483,000, respectively, which represents the total potential credit risk associated with these particular 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 21. 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. Participants may contribute up to 10.0% of their pre-tax base pay with the Corporation matching contributions equal to 100.0% of the first 8.0% of participant contributions. Participants vest immediately in their own contributions and over a five-year period for Corporation contributions. Contribution expense was $1,208,000, $1,164,000 and $996,000 for the years ended June 30, 1995, 1994 and 1993, respectively. 63 - - -------------------------------------------------------------------------------- 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 immediately exercisable 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. 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. The following table presents the activity of the stock options for the fiscal years ended June 30, 1995, 1994 and 1993: - - ------------------------------------------------------------------------------------------------------------------ Stock Option Option Price Aggregate Shares Per Share Amount - - ------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1992.................................. 450,875 $2.50 - $19.13 $2,773 Granted................................................ -- -- -- Exercised.............................................. (116,365) 2.50 - 9.75 (676) Canceled............................................... -- -- -- - - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1993.................................. 334,510 2.50 - 19.13 2,097 Granted................................................ -- -- -- Exercised.............................................. (32,699) 2.50 - 9.75 (209) Canceled............................................... -- -- -- - - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994.................................. 301,811 2.50 - 19.13 1,888 Granted................................................ 61,462 27.31 1,679 Exercised.............................................. (74,358) 2.50 - 9.75 (376) Canceled............................................... (262) 5.67 (1) - - ------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995.................................. 288,653 $2.50 - $27.31 $3,190 - - ------------------------------------------------------------------------------------------------------------------- Shares available for future grants at June 30, 1995....... 319,439 - - -------------------------------------------------------------------------------------------------------------------
On June 30, 1995, stock options for 61,462 shares 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 fiscal year 1995. Management incentive plans were adopted in fiscal year 1993 with restricted stock to be granted for awards earned each fiscal year. Accordingly, on June 30, 1995, 1994 and 1993 (the grant dates), the Corporation issued 28,417 shares, 59,660 shares and 55,376 shares, respectively, of restricted stock with an aggregate market value of $776,000, $1,525,000 and $1,402,000, respectively. 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 $1,951,000, $2,480,000 and $1,402,000, at June 30, 1995, 1994 and 1993, 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 $1,173,000 and $395,000 for fiscal years 1995 and 1994, respectively. During fiscal year 1993, the restrictions on 163,325 shares of restricted stock and related stock appreciation rights previously granted were removed as a result of the rescission of the Bank's capital directive. Accordingly, deferred compensation equivalent to the market value of these restricted shares and related stock appreciation rights totaling $2,222,000 was amortized to compensation expense in fiscal year 1993. 64 - - -------------------------------------------------------------------------------- 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 $336,000 ($.03 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:
- - ---------------------------------------------------------------------------------------------------------------- 1995 1994 - - ---------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees..................................................................... $260 $177 Fully eligible active plan participants...................................... 118 51 Other active plan participants............................................... 581 369 - - ---------------------------------------------------------------------------------------------------------------- 959 597 Unrecognized net loss........................................................... (426) (42) - - ---------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost included in other liabilities............... $533 $555 - - ----------------------------------------------------------------------------------------------------------------
The following sets forth the components of the net periodic postretirement benefit cost for the fiscal years ended June 30:
- - ---------------------------------------------------------------------------------------------------------------- 1995 1994 - - ---------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the fiscal year........................... $ 61 $ 56 Interest cost on accumulated postretirement benefit obligation.................. 43 39 - - ---------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost..................................... $104 $ 95 - - ---------------------------------------------------------------------------------------------------------------- Postretirement benefit claims paid for the year................................. $126 $ 59 - - ----------------------------------------------------------------------------------------------------------------
The weighted average discount rate used to determine the APBO was 7.5% for both fiscal years ended June 30, 1995 and 1994. The assumed health care cost trend rate used in measuring the APBO as of July 1, 1994, was 8.0% decreasing gradually until it reaches 5.0% in 2007, 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, 1995, by $100,000 and the aggregate of the service and interest cost components of the net periodic postretirement cost for fiscal year 1995 by $28,000. 65 - - -------------------------------------------------------------------------------- Note 22. Financial Information (Parent Company Only): CONDENSED STATEMENT OF FINANCIAL CONDITION - - ---------------------------------------------------------------------------------------------------------------- June 30, ASSETS 1995 1994 - - ---------------------------------------------------------------------------------------------------------------- Cash........................................................ $ 10,493 $ 7,099 Other assets................................................ 3,433 3,819 Equity in Commercial Federal Bank........................... 336,545 309,188 - - ---------------------------------------------------------------------------------------------------------------- Total Assets................................................ $350,471 $320,106 - - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - - ---------------------------------------------------------------------------------------------------------------- Liabilities: Other liabilities........................................ $ 720 $ 405 Subordinated notes....................................... 40,250 40,250 - - ---------------------------------------------------------------------------------------------------------------- Total liabilities........................................... 40,970 40,655 Total stockholders' equity.................................. 309,501 279,451 - - ---------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity.................. $350,471 $320,106 - - ----------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS - - ---------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------- Dividend income from the Bank....................................... $ 4,400 $ 5,050 $ 2,200 Interest income..................................................... 571 370 -- Interest expense.................................................... (4,462) (4,426) (2,362) Operating expenses.................................................. (283) (1,066) (164) - - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes, cumulative effect of change in accounting principles and equity in undistributed earnings (losses) of subsidiaries.................. 226 (72) (326) Income tax benefit.................................................. (1,478) (1,877) (1,191) - - ---------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principles and equity in undistributed earnings (losses) of subsidiaries................................ 1,704 1,805 865 Cumulative effect of change in accounting principles................ -- (198) -- - - ---------------------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings (losses) of subsidiaries................................ 1,704 1,607 865 Equity in undistributed earnings (losses) of subsidiaries........... 25,831 (1,449) 29,913 - - ---------------------------------------------------------------------------------------------------------------- Net income.......................................................... $27,535 $ 158 $30,778 - - ----------------------------------------------------------------------------------------------------------------
66 - - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS - - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1995 1994 1993 - - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................................... $27,535 $ 158 $30,778 Adjustments to reconcile net income to net cash provided (used) by operating activities: Cumulative effect of change in accounting principles..................... -- 198 -- Equity in (earnings) losses of subsidiaries.............................. (25,831) 1,449 (29,913) Other items, net......................................................... 563 336 (1,277) ------- ----- ------ Total adjustments....................................................... (25,268) 1,983 (31,190) ------- ----- ------ Net cash provided (used) by operating activities...................... 2,267 2,141 (412) - - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of stock of the Bank.................................................. -- (5,000) (58,450) Other items.................................................................... (136) (244) (17) ------- ----- ------ Net cash used by investing activities................................. (136) (5,244) (58,467) - - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options and other employee plans........... 1,263 887 1,002 Issuance of subordinated notes, net............................................ -- -- 38,841 Issuance of 4,025,000 shares of common stock................................... -- -- 36,958 Issuance of common stock from warrants exercised............................... -- -- 2,846 Payment of note payable........................................................ -- -- (11,600) ------- ----- ------ Net cash provided by financing activities............................. 1,263 887 68,047 - - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS: Increase (decrease) in net cash position....................................... 3,394 (2,216) 9,168 Balance, beginning of year..................................................... 7,099 9,315 147 ------- ----- ------ Balance, end of year........................................................... $10,493 $ 7,099 $ 9,315 - - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest expense............................................................ $ 4,126 $ 4,126 $ 1,983 Income tax refunds, net of payments......................................... (3,670) (1,100) (1,237) Non-cash investing activities: Increase to assets and liabilities for prior business combinations.......... -- 198 -- - - ------------------------------------------------------------------------------------------------------------------------------------
67 - - -------------------------------------------------------------------------------- Note 23. 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 of rights to service mortgage loans. Segment information at and for the fiscal years ended June 30 is summarized as follows: - - ------------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------------------ Interest income: Financial institution.................................... $ 407,451 $ 358,744 $ 366,842 Mortgage banking......................................... 4,478 6,730 5,936 ---------------------------------------------------- Total................................................. 411,929 365,474 372,778 Intersegment interest income: Financial institution.................................... (9,666) (9,296) (8,961) Mortgage banking......................................... 6,417 5,345 4,441 ---------------------------------------------------- (3,249) (3,951) (4,520) Intersegment elimination................................. 3,249 3,951 4,520 ---------------------------------------------------- Total................................................. -- -- -- ---------------------------------------------------- Total interest income: Financial institution.................................... 397,785 349,448 357,881 Mortgage banking......................................... 10,895 12,075 10,377 Intersegment elimination................................. 3,249 3,951 4,520 ---------------------------------------------------- Total................................................. $ 411,929 $ 365,474 $ 372,778 - - ------------------------------------------------------------------------------------------------------------------------ Other income: Financial institution - loan servicing fees.............. $ 146 $ 78 $ 1,282 Financial institution - other income..................... 16,620 18,355 6,691 Mortgage banking - loan servicing fees................... 22,389 20,348 15,788 Mortgage banking - other income (loss)................... (1,558) (6,441) (484) ---------------------------------------------------- Total................................................. 37,597 32,340 23,277 ---------------------------------------------------- Intersegment other income: Financial institution - loan servicing fees.............. -- -- -- Financial institution - other income..................... -- -- -- Mortgage banking - loan servicing fees................... 12,218 11,428 10,993 Mortgage banking - other income (loss)................... -- -- -- ---------------------------------------------------- 12,218 11,428 10,993 Intersegment elimination................................. (12,218) (11,428) (10,993) ---------------------------------------------------- Total................................................. -- -- -- ---------------------------------------------------- Total other income: Financial institution - loan servicing fees.............. 146 78 1,282 Financial institution - other income..................... 16,620 18,355 6,691 Mortgage banking - loan servicing fees................... 34,607 31,776 26,781 Mortgage banking - other income (loss)................... (1,558) (6,441) (484) Intersegment elimination................................. (12,218) (11,428) (10,993) ---------------------------------------------------- Total................................................. $ 37,597 $ 32,340 $ 23,277 - - ------------------------------------------------------------------------------------------------------------------------
68 - - -------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------- 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------- Operating profit (1): Financial institution.................... $ 35,913 $ 86 $ 37,995 Mortgage banking......................... 17,099 13,992 15,150 ---------------------------------------------------- 53,012 14,078 53,145 Less: General corporate expenses............... 283 1,066 164 Corporate interest expense............... 4,462 4,426 2,362 ---------------------------------------------------- Total................................. $ 48,267 $ 8,586 $ 50,619 - - ---------------------------------------------------------------------------------------------------------
(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................... $5,940,095 $5,467,687 $4,804,628 Mortgage banking........................ 94,066 123,859 110,391 Eliminations............................ (79,853) (70,206) (43,657) ---------------------------------------------------- Total................................ $5,954,308 $5,521,340 $4,871,362 - - --------------------------------------------------------------------------------------------------------- Additions to premises and equipment: Financial institution................... $ 5,244 $ 3,278 $ 1,293 Mortgage banking........................ 5,298 381 885 ---------------------------------------------------- Total................................ $ 10,542 $ 3,659 $ 2,178 - - --------------------------------------------------------------------------------------------------------- Depreciation and amortization: Financial institution................... $ 3,972 $ 3,845 $ 3,804 Mortgage banking........................ 998 420 339 ---------------------------------------------------- Total................................ $ 4,970 $ 4,265 $ 4,143 - - ---------------------------------------------------------------------------------------------------------
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 $1,236,000 and $5,900,000 were incurred during fiscal years 1995 and 1994, respectively, with gains on sales to the Bank approximating $179,000 for the fiscal year ended June 30, 1993. Purchased mortgage loan servicing rights are included in the Consolidated Statement of Financial Condition under the caption "Prepaid expenses and other assets." The activity of purchased mortgage loan servicing rights at June 30 is summarized as follows: - - ------------------------------------------------------------------------------------------------------------ 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------------ Beginning balance...................................... $ 33,943 $ 33,855 $ 18,750 Purchases of mortgage loan servicing rights............ 9,386 7,636 20,873 Acquisition of mortgage loan servicing rights.......... 1,046 -- -- Amortization expense................................... (8,293) (7,548) (5,768) - - ------------------------------------------------------------------------------------------------------------ Ending balance......................................... $ 36,082 $ 33,943 $ 33,855 - - ------------------------------------------------------------------------------------------------------------
The amount of loans serviced by the mortgage banking operations at June 30, 1995 and 1994 totaled $7,842,700,000 and $7,024,800,000, respectively, (including approximately $3,236,800,000 and $2,982,500,000, respectively, for the Bank). 69 - - -------------------------------------------------------------------------------- Note 24. 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 1995: Total interest income......................................... $108,158 $103,995 $101,676 $98,100 Net interest income........................................... 33,333 33,949 33,666 33,175 Provision for loan losses..................................... (1,508) (1,509) (1,508) (1,508) Loss on sales of loans........................................ (47) (189) (80) (280) Accelerated amortization of goodwill.......................... -- -- 10,678 10,679 Net income.................................................... 12,251 13,527 1,250 507 Earnings per share............................................ .94 1.04 .10 .04 - - -------------------------------------------------------------------------------------------------------------------------------- FISCAL 1994: Total interest income......................................... $ 93,426 $ 91,685 $ 90,729 $89,634 Net interest income........................................... 32,160 32,533 30,122 30,709 Provision for loan losses..................................... (1,508) (1,509) (1,508) (1,508) Gain (loss) on sales of securities and loans.................. 101 (510) (257) 158 Intangible assets valuation adjustment........................ (52,703) -- -- -- Income (loss) before cumulative effects of changes in accounting principles................................ (32,811) 9,697 9,070 8,399 Cumulative effects of changes in accounting principles........ -- -- -- 5,803 Net income (loss)............................................. (32,811) 9,697 9,070 14,202 Earnings (loss) per share (fully diluted): Income (loss) before cumulative effects of changes in accounting principles................................ (2.54) .75 .70 .65 Cumulative effects of changes in accounting principles..... -- -- -- .45 Net income (loss).......................................... (2.54) .75 .70 1.10 - - -------------------------------------------------------------------------------------------------------------------------------- FISCAL 1993: Total interest income......................................... $ 90,586 $ 92,871 $ 94,613 $94,708 Net interest income........................................... 29,515 30,395 30,094 26,306 Provision for loan losses..................................... (1,161) (1,594) (1,529) (1,451) Loss on sales of securities and loans......................... (81) (187) (44) (40) Net income.................................................... 9,211 8,317 7,272 5,978 Earnings per share............................................ .72 .65 .58 .48 - - --------------------------------------------------------------------------------------------------------------------------------
70 - - -------------------------------------------------------------------------------- Note 25. 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, 1995 and 1994, 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, 1995 and 1994. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors. - - ------------------------------------------------------------------------------------------------------------------------ 1995 1994 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Value Value Value Value - - ------------------------------------------------------------------------------------------------------------------------ SELECTED ASSETS - - ------------------------------------------------------------------------------------------------------------------------ Cash (including short-term investments)............. $ 29,330 $ 29,330 $ 21,208 $ 21,208 Investment securities............................... 294,237 291,651 280,600 273,601 Mortgage-backed securities.......................... 1,331,783 1,323,280 1,305,434 1,252,470 Loans receivable, net............................... 3,991,638 4,023,716 3,592,938 3,560,633 Federal Home Loan Bank stock........................ 97,110 97,110 90,913 90,913 - - ------------------------------------------------------------------------------------------------------------------------ SELECTED LIABILITIES - - ------------------------------------------------------------------------------------------------------------------------ Deposits: Passbook accounts................................ 538,207 538,207 468,308 468,308 Market rate savings accounts..................... 169,892 169,892 220,250 220,250 NOW checking accounts............................ 273,809 273,809 254,442 254,442 Certificates of deposit.......................... 2,609,267 2,615,417 2,412,597 2,392,546 -------------------------------------------------------------- Total deposits................................ 3,591,175 3,597,325 3,355,597 3,335,546 Advances from Federal Home Loan Bank................ 1,656,602 1,643,593 1,524,516 1,486,895 Securities sold under agreements to repurchase...... 195,755 196,779 157,432 158,188 Other borrowings.................................... 55,403 57,308 59,740 62,476 - - ------------------------------------------------------------------------------------------------------------------------ OFF-BALANCE SHEET INSTRUMENTS - - ------------------------------------------------------------------------------------------------------------------------ Interest rate swap agreements....................... -- (2,409) -- (9,318) 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, 1995 and 1994. 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 Bank has utilized quotes for similar or identical securities in an actively traded market, 71 - - -------------------------------------------------------------------------------- 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 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, 1995 and 1994, 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 Bank 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 the current rates as of June 30, 1995 and 1994, offered on certificates of deposit with similar maturities. In accordance with provisions of SFAS No. 107, no value has been assigned to the Bank'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, 1995 and 1994, 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, 1995 and 1994, over the contractual maturity of such borrowings. Other borrowings: Subordinated notes with a carrying value of $40.25 million is included in other borrowings with the fair value of such notes based on a dealer quoted market price as of June 30, 1995 and 1994. The fair value of other borrowings, excluding the subordinated notes, was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 1995 and 1994, 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. Accordingly, the Corporation estimates that the face amount of these commitments approximates carrying value. 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, 1995 and 1994, respectively, taking into consideration current interest rates as of June 30, 1995 and 1994. 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 72 - - -------------------------------------------------------------------------------- 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, 1995 and 1994, are not intended to represent the underlying value of the Corporation, on either a going concern or a liquidation basis. Note 26. Current Accounting Pronouncements: Disclosure of Certain Significant Risks and Uncertainties: In December 1994, the Accounting Standards Executive Committee issued Statement of Position 94-6 (SOP 94-6) entitled "Disclosure of Certain Significant Risks and Uncertainties." The disclosures required by SOP 94-6 focus primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near-term functioning of the reporting entity. The risks and uncertainties this SOP deals with result from the nature of the entity's operations, from the necessary use of estimates in the preparation of the entity's financial statements, and from significant concentrations in certain aspects of the entity's operations. The disclosure requirements of the SOP in many circumstances are similar to or overlap the disclosure requirements in certain pronouncements of the FASB and the Securities and Exchange Commission. The provisions of SOP 94-6 are effective for fiscal years ending after December 15, 1995, or effective as of July 1, 1995, for the Corporation, and for financial statements for interim periods in fiscal years subsequent to the year for which the SOP is first applied. Since this statement requires only disclosures about significant risks and uncertainties, with such disclosures, in most cases, having already been met by compliance with other authoritative pronouncements, the provisions of SOP 94-6 will not affect the Corporation's financial position or results of operations. Accounting for the Impairment of Long-Lived Assets: In March 1995, the FASB issued 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." 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 to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of recoverability, the provisions of SFAS No. 121 require the estimation of the expected future cash flows (undiscounted and without interest charges) to result from the use of the asset and its eventual disposition with an impairment loss recognized if the sum of such cash flows is less than the carrying amount of the asset. SFAS No. 121 is effective for fiscal years beginning after December 15, 1995, or effective as of July 1, 1996, for the Corporation. Management of the Corporation has not determined the time period in which to implement the provisions of SFAS No. 121 and does not believe such adoption will have a material effect on the Corporation's financial position or results of operations. Accounting for Mortgage Servicing Rights: In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65, "Accounting For Certain Mortgage Banking Operations" by eliminating the distinction in accounting for mortgage servicing rights depending on whether the loan was originated by the servicer or purchased. SFAS No. 122 requires mortgage servicers that sell or securitize loans and retain the servicing rights to allocate the total cost of the loans to the servicing rights and loans based on their fair value if practicable to estimate. If not practicable, the cost of acquiring the loans should be allocated to the mortgage loans only. Purchased mortgage servicing rights are mortgage servicing rights that have been purchased from other parties. Originated mortgage servicing rights generally represent the mortgage servicing rights acquired when an institution originates and subsequently sells mortgage loans but retains the servicing rights. Currently, only purchased mortgage servicing rights are capitalized as assets. However, upon implementation of SFAS No. 122, originated mortgage servicing rights must be capitalized as assets on a prospective basis. In addition, SFAS No. 122 requires all capitalized mortgage servicing rights, both originated and purchased, to be evaluated for impairment based on their fair values. 73 - - -------------------------------------------------------------------------------- SFAS No. 122 is effective for fiscal years beginning after December 15, 1995, or effective as of July 1, 1996, for the Corporation, with earlier application encouraged and retroactive restatement prohibited. The 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. Management of the Corporation is currently reviewing the provisions of this statement to determine its implementation date and has not as of this date determined the effect of such implementation. Note 27. Subsequent Events - Acquisitions: Railroad Financial Corporation: On April 18, 1995, the Corporation entered into a Reorganization and Merger Agreement (the Agreement) by and among the Corporation, the Bank, Railroad Financial Corporation (Railroad) and Railroad Savings Bank, a wholly-owned subsidiary of Railroad. On September 22, 1995, the stockholders of Railroad approved this merger which is expected to close in October 1995. Under the terms of the Agreement, the Corporation will exchange its common stock for all of the outstanding shares of Railroad with the number of shares to be issued based upon the average closing price of the Corporation's common stock for the twenty-fifth through the sixth trading days preceding the effective date of the merger. Based on the Corporation's closing stock price on September 22, 1995, of $35.75, each share of Railroad common stock would be exchanged for .6389 shares of the Corporation's common stock, resulting in the exchange of approximately 1,361,222 shares of the Corporation's common stock with an aggregate value approximating $48,664,000. Cash will be paid in lieu of fractional shares. At June 30, 1995, Railroad had assets of approximately $615,271,000, deposits of approximately $421,651,000 and stockholders' equity of approximately $28,113,000. Railroad operates 18 branches and 71 agency offices in Kansas. It is anticipated that this acquisition will be accounted for as a pooling of interests. Conservative Savings Corporation: On August 15, 1995, the Corporation entered into a Reorganization and Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank, Conservative Savings Corporation (Conservative) and Conservative Savings Bank, FSB. Under the terms of the Merger Agreement, the Corporation will acquire all of the outstanding shares of Conservative's common stock (1,846,005 shares) and preferred stock (460,000 shares). As defined in the Merger Agreement, Conservative's common and preferred 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 September 22, 1995, of $35.75, the transaction has a per share value of $15.37 for the common stock and $34.73 for the preferred stock and an aggregate value of approximately $44,343,000 for all outstanding common and preferred stock. The Corporation also announced that it has entered into a stock option agreement with Conservative under which the Corporation has been granted an option to purchase 19.9% of Conservative's outstanding shares of common stock under certain circumstances provided in the agreement in the event the transaction is terminated. At June 30, 1995, Conservative had assets of approximately $383,400,000, deposits of approximately $198,100,000 and stockholders' equity of approximately $34,800,000. Conservative operates nine branches with seven located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. This proposed acquisition, which is subject to regulatory approvals and the approval of Conservative's shareholders, is expected to be completed by March 31, 1996. The acquisition is to be completed no later than June 30, 1996, unless extended by mutual agreement of both the Corporation and Conservative. 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. 74 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, 1995. 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, 1995. /s/ William 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 75 Independent Auditors' Report - - -------------------------------------------------------------------------------- Board of Directors and Shareholders Commercial Federal Corporation Omaha, Nebraska We have audited the accompanying consolidated statements of financial condition of Commercial Federal Corporation and subsidiaries as of June 30, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1995. 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. 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 financial 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, 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 certain investments in debt and equity securities to conform with Statement of Financial Accounting Standards No. 115 in 1995. As discussed in Notes 1 and 21 to the consolidated financial statements, in 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 25, 1995 (September 22, 1995 as to Note 27) Omaha, Nebraska 76 - - -------------------------------------------------------------------------------- INVESTOR INFORMATION CORPORATE HEADQUARTERS Commercial Federal Corporation Commercial Federal Tower 2120 S. 72nd Street Omaha, NE 68124 GENERAL COUNSEL Fitzgerald, Schorr, Barmettler & Brennan 1000 Woodman Tower Omaha, NE 68102 WASHINGTON COUNSEL Housley Goldberg 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: Transfer Agent Chemical Bank/GeoServe Stock Transfer Department P.O. Box 24935 Church Street Station New York, NY 10249 (800) 851-9677 Analysts, investors and others seeking a copy of the Form 10-K without charge or other financial information should contact: Investor Relations Department 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 21, 1995. 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. 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 Treasurer of the Corporation, and Senior Vice President and Treasurer of the Bank SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES MARGARET E. ASH Senior Vice President Retail Operations JON W. STEPHENSON Senior Vice President State Director - Oklahoma/Kansas TERRY A. TAGGART Senior Vice President State Director - Colorado GARY D. WHITE Senior Vice President State Director - Nebraska RONALD A. AALSETH First Vice President of the Bank and President of Commercial Federal Investment Services, Inc., and Commercial Federal Insurance Corp. MICHAEL C. BRUGGEMAN First Vice President Human Resources DAVID E. GUNTER, JR. First Vice President of the Bank and President of Commercial Federal Service Corp. JOHN L. LAUGHLIN First Vice President Consumer Lending ROGER L. LEWIS First Vice President Marketing KEVIN C. PARKS First Vice President Internal Audit THOMAS N. PERKINS First Vice President Acquisitions and Expansion DENNIS R. ZIMMERMAN First Vice President Information Systems 78 BRANCH LOCATIONS* NEBRASKA (30) OMAHA 1912 Harney Street 4724 S. 24th Street 4503 N. 30th Street 3605 "Q" Street 4444 Farnam Street 5007 Grover Street 5901 N.W. Radial Highway (Benson) 1818 S. 72nd Street 8510 Dodge Street 3520 N. 90th Street 4860 S. 96th Street 12255 W. Center Road 13737 "Q" Street 11910 Stonegate Circle BEATRICE 633 N. 6th Street BELLEVUE 505 Galvin Road FREMONT 1330 E. 23rd Street GRAND ISLAND 3301 W. State Street KEARNEY 4407 Second Street LAVISTA/PAPILLION 8125 S. 84th Street LINCOLN 1314 "O" Street 5555 "O" Street 2103 S. 16th Street (Central Park) 3045 N. 70th Street (70th & Adams) 6345 Havelock Avenue 3800 Normal Boulevard 5700 Village Boulevard NORFOLK 602 Norfolk Avenue NORTH PLATTE 301 W. Fourth Street SOUTH SIOUX CITY 1001 Dakota Avenue COLORADO (20) DENVER 600 17th Street 3102 S. Sheridan Boulevard (Bear Valley) 2 Steele Street (Cherry Creek) 7995 E. Hampden Avenue (Tamarac Square) 2700 S. Colorado Boulevard (University Hills) 330 S. Dayton Street (Windsor Gardens) ARAPAHOE COUNTY (SOUTH) 7310 E. Arapahoe Road (Arapahoe Plaza) 6941 S. University (Southglenn Mall) ARVADA 7355 Ralston Road, Building 1 AURORA 700 S. Abilene Street (Aurora Mall) BROOMFIELD One Garden Center ENGLEWOOD 3513 S. Logan Street, Suite A GREELEY 1111 11th Street JEFFERSON COUNTY (SOUTH) 9111 W. Bowles Avenue (Southwest Plaza) LAKEWOOD 7077 W. Alameda (Villa Italia) 10425 W. Colfax (Westland Mall) LONGMONT 700 5th Avenue (Downtown) LOVELAND 303 E. 6th Street NORTHGLENN 10393 N. Huron Street WHEAT RIDGE 7575 W. 44th Avenue OKLAHOMA (17) OKLAHOMA CITY 5757 N.W. Expressway 5603 N. Pennsylvania (Penn Plaza) 12401 N. May (Quail Creek) 5401 N.W. 23rd (Windsor Hills) 89th & Penn ADA 301 S. Broadway 606 E. Main ARDMORE 321 N. Commerce BARTLESVILLE 100 S. E. 4th CUSHING 323 E. Broadway EDMOND 901 West Edmond Road ENID 701 W. Broadway PONCA CITY 400 E. Central 1417 E. Hartford TULSA 6100 E. 51st (Southeast) 2201 E. 21st (Utica) SEMINOLE 1907 N. Milt Phillips KANSAS (5*) KANSAS CITY 1380 W. 87th Parkway (Lenexa) 6263 Nall Avenue (Mission) IOLA 120 E. Madison LYNDON 730 Topeka Avenue OTTAWA 700 S. Main Street * Commercial Federal expects to close in October 1995 its previously announced acquisition of 18 full-service retail offices and 71 agency offices from Railroad Financial. These offices are located throughout the state of Kansas. In addition, the Company anticipates that its acquisition of nine retail offices--seven in Nebraska, one in Kansas and one in Iowa--from Conservative Savings Corporation will be completed in March 1996. 79 EX-21 4 EXHIBIT 21 EXHIBIT 21 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. 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. 100% Nebraska Commercial Federal Investment 100% Nebraska Corporation Commercial Federal Investment 100% Nebraska Services, Inc. Commercial Financial Investment 100% Nebraska Associates, Inc. ESL Corporation 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 EX-23 5 EXHIBIT 23 EXHIBIT 23 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 25, 1995 (September 22, 1995, as to Note 27), incorporated by reference in the Annual Report on Form 10-K of Commercial Federal Corporation for the year ended June 30, 1995. /s/ Deloitte & Touche LLP Omaha, Nebraska September 27, 1995 EX-27 6 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 12-MOS JUN-30-1995 JUL-01-1995 JUN-30-1995 26,230 0 3,100 0 10,322 1,615,698 1,604,609 3,991,638 46,567 5,954,308 3,591,175 716,583 145,872 1,191,177 129 0 0 309,372 5,954,308 306,033 105,896 0 411,929 165,124 277,806 134,123 6,033 0 117,420 48,267 27,535 0 0 27,535 2.11 2.11 2.42 29,217 0 17,002 0 42,926 3,503 1,334 46,567 15,280 0 31,287
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