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Rule No. 424(b)(3)
Registration No. 33-64017
CONSERVATIVE SAVINGS CORPORATION
11207 West Dodge Road
Omaha, Nebraska 68154
(402) 334-8475
November 27, 1995
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the "Special
Meeting") of Conservative Savings Corporation ("Conservative") to be held at the
Marriott Hotel, 10220 Regency Circle, Omaha, Nebraska, on Wednesday, January 10,
1996 at 9:00 a.m., local time. Notice of the Special Meeting, a Prospectus/Proxy
Statement and a Proxy Card are enclosed.
The Special Meeting has been called in connection with the proposed
acquisition of Conservative and its principal subsidiary, Conservative Savings
Bank, FSB ("Conservative Savings") by Commercial Federal Corporation
("Commercial") and its principal subsidiary, Commercial Federal Bank, a Federal
Savings Bank (the "Bank"), respectively, in accordance with a Reorganization and
Merger Agreement by and among Commercial, the Bank, Conservative and
Conservative Savings (the "Merger Agreement"). Pursuant to the Merger Agreement
(1) Conservative will merge into Commercial and the outstanding shares of
Conservative's common stock and Conservative's preferred stock will be converted
into cash and shares of Commercial common stock as set forth below and in the
accompanying Prospectus/Proxy Statement (the "Acquisition Merger") and (2)
Conservative Savings will, following the Acquisition Merger, merge into the Bank
(collectively, the "Merger"). Pursuant to the Merger Agreement, each share of
Conservative common stock outstanding at the time of the Acquisition Merger will
be converted into the right to receive (a) $6.34 in cash and (b) a number of
shares of Commercial common stock (such number of shares referred to as the
"Exchange Ratio") based upon the "Average Closing Price" of Commercial common
stock (i.e., the arithmetic mean of the per share closing price of the
Commercial common stock as reported on the New York Stock Exchange ("NYSE") for
the twenty-fifth through the sixth trading day immediately preceding the
effective time of the Acquisition Merger) as follows: (i) if the Average Closing
Price is less than $28.00 but equal to or greater than $26.00, the Exchange
Ratio shall be that number of shares of Commercial common stock equal to the
quotient that results by dividing $7.07 by the Average Closing Price; (ii) if
the Average Closing Price is equal to or greater than $28.00 but equal to or
less than $36.00, the Exchange Ratio shall be .2525 shares of Commercial common
stock; (iii) if the Average Closing Price is greater than $36.00, the Exchange
Ratio shall be that number of shares of Commercial common stock equal to the
quotient that results by dividing $9.09 by the Average Closing Price; and (iv)
if the Average Closing Price is less than $26.00, the Exchange Ratio shall be
.2719 shares of Commercial common stock; provided, however, that if the Average
Closing Price is less than $26.00, Conservative will have the right to terminate
the Merger Agreement unless Commercial elects to adjust the Exchange Ratio to
equal $7.07 divided by the Average Closing Price. If the Average Closing Price
is less than $18.00, Conservative may terminate the Merger Agreement and
Commercial does not have the option to increase the Exchange Ratio. Also
pursuant to the Merger Agreement, each share of Conservative preferred stock
outstanding at the time of the Acquisition Merger will be converted into the
right to receive (a) $14.33 in cash and (b) a number of shares of Commercial
common stock equal to the product of 2.26 and the Exchange Ratio. Based on the
closing price per share of Commercial common stock on the NYSE on November 21,
1995, of $35.25, each share of Conservative common stock would be exchanged for
$6.34 in cash and .2525 shares of Commercial common stock and each share of
Conservative preferred stock would be exchanged for $14.33 in cash and .5707
shares of Commercial common stock. Such Exchange Ratio may increase or decrease
depending on the Average Closing Price of Commercial common stock. Cash will be
paid in lieu of fractional shares. Following the Merger, Commercial will be the
resulting holding company, and the Bank will be the resulting savings
institution. Consummation of the Merger is conditioned upon, among other things,
receipt of all required regulatory approvals and approval by Conservative's
common and preferred stockholders.
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At the Special Meeting, stockholders of Conservative will consider and vote
upon approval of the Acquisition Merger and the Merger Agreement. In addition,
the stockholders of Conservative may be asked to approve adjournment of the
Special Meeting if necessary to permit further solicitation of proxies in the
event that there are not sufficient votes at the time of the Special Meeting to
approve the Acquisition Merger and the Merger Agreement. Your Board of
Directors has approved the Merger Agreement, including the Acquisition Merger,
and believes that the Acquisition Merger and the Merger Agreement are in the
best interests of Conservative and its stockholders. Accordingly, your Board of
Directors unanimously recommends that you vote FOR approval of the Acquisition
Merger and the Merger Agreement and FOR adjournment of the Special Meeting, if
necessary.
Conservative's Board of Directors has received the opinion of its financial
advisor, Dain Bosworth Incorporated, that the consideration to be received by
holders of Conservative's common stock and Conservative's preferred stock in the
Acquisition Merger is fair from a financial point of view.
You are urged to read the accompanying Prospectus/Proxy Statement, which
provides detailed information concerning the Merger and related matters.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE
SPECIAL MEETING. This will not prevent you from voting in person but will
assure that your vote is counted if you are unable to attend the Special
Meeting.
Sincerely,
/s/ Robert P. DeLay
Robert P. DeLay
President and Chief Executive Officer
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CONSERVATIVE SAVINGS CORPORATION
11207 West Dodge Road
Omaha, Nebraska 68154
(402) 334-8475
______________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 10, 1996
______________________________
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Special
Meeting") of Conservative Savings Corporation ("Conservative") will be held on
Wednesday, January 10, 1996 at 9:00 a.m. at the Marriott Hotel, 10220 Regency
Circle, Omaha, Nebraska, for the following purposes:
(1) To approve the merger of Conservative into Commercial Federal Corporation
("Commercial"), with Commercial as the surviving corporation, pursuant to
which the outstanding shares of Conservative's common stock and
Conservative's preferred stock will be converted into cash and shares of
Commercial common stock as set forth in the accompanying Prospectus/Proxy
Statement (the "Acquisition Merger"), and to adopt the Reorganization and
Merger Agreement by and between Commercial, Commercial Federal Bank, a
Federal Savings Bank (the "Bank"), Conservative and Conservative Savings
Bank, FSB ("Conservative Savings") dated August 15, 1995 (the "Merger
Agreement"), which sets forth the terms and conditions of the Acquisition
Merger and also provides for the subsequent merger of Conservative
Savings into the Bank, with the Bank as the surviving savings
institution.
(2) Adjournment of the Special Meeting if necessary to permit further
solicitation of proxies in the event that there are not sufficient votes
at the time of the Special Meeting to approve the Acquisition Merger and
the Merger Agreement.
(3) Such other business as may properly come before the Special Meeting or
any adjournments thereof.
NOTE: The Board of Directors of Conservative is not aware of any other business
to come before the Special Meeting.
The Board of Directors of Conservative has fixed the close of business on
November 14, 1995 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only stockholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Special Meeting.
By Order of the Board of Directors,
/s/ Robert P. DeLay
Robert P. DeLay
President and Chief Executive Officer
Omaha, Nebraska
November 27, 1995
________________________________________________________________________________
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
________________________________________________________________________________
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Prospectus/Proxy Statement
--------------------------------------
COMMERCIAL FEDERAL CORPORATION
Prospectus
810,943 Shares of Common Stock
par value $.01 per share
(subject to adjustment)
--------------------------------------
--------------------------------------
CONSERVATIVE SAVINGS CORPORATION
Proxy Statement
For Special Meeting of Stockholders
To Be Held on January 10, 1996
--------------------------------------
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, par value $.01 per share ("Conservative Common Stock") and holders
of the $1.52 Series A Cumulative Convertible Preferred Stock ("Conservative
Preferred Stock"), of Conservative Savings Corporation ("Conservative") in
connection with the solicitation of proxies by Conservative's Board of Directors
for use at a special meeting of stockholders (the "Special Meeting") to be held
at the Marriott Hotel, 10220 Regency Circle, Omaha, Nebraska, on Wednesday,
January 10, 1996 at 9:00 a.m., local time.
The purposes of the Special Meeting and the matters to be acted upon are: (i)
to consider and vote upon the proposed merger of Conservative into Commercial
Federal Corporation ("Commercial"), with Commercial as the surviving corporation
(the "Acquisition Merger"), in accordance with a Reorganization and Merger
Agreement by and between Commercial; Commercial Federal Bank, a Federal Savings
Bank (the "Bank"), the wholly-owned savings institution subsidiary of
Commercial; Conservative; and Conservative Savings Bank, FSB ("Conservative
Savings"), the wholly-owned savings institution subsidiary of Conservative,
dated August 15, 1995 (the "Merger Agreement"), which sets forth the terms and
conditions of the Acquisition Merger and also provides for the subsequent merger
of Conservative Savings into the Bank; (ii) to consider and vote upon
adjournment of the Special Meeting if necessary to permit further solicitation
of proxies in the event that there are not sufficient votes at the time of the
Special Meeting to approve the Acquisition Merger and the Merger Agreement; and
(iii) to consider and vote upon such other business as may properly come before
the Special Meeting or any adjournments thereof.
Pursuant to the Merger Agreement, each share of Conservative Common Stock
outstanding at the effective time of the Acquisition Merger (the "Acquisition
Merger Effective Time") will be converted into the right to receive (a) $6.34 in
cash and (b) a number of shares of Commercial common stock, par value $.01 per
share (the "Commercial Common Stock") (such number of shares referred to as the
"Exchange Ratio") based upon the "Average Closing Price" of Commercial Common
Stock (i.e., the arithmetic mean of the per share closing price of the
Commercial Common Stock as reported on the New York Stock Exchange ("NYSE") for
the twenty-fifth through the sixth trading day immediately preceding the
effective time of the Acquisition Merger (the "Determination Period")) as
follows: (i) if the Average Closing Price is less than $28.00 but equal to or
greater than $26.00, the Exchange Ratio shall be that number of shares of
Commercial Common Stock equal to the quotient that results by dividing $7.07 by
the Average Closing Price; (ii) if the Average Closing Price is equal to or
greater than $28.00 but equal to or less than $36.00, the Exchange Ratio shall
be .2525 shares of Commercial Common Stock; (iii) if the Average Closing Price
is greater than $36.00, the Exchange Ratio shall be that number of shares of
Commercial Common Stock equal to the quotient that results by dividing $9.09 by
the Average Closing Price; and (iv) if the Average Closing Price is less than
$26.00, the Exchange Ratio shall be .2719 shares of Commercial Common Stock;
provided, however, that if the Average Closing Price is less than $26.00,
Conservative will have the right to
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terminate the Merger Agreement unless Commercial elects to adjust the Exchange
Ratio to equal $7.07 divided by the Average Closing Price. If the Average
Closing Price is less than $18.00, Conservative may terminate the Merger
Agreement and Commercial does not have the option to increase the Exchange
Ratio. Also pursuant to the Merger Agreement, each share of Conservative
Preferred Stock outstanding at the time of the Acquisition Merger will be
converted into the right to receive (a) $14.33 in cash and (b) a number of
shares of Commercial Common Stock equal to the product of 2.26 and the Exchange
Ratio (the cash consideration and shares of Commercial Common Stock to be
received by holders of the Conservative Common Stock and Conservative Preferred
Stock pursuant to the Merger Agreement are collectively referred to herein, as
the context requires, as the "Merger Consideration"). Based on the closing
price per share of Commercial Common Stock on the NYSE on November 21, 1995,
of $35.25, each share of Conservative Common Stock would be exchanged for $6.34
in cash and .2525 shares of Commercial Common Stock, and each share of
Conservative Preferred Stock would be exchanged for $14.33 in cash and .5707
shares of Commercial Common Stock. Cash will be paid in lieu of fractional
shares.
Commercial has filed a registration statement on Form S-4 with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of its
common stock, par value $.01 per share, to be issued upon consummation of the
Acquisition Merger. See "Available Information." This Prospectus/Proxy
Statement constitutes a prospectus of Commercial with respect to the issuance of
shares of Commercial Common Stock to the stockholders of Conservative upon
consummation of the Acquisition Merger.
THE BOARD OF DIRECTORS OF CONSERVATIVE BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF CONSERVATIVE'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION MERGER, INCLUDING THE
MERGER AGREEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE AGENCY, NOR HAS SUCH COMMISSION, OFFICE,
CORPORATION OR AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION.
This Prospectus/Proxy Statement and the accompanying proxy card are first
being sent to the stockholders of Conservative on or about November 27, 1995.
Conservative's principal executive office is located at 11207 West Dodge
Road, Omaha, Nebraska 68154, and its telephone number is (402) 334-8475.
This Prospectus/Proxy Statement does not cover any resales of the Commercial
Common Stock offered hereby to be received by the stockholders deemed to be
affiliates of Commercial or Conservative upon consummation of the Merger. No
person is authorized to make use of this Prospectus/Proxy Statement in
connection with such resales, although such securities may be traded without the
use of this Proxy Statement/Prospectus by those stockholders of Commercial not
deemed to be affiliates of Commercial or Conservative.
The date of this Prospectus/Proxy Statement is November 14, 1995
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PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION................................................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................... 1
SUMMARY.............................................................................................. 3
The Special Meeting of Conservative Stockholders..................................................... 3
Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings Bank................... 3
Conservative Savings Corporation and Conservative Savings Bank, FSB.................................. 3
The Merger........................................................................................... 4
Comparison of Stockholder Rights..................................................................... 8
Adjournment of Special Meeting....................................................................... 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION....................................................................... 9
Financial Condition Data and Capital Ratios.......................................................... 9
Operating Data....................................................................................... 10
Operating Ratios and Other Data...................................................................... 11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF CONSERVATIVE SAVINGS CORPORATION.................................................................. 12
Financial Condition Data and Capital Ratios.......................................................... 12
Operating Data....................................................................................... 13
Operating Ratios and Other Data...................................................................... 14
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
RAILROAD FINANCIAL CORPORATION....................................................................... 15
Financial Condition Data and Capital Ratios.......................................................... 15
Operating Data....................................................................................... 16
Operating Ratios and Other Data...................................................................... 17
INFORMATION CONCERNING THE SPECIAL MEETING........................................................... 18
General.............................................................................................. 18
Recent Events........................................................................................ 18
Solicitation, Voting and Revocability of Proxies..................................................... 19
COMMERCIAL FEDERAL CORPORATION AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK...................................................... 20
CONSERVATIVE SAVINGS CORPORATION AND CONSERVATIVE SAVINGS BANK, FSB.................................. 20
THE MERGER........................................................................................... 21
General.............................................................................................. 21
Background of the Merger............................................................................. 22
Reasons for the Merger and Recommendations of the Conservative Board of Directors.................... 23
Financial Advisors and Opinions of Financial Advisors................................................ 24
Conversion of Conservative Common Stock and Conservative Preferred Stock............................. 29
Treatment of Conservative Stock Options.............................................................. 30
No Dissenters' Appraisal Rights...................................................................... 30
The Bank Merger...................................................................................... 31
Management after the Merger.......................................................................... 31
Representations and Warranties....................................................................... 31
Covenants Pending the Acquisition Merger............................................................. 31
</TABLE>
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TABLE OF CONTENTS (continued) Page
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Conditions to Consummation of the Merger............................................................. 33
Amendment or Termination of the Merger Agreement..................................................... 35
Stock Option Agreement............................................................................... 36
Required Regulatory Approvals........................................................................ 37
Expenses............................................................................................. 38
Closing; Merger Effective Times...................................................................... 38
Employee Benefit Plans after the Merger.............................................................. 38
Interests of Certain Persons in the Merger........................................................... 38
Indemnification of Conservative Management........................................................... 40
Federal Income Tax Consequences...................................................................... 40
Accounting Treatment................................................................................. 42
Resale of Commercial Common Stock; Restrictions on Transfer.......................................... 42
New York Stock Exchange Listing...................................................................... 42
Vote Required........................................................................................ 43
UNAUDITED HISTORICAL PRO FORMA COMBINED FINANCIAL INFORMATION........................................ 44
Unaudited Historical Pro Forma Combined Statement of Financial Condition............................. 45
Unaudited Historical Pro Forma Condensed Combined Statement of Operations............................ 47
Unaudited Pro Forma Combined Earnings Per Share Data................................................. 50
Unaudited Historical Pro Forma Combined Regulatory Capital........................................... 52
BENEFICIAL OWNERSHIP OF CONSERVATIVE COMMON STOCK AND PREFERRED STOCK................................ 54
COMMON STOCK AND PREFERRED STOCK PRICES AND DIVIDENDS................................................ 55
Common Stock and Preferred Stock Prices.............................................................. 55
Dividends............................................................................................ 56
COMPARISON OF STOCKHOLDER RIGHTS..................................................................... 56
ADJOURNMENT OF SPECIAL MEETING....................................................................... 62
STOCKHOLDER PROPOSALS................................................................................ 62
LEGAL MATTERS........................................................................................ 62
EXPERTS.............................................................................................. 62
INDEPENDENT ACCOUNTANTS.............................................................................. 63
OTHER MATTERS........................................................................................ 63
ANNEX:
Annex A -- Reorganization and Merger Agreement by and between Commercial Federal
Corporation and Commercial Federal Bank, a Federal Savings Bank and Conservative
Savings Corporation and Conservative Savings Bank, FSB (excluding exhibits)......... A-1
Annex B -- Opinion of Dain Bosworth Incorporated............................................... B-1
Annex C -- Stock Option Agreement.............................................................. C-1
Annex D -- Conservative Savings Corporation Form 10-K for the fiscal year
ended December 31, 1994, as amended by Form 10-K/A filed
November 3, 1995.................................................. (Provided Separately)
Annex E -- Conservative Savings Corporation Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1995............................... (Provided Separately)
</TABLE>
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No person is authorized to give any information or make any representation
other than those contained or incorporated in this Prospectus/Proxy Statement,
and, if given or made, such information or representation should not be relied
upon as having been authorized. This Prospectus/Proxy Statement does not
constitute an offer to exchange or sell, or a solicitation of an offer to
exchange or purchase, the securities offered by this Prospectus/Proxy Statement,
or the solicitation of a proxy, in any jurisdiction in which such offer or
solicitation is not authorized or to or from any person to whom it is unlawful
to make such offer or solicitation. The information contained in this
Prospectus/Proxy Statement speaks as of the date hereof unless otherwise
specifically indicated. Information contained in this Prospectus/Proxy
Statement regarding Commercial has been furnished by Commercial, and information
herein regarding Conservative has been furnished by Conservative. Neither
Commercial nor Conservative warrants the accuracy or completeness of information
relating to the other party.
AVAILABLE INFORMATION
Commercial has filed with the Commission a registration statement on Form
S-4 under the Securities Act relating to the shares of Commercial Common Stock
to be issued in connection with the Acquisition Merger. This Prospectus/Proxy
Statement does not contain all the information set forth in the registration
statement, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. The information omitted may be obtained from the
public reference facilities of the Commission or inspected and copied at the
principal or regional offices of the Commission at the addresses listed below.
Commercial and Conservative are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices at Northwestern Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60601, and World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials also can be obtained
from the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by Commercial
are hereby incorporated by reference in this Prospectus/Proxy Statement:
(i) Commercial's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995;
(ii) Commercial's Current Reports on Form 8-K dated August 8, 1995, August
18, 1995 and October 17, 1995; and
(iii) the description of Commercial's common stock set forth at Item 1 of
Commercial's registration statement on Form 8-A dated July 3, 1985
(File No. 0-13082).
The following documents previously filed with the Commission by
Conservative are hereby incorporated by reference in this Prospectus/Proxy
Statement:
(i) Conservative's Annual Report on Form 10-K for the year ended
December 31, 1994, as amended by Form 10-K/A filed on November 3,
1995;
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(ii) Conservative's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1995 and June 30, 1995; and
(iii) Conservative's Current Reports on Form 8-K dated April 10, 1995,
August 17, 1995 and October 23, 1995.
In addition, Conservative's Form 10-K for the fiscal year ended
December 31, 1994, as amended by Form 10-K/A filed on November 3, 1995, and
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1995 accompany this
Prospectus/Proxy Statement as Appendices D and E, respectively, and are
incorporated herein by reference.
All documents subsequently filed by Commercial with the Commission pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
of this Prospectus/Proxy Statement and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Prospectus/Proxy
Statement and to be part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part of
this Prospectus/Proxy Statement, except as so modified or superseded.
This Prospectus/Proxy Statement incorporates by reference other documents
relating to Commercial and Conservative which are not presented herein or
delivered herewith. These documents are available upon request without charge,
in the case of documents relating to Commercial, directed to Mr. Gary L. Matter,
Commercial's Corporate Secretary, 2120 South 72nd Street, Omaha, Nebraska 68124,
telephone (402) 390-5176 or, in the case of documents relating to Conservative,
to Mr. Craig S. Allen, Conservative's Senior Vice President and Chief Financial
Officer, 11207 West Dodge Road, Omaha, Nebraska 68154, telephone (402) 334-8475.
In order to ensure timely delivery of any requested documents, the request
should be made no later than the close of business on December 29, 1995.
2
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SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the detailed information and definitions appearing elsewhere herein,
the annexes hereto and documents incorporated by reference herein.
The Special Meeting of Conservative Stockholders
The Special Meeting will be held on Wednesday, January 10, 1996
at 9:00 a.m. at the Marriott Hotel, 10220 Regency Circle, Omaha, Nebraska. At
the Special Meeting, stockholders of Conservative will consider and vote upon
proposals (1) to approve the Acquisition Merger and the Merger Agreement; (2) to
adjourn the Special Meeting if necessary to permit further solicitation of
proxies in the event that there are not sufficient votes at the time of the
Special Meeting to approve the Acquisition Merger and the Merger Agreement; and
(3) to vote upon any other business which may be properly brought before the
Special Meeting. Stockholders of record at the close of business on November 14,
1995 (the "Record Date") will be entitled to one vote for each share then so
held. The presence, in person or by proxy, of a majority of the total number of
outstanding shares of Conservative Common Stock and a majority of the total
number of outstanding shares of Conservative Preferred Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special Meeting.
The affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of Conservative Common Stock and two-thirds of the issued and
outstanding shares of Conservative Preferred Stock voting separately as a class,
in addition to two-thirds of the total outstanding shares, is required to
approve the Acquisition Merger and the Merger Agreement. The affirmative vote of
a majority of the shares of Conservative Common Stock and a majority of the
shares of Conservative Preferred Stock voting separately as a class represented
and voting at the Special Meeting is required to approve an adjournment of the
Special Meeting. Conservative's directors and executive officers, and their
affiliates, are expected to vote substantially all of the 85,388 shares of
Conservative's outstanding Common Stock (excluding stock options), and 100
shares of Conservative's outstanding Preferred Stock beneficially owned by them
as of the Record Date for approval of the Acquisition Merger and the Merger
Agreement.
For additional information, see "Information Concerning the Special
Meeting" herein.
Commercial Federal Corporation and Commercial Federal Bank, a Federal Savings
Bank
Commercial is a unitary non-diversified savings and loan holding company
whose primary asset is 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. The Bank conducts loan origination activities through its
branch office network, loan offices of its wholly-owned mortgage banking
subsidiary and a nationwide correspondent network consisting of approximately
400 loan originators. The Bank also provides insurance and securities brokerage
and other retail financial services. On October 2, 1995, Commercial completed
its acquisition of Railroad Financial Corporation, a savings and loan holding
company headquartered in Wichita, Kansas with total assets of $626.5 million at
August 31, 1995. Commercial added 18 branches (for a total of 91 branches) and
71 agency offices all located in Kansas to its network as a result of such
acquisition.
For additional information, see "Commercial Federal Corporation and
Commercial Federal Bank, a Federal Savings Bank" herein.
Conservative Savings Corporation and Conservative Savings Bank, FSB
Conservative is a savings and loan holding company headquartered in Omaha,
Nebraska. Conservative's sole subsidiary is Conservative Savings, a federally-
chartered savings bank that attracts deposits insured by the Federal Deposit
Insurance Corporation ("FDIC"). Conservative originates one-to-four family and
multi-family
3
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mortgage loans, residential and multi-family construction loans and consumer
loans through four offices in Omaha, two in Columbus, Nebraska, one in Bellevue,
Nebraska, one in Harlan, Iowa and one in Overland Park, Kansas. At June 30,
1995, Conservative had total consolidated assets of $383.4 million, net loans
receivable of $161.2 million, total deposits of $198.1 million and total
stockholders equity of $34.8 million.
For additional information, see "Conservative Savings Corporation and
Conservative Savings Bank, FSB" herein.
The Merger
General. The Merger Agreement provides for the acquisition of Conservative
by Commercial, and the subsequent merger of Conservative Savings into the Bank,
as follows: (i) Conservative will merge into Commercial, with Commercial as the
surviving corporation, pursuant to which the outstanding shares of Conservative
Common Stock and Conservative Preferred Stock will be converted into cash and
shares of Commercial Common Stock as set forth below under " -- Conversion of
Conservative Common Stock and Preferred Stock" (the Acquisition Merger); and
(ii) Conservative Savings will, following the Acquisition Merger, merge into the
Bank, with the Bank as the surviving savings institution (the "Bank Merger")
(collectively, the "Merger"). At the Acquisition Merger Effective Time,
Conservative will have merged into Commercial. Upon the consummation of the
Bank Merger (the "Bank Merger Effective Time"), Conservative Savings will have
merged into the Bank, Commercial will be the resulting savings institution
holding company, and the Bank will be the resulting subsidiary savings
institution. It is anticipated that the Bank Merger Effective Time will occur
immediately following the Acquisition Merger Effective Time.
The Board of Directors of Conservative considered the Merger and the terms
of the Merger Agreement, including the Exchange Ratio, in light of economic,
financial, legal, market and other factors and concluded that the Merger is in
the best interests of Conservative and its stockholders.
The Board of Directors of Conservative believes that the Merger is in the
best interests of Conservative and its stockholders and recommends that
Conservative's stockholders vote FOR approval of the Merger Agreement and the
Acquisition Merger.
For additional information, see "The Merger -- General," "-- Background of
the Merger" and "-- Reasons for the Merger and Recommendations of the
Conservative Board of Directors" herein and the Merger Agreement attached as
Annex A hereto.
Financial Advisors and Opinions of Financial Advisors. The Board of
Directors of Conservative has received written opinions of Dain Bosworth
Incorporated ("Dain Bosworth") that, as of the date of such opinions, based upon
and subject to the assumptions, factors and limitations set forth therein, the
consideration to be received by holders of Conservative Common Stock and
Conservative Preferred Stock in the Acquisition Merger is fair from a financial
point of view. The Dain Bosworth opinion was updated and confirmed on
November 21, 1995. A copy of the Dain Bosworth opinion dated August 15, 1995
is attached as Annex B hereto, and the description set forth herein is qualified
in its entirety by reference to this opinion.
Commercial has retained Merrill Lynch & Co. ("Merrill Lynch") to render its
opinion with respect to the fairness to Commercial of the Exchange Ratio
negotiated by Commercial and Conservative. Merrill Lynch rendered its written
opinion to Commercial's Board of Directors on August 15, 1995, that as of the
date of such opinion, the Exchange Ratio was fair to Commercial from a financial
point of view. The opinion sets forth a description of the assumptions made and
matters considered by Merrill Lynch and contains certain limitations and
qualifications. The Merrill Lynch opinion was updated and confirmed on
November 17, 1995. A copy of the Merrill Lynch opinion is available for
inspection and copying at the principal executive offices of Commercial during
its regular business hours by any interested stockholder of Commercial or
Conservative or his authorized representative.
4
<PAGE>
Conversion of Conservative Common Stock and Preferred Stock. Pursuant to
the Merger Agreement, each share of Conservative Common Stock outstanding at the
Acquisition Merger Effective Time (other than shares owned or held by
Commercial) will be converted into the right to receive (a) $6.34 in cash and
(b) a number of shares of Commercial Common Stock (such number of shares
referred to as the "Exchange Ratio") based upon the "Average Closing Price" of
Commercial Common Stock (i.e., the arithmetic mean of the per share closing
price of the Commercial Common Stock as reported on the New York Stock Exchange
("NYSE") for the twenty-fifth through the sixth trading day immediately
preceding the effective time of the Acquisition Merger (the "Determination
Period")) as follows: (i) if the Average Closing Price is less than $28.00 but
equal to or greater than $26.00, the Exchange Ratio shall be that number of
shares of Commercial Common Stock equal to the quotient that results by dividing
$7.07 by the Average Closing Price; (ii) if the Average Closing Price is equal
to or greater than $28.00 but equal to or less than $36.00, the Exchange Ratio
shall be .2525 shares of Commercial Common Stock; (iii) if the Average Closing
Price is greater than $36.00, the Exchange Ratio shall be that number of shares
of Commercial Common Stock equal to the quotient that results by dividing $9.09
by the Average Closing Price; and (iv) if the Average Closing Price is less than
$26.00, the Exchange Ratio shall be .2719 shares of Commercial Common Stock;
provided, however, that if the Average Closing Price is less than $26.00,
Conservative will have the right to terminate the Merger Agreement unless
Commercial elects to adjust the Exchange Ratio to equal $7.07 divided by the
Average Closing Price. If the Average Closing Price is less than $18.00,
Conservative may terminate the Merger Agreement and Commercial does not have the
option to increase the Exchange Ratio. Also pursuant to the Merger Agreement,
each share of Conservative Preferred Stock outstanding at the time of the
Acquisition Merger will be converted into the right to receive (a) $14.33 in
cash and (b) a number of shares of Commercial Common Stock equal to the product
of 2.26 and the Exchange Ratio. Based on the closing price per share of
Commercial Common Stock on the NYSE on November 21, 1995, of $35.25, each
share of Conservative Common Stock would be exchanged for $6.34 in cash and
.2525 shares of Commercial Common Stock and each share of Conservative Preferred
Stock would be exchanged for $14.33 in cash and .5707 shares of Commercial
Common Stock. Such Exchange Ratio may increase or decrease depending on the
Average Closing Price of Commercial Common Stock. Cash will be paid in lieu of
fractional shares. Shares of Conservative Common Stock and Conservative
Preferred Stock owned or held by Commercial or a subsidiary (other than in a
fiduciary capacity) would be cancelled. For additional information, see "The
Merger -- Conversion of Conservative Common Stock and Preferred Stock" herein.
Treatment of Conservative Stock Options. Immediately prior to the
Acquisition Merger Effective Time, each holder of an option outstanding under
Conservative's Employee Stock Compensation Program as Amended and Restated
May 12, 1994 (the "Conservative Option Plan"), whether or not the option is then
exercisable, shall receive in cancellation of such option, for each share of
Conservative Common Stock subject to such option, a cash payment in an amount
equal to the sum of (i) $6.34, (ii) the product of the Exchange Ratio and the
Average Closing Price, less (iii) the exercise price of such option, net of any
cash which must be withheld under federal and state income tax requirements.
For additional information, see "The Merger -- Treatment of Conservative Stock
Options" and "--Interests of Certain Persons in the Merger" herein.
Dissenters' Appraisal Rights. Under Nebraska law, stockholders of
Conservative will not have any dissenters' rights of appraisal as a result of
the matters to be voted upon at the Special Meeting. See "The Merger -- No
Dissenters' Appraisal Rights."
Stock Option Agreement. As a condition to Commercial's entry into the
Merger Agreement, Conservative and Commercial entered into a Stock Option
Agreement dated August 16, 1995 (the "Stock Option Agreement"), pursuant to
which Conservative granted to Commercial an option to purchase shares of
authorized and unissued or treasury shares of Conservative Common Stock in an
amount up to 367,354 shares of such stock, upon or after the occurrence of both
an "initial triggering event" and a "subsequent triggering event" (as defined
therein). The exercise price is $10.375 per share payable in cash. The Stock
Option Agreement is intended to increase the likelihood that the Merger will be
consummated in accordance with the terms of the Merger Agreement. Consequently,
certain aspects of the Stock Option Agreement may have the effect of
discouraging persons who otherwise might be interested in acquiring all of or a
significant interest in Conservative from considering or proposing such an
5
<PAGE>
acquisition, even if such persons were prepared to pay for the Conservative
Common Stock and Conservative Preferred Stock a price in excess of that being
paid by Commercial in the Merger. For additional information, see "The
Merger -- Stock Option Agreement" herein and the Stock Option Agreement, which
is attached hereto as Annex C.
Conditions to the Merger. The obligations of Commercial and Conservative
to effect the Merger are jointly subject to a number of conditions regarding,
among other things, stockholder and regulatory approval of the Merger and
receipt of an opinion with respect to the tax effects of the Merger. The
obligations of Commercial and the Bank to effect the Merger are subject to a
number of additional conditions regarding, among other things, (i) receipt of a
customary legal opinion from Conservative's legal counsel; (ii) receipt by
Conservative and Conservative Savings of certain third party consents and
approvals; (iii) receipt of a letter from Conservative's independent public
accountants regarding certain financial information included in this
Prospectus/Proxy Statement and other matters; (iv) the absence of material
adverse changes in the financial condition, business or results of operations of
Conservative and its subsidiaries; (v) the accuracy of Conservative's and
Conservative Savings' representations and their performance of obligations and
compliance with covenants and conditions under the Merger Agreement; (vi) the
receipt by Commercial of an updated written opinion from its financial advisor
prior to mailing of this Prospectus/Proxy Statement to the effect that the
Exchange Ratio is fair to Commercial from a financial point of view; (vii) the
receipt by Commercial of a Phase I Environmental Risk Report on certain
properties owned by, and securing loans made by, Conservative and Conservative
Savings; and (viii) the receipt of all required governmental approvals without
the imposition of any conditions which Commercial and the Bank determine to be
unduly burdensome on the conduct of the business of Commercial or the Bank. The
obligations of Conservative and Conservative Savings to effect the Acquisition
Merger and the transactions contemplated in the Merger Agreement are subject to
a number of additional conditions regarding, among other things, (i) receipt of
a customary legal opinion from Commercial's legal counsel; (ii) the accuracy of
Commercial's and the Bank's representations and warranties and their performance
of obligations and compliance with covenants and conditions under the Merger
Agreement; (iii) the receipt by Conservative of an updated written opinion from
its financial advisor prior to mailing of this Prospectus/Proxy Statement to the
effect that the consideration to be received by Conservative shareholders in the
Acquisition Merger is fair from a financial point of view; and (iv) receipt by
Commercial and the Bank of certain third party consents and approvals. For
additional information, see "The Merger -- Conditions to Consummation of the
Merger" herein.
Required Regulatory Approvals. The Merger is subject to the approval of
the OTS. Following OTS approval of the Merger, the U.S. Department of Justice
may review the Merger and raise objections on antitrust grounds, though
objections on such grounds are not expected. For additional information, see
"The Merger -- Required Regulatory Approvals" herein.
Termination of the Merger. The Merger Agreement may be terminated at any
time before the Acquisition Merger Effective Time, whether before or after
approval by Conservative stockholders, in a number of circumstances, including:
(a) by mutual consent of the parties; (b) at the election of either party, if
the closing of the Merger shall not have occurred on or before June 30, 1996;
(c) by either party upon the occurrence of an event which renders satisfaction
of one or more of the conditions to the obligations of the other party
impossible; (d) by Conservative at any time during the two business days
commencing on the business day immediately following the end of the
Determination Period, if the Average Closing Price of Commercial Common Stock is
less than $26.00; provided, however, that Conservative shall not be entitled to
terminate the Merger Agreement on this basis if Commercial exercises its option
to adjust the Exchange Ratio so that it equals the number obtained by dividing
$7.07 by the Average Closing Price of Commercial Common Stock; or (e) by
Conservative if the Average Closing Price is less than $18.00, in which case
Commercial will not have the right to increase the Exchange Ratio. In addition,
each of the parties has agreed to pay all costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated by the Merger
Agreement, and Conservative has agreed to reimburse Commercial for up to
$500,000 of all reasonable out-of-pocket expenses if the Merger Agreement is
terminated under certain
6
<PAGE>
circumstances. For additional information, see "The Merger -- Amendment or
Termination of the Merger Agreement" herein.
Interests of Certain Persons in the Merger. Shares of Conservative Common
Stock and Preferred Stock held by directors, officers and employees of
Conservative will be converted into cash and Commercial Common Stock under the
Merger Agreement on the same basis as shares held by other Conservative
stockholders. Directors, officers and employees of Conservative who hold
unexercised options to purchase Conservative Common Stock under the Conservative
Option Plan at the Acquisition Merger Effective Time will have their stock
options converted into cash in connection with the terms of the Merger
Agreement.
At the Record Date, officers and directors of Conservative held options to
purchase 98,064 shares of Conservative Common Stock at prices ranging between
$5.25 and $11.50 per share. The weighted average price of such options was
approximately $9.06 per share.
It is also currently anticipated that three executive officers of
Conservative will become entitled to severance payments under their current
employment agreements as a result of the Merger. In addition, Commercial has
separately entered into a consulting agreement with Robert P. DeLay, President
and Chief Executive Officer of Conservative. In particular, Messrs. DeLay, Uher
and Allen may receive up to $533,500, $100,000 and $88,400, respectively, upon
termination of their existing employment agreements with Conservative, and Mr.
DeLay will receive $75,000 per year for three years under his consulting
agreement with Commercial.
In addition, Commercial has agreed to provide indemnification for a period
of three years to Conservative's employees, agents, directors or officers
arising by virtue of Conservative's articles of incorporation or bylaws in the
form in effect at the date of the Merger Agreement or arising by operation of
law. Commercial has also agreed to cause the officers and directors of
Conservative immediately prior to the Acquisition Merger to be covered for a
period of 18 months from the Acquisition Merger by the directors' and officers'
liability insurance policy maintained by Conservative with respect to acts or
omissions occurring prior to the Acquisition Merger which were committed by such
officers and directors in their capacity as such.
For additional information, see "The Merger -- Management after the
Merger," "-- Employee Benefit Plans after the Merger" and "-- Interests of
Certain Persons in the Merger" herein.
Federal Income Tax Consequences. Commercial and Conservative will rely
upon an opinion of Deloitte & Touche LLP, tax advisor to Commercial, to the
effect that, among other things, (i) the Acquisition Merger should be treated
for federal income tax purposes as a tax-free reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the
gain, if any, to be realized by a Conservative stockholder who receives
Commercial Common Stock and cash in exchange for Conservative Common Stock or
Preferred Stock should be recognized, but not in excess of the amount of cash
received; (iii) if the exchange has the effect of the distribution of a dividend
(which determination is made on a stockholder-by-stockholder basis), then the
amount of gain recognized that is not in excess of each stockholder's ratable
share of undistributed earnings and profits should be treated as a dividend; and
(iv) cash received by Conservative stockholders in lieu of fractional share
interests in Commercial Common Stock should be treated as having been received
as distributions in full payment in exchange for the fractional share interests
in Commercial Common Stock which they would otherwise be entitled to receive and
should qualify as capital gain or loss if the stockholders held the Conservative
Common Stock or Preferred Stock as a capital asset at the Acquisition Merger
Effective Time. For additional information, see "The Merger -- Federal Income
Tax Consequences" herein.
Accounting Treatment. The Merger will be accounted for under the purchase
method of accounting in accordance with generally accepted accounting
principles, resulting in adjustments to the carrying value of Conservative's
assets and liabilities to reflect their fair values at the date of the
Acquisition Merger.
7
<PAGE>
Comparison of Stockholder Rights
Upon consummation of the Merger, holders of Conservative Common Stock and
Preferred Stock, whose rights are presently governed by Nebraska law and
Conservative's articles of incorporation and bylaws, and indirectly Conservative
Savings' charter and bylaws, will become stockholders of Commercial, a Nebraska
corporation. Accordingly, their rights will be governed by the articles of
incorporation and bylaws of Commercial and indirectly by the Bank's charter and
bylaws. Certain differences arise from the differences between the articles of
incorporation and bylaws of Conservative and the articles of incorporation and
bylaws of Commercial and between the charter and bylaws of Conservative Savings
and the Bank, including, among other things, the number of authorized shares of
capital stock, the calling of special meetings of stockholders, the number and
term of directors, advance notice requirements for nominations of directors and
presentation of new business at annual or special meetings of stockholders,
limitations on acquisitions of capital stock, approval requirements for mergers,
consolidations, sales of substantially all assets and dissolutions, limitations
on directors' liability and amendment of corporate governing documents. In
addition, both Commercial and Conservative have in effect shareholder rights
plans. For additional information, see "Comparison of Stockholder Rights"
herein.
Adjournment of Special Meeting
In the event that there are not sufficient votes to approve the Acquisition
Merger and the Merger Agreement at the time of the Special Meeting, stockholders
of Conservative will consider and vote upon a proposal to adjourn the Special
Meeting for the solicitation of additional votes in favor of the Acquisition
Merger and the Merger Agreement. A majority of the shares of Conservative
Common Stock and Conservative Preferred Stock voting separately as a class
represented and voting at the Special Meeting is required in order to approve
any such adjournment. Conservative's Board of Directors unanimously recommends
that stockholders vote FOR the proposal to adjourn the Special Meeting if
necessary to permit further solicitation of proxies.
For additional information, see "Adjournment of Special Meeting" herein.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION
The following tables set forth certain consolidated financial information
for Commercial at or for the dates indicated. This information is derived from
and should be read in conjunction with Commercial's consolidated financial
statements and the notes thereto, as well as the information under the caption
"Selected Consolidated Financial Data" contained in Commercial's 1995 Annual
Report to Stockholders.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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 (1)........... 1,331,783 1,305,434 892,361 764,547 975,025
Loans receivable, net (2)................ 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(3).. 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%
</TABLE>
- --------------------
(1) Includes mortgage-backed securities available for sale amounting to $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.
(2) Includes loans held for sale amounting to $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.
(3) 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.
9
<PAGE>
COMMERCIAL FEDERAL CORPORATION
Operating Data:
<TABLE>
<CAPTION>
For the Year Ended June 30,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
(Table continued on following page)
10
<PAGE>
COMMERCIAL FEDERAL CORPORATION
<TABLE>
<CAPTION>
For the Year Ended June 30,
------------------------------------
1995 1994 1993 1992 1991
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands, except per share)
Operating Ratios and 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
</TABLE>
- --------------------
(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.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF CONSERVATIVE SAVINGS CORPORATION
The following tables set forth certain consolidated financial information
for Conservative at or for the dates indicated. This information is derived from
and should be read in conjunction with Conservative's consolidated financial
statements and the notes thereto contained in Conservative's Form 10-K for the
fiscal year ended December 31, 1994, as amended by Form 10-K/A filed on November
3, 1995, and Quarterly Report on Form 10-Q for the quarter ended June 30, 1995,
which accompany this Prospectus/Proxy Statement as Appendices D and E,
respectively, and are incorporated herein by reference.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At At December 31, At June 30,
June 30, ----------------------- ----------------------------------
1995 1994 1993 1993 1992 1991
----------- -------- -------- -------- -------- --------
(Unaudited) (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Total assets.......................... $383,375 $392,454 $407,072 (1) $256,630 $249,906 $202,029
Cash and cash equivalents............. 5,463 5,634 7,631 10,159 5,553 682
Loans receivable, net................. 161,227 154,666 160,021 (1) 130,410 144,636 136,898
Investment securities available for
sale................................. 21,972 22,034 (6) 45,642 43,409 41,312 18,770
Investment securities
held-to-maturity..................... 15,471 18,463 (6) -- -- -- --
Mortgage-backed securities
available for sale................... 14,700 25,275 (6) 163,967 (2) 54,090 40,622 29,825
Mortgage-backed securities
held-to-maturity..................... 139,898 139,747 (6) -- -- -- --
Loans held for sale................... 1,174 525 7,950 6,509 1,784 2,881
Federal Home Loan Bank stock.......... 8,025 7,850 7,450 2,250 1,407 967
Certificates of deposit............... -- -- -- -- 295 788
Premises and equipment, net........... 5,380 6,104 5,777 5,102 3,269 2,434
Real estate owned..................... 147 955 29 29 1,284 1,379
Other assets (excludes interest
receivable).......................... 7,367 8,582 (6) 5,997 (1) 2,679 7,103 5,093
Deposits.............................. 198,060 207,114 229,428 (1) 193,923 223,717 170,629
FHLB borrowings....................... 145,600 149,500 139,000 (2) 24,000 4,000 13,000
Other liabilities..................... 1,177 1,926 1,255 1,477 2,152 881
Stockholders' equity.................. 34,773 32,409 (6) 35,588 33,692 (3) 15,719 13,531
Book value per common share........... 12.23 11.03 12.83 11.81 12.07 10.39
Tangible book value per common share.. 10.22 8.87 10.41 10.90 7.48 7.18
Nonperforming assets to total assets.. 0.13% 0.33% 0.16% 0.16% 0.68% 0.94%
Nonaccrual loans to total gross
loans................................ 0.20% 0.17% 0.36% 0.27% 0.26% 0.36%
Allowance for estimated losses on
loans to total nonperforming loans... 233.8% 292.0% 182.4% 205.9% 195.0% 213.2%
Regulatory Capital Ratios:
Tangible capital.................... 9.09% 8.67% 7.72% 12.68% 5.72% 5.85%
Core capital........................ 9.09% 8.67% 7.72% 12.68% 5.72% 5.85%
Risk-based capital.................. 22.61% 21.95% 20.18% 27.49% 11.69% 11.89%
</TABLE>
12
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
<TABLE>
<CAPTION>
Operating Data:
Six Months Ended Fiscal Year Ended Six Months Ended
June 30, December 31, December 31, Fiscal Year Ended June 30,
------------------------ ---------------------- --------------------- ----------------------------
1995 1994 1994 1993 1993 1992 1993 1992 1991
----------- ----------- ----------- --------- ---------- --------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............ $14,202 $13,924 $ 27,838 $ 22,877 $ 12,410 $ 11,168 $ 21,635 $ 22,708 $ 17,815
Interest expense........... (9,444) (7,287) (15,514) (11,640) (6,250) (6,009) (11,399) (13,826) (12,097)
------- ------- -------- -------- --------- --------- -------- -------- --------
Net interest income before
provision for loan loss... 4,758 6,637 12,324 11,237 6,160 5,159 10,236 8,882 5,718
Provision for loan loss
(credit).................. -- 89 190 (22) (22) 31 31 (219) 488
------- ------- -------- -------- --------- --------- -------- -------- --------
Net interest income after
provision for loan loss... 4,758 6,548 12,134 11,259 6,182 5,128 10,205 9,101 5,230
Other income............... 879 966 2,176 3,175 1,288 1,403 3,289 2,045 1,544
Other expenses............. 4,509 4,979 9,687 9,783 5,047 4,673 9,409 7,955 5,461
------- ------- -------- -------- --------- --------- -------- -------- --------
Income before taxes and
cumulative effect of a
change in accounting
principle............... 1,128 2,535 4,623 4,651 2,423 1,858 4,085 3,191 1,313
Income tax expense......... 225 634 1,132 1,008 509 619 1,118 906 403
------- ------- -------- -------- --------- --------- -------- -------- --------
Net income before
cumulative effect of
a change in accounting
principle............... 903 1,901 3,491 3,643 1,914 1,239 2,967 2,285 910
Cumulative effect of
retroactive application of
a change in accounting
principle............... -- -- -- 463 463 -- -- -- --
------- ------- -------- -------- --------- --------- -------- -------- --------
Net income................. $ 903 $ 1,901 $ 3,491 $ 4,106 $ 2,377 $ 1,239 $ 2,967 $ 2,285 $ 910
======= ======= ======== ======== ========= ========= ======== ======== ========
Earnings per common and
common equivalent share... $ 0.30 $ 0.84 $ 1.51 $ 2.35 $ 1.10 $ 0.94 $ 2.22 $ 1.76 $ 0.70
======= ======= ======== ======== ========= ========= ======== ======== ========
Earnings per common share
-- full dilution.......... $ 0.30 $ 0.66 $ 1.21 $ 1.92 $ 0.82 $ 0.94 $ 2.20 $ 1.76 $ 0.70
======= ======= ======== ======== ========= ========= ======== ======== ========
Cash dividends per common
share..................... $ 0.06 $ 0.06 $ 0.120 $ 0.130 $ 0.080(4)$ 0.075(4) 0.125 $ 0.075 $ --
======= ======= ======== ======== ========= ========= ======== ======== ========
</TABLE>
(Table continued on following page)
13
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended Six Months Ended
June 30, December 31, December 31, Fiscal Year Ended June 30,
----------------------- ----------------------- ----------------------- --------------------------
1995 1994 1994 1993 1993 1992 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Ratios and Other Data:
Net interest margin.......... 2.49% 3.42% 3.19% 4.00% 3.88% 4.23% 4.20% 3.97% 3.41%
Net interest spread.......... 2.11 3.15 2.88 3.63 3.58 4.05 4.02 3.75 2.78
Return on average assets..... .46 .95 0.88 1.39 1.42 0.96 1.15 0.95 .52
Return on average equity..... 5.44 10.68 10.30 15.58 13.71 15.26 17.32 15.39 6.75
Dividend payout ratio........ 20.00 7.14 1.00 5.54 7.27 7.98 5.62 4.27 --
Stockholders' equity to
total assets................ 9.07 7.82 8.26 8.74 8.74 6.41 13.13 6.20 7.73
Average interest-earning
assets to average interest-
bearing liabilities......... 107.64 107.22 107.66 108.92 107.57 103.62 103.93 103.66 108.74
Ratio of earnings to fixed
charges (5):
Including interest on
deposits.................. 1.12x 1.35x 1.30x 1.40x 1.39x 1.31x 1.36x 1.23x 1.11x
Excluding interest on
deposits.................. 1.23x 1.98x 1.74x 3.42x 2.85x 5.58x 5.02x 5.53x 29.23x
Amount of loans serviced
for others.................. 507 19,088 527 23,341 23,341 286,230 30,388 340,949 204,800
Total number of branches
at end of period............ 9 9 10 9 9 8 8 7 6
- --------------------
</TABLE>
(1) Includes the Overland Park, Kansas transaction of August 13, 1993. Also
includes the impact of Conservative's leveraged asset program commenced in
July 1993.
(2) Includes the impact of Conservative's leverage asset program commenced in
July 1993.
(3) Includes the impact of the $15.3 million of additional capital, in the form
of common and cumulative convertible preferred stock, raised in June 1993.
(4) Includes a $0.025 per common share special dividend during the quarters
ended September 30, 1993 and 1992, respectively.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before income taxes plus fixed charges. Fixed charges
represent interest expense plus one-third of net rental expense
(which is deemed representative of the interest factor).
(6) Reflects the implementation of FAS 115, "Accounting for Certain Investment
in Debt Equity Securities."
14
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF RAILROAD FINANCIAL CORPORATION
On October 2, 1995, Commercial completed the acquisition of Railroad
Financial Corporation ("Railroad"). This transaction was accounted for as a
pooling of interests. Under this method of accounting, the recorded assets and
liabilities of Commercial and Railroad will be combined at their recorded
amounts with Commercial the surviving corporation; income and expenses of
Commercial will include income and expenses of Commercial and Railroad for the
entire fiscal year in which the acquisition occurred; and the reported net
income of Commercial and Railroad for prior periods will be combined and
restated as stockholders' equity of Commercial. The following tables set forth
certain consolidated financial information for Railroad at or for the dates
indicated.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At At December 31,
June 30, ------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- ---------- ---------
(Unaudited) (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total assets..................... $615,271 $561,496 $460,967 $390,974 $394,917 $379,801
Loans receivable, net............ 472,051 435,776 264,330 227,459 231,843 263,989
Loans held for sale.............. 77,003 47,154 113,358 73,602 118,978 41,660
Mortgage-backed securities....... 33,124 38,003 44,968 60,178 15,422 42,334
Investment securities............ 12,782 17,199 15,389 10,633 7,434 11,719
Real estate owned and in
judgment....................... 401 7,865 8,363 8,437 9,128 5,103
Deposits......................... 421,651 320,297 320,483 339,979 360,362 360,292
Advances from Federal Home Loan
Bank and other borrowings...... 153,268 208,722 107,840 21,900 10,797 2,504
Stockholders' equity............. 28,113 25,173 25,117 20,631 16,595 12,912
Stockholders' equity per
share (1)...................... 13.20 11.90 11.66 9.90 7.91 6.31
Regulatory capital ratios of
Railroad Savings:
Tangible capital............... 5.56% 5.56% 6.47% 6.61% 4.16% 3.32%
Core capital (Tier 1 capital).. 5.56% 5.56% 6.47% 6.61% 4.16% 3.32%
Risk-based capital (Total
capital)..................... 10.52% 11.75% 13.49% 13.43% 8.25% 7.25%
</TABLE>
- --------------------
(1) Reflects effect of 3-for-2 stock split to stockholders of record as of
February 11, 1994.
15
<PAGE>
RAILROAD FINANCIAL CORPORATION
Operating Data:
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30, For the Year Ended December 31,
----------------- ---------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
(Unaudited) (Dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income..................... $23,053 $15,211 $34,597 $28,380 $31,850 $35,644 $37,601
Interest expense.................... 15,151 8,453 20,022 16,152 20,116 25,337 29,232
------- ------- ------- ------- ------- ------- -------
Net interest income................. 7,902 6,758 14,575 12,228 11,734 10,307 8,369
Provision for loan losses........... 150 150 375 215 450 600 800
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses.................... 7,752 6,608 14,200 12,013 11,284 9,707 7,569
------- ------- ------- ------- ------- ------- -------
Other income:
Fees and service charges.......... 1,271 1,466 2,967 2,964 2,381 1,489 1,232
Gain on sale of loans and
loan servicing................... 1,365 1,011 2,066 7,754 8,449 6,497 3,082
Gain (loss) on sale of mortgage-
backed securities and investment
securities....................... (4) (90) (127) 220 (231) 992 --
Other operating income............ 82 125 209 540 577 425 600
------- ------- ------- ------- ------- ------- -------
Total other income.................. 2,714 2,512 5,115 11,478 11,176 9,403 4,914
------- ------- ------- ------- ------- ------- -------
Other expenses:
Compensation and employee
benefits......................... 4,880 5,446 9,882 10,066 9,723 8,017 4,668
Loss (gain) on real estate
operations....................... (1,415) (406) (1,143) (875) 11 85 355
Federal insurance premiums........ 377 369 737 754 812 820 792
Provision for loss on future loan
repurchases...................... 143 75 139 242 905 -- --
Advertising, occupancy and other
expense.......................... 3,215 3,333 6,603 6,642 5,431 4,087 3,889
------- ------- ------- ------- ------- ------- -------
Total other expenses................ 7,200 8,817 16,218 16,829 16,882 13,009 9,704
------- ------- ------- ------- ------- ------- -------
</TABLE>
(Table continued on following page)
16
<PAGE>
RAILROAD FINANCIAL CORPORATION
Operating Data (continued):
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30, For the Year Ended December 31,
---------------- ----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ ------
(Unaudited) (Dollars in thousands, except per share)
<S> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes................... 3,266 303 3,097 6,662 5,578 6,101 2,779
Provision for income taxes................... 1,312 118 1,220 2,644 2,240 2,549 1,057
------ ------ ------ ------ ------ ------ ------
Net income before accounting change.......... 1,954 185 1,877 4,018 3,338 3,552 1,722
Cumulative effect of accounting change....... -- -- -- -- 794 -- --
------ ------ ------ ------ ------ ------ ------
Net income................................... $1,954 $ 185 $1,877 $4,018 $4,132 $3,552 $1,722
====== ====== ====== ====== ====== ====== ======
Average common stock and equivalents (1)..... 2,183 2,224 2,193 2,218 2,190 2,081 1,724
Income per common share and common
equivalent share (1)....................... $.90 $.08 $.86 $1.81 $1.89 $1.71 $ 1.00
====== ====== ====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------
Operating Ratios and Other Data:
Interest rate spread....................... 2.45% 2.91% 2.88% 2.90% 2.90% 2.66% 1.97%
Net interest margin........................ 2.73% 3.11% 3.06% 3.08% 3.06% 2.74% 2.17%
Average equity divided by average assets... 4.54% 5.53% 5.02% 5.53% 4.58% 3.62% 2.94%
Return on average assets (annualized) (2).. .33% .04% .38% .97% .84% .91% .44%
Return on average equity (annualized) (2).. 7.26% .74% 7.59% 17.60% 18.30% 25.17% 14.83%
</TABLE>
- --------------------
(1) Reflects effect of 3-for-2 stock split payable to stockholders of record as
of February 11, 1994.
(2) Reflects return from operations, exclusive of the change in accounting for
income taxes in 1992.
17
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
General
This Prospectus/Proxy Statement is being furnished to the stockholders of
Conservative as part of the solicitation of proxies by its Board of Directors
from holders of the outstanding shares of Conservative Common Stock and
Conservative Preferred Stock for use at the Special Meeting to be held on
January 10, 1996, and any adjournments thereof. This Prospectus/Proxy
Statement, and the accompanying proxy card, are first being mailed to
stockholders of Conservative on or about November 27, 1995.
The principal purpose of the Special Meeting is to consider and vote upon
the approval of the Acquisition Merger, pursuant to which Conservative will
merge into Commercial, and the Merger Agreement among Commercial, the Bank,
Conservative and Conservative Savings, which sets forth the terms and conditions
of the Acquisition Merger and also provides for the Bank Merger. See "The
Merger -- Conversion of Conservative Common Stock and Conservative Preferred
Stock." The Merger is subject to certain conditions, including regulatory
approval of the OTS.
In addition to approval of the Acquisition Merger and the Merger Agreement,
the stockholders of Conservative may be asked to approve a proposal to adjourn
the Special Meeting if necessary to permit further solicitation of proxies in
the event that there are not sufficient votes at the time of the Special Meeting
to approve the Acquisition Merger and the Merger Agreement.
In this Prospectus/Proxy Statement, the terms "Commercial" and
"Conservative" refer to the parent corporation only or to both the parent
corporation and its subsidiaries, depending on the context.
Recent Events
Deposit Insurance Premiums. The Bank's and Conservative Savings' 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 ratio as the SAIF. On August 8, 1995, the FDIC adopted
an amendment to the BIF risk-based assessment schedule which lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range 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 FDIC amendment became effective September 30, 1995.
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.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate the premium disparity. The Senate and the House of
Representatives have both, as part of a budget reconciliation package to balance
the federal budget, approved legislation requiring a one time assessment of .85%
of insured deposits to be imposed on all SAIF-insured deposits held as of March
31, 1995. This assessment would be payable during the first quarter of 1996. The
assessment would result, on a pro forma basis as of June 30, 1995, in a one-time
charge of approximately $21.8 million (assuming such charge would be tax
deductible), including the insured deposits of Railroad as if Commercial and
Railroad had merged as of June 30, 1995. Such assessment would have the effect
of reducing Commercial's and Railroad's tangible capital to $315.7 million, or
4.85%, of adjusted total assets, core
18
<PAGE>
capital to $337.1 million, or 5.16%, of adjusted total assets, and risk-based
capital to $369.9 million, or 12.39%, of risk-weighted assets. Similarly, such
an assessment would result, on a pro forma basis as of June 30, 1995, in a one-
time charge to Conservative Savings of approximately $1.1 million
(assuming such charge would be tax deductible), which would have the effect of
reducing Conservative Savings' tangible and core capital to $33.9 million, or
8.82%, of adjusted total assets, and risk-based capital to $34.6 million, or
21.89%, of risk-weighted assets. Also under consideration by Congress are
proposals relating to merger of the BIF and SAIF funds, the elimination of the
thrift charter and the federal tax implications of conversion to a national
bank. Commercial is unable to accurately predict at this time whether any of
these proposals will be adopted in their current form or the impact of these
proposals on Commercial.
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 and
Conservative Savings' deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
Solicitation, Voting and Revocability of Proxies
The Board of Directors of Conservative has fixed the close of business on
November 14, 1995 as the record date (the "Record Date") for the
determination of the Conservative stockholders entitled to notice of and to vote
at the Special Meeting. Accordingly, only holders of record of shares of
Conservative Common Stock and Conservative Preferred Stock at the close of
business on such date will be entitled to vote at the Special Meeting, with each
such share entitling its owner to one vote on all matters properly presented at
the Special Meeting and with Conservative Preferred Stockholders entitled to
vote separately as a class. On the Record Date, there were approximately 210
holders of record of the 1,844,838 shares of Conservative Common Stock then
outstanding, and 38 holders of record of the 460,000 shares of Conservative
Preferred Stock outstanding. The presence, in person or by proxy, of a majority
of the total number of outstanding shares of Conservative Common Stock and a
majority of the total number of outstanding shares of Conservative Preferred
Stock entitled to vote at the Special Meeting is necessary to constitute a
quorum at the Special Meeting. Abstentions and broker non-votes will be treated
as shares present at the Special Meeting for purposes of determining the
presence of a quorum. The affirmative vote of at least two-thirds of the
outstanding shares of Conservative Common Stock and at least two-thirds of the
outstanding shares of Conservative Preferred Stock voting separately as a class,
in addition to two-thirds of the total outstanding shares, is required to
approve the Acquisition Merger and the Merger Agreement. The affirmative vote
of a majority of the shares of Conservative Common Stock and Conservative
Preferred Stock voting separately as a class represented and voting at the
Special Meeting is required to approve an adjournment of the Special Meeting.
It is expected that substantially all of the 85,388 shares of
outstanding Conservative Common Stock (excluding shares subject to stock
options) and 100 shares of the outstanding Conservative Preferred
Stock beneficially owned by directors and executive officers of Conservative and
their affiliates as of the Record Date will be voted for approval of the
Acquisition Merger and the Merger Agreement.
If the accompanying proxy card is properly executed and returned to
Conservative in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked proxies will be voted for approval of the Acquisition
Merger and the Merger Agreement and for the proposal to adjourn the Special
Meeting if necessary to permit further solicitation of proxies. Except for
procedural matters incident to the conduct of the Special Meeting, the Board of
Directors of Conservative does not know of any matters other than those
described in the Notice of Special Meeting that are to come before the Special
Meeting. If any other matters are properly brought before the Special Meeting,
the persons named in the Conservative proxy will vote the shares represented by
such proxy on such matters as determined by a majority of Conservative's Board
of Directors. Abstentions and broker non-votes will not be voted and therefore,
with respect to the proposal to approve the Acquisition Merger and the Merger
Agreement, abstentions and broker non-votes will have the same effect as votes
against approval of that proposal.
The presence of a stockholder at the Special Meeting will not automatically
revoke such stockholder's proxy. A stockholder may, however, revoke a proxy at
any time prior to its exercise by filing a written notice of revocation with, or
by delivering a duly executed proxy bearing a later date to, the Corporate
Secretary of Conservative at its headquarters address or by attending the
Special Meeting and voting in person.
19
<PAGE>
The cost of soliciting proxies for the Special Meeting will be borne by
Conservative. In addition to use of the postal system, proxies may be solicited
personally or by telephone or telegraph by directors, officers and employees of
Conservative, who will not be specially compensated for such activities. In
addition, Conservative has engaged Regan & Associates, Inc. to act as a proxy
solicitor in connection with the Special Meeting. The agreement provides that
Conservative will pay the solicitor $4,500 plus reasonable out-of-pocket
expenses for soliciting and delivering proxies. Conservative will also request
persons, firms and companies holding shares in their names or in the name of
their nominees, which are beneficially owned by others, to send proxy materials
to and obtain proxies from such beneficial owners and will reimburse such
holders for their reasonable expenses incurred in that connection.
COMMERCIAL FEDERAL CORPORATION AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
Commercial is a unitary non-diversified savings and loan holding company
whose primary asset is 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. Currently, the Bank conducts loan origination activities
through its 91 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.
At June 30, 1995, Commercial had assets of $6.0 billion and stockholders'
equity of $309.5 million and through the Bank operated 71 branch offices before
the Railroad acquisition. The Bank was the largest depository institution
headquartered in Nebraska as of June 30, 1995 and, based upon total assets at
that date, Commercial was the 18th largest publicly held thrift institution
holding company in the United States. On October 2, 1995, Commercial completed
the acquisition of Railroad Financial Corporation, Wichita, Kansas, the holding
company for Railroad Savings Bank, FSB. Railroad operated 18 full-service
branch offices and 71 agency offices throughout the State of Kansas and at
August 31, 1995, had $626.5 million in total assets, $420.4 million in deposits
and $28.0 million in stockholders' equity. See "Summary Consolidated Financial
Information of Railroad Financial Corporation" for additional information
regarding Railroad. As of October 17, 1995, the Bank operated 91 branches
located as follows: 31 offices in Nebraska, 20 offices in greater metropolitan
Denver, Colorado, 17 offices in Oklahoma and 23 offices in Kansas.
Commercial will seek to continue its growth through expansion of the Bank's
operations in its market areas, and may seek to enter markets in other adjoining
states. The Bank 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.
The Bank is a member of the Federal Home Loan Bank System and the Federal
Home Loan Bank of Topeka, and its deposits are insured up to prescribed limits
by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject to
comprehensive examination, supervision and regulation by the OTS and the FDIC.
For additional information regarding the Bank, see Commercial's Annual
Report on Form 10-K for the fiscal year ended June 30, 1995, which is
incorporated by reference herein.
CONSERVATIVE SAVINGS CORPORATION AND CONSERVATIVE SAVINGS BANK, FSB
Conservative is a savings and loan holding company headquartered in Omaha,
Nebraska. Conservative's sole subsidiary is the Conservative Savings, a
federally-chartered savings bank. Conservative originates one- to four-family
and multi-family mortgage loans, residential and multi-family construction loans
and consumer loans through four offices in Omaha, two in Columbus, Nebraska, one
in Bellevue, Nebraska, one in Harlan, Iowa and one in Overland Park, Kansas. At
June 30, 1995, Conservative had total consolidated assets of $383.4 million, net
loans receivable of $161.2 million, total deposits of $198.1 million and total
shareholders' equity of $34.8 million.
20
<PAGE>
The principal business of Conservative, through Conservative Savings, is
attracting funds, primarily in the form of savings deposits acquired from the
general public and originating or purchasing loans secured by liens on
residential properties and other real estate, including commercial real estate,
multi-family real estate, construction loans, automobile loans and other
consumer loans. Funds for Conservative Savings' operations are also provided
through borrowings from the Federal Home Loan Bank system, proceeds from the
sales of loans and mortgage-backed and other securities, funds from repayment of
outstanding loans and purchased loans serviced and earnings from operations.
Earnings depend primarily upon the difference between (i) revenues from loan,
investments and other interest-bearing assets and (ii) expenses incurred in
payment of interest on deposit accounts and borrowings, and general operating
expenses.
Conservative's principal executive offices are located at 11207 West Dodge
Road, Omaha, Nebraska, 68154 and its telephone number is (402) 334-8475.
For additional information regarding Conservative, including its
consolidated financial statements and related notes as of December 31, 1994, see
Conservative's Annual Report on Form 10-K for the year ended December 31, 1994,
as amended by Form 10-K/A filed on November 3, 1995, and Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, which are incorporated by
reference herein and delivered herewith.
THE MERGER
(Proposal 1 -- Approval of the Acquisition Merger and Merger Agreement)
The following information with respect to the Merger, insofar as it relates
to matters contained in the Merger Agreement, including the exhibits thereto, is
qualified in its entirety by reference to the full text of such agreement, which
is attached as Annex A to this Prospectus/Proxy Statement and is incorporated by
reference herein.
General
The Merger Agreement provides for the acquisition of Conservative by
Commercial, and the subsequent merger of Conservative Savings into the Bank, as
follows: (i) Conservative will merge into Commercial, with Commercial as the
surviving corporation, pursuant to which the outstanding shares of
Conservative's Common Stock and Conservative's Preferred Stock would be
converted into cash and shares of Commercial Common Stock as set forth below
(the Acquisition Merger); and (ii) Conservative Savings will then merge into the
Bank, with the Bank as the surviving savings institution (the Bank Merger)
(collectively, the Merger). Upon the consummation of the Acquisition Merger
(the Acquisition Merger Effective Time), Conservative will have merged into
Commercial. Upon the consummation of the Bank Merger (the Bank Merger Effective
Time), Conservative Savings will have merged into the Bank, Commercial will be
the resulting savings institution holding company, and the Bank will be the
resulting subsidiary savings institution. It is anticipated that the Bank
Merger Effective Time will occur immediately following the Acquisition Merger
Effective Time. For additional information regarding the Merger, see the Merger
Agreement, which is attached as Annex A hereto.
Stockholders of Conservative are being asked to approve the Merger
Agreement and the Acquisition Merger. The affirmative vote of at least two-
thirds of the outstanding shares of Conservative Common Stock and at least two-
thirds of the outstanding shares of Conservative Preferred Stock voting
separately as a class is required for Conservative's stockholders to approve the
Merger Agreement and the Acquisition Merger.
21
<PAGE>
Background of the Merger
On August 4, 1994, representatives of Dain Bosworth made a presentation to
the Conservative Board of Directors ("Conservative Board") regarding possible
strategic alternatives available to Conservative to maximize stockholder value,
including exploring a business combination with a larger banking or thrift
institution. At that meeting, the Conservative Board approved an agreement
engaging Dain Bosworth as Conservative's exclusive financial advisor to pursue
the process of exploring potential strategic business combinations.
During August and September, 1994, a Confidential Memorandum ("Memorandum")
containing financial and other information was prepared by Conservative with the
assistance of Dain Bosworth. Commencing October 7, 1994, after execution and
delivery of Confidentiality and Standstill Agreements by the recipients, Dain
Bosworth delivered the Memorandum to Commercial and other thrift or bank holding
companies identified by Conservative as potential strategic merger partners.
Each holding company was asked to submit its indication of interest (including
the value it would propose for a contemplated acquisition of Conservative, the
form of consideration and other relevant information) by November 1, 1994.
Commercial submitted a nonbinding, preliminary indication of interest. On
November 3, 1994, representatives of Dain Bosworth reported on the status of
Commercial's interest via telephone to a meeting of the Conservative Board. The
Conservative Board discussed its strategy to respond to Commercial and
authorized Dain Bosworth to proceed with discussions with Commercial's
investment banker, Merrill Lynch. Discussions between representatives of
Conservative and Commercial continued during November and early December, 1994,
at which time Conservative supplied requested information to Commercial, but no
agreement was reached as to consideration to be received by shareholders of
Conservative in the event of a merger. Accordingly, discussions with Commercial
were terminated by Conservative following a Conservative Board meeting on
December 13, 1994.
On February 10, 1995, Commercial submitted to Conservative a new proposal
to negotiate a merger which did not contain a definitive offer. On February 23,
1995, the Conservative Board reviewed this proposal and Dain Bosworth's analysis
of its structure, but concluded not to pursue further discussions.
William A. Fitzgerald, Chairman and Chief Executive Officer of Commercial,
initiated a meeting on June 7, 1995, with Robert P. DeLay, Conservative's
President and Chief Executive Officer, to discuss a possible merger of
Conservative with Commercial. At that meeting Mr. Fitzgerald requested
information from Conservative in order for Commercial to propose a price range
for Conservative stock. During the remainder of June and early July, 1995,
Conservative supplied requested information to Commercial and discussions
between senior managements of Conservative and Commercial continued. During
late June and early July, 1995, Conservative also supplied information to, and
held discussions with, another Midwestern thrift institution regarding a
possible business combination, but no acceptable offer was forthcoming.
Commencing July 19, 1995 and continuing through August 1, 1995,
representatives of Dain Bosworth and Merrill Lynch or Commercial discussed price
ranges, structure and other terms of a potential merger of Conservative and
Commercial. On August 2, 1995, Mr. Fitzgerald and Mr. DeLay discussed a price
for Conservative stock which Mr. DeLay agreed to present to the Conservative
Board for consideration. On August 3, 1995, the Conservative Board reviewed the
status of negotiations and the proposed price and scheduled a special
Conservative Board meeting on August 8, 1995, at which representatives of Dain
Bosworth could be present to provide analysis and advice to the Board to
consider these matters further. At the August 8, 1995 Conservative Board
meeting, representatives of Dain Bosworth discussed certain financial terms of
Commercial's verbal proposal. In addition, the Conservative Board discussed
with Conservative's legal counsel the anticipated structure and terms and
conditions of the proposed merger with Commercial. Following discussion, the
Conservative Board voted unanimously to proceed with negotiation of a definitive
agreement with Commercial. Beginning August 9, 1995, officers and
representatives of Conservative conducted a due diligence investigation of
Commercial. From August 9 through August 14, 1995, officers and representatives
of Conservative and Commercial negotiated the terms and conditions of the
definitive Merger Agreement, including the Stock Option Agreement.
22
<PAGE>
On August 15, 1995, the Conservative Board again met with its financial and
legal advisors. All board members were present. Representatives of Dain
Bosworth reviewed the financial terms of the Merger Agreement, Conservative's
historical and projected financial performance, terms of comparable transactions
in the Midwest involving institutions similar in size to Conservative, the
market valuation of selected Midwestern thrifts, Commercial's recent market
price history and other factors. Management reviewed the results of
Conservative's due diligence investigation of Commercial. Legal counsel for
Conservative reviewed the final terms of the Merger Agreement and Stock Option
Agreement. Dain Bosworth reported to the Conservative Board its opinion that
the consideration to be received in the Merger is fair from a financial point of
view to Conservative common and preferred stockholders. Following discussion,
the Conservative Board concluded that the Merger Agreement was in the best
interests of Conservative and its stockholders. By unanimous vote of the
directors, the Conservative Board authorized the Merger Agreement and Stock
Option Agreement and directed that the Merger Agreement be submitted to a vote
of the stockholders of Conservative with the favorable recommendation of the
Conservative Board. Following the board meeting, Conservative and Commercial
executed the Merger Agreement on August 15, 1995.
Reasons for the Merger and Recommendations of the Conservative Board of
Directors
In reaching its conclusion that the Merger Agreement is in the best
interests of Conservative and its stockholders, the Conservative Board carefully
considered a variety of factors. Among the factors considered were those
described above and the following:
(i) the financial terms of the proposed Merger, including the
anticipated tax-deferred nature of a portion of the Merger Consideration to
Conservative's stockholders, which will consist of Commercial Common Stock which
is traded on the New York Stock Exchange;
(ii) a comparison of the terms of the proposed Merger with comparable
transactions, both in the Midwest and elsewhere;
(iii) information concerning the business, financial condition,
results of operations and prospects of Conservative and Commercial;
(iv) competitive factors and trends toward consolidation in the banking
industry, particularly in Conservative's market place;
(v) the review by the Conservative Board with its legal and financial
advisors of the provisions of the Merger Agreement; and
(vi) the financial advice rendered by Dain Bosworth to the Conservative
Board and the opinion rendered by Dain Bosworth that the consideration to be
received in the Merger is fair from a financial point of view to the holders of
the Conservative Common Stock and Conservative Preferred Stock.
While each member of the Conservative Board individually considered the
foregoing and other factors, the Conservative Board did not collectively assign
any specific or relative weights to the factors considered and did not make any
determination with respect to any individual factor. The Conservative Board
collectively made its determination with respect to the Merger based on the
unanimous conclusion reached by its members, in light of the factors that each
of them considered as appropriate, that the Merger is in the best interests of
the Conservative stockholders.
THE CONSERVATIVE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE MERGER
AGREEMENT AND THE MERGER BE ADOPTED AND APPROVED BY ALL SHAREHOLDERS OF
CONSERVATIVE.
23
<PAGE>
Financial Advisors and Opinions of Financial Advisors
Dain Bosworth. Conservative retained Dain Bosworth on August 4, 1994, to
act as its financial advisor in connection with a possible sale or merger of
Conservative, and to provide an opinion to the Board of Directors of
Conservative as to the fairness, from a financial point of view, of the
consideration to be received by stockholders of Conservative in connection with
any such sale or merger. While Dain Bosworth acted as Conservative's financial
advisor, provided certain analysis to the Conservative Board and assisted
management in the negotiations between Conservative and Commercial, Dain
Bosworth was not requested to and did not make any recommendation to the Board
of Directors as to the form or amount of consideration in connection with the
Merger. See "Background of the Merger".
Dain Bosworth rendered an oral opinion to the Conservative Board,
subsequently confirmed in writing, that, as of August 15, 1995, the
consideration to be received in the Merger by the holders of Conservative
Preferred Stock and Conservative Common Stock is fair to such stockholders from
a financial point of view. A copy of the opinion of Dain Bosworth is attached
as Annex B to this Proxy Statement/Prospectus.
There were no limitations imposed by Conservative on the scope of Dain
Bosworth's investigation, and Dain Bosworth did solicit proposals from parties
other than Commercial regarding a potential sale or merger of Conservative with
such parties. Dain Bosworth's opinion did not address Conservative's underlying
business decision to proceed with the Merger and such opinion is not a
recommendation to any Conservative stockholder as to how such stockholder should
vote at the Special Meeting. As set forth in its opinion, Dain Bosworth relied
on, and did not independently verify, the accuracy and completeness of the
financial and other information furnished to it by Conservative and Commercial.
Dain Bosworth did not make an independent evaluation or appraisal of the assets
and liabilities of Conservative and Commercial, and did not express any opinion
regarding the liquidation value or regulatory compliance of either entity.
Also, Dain Bosworth did not express any opinion as to the future price at which
the Commercial Common Stock may trade at the Acquisition Merger Effective Time
or any time in the future. Conservative stockholders are urged to read Dain
Bosworth's opinion in its entirety for a summary description of the procedures
followed, the factors considered and the assumptions made by Dain Bosworth in
rendering its opinion.
In connection with its opinion, Dain Bosworth, among other things: (i)
reviewed drafts of the Merger Agreement and related documents; (ii) visited the
headquarters of each of Conservative and Commercial; (iii) held discussions with
certain members of the management of Conservative and Commercial regarding the
business, operations and prospects of each company and the reasons for
completing the Merger; (iv) reviewed certain business and financial information
on Conservative, including financial forecasts that had been prepared and
provided by the management of Conservative; (v) reviewed certain business and
financial information on Commercial, including financial forecasts that had been
prepared by independent research analysts and provided by the management of
Commercial; (vi) made further inquiries and performed sensitivity analyses on
the financial forecasts for Conservative and Commercial on a stand-alone and
combined basis; (vii) reviewed certain publicly available documents filed by
Conservative and Commercial with the SEC pursuant to the Exchange Act of 1934;
(viii) compared certain financial statistics of Conservative and Commercial with
statistics for other publicly traded companies deemed comparable; (ix) reviewed
price and trading data of the common stock of both Conservative and Commercial;
and (x) to the extent publicly available, compared the financial terms of the
Merger with those of other transactions deemed comparable. Dain Bosworth used
the foregoing information to further its understanding of Conservative and the
market for the common stock of Conservative and Commercial.
In conducting the review and in performing the analyses described below,
Dain Bosworth did not attribute any particular weight to any information or
analysis considered by it, but rather made qualitative judgments as to the
significance and relevance of each factor and analysis. Accordingly, Dain
Bosworth believes that the information reviewed and the analyses conducted must
be considered as a whole and that considering any portion of such information or
analyses, without considering all of such information and analyses, could create
a misleading or incomplete view of the process underlying its opinion.
24
<PAGE>
In delivering its oral opinion to the Conservative Board on August 15,
1995, Dain Bosworth prepared and delivered to the Conservative Board and its
counsel certain written materials containing a summary of various analyses and
information that Dain Bosworth considered to be material to its opinion. The
following is a summary of certain of these materials:
Analysis of Selected Publicly Traded Companies. Dain Bosworth compared
Conservative's financial information and recent prices of Conservative Common
Stock to similar information for selected publicly traded midwestern thrifts,
including: Capital Savings Bancorp; First Federal Bancshares, Eau Claire; First
Midwest Financial; First Northern Savings Bank; Hallmark Capital Corporation; HF
Financial Corporation; Landmark Bancshares; Mid-Continent Bancshares; Midwest
Federal Financial Corporation; North American Savings Bank; Perpetual Midwest
Financial; and WFS Bancorp (the "Comparable Companies"). The Comparable
Companies were selected because they are midwestern thrifts with total assets of
$150 million to $600 million and a ratio of tangible capital to tangible assets
of less than 13.0% as of the last publicly reported date.
Dain Bosworth calculated valuation ratios based on published stock prices
for each of the Comparable Companies. The valuation ratios were based upon
several variables, including earnings for the latest twelve months ("LTM"),
earnings per share ("EPS") estimated for calendar 1995 and calendar 1996, book
value and tangible book value. The estimates of EPS for the Comparable
Companies were based upon consensus earnings estimates obtained from an
independent reporting system that monitors estimates prepared by research
analysts from various investment firms. Estimates of EPS for Conservative were
based upon estimates prepared by Conservative management.
Dain Bosworth compared its analysis of the historical performance and
expectations for the Comparable Companies with the performance and management's
expectations for future profitability of Conservative. Based upon this
comparison, Dain Bosworth determined that the median valuation ratios for the
Comparable Companies were the appropriate benchmarks against which the value of
Conservative Common Stock should be measured; accordingly, Dain Bosworth
computed the same valuation ratios for Conservative Common Stock based on (i)
the midpoint of the closing bid and ask prices for Conservative Common Stock on
August 11, 1995, two trading days prior to the announcement of the Merger; and
(ii) the implied price for Conservative Common Stock in the Merger, assuming
consideration of 0.2525 shares of Commercial Common Stock and $6.34 in cash per
share of Conservative Common Stock and a NYSE Average Closing Price for
Commercial Common Stock of $31.875, equal to its closing price on August 11,
1995; and compared such ratios to the median valuation ratios for the Comparable
Companies. The following table lists the results of this analysis:
<TABLE>
<CAPTION>
Multiple for Conservative
Common Stock Based Upon
----------------------------
Median for Midpoint on Price
Comparable August 11, Implied in
Companies 1995 Merger
---------- ----------- ----------
<S> <C> <C> <C>
Valuation Variable:
Price/Book Value........... 0.91x 0.85x 1.21x
Price/Tangible book value.. 0.92 0.95 1.35
Price/LTM EPS.............. 13.8 11.9 16.9
Price/1995 EPS............. 15.3 16.6 23.6
Price/1996 EPS............. 12.8 9.7 13.8
</TABLE>
Dain Bosworth also performed a similar analysis of selected public
companies for Commercial, comparing Commercial's financial information and
recent prices of Commercial Common Stock to similar information for selected
publicly traded midwestern thrifts including: Charter One Financial; First
Financial Corporation; Roosevelt Financial Group; Security Capital Corporation;
St. Paul Bancorp; Standard Federal; and TCF Financial Corporation
25
<PAGE>
(the "Commercial Comparable Companies"). The Commercial Comparable Companies
were selected because they are midwestern thrifts with total assets of over $2
billion. Dain Bosworth compared its analysis of the historical performance and
expectations for the Commercial Comparable Companies with the historical and
projected performance of Commercial. Based upon this comparison, Dain Bosworth
determined that the median valuation ratios for the Commercial Comparable
Companies were the appropriate benchmarks against which the value of Commercial
Common Stock should be measured. The following table lists the results of this
analysis:
<TABLE>
<CAPTION>
Median for Multiple for
Commercial Comparable Commercial on
Companies August 11, 1995
--------------------- ---------------
<S> <C> <C>
Valuation Variable:
Price/Book Value........... 1.44x 1.33x
Price/Tangible book value.. 1.51 1.49
Price/LTM EPS.............. 10.3 8.9
Price/1995 EPS............. 9.9 8.7
Price/1996 EPS............. 8.3 8.3
</TABLE>
In addition, Dain Bosworth analyzed the liquidity of Commercial Common Stock and
determined that the aggregate number of shares of Commercial Common Stock
and Conservative Preferred Stock to be received by holders of Conservative
Common Stock in the Merger would be equivalent to 8.6 times the average daily
trading volume of Commercial Common Stock.
Analysis of Selected Merger and Acquisition Transactions. Dain Bosworth
reviewed and summarized the terms of relevant merger and acquisition
transactions, including (i) 18 acquisitions of selected midwestern thrifts (the
"Midwest Thrift Acquisitions"), and (ii) 60 acquisitions of thrifts with total
assets of $100 million to $1 billion, located anywhere in the United States (the
"Small Thrift Acquisitions"). For each group, Dain Bosworth concentrated on
transactions that occurred since June 30, 1994, and those for which relevant
financial data was available.
For purposes of evaluating the Merger, valuation multiples were calculated
for each of the Midwest Thrift Acquisitions and Small Thrift Acquisitions based
upon several variables, including book value, tangible book value, LTM earnings
per share and the ratio of the premium paid to tangible equity over core
deposits. These valuation multiples were then compared to the valuation
multiples implied in the Merger, assuming consideration of 0.2525 shares of
Commercial Common Stock and $6.34 in cash per share of Conservative Common Stock
and a NYSE Average Closing Price for Commercial Common Stock of $31.875, equal
to its closing price on August 11, 1995.
The following table lists the results of Dain Bosworth's analysis of
selected merger and acquisition transactions:
<TABLE>
<CAPTION>
Valuation Ratios
-------------------------------------------------
Price to Price to Price to Premium to Tangible
Book Tangible LTM Equity Over
Value Book EPS Core Deposits
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Comparable Acquisitions:
Midwest Thrift Acquisitions 1.32x 1.32x 16.4x 5.63%
Small Thrift Acquisitions 1.50 1.50 15.0 6.45
Implied in Merger 1.21 1.35 16.9 5.60
</TABLE>
26
<PAGE>
Premiums Paid Analysis. In addition to the acquisition analysis described
above, Dain Bosworth performed an analysis of the historical premiums paid to
prevailing market prices in acquisitions of public companies in (i) the Midwest
Thrift Acquisitions; (ii) the Small Thrift Acquisitions; (iii) acquisitions in
the banking and finance industry from 1990 to 1994; and (iv) acquisitions in all
industries from 1990 to 1994. These premiums were then compared to the premiums
implied in the Merger assuming consideration of 0.2525 shares of Commercial
Common Stock and $6.34 in cash per share of Conservative Common Stock and a NYSE
Average Closing Price for Commercial Common Stock of $31.875, equal to its
closing price on August 11, 1995. The following table lists the results of Dain
Bosworth's analysis of historical premiums paid in acquisitions of public
companies:
<TABLE>
<CAPTION>
Premiums Paid
to Stock Price
---------------
<S> <C>
Midwest Thrift Acquisitions:
Premium to Price 3 months prior to announcement 45%
Premium to Price 1 month prior to announcement 35
Premium to Price 1 day prior to announcement 15
Small Thrift Acquisitions:
Premium to Price 3 months prior to announcement 39
Premium to Price 1 month prior to announcement 28
Premium to Price 1 day prior to announcement 21
Banking & Finance (1990-1994 Average) 38
All industries (1990-1994 Average) 40
Implied in the Merger 42
</TABLE>
Pro Forma Dilution Analysis. Dain Bosworth analyzed certain projected
income statement data for Conservative and Commercial for calendar years 1996
and 1997 on a pro-forma combined basis. The pro-forma combined projections were
based upon the stand-alone projections for both Conservative and Commercial and
were prepared with input from management of both companies. Based upon this
analysis, the Merger would result in little, if any, dilution in earnings per
share of Commercial Common Stock in 1996, and would be accretive to earnings per
share of Commercial Common Stock for 1997. The analysis showed that the
accretion to earnings per share of Commercial Common Stock in 1997 would be
between 3.5% and 4.0% assuming a reduction in non-interest expenses in 1997 of
approximately 60%.
Discounted Cash Flow Analysis. Dain Bosworth performed a discounted cash
flow analysis using financial projections through the year 2000 that had been
prepared and provided by management of Conservative. Discount rates ranging
from 12% to 20% and terminal value multiples ranging from (i) 1.0 to 1.5 times
book value estimated at the end of the year 2000 and (ii) 8.0 to 13.0 times
estimated earnings for the year 2000 were applied to the projections to compute
ranges of present values for Conservative Common Stock.
The computed ranges for the present value of Conservative Common Stock were
(i) $6.91 to $14.26 per fully diluted share using terminal multiples based upon
estimated book value in the year 2000 and (ii) $4.10 to $8.96 per fully diluted
share using terminal multiples based upon estimated earnings for the year 2000.
Dain Bosworth did not assign any particular weight to the individual
analyses described above, which represent a summary of the material analyses
performed by Dain Bosworth. Dain Bosworth's determination regarding the
fairness of the Merger is not based on a mathematical model but rather upon the
body of information obtained from such analyses and qualitative factors.
27
<PAGE>
For its services as financial advisor in rendering its opinion to the
Conservative Board of Directors in connection with the transaction contemplated
by the Merger Agreement, Conservative has paid Dain Bosworth $150,000 and has
also agreed to pay Dain Bosworth an estimated $255,000 upon consummation of the
Merger, based upon the implied value in the Merger. In addition, Conservative
has agreed to reimburse Dain Bosworth for its reasonable out-of-pocket expenses
and to indemnify Dain Bosworth against certain expenses and liabilities arising
in connection with its engagement, including liabilities under the Securities
Act and the Exchange Act.
Dain Bosworth was selected by Conservative on the basis of its experience
in valuing securities in connection with mergers and acquisitions, knowledge of
Conservative, and expertise in transactions involving financial institutions.
Dain Bosworth is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the past, Dain Bosworth
has provided investment banking services to Conservative and has received
customary fees for the rendering of such services. Dain Bosworth has, from time
to time, issued research reports and recommendations on Conservative Common
Stock. In the course of its trading activities, Dain Bosworth may, from time to
time, have a long or short position in, and buy and sell securities of,
Conservative and Commercial. Dain Bosworth also periodically publishes research
reports regarding other financial institutions, including other thrifts based in
the Midwest.
Merrill Lynch. On October 26, 1994, Commercial retained Merrill Lynch to
act as its exclusive financial advisor in connection with the Merger. On August
15, 1995, Merrill Lynch rendered its written opinion to the effect that, as of
such date, the Exchange Ratio was fair to Commercial from a financial point of
view, which opinion is still in effect as of the date hereof. Merrill Lynch was
not requested to and did not make any recommendations to the Commercial Board of
Directors as to the form or amount of consideration to be paid to the
stockholders of Conservative in the Acquisition Merger, which was determined
through arms-length negotiations between Commercial and Conservative.
In arriving as its written opinion, Merrill Lynch, among other things,
reviewed selected financial and other information concerning Commercial and
Conservative, including publicly-available reports and internal projections and
forecasts, and information concerning comparable companies and comparable thrift
acquisition and merger transactions. In connection with rendering its opinion,
Merrill Lynch performed a variety of financial analyses. In preparing its
opinion, Merrill Lynch assumed and relied upon the accuracy and completeness of
all the financial and other information reviewed by it for purposes of the
opinion, and did not independently verify such information or undertake any
independent evaluation or appraisal of the assets or liabilities of Commercial
or Conservative nor was it furnished with any such evaluation or appraisal.
Merrill Lynch is not an expert in the evaluation of allowance for loan losses,
and it has not made an independent evaluation of the adequacy of the allowance
for loan losses of Commercial or Conservative nor has it reviewed any individual
credit files, and it has assumed that the aggregate allowance for loan losses is
adequate to cover such losses and will be adequate on a pro forma basis for the
combined entity.
In arriving at its written opinion, Merrill Lynch also assumed and relied
upon the senior management of Commercial as to the reasonableness and
achievability of the financial and operating forecasts furnished by Commercial
and Conservative (and the assumptions and bases therefor). Merrill Lynch, with
the consent of Commercial, assumed that such information, including, without
limitation, financial forecasts, projected cost savings and operating synergies
resulting from the Merger and projections regarding underperforming and
nonperforming assets, net charge-offs, and adequacy of reserves, reflect the
best currently available estimates and judgment of the senior management of
Commercial and Conservative as to the expected future financial performance of
Commercial, Conservative, or the combined entity, as the case may be. The
opinion was based on economic, market and other conditions as in effect on, and
the information made available to Merrill Lynch on, the date the opinion was
rendered. The opinion also was rendered without regard as to the necessity for,
or level of, any restrictions, obligations, undertakings or divestitures which
may be imposed or required in the course of obtaining regulatory approvals for
the Merger.
28
<PAGE>
Merrill Lynch has received a $125,000 fee for investment banking services
related to the Merger and related advisory work and will receive an additional
$150,000 fee upon consummation of the Merger. Merrill Lynch will also be
reimbursed for its out-of-pocket expenses and will be indemnified against
certain liabilities relating to or arising out of the Merger, including
liabilities arising under the securities laws. In addition, Merrill Lynch has
from time to time provided financial advisory services to Commercial for which
it has received customary compensation. In the ordinary course of its business,
Merrill Lynch may also trade the securities of Commercial and/or Conservative
for its own account and the accounts of customers and, accordingly, may also
from time to time hold a long or short position in such securities.
Merrill Lynch's opinion was rendered to the Board of Directors of
Commercial and does not constitute, and should not be construed as, a
recommendation to any shareholder of Conservative as to how such shareholder
should vote at the Special Meeting.
Conversion of Conservative Common Stock and Conservative Preferred Stock
Exchange Ratio. Each share of Conservative Common Stock issued and
outstanding at the Acquisition Merger Effective Time (other than shares owned or
held by Commercial) will be converted into and represent solely the right to
receive (a) $6.34 in cash and (b) a number of shares of Commercial Common Stock
(such number of shares referred to as the "Exchange Ratio") based upon the
"Average Closing Price" of Commercial Common Stock (i.e., the arithmetic mean of
the per share closing price of the Commercial Common Stock as reported on the
NYSE for the Determination Period) as follows: (i) if the Average Closing Price
is less than $28.00 but equal to or greater than $26.00, the Exchange Ratio
shall be that number of shares of Commercial Common Stock equal to the quotient
that results by dividing $7.07 by the Average Closing Price; (ii) if the Average
Closing Price is equal to or greater than $28.00 but equal to or less than
$36.00, the Exchange Ratio shall be .2525 shares of Commercial Common Stock;
(iii) if the Average Closing Price is greater than $36.00, the Exchange Ratio
shall be that number of shares of Commercial Common Stock equal to the quotient
that results by dividing $9.09 by the Average Closing Price; and (iv) if the
Average Closing Price is less than $26.00, the Exchange Ratio shall be .2719
shares of Commercial Common Stock; provided, however, that if the Average
Closing Price is less than $26.00, Conservative will have the right to terminate
the Merger Agreement unless Commercial elects to adjust the Exchange Ratio to
equal $7.07 divided by the Average Closing Price. If the Average Closing Price
is less than $18.00, Conservative may terminate the Merger Agreement and
Commercial does not have the right to adjust the Exchange Ratio. Also pursuant
to the Merger Agreement, each share of Conservative Preferred Stock outstanding
at the time of the Acquisition Merger will be converted into the right to
receive (a) $14.33 in cash and (b) a number of shares of Commercial Common Stock
equal to the product of 2.26 and the Exchange Ratio. Based on the closing price
per share of Commercial Common Stock on the NYSE on November 21, 1995, of
$35.25, each share of Conservative Common Stock would be exchanged for $6.34 in
cash and .2525 shares of Commercial Common Stock, and each share of Conservative
Preferred Stock would be exchanged for $14.33 in cash and .5707 shares of
Commercial Common Stock.
No Fractional Shares. No fractional shares of Commercial Common Stock will
be issued in the Merger. Instead, cash will be paid in lieu of any fractional
share interests of Commercial Common Stock resulting from the Merger. No
dividend or distribution with respect to Commercial Common Stock will be payable
on or with respect to any fractional share interests, and no fractional share
interest will entitle the owner thereof to vote or to any other rights of a
stockholder of Commercial. The applicable cash value of each fractional share
interest will be equal to the product of such fraction multiplied by the Average
Closing Price for shares of Commercial Common Stock.
Exchange of Conservative Stock Certificates. Chemical Mellon Shareholder
Services, L.L.C. is expected to act as the exchange agent (the "Exchange Agent")
to effect the exchange of stock certificates in connection with the Merger. As
soon as practicable after the Acquisition Merger Effective Time, the Exchange
Agent will send a notice and transmittal form to each Conservative stockholder
of record at such date whose Conservative Common Stock or Conservative Preferred
Stock has been converted into cash and Commercial Common Stock, advising such
stockholder of the effectiveness of the Acquisition Merger and the procedure for
surrendering to the Exchange Agent outstanding certificates formerly evidencing
Conservative Common Stock and Conservative Preferred Stock in
29
<PAGE>
exchange for cash and for new certificates of Commercial Common Stock. Promptly
following receipt of such notice and transmittal form, holders of Conservative
Common Stock and Conservative Preferred Stock certificates should surrender
their certificates in accordance with the specified procedures. Upon surrender,
each Conservative Common Stock and Conservative Preferred Stock certificate will
be cancelled.
Until surrendered, certificates that prior to the Acquisition Merger
Effective Time represented outstanding shares of Conservative Common Stock and
Conservative Preferred Stock will be deemed for all corporate purposes to
evidence the right to receive cash and the ownership of the number of whole
shares of Commercial Common Stock into which such shares of Conservative Common
Stock and Conservative Preferred Stock have been converted. Until such
certificates are so surrendered, no dividend payable to holders of Commercial
Common Stock as of any record date subsequent to the Acquisition Merger
Effective Time will be paid to the holders of such certificates. However, upon
surrender of such certificates, there will be paid to the record holder of the
certificates of Commercial Common Stock issued in exchange therefor the amount
of dividends that theretofore have become payable with respect to such shares of
Commercial Common Stock along with the amount of cash, if any, payable to the
holder in lieu of fractional shares. No interest will be payable with respect
to such dividends, cash paid in lieu of fractional shares or the cash portion of
the consideration to be received in the Merger.
If any certificate for shares of Commercial Common Stock is to be issued in
a name other than the name in which the surrendered certificate is registered,
it will be a condition of issuance that the certificate so surrendered is
properly endorsed and otherwise in proper form for transfer and that the person
requesting the issuance of such certificate either pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of the certificate in
a name other than the registered holder of the certificate surrendered or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
Holders of Conservative Common Stock or Conservative Preferred Stock should
NOT surrender their certificates until they receive written instructions from
the Exchange Agent.
Any shares of Conservative Common Stock or Conservative Preferred Stock
owned or held by Commercial or any of its subsidiaries (other than in a
fiduciary capacity) or by Conservative or any of its subsidiaries (other than in
a fiduciary capacity) at the Acquisition Merger Effective Time will cease to
exist, and the certificates for such shares will be cancelled.
Treatment of Conservative Stock Options
Immediately prior to the Acquisition Merger Effective Time, each holder of
an option outstanding under the Conservative Option Plan, whether or not the
option is then exercisable, shall receive in cancellation of such option (such
cancellation to be reflected in a written agreement) per share of Conservative
Common Stock subject to such option a cash payment in an amount equal to the sum
of (i) $6.34 and (ii) the product of the Exchange Ratio and the Average Closing
Price, less (iii) the exercise price of such option, net of any cash which must
be withheld under federal and state tax requirements. Immediately thereafter,
Conservative will cancel each such option.
See " -- Interests of Certain Persons in the Merger" for information
regarding outstanding Conservative stock options.
No Dissenters' Appraisal Rights
The Nebraska Business Corporation Act generally provides that stockholders
of a corporation that is a party to certain extraordinary corporate actions,
including a merger, consolidation, sale of substantially all of the assets of
the corporation, and a charter amendment materially and adversely affecting
stockholder rights have a right to object to such actions and to demand and
receive the fair value of their shares. The Nebraska Business Corporation Act
provides, however, that dissenters' rights of appraisal are not available to the
stockholders of a bank, trust company, stock-owned savings and loan association,
industrial loan and investment company, or the holding company of any such
financial institution. Because of this provision of the Nebraska Business
Corporation Act, Conservative's
30
<PAGE>
stockholders do not have dissenters' rights of appraisal under the Nebraska
Business Corporation Act in connection with the transactions contemplated by the
Merger Agreement.
The Bank Merger
Following the Acquisition Merger, Conservative Savings will merge into the
Bank, as a result of which the Bank will be the surviving savings institution.
The Bank Merger will be undertaken subject to and upon the terms and conditions
contained in the Merger Agreement and in the Plan of Merger between Conservative
Savings and the Bank dated August 15, 1995. At the Bank Merger Effective Time,
the shares of Conservative Savings common stock issued and outstanding
immediately prior thereto will be cancelled and the shares of capital stock of
the Bank outstanding immediately prior thereto will constitute the only
outstanding shares of capital stock of the Bank following consummation of the
Bank Merger, the charter and bylaws of the Bank in effect immediately before the
Bank Merger will be the charter and bylaws of the Bank immediately after the
Bank Merger, the current home office of the Bank will continue to be the home
office of the Bank, and the former home office of Conservative Savings and all
branch offices of the Bank and former branch offices of Conservative Savings
will be branch offices of the Bank. Following the Bank Merger, the Bank will
continue to operate under the name "Commercial Federal Bank, a Federal Savings
Bank." For additional information, see " -- Management after the Merger," " --
Employee Benefit Plans after the Merger" and " -- Interests of Certain Persons
in the Merger."
The obligations of the parties to consummate the Bank Merger are subject to
the receipt of OTS approval of the Bank Merger.
Management after the Merger
The directors and officers of Commercial and the Bank will not be affected
by the Merger, with the exception that Robert P. DeLay will hold the office of
Vice President of the Bank through December 31, 1996 and Gene F. Uher will hold
the office of First Vice President and Director of Correspondent Lending.
Representations and Warranties
Commercial and the Bank, and Conservative and Conservative Savings, have
given certain representations and warranties to each other in the Merger
Agreement relating to, among other things, the following: the validity of their
organization; authorized capital; the ownership, organization and status of
their subsidiaries; the accuracy and completeness of certain internal books and
records and of their financial statements, reports and material relating to them
included in this Prospectus/Proxy Statement; the absence of any undisclosed
material adverse change in their business, financial conditions or results of
operations; the accuracy and completeness of information contained in this
Prospectus/Proxy Statement; disclosure of financial advisory, brokerage, finders
and similar fees; the absence of undisclosed material pending or threatened
litigation; their standing under and compliance with applicable state and
federal law, including compliance with federal securities laws and state and
federal tax laws, among others; certain tax matters; their authority to enter
into the Merger Agreement and to undertake the transactions contemplated by it;
and the accuracy of all information provided to each other in connection with
the Merger. Conservative and Conservative Savings have made additional
representations as to the absence of undisclosed employment agreements or
arrangements and employee benefits; ownership of all of their real property and
undisturbed possession of all material leases; absence of any material contract
defaults; the absence of environmental hazards and claims; the quality of
Conservative Savings' loan portfolio; the adequacy of the present carrying
values of any real estate investments, joint ventures, construction loans or
other investments or loans under generally accepted accounting principles; lack
of undisclosed derivative contracts; the adequacy of certain types of insurance;
and certain matters related to the Conservative Preferred Stock.
Covenants Pending the Acquisition Merger
In the Merger Agreement, Commercial, the Bank, Conservative and
Conservative Savings have agreed to use their best efforts, and to take all
actions necessary or appropriate, to consummate the transactions contemplated by
the Merger Agreement. Each party has also agreed to give to the other party and
its respective representatives and agents full access (to the extent lawful) to
all of the premises, books, records and employees of it and its
31
<PAGE>
subsidiaries at all reasonable times, and to furnish and cause its subsidiaries
to furnish to the other party and its respective agents or representatives
access to and true and complete copies of such financial and operating data and
all documents with respect to matters to which reference is made in the Merger
Agreement.
Pursuant to the Merger Agreement, Conservative and its subsidiaries,
including Conservative Savings, will conduct their business only in the ordinary
course, and maintain their books and records in accordance with past practices
and not take any action that would (i) adversely affect the ability to obtain
any governmental approvals contemplated in the Merger Agreement, or (ii)
adversely affect Conservative's ability to perform its obligations under the
Merger Agreement or the Stock Option Agreement. Further, Conservative has
agreed that it will not, without the prior written consent of Commercial: (i)
declare, set aside or pay any dividend or make any other distribution with
respect to Conservative's capital stock, except for the regularly quarterly
dividends on Conservative's Common Stock in an amount not to exceed $.03 per
share per quarter, and for the regular quarterly dividends on Conservative's
Preferred Stock in an amount not to exceed $.38 per share per quarter; (ii)
reacquire any of Conservative's outstanding shares; (iii) issue, sell or buy any
shares of capital stock of Conservative or any of its subsidiaries, except
shares of Conservative Common Stock issued under the Conservative Option Plan;
(iv) effect any stock split, stock dividend or other reclassification of
Conservative's Common Stock; or (v) grant any options or issue any warrants
exercisable for or securities convertible or exchangeable into capital stock of
Conservative or any Conservative subsidiary or grant any stock appreciation or
other rights with respect to shares of capital stock of Conservative or any of
its subsidiaries.
In addition, pursuant to the Merger Agreement, Conservative and its
subsidiaries shall not, without the prior written consent of Commercial:
(i) sell or dispose of any significant assets of Conservative or any of its
subsidiaries other than in the ordinary course of business consistent with past
practices;
(ii) merge or consolidate Conservative or any of its subsidiaries with or
otherwise acquire any other entity, or file any application or make any contract
with respect to branching by Conservative Savings (whether de novo, purchase,
sale or relocation) or acquire or construct, or enter into any agreement to
acquire or construct, any interest in real property (other than with respect to
security interests in properties securing loans and properties acquired in
settlement of loans in the ordinary course) or improvements to real property;
(iii) change the certificate of incorporation, charter documents or other
governing instruments of Conservative or any of its subsidiaries, except as
provided in the Merger Agreement;
(iv) grant to any executive officer, director or employee of Conservative or
any of its subsidiaries (a) any increase in annual compensation, except
increases in salaries to non-executive employees in the ordinary course of
business not to exceed $25,000 in the aggregate, or (b) any bonus type payment,
except bonus payments not to exceed $141,000 in the aggregate;
(v) adopt any new or amend or terminate any existing employee plans or
benefit arrangements of any type;
(vi) authorize severance pay or other benefits for any officer, director or
employee of Conservative or any of its subsidiaries;
(vii) incur any material indebtedness or obligation or enter into or extend
any material agreement or lease, except in the ordinary course of business
consistent with past practices;
(viii) engage in any lending activities other than in the ordinary course of
business consistent with past practices;
(ix) form any new subsidiary or cause or permit a material change in the
activities presently conducted by any Conservative subsidiary or make additional
investments in subsidiaries;
32
<PAGE>
(x) purchase any debt securities or derivative securities, including
collateralized mortgage obligations ("CMOs") or real estate mortgage investment
conduits products, that are defined as "high risk mortgage securities" under OTS
Thrift Bulletin No. 52 dated January 10, 1992, as revised, or purchase any
derivatives contracts or structured notes;
(xi) purchase any equity securities other than Federal Home Loan Bank stock;
(xii) make any investment which would cause Conservative Savings to not be a
qualified thrift lender under Section 10(m) of the Home Owners' Loan Act or not
to be a "domestic building and loan association" as defined in Section
7701(a)(19) of the Internal Revenue Code of 1986, as amended (the "Code");
(xiii) make any loan with a principal balance of $500,000 or more;
(xiv) authorize capital expenditures other than in the ordinary course of
business;
(xv) adopt or implement any change in its accounting principles, practices
or methods other than as may be required by generally accepted accounting
principles, or adopt or implement any change in its methods of accounting for
federal income tax purposes; or
(xvi) make any loan in which participation interests therein are to be sold
to other persons or entities or acquire a participation interest in a loan
originated by another person or entity.
Notwithstanding the foregoing, Conservative Savings is permitted to engage
in any of the foregoing activities exclusively with the Bank.
Pursuant to the Merger Agreement, Conservative also shall not authorize or
permit any representative of Conservative or any subsidiary to initiate contact
with any person or entity in an effort to solicit, initiate or encourage any
"takeover proposal" (generally, any proposal other than as contemplated by the
Merger Agreement, for a merger or other business combination involving
Conservative or Conservative Savings, for the acquisition of a 10.0% or greater
equity interest in Conservative or Conservative Savings or for the acquisition
of a substantial portion of the assets of Conservative or Conservative Savings)
or, except as the fiduciary duties of Conservative's Board of Directors may
otherwise require, cooperate with, negotiate with or enter into an agreement
with any party relating to a takeover proposal. Further, Conservative has
agreed to give prompt written notice to Commercial upon becoming aware of any
takeover proposal.
Conditions to Consummation of the Merger
Pursuant to the Merger Agreement, the obligations of Commercial and
Conservative to effect the Acquisition Merger and the Bank Merger are subject to
the following conditions:
(i) holders of the outstanding shares of Conservative Common Stock and
Conservative Preferred Stock shall have approved the Merger Agreement and the
Acquisition Merger;
(ii) no order shall have been entered and remain in force restraining or
prohibiting the Merger in any legal, administrative, arbitration, investigatory
or other proceedings by any governmental or judicial or other authority;
(iii) to the extent required by applicable law or regulation, all approvals
of or filings with any governmental authority, including without limitation
those of the OTS, the FDIC, the Federal Trade Commission, the Department of
Justice, the Commission, and any state securities or blue sky authorities, shall
have been obtained or made and any waiting periods shall have expired in
connection with the consummation of the Merger and all other statutory or
regulatory requirements for the valid consummation of the Merger and related
transactions shall have been satisfied;
33
<PAGE>
(iv) the Registration Statement of which this Prospectus/Proxy Statement is
a part shall have been declared effective and shall not be subject to a stop
order of the Commission and, if the offer and sale of Commercial's Common Stock
in the Merger pursuant to the Merger Agreement is subject to the blue sky laws
of any state, shall not be subject to a stop order of any state securities
commissioner; and
(v) receipt of either an opinion of Deloitte & Touche LLP, or other tax
advisor reasonably acceptable to Commercial and Conservative, or a private
letter ruling from the Internal Revenue Service ("IRS"), in form and content
reasonably satisfactory to Commercial and Conservative, and upon which
Conservative shareholders may rely, as to certain of the federal income tax
consequences of the Acquisition Merger and the Bank Merger (see " -- Federal
Income Tax Consequences").
The obligations of Commercial and the Bank to effect the Merger and the
transactions contemplated in the Merger Agreement are subject to the following
additional conditions, among others, any of which may be waived by Commercial
and the Bank: (i) Commercial shall have received from Conservative's counsel an
opinion dated as of the closing date of the Merger covering certain matters;
(ii) Conservative and Conservative Savings shall have obtained all necessary
third party consents or approvals in connection with the Merger, the absence of
which would materially and adversely affect Conservative and its subsidiaries,
taken as a whole; (iii) Commercial shall have received a letter from
Conservative's independent public accountants regarding certain financial
information included in this Prospectus/Proxy Statement and other matters; (iv)
between the date of the Merger Agreement and the closing date of the Merger,
there shall not have occurred any material adverse change in the financial
condition, business or results of operations of Conservative and any
Conservative subsidiaries, taken as a whole, other than any such change
attributable to or resulting from any change in law, regulation or generally
accepted accounting principles which impair both Conservative and Commercial in
a substantially similar manner; (v) the representations and warranties of
Conservative and Conservative Savings shall be true in all material respects at
the Acquisition Merger Effective Time with the same effect as though made at the
Acquisition Merger Effective Time (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date);
Conservative and Conservative Savings shall have performed all obligations and
complied with each covenant, in all material respects, and all conditions under
the Merger Agreement on their parts to be performed or complied with at or prior
to the Acquisition Merger Effective Time; and Conservative shall have delivered
to Commercial a certificate, dated the Acquisition Merger Effective Time and
signed by its chief executive officer and chief financial officer, to such
effect; (vi) neither Conservative nor any of its subsidiaries shall be a party
to any pending litigation, reasonably probable of being determined adversely to
Conservative or any Conservative subsidiary, which would have a material adverse
effect on the business, financial condition or results of operations of
Conservative and its subsidiaries, taken as a whole; (vii) all governmental
approvals required by the Merger Agreement to consummate the transactions
contemplated thereby shall have been obtained without the imposition of any
conditions which Commercial and the Bank reasonably and in good faith determine
to be unduly burdensome upon the conduct of the business of Commercial or the
Bank; (viii) the form and substance of all legal matters contemplated by the
Merger Agreement and all papers delivered thereunder shall be reasonably
acceptable to counsel to Commercial and the Bank; (ix) Commercial shall have
received letter agreements from all affiliates of Conservative regarding
restrictions on resale of Commercial Common Stock received by them in the Merger
to ensure compliance with applicable resale restrictions imposed under the
federal securities laws; (x) prior to mailing this Prospectus/Proxy Statement,
Commercial shall have received an updated written opinion from its financial
advisor, Merrill Lynch & Co., to the effect that the Merger Consideration is
fair to Commercial from a financial point of view; (xi) neither a "distribution
date," "share acquisition date," nor a "triggering event" (as such terms are
defined in the Conservative Rights Agreement dated as of May 24, 1989 and
amended as of September 25, 1989), shall have occurred, and the rights shall not
have become redeemable or exercisable for capital stock of Commercial upon
consummation of the Acquisition Merger or the Bank Merger and Conservative shall
have, if requested by Commercial, redeemed the rights under the Rights Agreement
for the applicable redemption price immediately prior to the Acquisition Merger
Effective Time; and (xii) Commercial, at its expense, shall have received a
Phase I Environmental Risk Report (as contemplated in OTS Thrift Bulletin No.
16) on (i) all commercial real estate owned of, (ii) all offices and premises
used as facilities by, and (iii) all properties which serve as security for any
commercial real estate loan having an original principal balance of $1,000,000
or more of, Conservative and Conservative Savings, and such reports or
34
<PAGE>
other reports derived therefrom or supplemental thereto shall be satisfactory to
Commercial; provided, however, that Commercial's rights to terminate the Merger
Agreement for failure to receive such Phase I Environmental Risk Report expires
on November 13, 1995.
The obligations of Conservative and Conservative Savings to effect the
Acquisition Merger and the transactions contemplated in the Merger Agreement are
subject to the following additional conditions, among others, any of which may
be waived by Conservative and Conservative Savings: (i) Conservative shall have
received from counsel to Commercial opinions dated as of the closing date of the
Merger covering certain matters; (ii) the representations and warranties of
Commercial and the Bank shall be true in all material respects at the
Acquisition Merger Effective Time with the same effect as though made at the
Acquisition Merger Effective Time (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date);
Commercial and the Bank shall have performed all obligations and complied with
each covenant, in all material respects, and all conditions under the Merger
Agreement on their parts to be performed or complied with at or prior to the
Acquisition Merger Effective Time; and Commercial shall have delivered to
Company a certificate, dated the Acquisition Merger Effective Time and signed by
its chief executive officer and chief financial officer, to such effect; (iii)
the form and substance of all legal matters contemplated by the Merger Agreement
and all papers delivered thereunder shall be reasonably acceptable to counsel to
Conservative; (iv) prior to mailing this Prospectus/Proxy Statement,
Conservative shall have received an updated written opinion from its financial
advisor, Dain Bosworth, to the effect that the consideration to be received by
Conservative stockholders in the Acquisition Merger is fair from a financial
point of view to the stockholders of Conservative; (v) a certificate for the
required number of whole shares of Commercial Common Stock, as determined in
accordance with the Merger Agreement, and cash for the cash consideration to be
received by Conservative stockholders and cash for the fractional share
interests, as so determined, shall have been delivered to the Exchange Agent;
and (vi) in addition to governmental approvals, Commercial and the Bank shall
have obtained all necessary third party consents or approvals in connection with
the Merger, the absence of which would materially and adversely affect
Commercial and its subsidiaries, taken as a whole.
There can be no assurance that the conditions to consummation of the Merger
will be satisfied or waived. In the event the conditions to either party's
obligations become impossible to satisfy in any material respect, the other
party may elect to terminate the Merger Agreement. See " -- Amendment or
Termination of the Merger Agreement."
Amendment or Termination of the Merger Agreement
The Merger Agreement may be terminated at any time before the Acquisition
Merger Effective Time, whether before or after approval by stockholders; (i) by
mutual consent of the parties; (ii) at the election of either party, if the
closing of the Merger shall not have occurred on or before June 30, 1996 or such
later date as may be agreed to in writing by the parties, provided that the
right to terminate under this provision shall not be available to any party
whose failure to perform an obligation has been the cause of, or has resulted
in, the failure of the closing to occur on or before such date; (iii) by
Commercial upon delivery of written notice of termination to Conservative if any
event occurs which renders impossible satisfaction in any material respect of
one or more of the conditions to the obligations of Commercial to effect the
Merger as set forth in the Merger Agreement and noncompliance is not waived by
Commercial, provided that the right to terminate under this provision due to the
failure to obtain a Phase I Environmental Risk Report expires on November 13,
1995; (iv) by Conservative upon delivery of written notice of termination to
Commercial if any event occurs which renders impossible satisfaction in any
material respect of one or more of the conditions to the obligations of
Conservative to effect the Merger set forth in the Merger Agreement and
noncompliance is not waived by Conservative; (v) by Conservative at any time
during the two business days commencing on the business day immediately
following the end of the Determination Period, if the Average Closing Price of
Commercial Common Stock is less than $26.00; provided, however, that
Conservative shall not be entitled to terminate the Merger Agreement on this
basis if Commercial exercises its option to adjust the Exchange Ratio so that it
equals the number obtained by dividing $7.07 by the Average Closing Price of
Commercial Common Stock. If the Average Closing Price is less than $18.00,
Conservative may terminate the Merger Agreement and Commercial does not have the
option to increase the Exchange Ratio.
35
<PAGE>
The representations, warranties and agreements of the parties set forth in
the Merger Agreement shall not survive the Acquisition Merger Effective Time,
and shall be terminated and extinguished at that time. From and after that
time, none of the parties shall have any liability to the other on account of
any breach or failure of any of those representations, warranties and
agreements, except with respect to agreements of the parties which by their
terms are intended to be performed after that time and with respect to liability
for fraud, deception or intentional misrepresentation.
The Merger Agreement may be amended, whether before or after approval by
stockholders of Conservative, by an agreement in writing executed in the same
manner as the Merger Agreement and authorized or ratified by the Boards of
Directors of Conservative and Commercial, except that after approval of the
Merger Agreement by Conservative's stockholders, no such amendment without
further approval by Conservative's stockholders may change the amount or form of
the consideration to be received by Conservative's stockholders in the Merger.
Each of the parties to the Merger Agreement will bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated thereunder. However, Conservative and Conservative Savings will
reimburse Commercial for all reasonable out-of-pocket expenses, not to exceed
$500,000, actually incurred by Commercial or any subsidiary in connection with
entering into the Merger Agreement and the Option Agreement if the Merger
Agreement is terminated under circumstances in which the Board of Directors of
Conservative does not publicly recommend in this Prospectus/Proxy Statement that
Conservative's stockholders approve and adopt the Merger Agreement, or if after
such recommendation the Board of Directors of Conservative withdraws, modifies,
or amends such recommendation in any respect that is materially adverse to
Commercial.
Stock Option Agreement
As a condition to Commercial's entry into the Merger Agreement,
Conservative and Commercial entered into a Stock Option Agreement dated August
16, 1995, pursuant to which Conservative granted to Commercial an option to
purchase up to 367,354 shares of authorized and unissued or treasury shares of
Conservative Common Stock at an exercise price of $10.375 per share, subject to
adjustment, upon the occurrence of both an "initial triggering event" (defined
as (i) the entry by Conservative or Conservative Savings into an agreement with
a person (other than Commercial or any of its affiliates) (a) to merge or
consolidate with, or enter into any similar transaction with, Conservative or
Conservative Savings, (b) to purchase, lease or otherwise acquire all or
substantially all of the assets of Conservative or Conservative Savings, or (c)
to purchase or otherwise acquire the beneficial ownership of securities
representing 10% or more of the Conservative Common Stock or of any class of
Conservative preferred stock; (ii) the acquisition by any person (other than
Commercial or its affiliates) of beneficial ownership of 15.0% or more of the
outstanding shares of Conservative Common Stock or any class of Conservative
preferred stock; (iii) the making of a bona fide proposal by any person to
Conservative or its stockholders by public announcement or written communication
that is or becomes the subject of public disclosure to (a) engage in an
"acquisition transaction" or (b) commence a tender or exchange offer the
consummation of which would result in such person acquiring beneficial ownership
of securities representing 15% or more of Conservative's Common Stock or of any
class of Conservative preferred stock; (iv) the Board of Directors failing to
recommend to its stockholders the adoption of the Merger Agreement, or
withdrawing, modifying or changing such recommendation or failing to obtain
stockholder approval of the transactions contemplated by the Merger Agreement;
(v) Conservative having intentionally and knowingly breached any representation,
warranty, covenant or agreement contained in the Merger Agreement that is not
cured; or (vi) any person other than Commercial, without Commercial's prior
written consent, having filed an application or notice with OTS, which has been
accepted for processing, for approval to engage in an "acquisition transaction")
and a "subsequent triggering event" (generally, (i) the acquisition by any
person of beneficial ownership of 25% or more of the then outstanding
Conservative Common Stock or of any class of Conservative preferred stock; or
(ii) the occurrence of the initial triggering event described in subsection (i)
above, except that the percentage referred to in clause (c) shall be 25%).
36
<PAGE>
Subject to compliance with applicable law and regulation (including any
regulatory approvals required to be obtained by Conservative prior to issuing
the shares subject to the option), unless Commercial shall have breached in any
material respect any material covenant contained in the Merger Agreement and
such breach has not been cured, the option may be exercised, in whole or part,
at any time or from time to time only upon or after the occurrence of an initial
triggering event and a subsequent triggering event. Conservative shall notify
Commercial promptly in writing of the occurrence of any transaction or event
which constitutes an initial triggering event or a subsequent triggering event.
To exercise the option, Commercial shall send to Conservative a written
notice specifying (i) the total number of shares it will purchase pursuant to
such exercise and (ii) a place and date not earlier than three business days nor
later than 60 business days from the notice date for the closing of such
purchase with respect to such exercise; however, if prior notification to or
approval of any federal or state regulatory agency is required in connection
with such purchase, Commercial and the Bank shall promptly file the required
notice or application for approval and expeditiously process the same, and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which the last required notification period has expired
or been terminated or such approvals have been obtained and any requisite
waiting periods shall have passed.
The Stock Option Agreement further provides that upon the occurrence of a
subsequent triggering event prior to termination of the Stock Option Agreement,
Commercial may request that Conservative repurchase the option at a price equal
to (i) the amount by which (a) the "market/offer price" exceeds (b) the option
price, multiplied by the number of shares for which the option may be exercised
plus (ii) Commercial's out-of-pocket expenses, not to exceed $500,000, incurred
in connection with the transactions contemplated by the Merger Agreement. For
purposes of the Stock Option Agreement, "market/offer price" means the highest
of (i) the price per share of Conservative Common Stock at which a tender offer
or exchange offer therefor has been made; (ii) the price per share of
Conservative Common Stock to be paid by any third party pursuant to an agreement
with Conservative; (iii) the highest closing price for shares of Conservative
Common Stock within the six-month period immediately preceding the date
Commercial gives notice of the required repurchase of the option; or (iv) in the
event of a sale of all or substantially all of Conservative's assets, the sum of
the price paid in such sale for such assets and the current market value of the
remaining assets of Conservative as determined by a nationally recognized
investment banking firm, divided by the number of shares of Conservative Common
Stock outstanding at the time of such sale. The Stock Option Agreement also
requires the repurchase by Conservative of shares that have been exercised under
the Stock Option Agreement at the request of Commercial at a price equal to the
sum of (i) the market/offer price multiplied by the number of shares that were
requested to be repurchased and (ii) Commercial's out-of-pocket expenses.
The option shall expire and terminate, to the extent not previously
exercised, upon the earlier of (i) the Acquisition Merger Effective Time; (ii)
termination of the Merger Agreement in accordance with the provisions thereof if
such termination occurs prior to the occurrence of an initial triggering event;
or (iii) the passage of twelve months after termination of the Merger Agreement
if such termination follows or occurs at the same time as the occurrence of an
initial triggering event.
The Stock Option Agreement is attached as Annex C hereto, and the
description herein of the Stock Option Agreement is qualified in its entirety by
reference to the Stock Option Agreement.
Required Regulatory Approvals
- -----------------------------
The Merger is subject to the approval of the OTS. Commercial has filed an
application with the OTS for approval of the Merger. As of the date of this
Prospectus/Proxy Statement, the approval of the OTS has not been received.
There can be no assurance as to the timing of such approval, if given, or as to
the conditions, if any, on which approval will be given. In addition, the
approval, if and when granted, may contain conditions which Commercial may find
unduly burdensome. When such approval is received, material changes to the
Merger
37
<PAGE>
Agreement, material conditions, or other changes of a material nature may be
imposed by regulatory authorities in connection therewith which could require a
resolicitation of Conservative's stockholders for approval. Following OTS
approval of the Merger, the U.S. Department of Justice may review the Merger and
raise objections on antitrust grounds, though objections on such grounds are not
expected. If the required regulatory approvals are not obtained, the Merger
Agreement will be terminated, and the Merger will not occur.
Expenses
Pursuant to the Merger Agreement, each of the parties shall bear and pay
all costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated thereunder.
Notwithstanding the above, Conservative and Conservative Savings shall
reimburse Commercial for all reasonable out-of-pocket expenses, not to exceed
$500,000, actually incurred by Commercial or any Commercial subsidiary in
connection with entering into the Merger Agreement and the Stock Option
Agreement and carrying out any or all of the acts contemplated thereby if the
Merger Agreement is terminated under circumstances in which the Board of
Directors of Conservative does not publicly recommend in this Prospectus/Proxy
Statement that Conservative's stockholders approve and adopt the Merger
Agreement, or if after recommending in this Prospectus/Proxy Statement that
stockholders approve and adopt the Merger Agreement, the Board of Directors of
Conservative withdraws, modifies or amends such recommendation in any respect
materially adverse to Commercial.
Closing; Merger Effective Times
As promptly as practicable following the satisfaction or waiver of all
conditions of the Merger Agreement, a closing shall take place at which the
parties thereto will exchange documents required by the Merger Agreement.
Immediately following the closing, and on the same day if practicable, the
Acquisition Merger shall become effective at the time and date the Nebraska
articles of merger are filed with the appropriate authorities in Nebraska.
Following the Acquisition Merger, the Bank Merger shall become effective at the
time the articles of combination for such merger are endorsed by the OTS.
Employee Benefit Plans after the Merger
To the extent permitted by applicable law, the employees of Conservative
and Conservative Savings who become employees of Commercial and/or the Bank
shall be entitled to participate in all benefit plans sponsored by Commercial or
the Bank to the same extent as other similarly situated employees of Commercial
and the Bank, and Commercial shall honor accrued vacation leave for the
employees of Conservative and Conservative Savings.
Interests of Certain Persons in the Merger
Conservative Stock Options. The following table sets forth as of
November 21, 1995 information regarding outstanding options under Conservative's
Option Plan held by directors and executive officers of Conservative Savings.
Immediately prior to the Acquisition Merger Effective Time, each holder of an
option outstanding under Conservative's Option Plan, whether or not the option
is then exercisable, will receive in cancellation of such option per share of
Conservative Common Stock subject to such option a cash payment in an amount
equal to the sum of (i) $6.34 and (ii) the product of the Exchange Ratio and the
Average Closing Price, less (iii) the exercise price of such option.
38
<PAGE>
<TABLE>
<CAPTION>
Amount of Cash to
be Received Upon
Consummation
Outstanding of the Merger
Principal Position Stock Option for Cancellation
Name with Conservative Savings Shares (1) of Stock Options (2)
- ---- ------------------------- ------------ -------------------
<S> <C> <C> <C>
Robert P. DeLay President and Chief Executive 39,532 $ 267,502
Officer
Gene F. Uher Executive Vice President, Chief 22,466 144,061
Operating Officer and Chief
Lending Officer
Craig S. Allen Senior Vice President, Chief 22,466 144,061
Financial Officer and Secretary-
Treasurer
Gary W. Klein Vice President and Controller 6,800 25,432
Gary G. Otteman Vice President -- Real Estate 6,800 25,432
Operations
------- -----------
Total 98,064 $ 606,488
</TABLE>
- --------------------
(1) Includes 7,640, 5,120, 5,120, 2,720 and 2,720 unvested options held by
Messrs. DeLay, Allen, Uher, Klein and Otteman, respectively, that will vest
as a result of consummation of the Merger.
(2) For purposes of this calculation, the Average Closing Price and Exchange
Ratio were estimated to be $35.25 and .2525, respectively.
Severance Benefits. Employees of Conservative Savings who are not offered
a similar position with the Bank upon consummation of the Merger, or who have
worked for the Bank through an assigned transition period and are not offered
similar employment with the Bank, will receive severance benefits of one week's
salary per credited year of service with Conservative Savings, up to a maximum
of twelve weeks salary. Severance benefits will not be paid to (i) employees
who are offered a position with the Bank and accept such offer; (ii) employees
who refuse a similar position with the Bank at comparable compensation and
employment location; (iii) employees who are terminated for cause; and (iv)
employees who voluntarily terminate before termination by the Bank at any time
after the Merger Agreement was executed.
In addition, three executive officers of Conservative, Messrs. Robert P.
DeLay, Gene F. Uher, Executive Vice President and Chief Operating Officer of
Conservative and Conservative Savings and Craig S. Allen, Senior Vice President
and Chief Financial Officer of Conservative and Conservative Savings, are
parties to employment agreements with Conservative that provide for severance
payments upon the occurrence of certain events, including termination of their
respective employment under such agreements following a change in control of
Conservative. It is currently anticipated that as a result of the Merger, the
three executive officers will become entitled to severance payments under their
current employment agreements with Conservative. In such event, Messrs. DeLay,
Uher and Allen will be entitled to payments under their employment agreements in
the approximate amounts of $533,500, $100,000 and $88,400, respectively.
In addition to his employment agreement, Conservative entered into a
Supplemental Executive Retirement Agreement ("SERA") with Mr. DeLay. The SERA
benefit is only payable in the event of a change in control of Conservative and
Mr. DeLay's termination of employment. The amount of the payment under the SERA
upon termination of employment is equal to the difference between $2,500 per
month and the monthly benefit provided under Conservative Savings' pension plan
at Mr. DeLay's normal retirement date of age 65. The estimated cost of funding
the increased benefit, if it becomes payable in 1995 in connection with the
Merger and Conservative elects to purchase a single premium annuity to fund the
increased benefit, would be approximately $208,000.
39
<PAGE>
Consulting Agreement. In addition, Commercial has entered into a
consulting agreement with Mr. Robert P. DeLay commencing at the Acquisition
Merger Effective Time and continuing for a period of three years. Under this
Agreement, Mr. DeLay will be required to provide assistance in the post-Merger
transition period and to render consulting, advisory and other services
regarding business development and general banking matters in the Omaha,
Nebraska area. Under the consulting agreement, Mr. DeLay will receive
approximately $75,000 per year and will hold the office of Vice President of the
Bank through December 31, 1996.
Indemnification of Conservative Management
Indemnification of Conservative Management. Pursuant to the Merger
Agreement, Commercial has agreed that for a period of three years following the
Acquisition Merger Effective Time, the Merger will not affect or diminish any of
Conservative's duties and obligations of indemnification existing as of the
Acquisition Merger Effective Time in favor of employees, agents, directors or
officers of Conservative or any of its subsidiaries arising by virtue of
Conservative's articles of incorporation or bylaws in the form in effect at the
date of the Merger Agreement or arising by operation of law. Commercial will
cause the persons serving as officers and directors of Conservative immediately
prior to the Acquisition Merger Effective Time to be covered for a period of 18
months from the Acquisition Merger Effective Time by the directors' and
officers' liability insurance policy maintained by Conservative (provided that
Commercial may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are not materially less
advantageous than such policy) with respect to acts or omissions occurring prior
to the Acquisition Merger Effective Time which were committed by such officers
and directors in their capacity as such; however, in no event will Commercial be
required to expend more than 150% of the amount currently expended by
Conservative on an annual basis to maintain or procure insurance coverage for
such 18 month period pursuant to the Merger Agreement.
Federal Income Tax Consequences
Commercial and Conservative have not sought a ruling from the IRS
concerning the federal income tax consequences of the Merger. Instead,
Commercial and Conservative will rely upon an opinion of Deloitte & Touche LLP,
tax advisor to Commercial, to the following effect:
. the Acquisition Merger should qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. Conservative and
Commercial should each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code.
. Conservative should recognize no gain or loss on the transfer of its
assets to Commercial in exchange for the Commercial Common Stock, cash
and the assumption of its liabilities by Commercial, by reason of the
application of Sections 361(a), 361(b) and 357(a) of the Code.
. no gain or loss should be recognized by Conservative upon the
distribution of the Commercial Common Stock to the Conservative
stockholders, by reason of the application of Section 361(c)(1) of the
Code.
. no gain or loss should be recognized by Commercial on the receipt of
Conservative's assets in exchange for Commercial Common Stock, and the
assumption by Commercial of Conservative's liabilities, by reason of
the application of Section 1032(a) of the Code.
. the basis of the assets of Conservative in the hands of Commercial
should be the same as the basis of such assets in the hands of
Conservative immediately prior to the Merger, by reason of the
application of Section 362(b) of the Code.
40
<PAGE>
. the holding period of the property acquired by Commercial from
Conservative should include the holding period of such property in the
hands of Conservative immediately prior to the Merger, by reason of
the application of Section 1223(2) of the Code.
. the gain, if any, to be realized by a Conservative stockholder who
receives Commercial Common Stock (including fractional share interests
a Conservative stockholder would otherwise be entitled to receive) and
cash in exchange for Conservative stock should be recognized, but not
in excess of the amount of cash received. If the exchange has the
effect of the distribution of a dividend (determined with application
of Code Section 318(a)), then the amount of gain recognized that is
not in excess of each stockholder's ratable share of undistributed
earnings and profits should be treated as a dividend. The
determination of whether the exchange has the effect of the
distribution of a dividend should be made on a stockholder-by-
stockholder basis. No loss should be recognized on the exchange.
Sections 356(a) and 356(c) of the Code. Each Conservative stockholder
should contact his own income tax advisor with respect to the
application of Section 356(a) of the Code.
. the basis of the Commercial Common Stock (including fractional share
interests a Conservative stockholder would otherwise be entitled to
receive) to be received by a Conservative stockholder who exchanges
Conservative Common Stock and Preferred Stock for Commercial Common
Stock and cash should be the same as the basis of the Conservative
Common Stock and Preferred Stock surrendered in the Merger, decreased
by the amount of cash received, and increased by the amount that is
treated as a dividend (if any), and by the amount of gain recognized
on the exchange (not including any portion of that gain that was
treated as a dividend). Section 358(a)(1) and 358(b)(1) of the Code.
. the holding period of the Commercial Common Stock (including
fractional share interests that they would otherwise be entitled to
receive) to be received by Conservative stockholders should, in each
instance, include the holding period of the Conservative shares
surrendered in the exchange, provided Conservative stock was held as a
capital asset on the date of the exchange, by reason of the
application of Code Section 1223(1).
. Commercial as the survivor should succeed to and take into account as
of the close of the day of the distribution or transfer the items of
Conservative described in Code Section 381(c), subject to the
conditions and limitations specified in Code Sections 381(b) and
381(c), by reason of the application of Code Section 381(a)(2).
. as provided in Code Section 381(c)(2) and Regulation Section
1.381(c)(2)-1, Commercial as the survivor should succeed to and take
into account the earnings and profits, or deficit in earnings and
profits, of Conservative as of the date or dates of transfer. Any
deficit in earnings and profits of either Commercial or Conservative
should be used only to offset earnings and profits accumulated after
the date or dates of transfer.
. cash received by a stockholder of Conservative otherwise entitled to
receive a fractional share of Commercial Common Stock in exchange for
his Conservative stock should be treated as if the fractional shares
were distributed as part of the exchange and then were redeemed by
Commercial. These cash payments should be treated as having been
received as distributions in full payment in exchange for the stock
redeemed as provided in Code Section 302(a). This receipt of cash
should result in gain or loss measured by the difference between the
basis of such fractional share interest and the cash received. Such
gain or loss should be capital gain or loss to the former Conservative
stockholder, provided the Conservative stock was a capital asset in
such former stockholder's hands and as such, will be subject to the
provisions and limitations of Subchapter P of Chapter 1 (Rev. Rul. 66-
365 and Rev. Rul. 77-41).
41
<PAGE>
Unlike a ruling from the IRS, the opinion of Deloitte & Touche LLP has no
binding effect on the IRS. The opinion of Deloitte & Touche LLP is filed with
the Commission as an exhibit to Commercial's registration statement on Form S-4
of which this Prospectus/Proxy Statement is a part. See " -- Additional
Information."
Cash payments made to the holders of Conservative Common Stock and
Conservative Preferred Stock upon the exchange thereof in connection with the
Acquisition Merger (other than certain exempt entities and persons) will be
subject to a 31.0% backup withholding tax under federal income tax law unless
certain requirements are met. Generally, Commercial will be required to deduct
and withhold the tax if (i) the stockholder fails to furnish a taxpayer
identification number ("TIN") or fails to certify under penalty of perjury that
such TIN is correct, (ii) the IRS notifies Commercial that the TIN furnished by
the stockholder is incorrect, (iii) the IRS notifies Commercial that the
stockholder has failed to report interest, dividends or original issue discount
in the past, or (iv) there has been a failure by the stockholder to certify
under penalty of perjury that such stockholder is not subject to the 31.0%
backup withholding tax. Any amounts withheld in collection of the 31.0% backup
withholding tax will reduce the federal income tax liability of the stockholders
from whom such tax was withheld. The TIN of an individual stockholder is that
stockholder's Social Security number.
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL INCOME
TAX CONSEQUENCES OF THE MERGER, WITHOUT CONSIDERATION OF THE PARTICULAR FACTS
AND CIRCUMSTANCES OF EACH CONSERVATIVE STOCKHOLDER'S SITUATION. EACH
CONSERVATIVE STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX AND
FINANCIAL ADVISORS AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE
TO SUCH STOCKHOLDER AND NOT COMMON TO STOCKHOLDERS AS A WHOLE AND ALSO AS TO ANY
ESTATE, GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER
AND/OR ANY SALE THEREAFTER OF COMMERCIAL COMMON STOCK RECEIVED IN THE MERGER.
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles, resulting in
adjustments to the carrying value of Conservative's assets and liabilities to
reflect their respective fair values at the date of the Acquisition Merger.
Resale of Commercial Common Stock; Restrictions on Transfer
The shares of Commercial Common Stock to be issued in the Acquisition
Merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares issued to any
stockholder who may be deemed to be an "affiliate" of Conservative or Commercial
for purposes of Rule 145 under the Securities Act (generally, individuals or
entities that control, are controlled by or are under common control with
Conservative or Commercial). Affiliates may not sell their shares of Commercial
Common Stock acquired in connection with the Acquisition Merger except pursuant
to an effective registration statement under the Securities Act covering such
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act.
Conservative has agreed in the Merger Agreement to use its best efforts to
cause each director, executive officer and other person who is an affiliate (for
purposes of Rule 145) of Conservative to deliver to Commercial a written
agreement intended to ensure compliance with the Securities Act.
New York Stock Exchange Listing
Commercial Common Stock is traded on the NYSE under the symbol "CFB". It
is expected that Commercial Common Stock will continue to be quoted on the NYSE
under the symbol "CFB" following the Merger.
<PAGE>
Vote Required
The affirmative vote of at least two-thirds of the outstanding Conservative
Common Stock and at least two-thirds of the outstanding Conservative Preferred
Stock voting separately as a class, in addition to two-thirds of the total
outstanding shares, is required for Conservative's stockholders to approve the
Merger Agreement and the Acquisition Merger. Each share of Conservative Common
Stock and Conservative Preferred Stock outstanding at the close of business on
the record date for the Special Meeting, November 14, 1995, is entitled to
one vote on each matter to be considered at such meeting. Conservative's
directors and executive officers, and their affiliates, are expected to vote
substantially all of the 85,388 shares, of Conservative's outstanding
Common Stock (excluding stock options) and all of the 100 shares of
Conservative's outstanding Preferred Stock, beneficially owned by them as of the
Record Date for approval of the Acquisition Merger and the Merger Agreement.
43
<PAGE>
UNAUDITED HISTORICAL PRO FORMA COMBINED FINANCIAL INFORMATION
Unaudited Historical Pro Forma Combined Statement of Financial Condition
The following unaudited historical pro forma combined statement of
financial condition for Commercial has been prepared based on the historical
consolidated statements of financial condition of Commercial and Conservative as
of June 30, 1995 giving effect to the Merger accounted for as a purchase. Pro
forma adjustments, and the assumptions on which they are based, are described in
the accompanying notes to the unaudited historical pro forma combined financial
statements. This unaudited historical pro forma combined statement for the
Merger is based on the conversion of each outstanding share of Conservative
Common Stock and Preferred Stock into shares of Commercial Common Stock in
accordance with the terms of the Merger Agreement, see "The Merger -- Conversion
of Conservative Common Stock and Conservative Preferred Stock." The pending
acquisition refers to and includes the historical results and pro forma
adjustments to effect the acquisition of Railroad accounted for as a pooling of
interests as described in the accompanying notes. Such acquisition of Railroad
was consummated on October 2, 1995.
The unaudited historical pro forma combined statement of financial
condition should be read in conjunction with the historical consolidated
financial statements and notes thereto incorporated by reference herein. The
unaudited historical pro forma combined statement of financial condition
presented on the following page does not include any expected cost savings as a
result of the merger of the companies, does not reflect nonrecurring merger
transaction costs, nor does it reflect any purchase accounting adjustments other
than those described in the accompanying notes, and is not necessarily
indicative of the actual financial position that would have occurred had the
merger of the companies been consummated on June 30, 1995 or that may be
obtained in the future.
44
<PAGE>
UNAUDITED HISTORICAL PRO FORMA COMBINED STATEMENT OF FINANCIAL CONDITION AT
JUNE 30, 1995
<TABLE>
<CAPTION>
Pro Forma Pending Pro Forma
Historical Pro Forma Commercial and Acquisition Adjustments Pro Forma
Commercial Conservative Adjustments Conservative (Railroad) (Railroad) Combined
---------- ------------ ----------- -------------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash................................ $ 29,330 $ 5,463 $(19,047)(1) $ 15,746 $ 5,815 $ -- $ 21,561
Investment securities available for
sale............................... -- 21,972 -- 21,972 2,988 -- 24,960
Mortgage-backed securities available
for sale........................... 10,322 14,700 -- 25,022 26,652 -- 51,674
Loans held for sale................. 36,382 1,174 27 (2) 37,583 77,003 -- 114,586
Investment securities held to
maturity........................... 294,237 15,471 (111)(2) 309,597 3,256 -- 312,853
Mortgage-backed securities held to
maturity........................... 1,321,461 139,898 216 (2) 1,461,575 6,472 -- 1,468,047
Loans receivable, net............... 3,955,256 161,227 4,977 (2) 4,121,460 472,051 -- 4,593,511
Federal Home Loan Bank stock........ 97,110 8,025 -- 105,135 6,538 -- 111,673
Interest receivable, net............ 38,761 2,551 -- 41,312 3,450 -- 44,762
Real estate......................... 16,385 147 -- 16,532 401 -- 16,933
Premises and equipment.............. 62,716 5,380 -- 68,096 4,488 -- 72,584
Prepaid expenses and other assets... 58,636 3,649 -- 62,285 2,606 -- 64,891
Goodwill and core value of deposits, 33,712 3,718 (3,718)(2) 39,359 3,551 -- 42,910
net of accumulated amortization.... 5,647 (2)
---------- -------- -------- ---------- -------- ----- ----------
Total Assets........................ $5,954,308 $383,375 $(12,009) $6,325,674 $615,271 $ -- $6,940,945
========== ======== ======== ========== ======== ===== ==========
Liabilities and Stockholders' Equity:
Liabilities:
Deposits............................ $3,591,175 $198,060 $ 368 (2) $3,789,603 $420,148 $ -- $4,209,751
Advances from Federal Home Loan
Bank............................... 1,656,602 145,600 (12)(2) 1,802,190 130,750 -- 1,932,940
Securities sold under agreements to
repurchase......................... 195,755 -- -- 195,755 12,618 -- 208,373
Other borrowings.................... 55,403 -- -- 55,403 9,900 -- 65,303
Interest payable.................... 22,703 2,078 -- 24,781 1,586 -- 26,367
Other liabilities................... 123,169 2,864 (3,640)(2) 122,393 12,156 -- 134,549
---------- -------- -------- ---------- -------- ----- ----------
Total liabilities................... 5,644,807 348,602 (3,284) 5,990,125 587,158 -- 6,577,283
---------- -------- -------- ---------- -------- ----- ----------
Commitments and Contingencies........ -- -- -- -- -- -- --
---------- -------- -------- ---------- -------- ----- ----------
Stockholders' Equity:
Preferred stock..................... -- 5 (5)(3) -- -- -- --
Common stock........................ 129 18 (18)(3) 136 221 (221) (5) 150
7 (4) 14 (5)
Additional paid-in capital.......... 139,728 21,174 (21,174)(3) 165,769 7,318 (502) (5) 172,571
26,041 (4) (14) (5)
Unrealized holding gain (loss) on
securities available for sale, net. 79 (4,078) 4,078 (3) 79 7 -- 86
Retained earnings,
substantially restricted........... 169,565 17,654 (17,654)(3) 169,565 21,290 -- 190,855
---------- -------- -------- ---------- -------- ----- ----------
309,501 34,773 (8,725) 335,549 28,836 (723) 363,662
Less: Treasury stock, at cost....... -- -- -- -- (723) 723 (5) --
---------- -------- -------- ---------- -------- ----- ----------
Total stockholders' equity.......... 309,501 34,773 (8,725) 335,549 28,113 -- 363,662
---------- -------- -------- ---------- -------- ----- ----------
Total Liabilities and Stockholders'
Equity.............................. $5,954,308 $383,375 $(12,009) $6,325,674 $615,271 $ -- $6,940,945
========== ======== ======== ========== ======== ===== ==========
</TABLE>
(Footnotes on following page)
45
<PAGE>
- --------------------
(1) Represents the cash portion to be paid on the purchase of Conservative's
Common Stock and Preferred Stock:
<TABLE>
<S> <C>
Common stock - $ 6.34 x 1,846,005 shares................. $11,704,000
Preferred stock - $14.33 x 460,000 shares................. 6,592,000
Consideration for cancellation of Conservative stock options..... 751,000
-----------
Total cash payment............................................... $19,047,000
===========
</TABLE>
(2) The acquisition of Conservative will be accounted for as a purchase. These
pro forma adjustments represent the estimated fair value of Conservative's
related assets and liabilities. The excess of the purchase price over the
fair value of the net assets acquired on a pro forma basis totaled
$5,647,000 of which all is allocated to core value of deposits for these
unaudited historical pro forma combined financial statements. Nonrecurring
expenses estimated to approximate $1.8 million associated with this
transaction are not included in the unaudited historical pro forma combined
statement of financial condition.
(3) Represents the surrender, cancellation and exchange of Conservative's
outstanding preferred stock ($.01 par value) totaling 460,000 shares and
common stock ($.01 par value) totaling 1,846,005 shares as well as the
elimination of Conservative's equity accounts since this transaction will
be accounted for as a purchase.
(4) Represents the exchange of .2525 shares of Commercial Common Stock for
Conservative's Preferred Stock and Common Stock as follows:
<TABLE>
<CAPTION>
Shares of Value of Par Value($.01)
Commercial Commercial of Commercial Additional
Common Stock Common Stock Common Stock Paid-in Capital
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Common Stock:
1,846,005 shares x .2525........ 466,116 $16,663,647 $4,661 $16,658,986
Preferred Stock:
460,000 shares x .2525 x 2.26... 262,499 9,384,339 2,625 9,381,714
------- ----------- ------ -----------
Total............................ 728,615 $26,047,986 $7,286 $26,040,700
======= =========== ====== ===========
</TABLE>
Such exchange ratio is based on the assumption that the Average Closing
Price (assumed for purposes of pro forma calculations to be $35.75) for
Commercial Common Stock would be equal to or greater than $28.00 but equal
to or less than $36.00 per share. The product of 2.26 is derived from the
terms of the Conservative Preferred Stock. No consideration was given for
fractional shares which will be paid in cash.
(5) Represents the tax-free exchange of .6389 shares of Commercial Common Stock
for each share of Railroad Common Stock surrendered in connection with this
acquisition, resulting in 1,360,377 shares of Commercial Common Stock
issued (2,129,249 net outstanding shares of Railroad Common Stock at June
30, 1995 multiplied by the exchange ratio of .6389). No consideration was
given for fractional shares in these pro forma adjustments. Fractional
shares will be paid in cash. The acquisition of Railroad was completed on
October 2, 1995 and will be accounted for as a pooling of interests.
46
<PAGE>
Unaudited Historical Pro Forma Condensed Combined Statement of Operations
The following unaudited historical pro forma condensed combined statement
of operations of Commercial has been prepared based upon the historical results
of operations of Commercial and Conservative for the fiscal year ended June 30,
1995 giving effect to the Merger accounted for as a purchase. Pro forma
adjustments, and the assumptions on which they are based, are described in the
accompanying notes to the unaudited historical pro forma condensed combined
statement of operations. The pending acquisition refers to and includes the
historical results of Railroad giving effect to such acquisition accounted for
as a pooling of interest. The unaudited historical pro forma statement presents
the combined revenues and expenses, and pro forma adjustments, of Commercial,
Conservative and Railroad as if the companies had been merged as of the
beginning of the June 30, 1995 fiscal year. The unaudited historical pro forma
condensed combined statement of operations and earnings per share presented on
the following page do not include any expected cost savings or the benefits of
related synergies as a result of the merger of the companies, do not reflect
nonrecurring merger transaction costs, nor do they reflect any purchase
accounting adjustments other than those described in the accompanying notes, and
are not necessarily indicative of the results that would have occurred if the
merger of the companies had occurred as of the beginning of the fiscal year or
which may be obtained in the future. The unaudited historical pro forma
condensed combined statement of operations should be read in conjunction with
the historical consolidated financial statements and notes thereto incorporated
by reference herein.
47
<PAGE>
UNAUDITED HISTORICAL PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30, 1995
- -------------------------------------------------------------------------------------------
Historical Pro Forma
-------------------------
Commercial Conservative Adjustments
----------- ------------ ------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Interest income.............................. $ 411,929 $ 28,116 $ (1,983) (1)
Interest expense............................. 277,806 17,671 (227) (1)
----------- ---------- -----------
Net interest income.......................... 134,123 10,445 (1,756)
Provision for loan losses.................... 6,033 101 --
----------- ---------- -----------
Net interest income after provision for loan
losses...................................... 128,090 10,344 (1,756)
Non-interest income.......................... 37,597 2,089 --
Non-interest expense......................... 117,420 9,217 661 (1)
----------- ---------- -----------
Income (loss) before income taxes............ 48,267 3,216 (2,417)
Income tax provision (benefit)............... 20,732 723 (1,008)
----------- ---------- -----------
Net income (loss)............................ $ 27,535 $ 2,493 $ (1,409)
=========== ========== ===========
Net income available to common stockholders.. $ 27,535 $ 1,794 $ (1,409)
=========== ========== ===========
Per share net income (loss) available for
common stock (2)........................... $ 2.11 $ .96 $ (.10)
=========== ========== ===========
Weighted average shares outstanding (2)...... 13,023,994 1,862,113 13,756,676
=========== ========== ===========
<CAPTION>
Year Ended June 30, 1995
- -------------------------------------------------------------------------------------------
Pro Forma Pending
Commercial and Acquisition Pro Forma
Conservative (Railroad) Combined
-------------- ------------ -----------
<S> <C> <C> <C>
(In thousands, except per share data)
Interest income.............................. $ 438,062 $ 42,439 $ 480,501
Interest expense............................. 295,250 26,720 321,970
----------- ---------- -----------
Net interest income.......................... 142,812 15,719 158,531
Provision for loan losses.................... 6,134 375 6,509
----------- ---------- -----------
Net interest income after provision for loan
losses...................................... 136,678 15,344 152,022
Non-interest income.......................... 39,686 7,469 47,155
Non-interest expense......................... 127,298 16,753 144,051
----------- ---------- -----------
Income (loss) before income taxes............ 49,066 6,060 55,126
Income tax provision (benefit)............... 20,447 2,414 22,861
----------- ---------- -----------
Net income (loss)............................ $ 28,619 $ 3,646 $ 32,265
=========== ========== ===========
Net income available to common stockholders.. $ 28,619 $ 3,646 $ 32,265
=========== ========== ===========
Per share net income (loss) available for
common stock (2)........................... $ 2.08 $ 1.68 $ 2.13
=========== ========== ===========
Weighted average shares outstanding (2)...... 13,756,676 2,175,000 15,146,283
=========== ========== ===========
</TABLE>
(Footnotes on following page)
48
<PAGE>
- --------------------
(1) The Merger will be accounted for as a purchase. These pro forma adjustments
represent the estimated fair value of Conservative's related assets
and liabilities. The excess of the purchase price over the fair value of
the net assets acquired on a pro forma basis totaled $5,647,000 of which
all is allocated to core value of deposits for these unaudited historical
pro forma combined financial statements. Net income was reduced for the
amortization expense of core value of deposits over a 10-year period; and
an adjustment was made to interest income on short-term investments assumed
to have been used to fund the purchase of Conservative shares in this
transaction. The effect of amortization of the pro forma purchase
accounting adjustments for fiscal year 1995 assuming the companies had
merged as of the beginning of the fiscal year are as follows:
<TABLE>
<CAPTION>
Pro Forma
Adjustment
------------
<S> <C>
Interest income:
Investment securities...................... $ 56,000
Mortgage-backed securities................. (153,000)
Loans...................................... (711,000)
-----------
(808,000)
Effect on the outlay of investable cash for
the purchase of Conservative's shares.. (1,175,000)
-----------
$(1,983,000)
===========
Interest expense:
Deposits................................... $ (239,000)
Advances from Federal Home Loan Bank....... 12,000
-----------
$ (227,000)
===========
Non-interest expense:
Amortization of core value of deposits..... $ 1,129,000
Reversal of amortization of intangible
assets recorded on Conservative's
historical statement of operations......... (468,000)
-----------
$ 661,000
===========
</TABLE>
(2) Per share data available for common stock presented above for the pro forma
Commercial and Conservative net income is based upon an Exchange Ratio of
.2525 and the issuance of 732,682 weighted average shares of weighted
average Commercial Common Stock. Based upon an Exchange Ratio of .2719, the
number of weighted average shares of Commercial Common Stock issued would
have been 788,975 and the pro forma earnings per share available for common
stock for Commercial and Conservative would have been $2.07 per share
(compared to $2.08), and for the combined companies would have been $2.12
per share (compared to $2.13). For information regarding adjustment of the
Exchange Ratio in the event the Average Closing Price is less than $28.00
but equal to or greater than $26.00 per share, or greater than $36.00 per
share as of the Acquisition Merger Effective Time, see "The Merger --
Conversion of Conservative Common Stock and Conservative Preferred Stock."
49
<PAGE>
Unaudited Pro Forma Combined Earnings Per Share Data
The following table represents selected per share data for Commercial,
Conservative and Railroad on a historical and pro forma basis for the fiscal
year ended June 30, 1995 as if the companies had been merged as of the beginning
of the 1995 fiscal year.
The Merger will be accounted for as a purchase and pro forma data is
derived in accordance with such method. The Conservative pro forma equivalent
amounts are presented with respect to each set of pro forma data. Such pro forma
equivalent per common share amounts as to net income and book value are computed
by multiplying the pro forma amounts for Commercial and Conservative by the
Exchange Ratio of .2525, assuming that the Average Closing Price for shares of
Commercial Common Stock is $35.75 per share. For information regarding
adjustment of the Exchange Ratio in the event the Average Closing Price is less
than $28.00 but equal to or greater than $26.00 per share or greater than $36.00
per share as of the Acquisition Merger Effective Time, see "The Merger --
Conversion of Conservative Common Stock and Conservative Preferred Stock." The
purpose of the Conservative pro forma equivalent net income and book value per
common share amounts is to show what such per share amounts would have equated
to for each respective share of Conservative Common Stock had the Merger been
consummated as of the beginning of the fiscal year.
The pending acquisition refers to and includes the historical results of
Railroad giving effect to such acquisition accounted for under the pooling of
interests method, and pro forma data is derived in accordance with such method.
Historical information for Commercial and Conservative is derived from the
respective consolidated financial statements incorporated by reference herein,
and the pro forma combined information is derived from the pro forma financial
information elsewhere herein. The pro forma results might not be indicative of
the results that would have occurred if the merger of the companies had occurred
as of the beginning of the fiscal year or which may be obtained in the future.
The information below should be read in conjunction with such historical
consolidated financial statements of Commercial and Conservative.
<TABLE>
<CAPTION>
Year Ended June 30, 1995
---------------------------------------------------------------------------------
Pro Forma Pending
Historical Commercial Conservative Acquisition
------------------------ and Conservative Pro Forma Railroad Pro Forma
Commercial Conservative Combined Equivalent Historical Combined
---------- ------------ ----------------- ------------ ----------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Per Common Share:
- ----------------------
Net income(1)......... $ 2.11 $ .96 $ 2.08 $ .53 $ 1.68 $ 2.13
Book value(2)......... 23.97 12.23 24.60 6.21 13.20 24.25
Cash dividends(3)..... N/A .12 -- -- N/A --
Per Preferred Share:
- ----------------------
Cash dividends........ -- 1.52 -- -- -- --
</TABLE>
- --------------
(1) Per share net income presented in the above table for pro forma Commercial
and Conservative combined is based upon an Exchange Ratio of .2525 and the
issuance of 732,682 weighted average shares of Commercial Federal Stock.
Based upon an Exchange Ratio of .2719, the number of weighted average
shares of Commercial Federal Common Stock issued would have been 788,975
and the pro forma earnings per share for Commercial and Conservative would
have been $2.07 per share (compared to $2.08), and for the combined
companies would have been $2.12 per share (compared to $2.13). For
information regarding adjustment of the Exchange Ratio in the event the
Average Closing Price is less than $28.00 but equal to or greater than
$26.00 per share or greater than $36.00 per share as of the Acquisition
Merger Effective Times, see "The Merger --Conversion of the Conservative
Common Stock and Preferred Stock."
(Footnotes continued on following page)
50
<PAGE>
(2) Pro forma Commercial and Conservative combined book value per common share
presented in the preceding table is based upon an Exchange Ratio of .2525
and the issuance of 728,615 shares of Commercial Common Stock. Based upon
an Exchange Ratio of .2719, the number of shares of Commercial Common Stock
issued would have been 784,596 and, based upon that Exchange Ratio, the pro
forma Commercial and Conservative combined book value per common share
would have been $24.50 (compared to $24.60) and the pro forma combined book
value per common share would have been $24.16 (compared to $24.25). For
information regarding adjustment of the Exchange Ratio in the event the
Average Closing Price is less than $28.00 but equal to or greater than
$26.00 per share or greater than $36.00 per share as of the Acquisition
Merger Effective Time, see "The Merger -- Conversion of Conservative Common
Stock and Conservative Preferred Stock. "
(3) Not applicable as Commercial has never paid a dividend until October 31,
1995 (see "Common Stock Prices and Dividends -- Dividends") and Railroad
has not paid a dividend since December 15, 1988.
51
<PAGE>
Unaudited Historical Pro Forma Combined Regulatory Capital
The following unaudited historical pro forma combined regulatory capital
table as of June 30, 1995 presents the tangible, core and risk-based capital
compliance of the Bank and Conservative Savings on a historical basis and on an
unaudited pro forma combined basis as if the Merger had been consummated
for the Bank's fiscal year ended June 30, 1995; and presents the capital
compliance of Railroad on a historical basis and all companies on an unaudited
pro forma combined basis as if the companies had merged as of June 30, 1995.
<TABLE>
<CAPTION>
Historical Historical
------------------------------------------- Pro Forma Bank and --------------------
Bank Conservative Savings Conservative Savings Railroad
--------------------- -------------------- --------------------- --------------------
Percentage Percentage Percentage Percentage
Amount of Assets Amount of Assets Amount of Assets Amount of Assets
-------- ----------- ------- ----------- -------- ----------- ------- -----------
(Dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible capital:
Tangible capital......... $303,479 5.12% $35,008 9.09% $327,833 5.21% $33,972 5.56%
Requirement.............. 88,849 1.50 5,780 1.50 94,449 1.50 9,168 1.50
-------- ----- ------- ----- -------- ----- ------- -----
Excess................. $214,630 3.62% $29,228 7.59% $233,384 3.71% $24,804 4.06%
======== ===== ======= ===== ======== ===== ======= =====
Core capital:
Core capital............. $324,909 5.47% $35,008 9.09% $349,263 5.53% $33,972 5.56%
Requirement.............. 178,341 3.00 11,560 3.00 189,541 3.00 18,336 3.00
-------- ----- ------- ----- -------- ----- ------- -----
Excess................. $146,568 2.47% $23,448 6.09% $159,722 2.53% $15,636 2.56%
======== ===== ======= ===== ======== ===== ======= =====
Risk-based capital:
Risk-based capital....... $355,733 13.45% $35,781 22.61% $380,860 13.57% $35,923 10.50%
Requirement.............. 211,525 8.00 12,658 8.00 224,543 8.00 27,362 8.00
-------- ----- ------- ----- -------- ----- ------- -----
Excess................. $144,208 5.45% $23,123 14.61% $156,317 5.57% $ 8,561 2.50%
======== ===== ======= ===== ======== ===== ======= =====
<CAPTION>
Pro Forma
Combined
---------------------
Percentage
Amount of Assets
-------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital:
Tangible capital......... $361,805 5.24%
Requirement.............. 103,617 1.50
-------- -----
Excess................. $258,188 3.74%
======== =====
Core capital:
Core capital............. $383,235 5.53%
Requirement.............. 207,877 3.00%
-------- -----
Excess................. $175,358 2.53%
======== =====
Risk-based capital:
Risk-based capital....... $416,783 13.24%
Requirement.............. 251,905 8.00
-------- -----
Excess................. $164,878 5.24%
======== =====
</TABLE>
52
<PAGE>
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 the
institution's regulatory capital declines. At June 30, 1995, the Bank and
Conservative Savings, on both a historical basis and on an unaudited pro forma
combined basis as if the Merger had been consummated for the Bank's fiscal year
ended June 30, 1995, as well as all companies including Railroad on an unaudited
pro forma combined basis as if the companies had merged as of June 30, 1995,
exceeded the minimum requirements for the well-capitalized category as shown in
the following table.
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------ --------------------- Historical
Conservative Bank and ----------- Pro Forma
Bank Savings Conservative Savings Railroad Combined
--------- ------------- --------------------- ----------- ----------
(Dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Tier 1 capital to adjusted total assets:
Actual capital............................ $324,909 $35,008 $349,263 $33,972 $383,235
Percentage of adjusted assets............. 5.47% 9.09% 5.53% 5.56% 5.53%
Minimum requirements to be classified as
well-capitalized........................ 5.00% 5.00% 5.00% 5.00% 5.00%
Tier 1 capital to risk-weighted assets:
Actual capital............................ $324,909 $35,008 $349,263 $33,972 $383,235
Percentage of risk-weighted assets........ 12.29% 22.12% 12.44% 9.93% 12.17%
Minimum requirements to be classified as
well-capitalized........................ 6.00% 6.00% 6.00% 6.00% 6.00%
Total capital to risk-weighted assets:
Actual capital............................ $355,733 $35,781 $380,860 $35,923 $416,783
Percentage of risk-weighted assets........ 13.45% 22.61% 13.57% 10.50% 13.24%
Minimum requirements to be classified as
well-capitalized........................ 10.00% 10.00% 10.00% 10.00% 10.00%
</TABLE>
The above tables should be read in conjunction with the historical
information with respect to the Bank and Conservative Savings in the historical
financial statements of Commercial and Conservative incorporated by reference
herein.
53
<PAGE>
BENEFICIAL OWNERSHIP OF CONSERVATIVE COMMON STOCK AND PREFERRED STOCK
The following tables set forth information with respect to the shares
of Conservative Common Stock and Conservative Preferred Stock beneficially owned
by (1) those persons who were beneficial owners of more than 5.0% of
Conservative's outstanding shares of Common Stock or Preferred Stock (as
obtained from reports regarding such ownership filed by such persons with the
Commission), (2) Conservative's directors and certain executive officers, and
(3) all directors and executive officers of Conservative as a group.
<TABLE>
<CAPTION>
Amount and Amount and
Nature of Nature of
Beneficial Beneficial Percent of
Ownership Percent of Ownership Shares of
of Shares of of Preferred
Name and Address Common Common Stock Preferred Stock
of Beneficial Owner Stock(1) Outstanding Stock Outstanding
- ------------------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Guarantee Mutual Life Co. 154,000 (2) 8.3% 7,505 1.6%
8801 Indian Hills Drive
Omaha, Nebraska 68114
Heartland Advisors, Inc. 127,000 (2) 6.9% -- --
790 N. Milwaukee Avenue
Milwaukee, Wisconsin 53202
Joel H. Wiens 96,450 (4) 5.2% -- --
P.O. Box 607
Kimball, Nebraska 69145 (3)
</TABLE>
- --------------------------
(1) Unless otherwise indicated, the named individual has sole voting and
investment power over the shares listed.
(2) At December 31, 1994.
(3) Includes 52,150 shares owned by First Mortgage Bancorp, of which Mr. Wiens
is President and Chairman of the Board, and 9,200 shares held in the Joel
H. Wiens IRA Account.
(4) At March 31, 1995.
<TABLE>
<CAPTION>
Percent of Percent of
Shares of Common Stock Shares of Shares of Preferred Stock Shares of
Beneficially Owned at Common Stock Beneficially Owned at Preferred Stock
Name November 14, 1995 (1) Outstanding November 14, 1995 Outstanding
- ---- ------------------------ ------------ ------------------------- ---------------
<S> <C> <C> <C> <C>
Robert P. DeLay 75,033 (2) 4.0% -- --%
Gene F. Uher 31,689 (3) 1.7 -- --
Craig S. Allen 27,863 (4) 1.5 -- --
Gary W. Klein 10,190 (5) * -- --
Gary G. Otteman 8,518 (6) * 100 *
David L. Friedland 7,068 * -- --
George F. Gilmore 15,904 * 1,000 (7) *
Philip S. Kemp 5,600 (8) * -- --
Matthew A. Kurs 2,000 * -- --
Margaret A. Lehning 1,376 * -- --
All Executive Officers
and Directors as a
Group (10 persons) 185,241 9.5% 1,100 *
</TABLE>
- --------------------
* Less than 1%.
(1) Unless otherwise indicated, the named individual has sole voting and
investment power over which the shares listed.
(2) Includes options to purchase 39,532 shares of Common Stock and 1,000 shares
owned by his wife as to which he disclaims beneficial ownership.
(3) Includes options to purchase 22,466 shares of Common Stock and 790 shares
owned by his wife and children as to which he disclaims beneficial
ownership.
(4) Includes options to purchase 22,466 shares of Common Stock and 860 shares
held jointly with his spouse and children.
(5) Includes options to purchase 6,800 shares of Common Stock and 1,000 shares
held jointly with his wife.
(6) Includes options to purchase 6,800 shares of Common Stock and 100 shares
held jointly with his wife.
(7) Shares owned by his wife, as to which Mr. Gilmore disclaims beneficial
ownership.
(8) Includes 1,600 shares owned jointly with family members.
54
<PAGE>
COMMON STOCK AND PREFERRED STOCK PRICES AND DIVIDENDS
Common Stock and Preferred Stock Prices
The Commercial Common Stock is currently traded on the NYSE under the
symbol "CFB." Prior to August 2, 1995, the Commercial Common Stock was quoted
on the Nasdaq National Market under the symbol "CFCN." Therefore, any
references herein to the closing price of the Commercial Common Stock for the
period up to and including August 1, 1995 shall be the closing price as reported
on the Nasdaq National Market. The Conservative Common Stock is traded on the
Nasdaq National Market and is quoted under the symbol "CONS." The Conservative
Preferred Stock is traded on the Small Cap market on the Nasdaq system. The
liquidation preference of the Conservative Preferred Stock is $25.00 per share.
The following table sets forth the comparative market prices of Commercial
Common Stock and Conservative Common Stock for the periods indicated, indicated
by the high and low closing sales prices for the common stock of each company as
reported on the Nasdaq National Market for Conservative and on the Nasdaq
National Market for Commercial up to and including August 1, 1995 and as
reported on the NYSE thereafter, and the high and low of the bid prices for the
Conservative Preferred Stock as quoted on the Small Cap market on the Nasdaq
system. Information is presented from the beginning of 1993 to the present
(through November 21, 1995).
<TABLE>
<CAPTION>
Commercial Conservative Conservative
Common Stock Common Stock Preferred Stock
----------------- -------------- ----------------
Quarter Ended High Low High Low High Low
- ------------- -------- ------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
1993
- ----
March 31, 1993...... $ 25.125 $ 16.50 $11.00 $ 9.38 $ -- $ --
June 30, 1993....... 27.00 19.25 11.50 9.00 25.50 25.50
September 30, 1993.. 27.75 24.125 11.50 9.13 28.00 25.50
December 31, 1993... 26.75 19.25 12.50 10.75 28.75 28.50
1994
- ----
March 31, 1994...... 21.625 17.875 13.00 11.75 31.50 30.50
June 30, 1994....... 25.75 17.875 12.75 11.00 31.00 31.00
September 30, 1994.. 27.875 23.75 13.75 11.50 31.50 31.25
December 31, 1994... 24.8125 18.875 12.50 10.25 30.00 30.00
1995
- ----
March 31, 1995...... 24.875 20.375 11.25 10.25 27.50 27.25
June 30, 1995....... 31.25 24.875 11.00 9.50 27.00 26.50
September 30, 1995.. 37.00 27.125 14.00 9.75 28.8125 26.00
December 31, 1995
(through November
21, 1995)......... 36.625 32.375 13.75 13.00 29.50 29.00
</TABLE>
On August 14, 1995, the last trading day preceding the public
announcement of the execution of the Merger Agreement, the reported closing sale
price of Commercial Common Stock was $31.50 per share, the reported closing sale
price for Conservative Common Stock was $9.75 per share, and the closing sale
price for the Conservative Preferred Stock was $26.25 per share. On November
21, 1995, the closing sale price for Commercial Common Stock was $35.25 per
share, the closing sale price for Conservative Common Stock was $13.25 per
share, and the closing sale price for the Conservative Preferred Stock was
$29.25 per share.
55
<PAGE>
Dividends
On October 4, 1995, Commercial established a policy of paying a
regular quarterly cash dividend. Accordingly, on October 4, 1995, Commercial
declared an initial quarterly dividend of $.10 per share on the Commercial
Common Stock payable on October 31, 1995 to stockholders of record on October
16, 1995. Prior to October 4, 1995, Commercial had never paid dividends.
Conservative has paid a quarterly dividend of $0.03 per share of Common Stock
since October 1, 1993 and a quarterly dividend of $0.38 per share of Preferred
Stock since June 18, 1993. The payment of dividends by Commercial and
Conservative is subject to the discretion of each company's Board of Directors
and depends on a variety of factors, including each company's operating results
and financial condition, regulatory limitations, tax considerations and other
factors. Under Nebraska law, dividends may be paid in cash, in property or in
shares of capital stock only out of unreserved and unrestricted earned surplus.
However, the holders of outstanding shares of Conservative Preferred Stock are
entitled to receive, when, as and if declared by the Board of Directors of
Conservative, cumulative quarterly cash dividends at the annual rate of $1.52
per share, in preference to and in priority over any dividends with respect to
junior stock, such as the Conservative Common Stock.
At the present time, the only significant independent sources of funds
available for the payment of dividends by Commercial are dividends paid by the
Bank to Commercial and Commercial's unrestricted liquid assets ($7.0 million at
June 30, 1995), and the only significant sources of funds available for the
payment of dividends by Conservative are dividends paid by Conservative Savings
to Conservative. Under regulations of the OTS, neither the Bank nor
Conservative Savings is permitted to pay dividends on its capital stock if its
regulatory capital would thereby be reduced below the amount then required for
the liquidation account established for the benefit of certain depositors at the
time of its conversion to stock form. In addition, the Bank and Conservative
Savings are required to give the OTS 30 days' prior notice of any proposed
declaration of a dividend to Commercial and Conservative, respectively, and are
subject to federal regulations which impose additional limitations on the
payment of dividends and other capital distributions (including stock
repurchases and cash mergers).
COMPARISON OF STOCKHOLDER RIGHTS
Introduction. Upon consummation of the Merger, holders of
Conservative Common Stock and Cumulative Preferred Stock, whose rights are
presently governed by Nebraska law and Conservative's articles of incorporation
and bylaws, and indirectly by Conservative Savings' charter and bylaws, will
become stockholders of Commercial, also a Nebraska corporation. Accordingly,
their rights will be governed by Nebraska law and the articles of incorporation
and bylaws of Commercial and indirectly by the Bank's charter and bylaws.
Certain differences arise from the differences between the articles of
incorporation and bylaws of Conservative and the articles of incorporation and
bylaws of Commercial and between the charter and bylaws of Conservative Savings
and the Bank. The following discussion is not intended to be a complete
statement of all differences affecting the rights of stockholders, but
summarizes material differences and is qualified in its entirety by reference to
the articles of incorporation and bylaws of Commercial and the articles of
incorporation and bylaws of Conservative. See "Available Information."
Issuance of Capital Stock. The articles of incorporation of Commercial
authorize the issuance of 25,000,000 shares of common stock, par value $.01 per
share, and 10,000,000 shares of preferred stock, par value $.01 per share. The
articles of incorporation of Conservative authorize the issuance of 10,000,000
shares of common stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share. At August 15, 1995, 12,910,957 and
1,846,005 shares of Commercial Common Stock and Conservative Common Stock,
respectively, were issued and outstanding, and 460,000 shares of Conservative
Preferred Stock were issued and outstanding. For information regarding the
number of shares of Commercial's Common Stock that would have been issued on a
pro forma basis upon the consummation of the Acquisition Merger as of that date,
see "Unaudited Historical Pro Forma Combined Financial Information." Under
Commercial's articles of incorporation and Conservative's articles of
incorporation, Commercial and Conservative are authorized to issue additional
shares of capital stock up to the amount authorized without stockholder
approval.
56
<PAGE>
Voting Rights. Holders of the Commercial Common Stock and
Conservative Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, other than in the election of directors,
where voting rights are cumulative. Holders of the Conservative Preferred Stock
have no right to vote for any purpose, other than as may be required by law or
to (i) create, authorize or issue or increase the authorized or issued amount of
any class or series of equity securities of Conservative (a) ranking prior to
the Preferred Stock as to dividend rights or rights upon liquidation, winding up
or dissolution or (b) which possess rights which may allow for voting separately
as one class with the Preferred Stock other than with respect to the election of
directors or (ii) repeal, amend or otherwise change any of the provisions of the
articles of incorporation in any manner which adversely affects the powers,
preferences, voting power or other rights or privileges of the Preferred Stock.
In addition, if at any time the payment of dividends (regardless of whether
declared) aggregating an amount at least equal to six full quarterly dividends
(whether or not consecutive) on the then outstanding shares of Preferred Stock
or any other parity stock which by its terms provides for voting rights similar
to those of the Preferred Stock shall be in arrears or in default, then
immediately prior to the next annual meeting of stockholders, the number of
members of the Board of Directors shall, without further action, be increased by
two directors and the holders of the outstanding Preferred Stock together with
the holders of the voting parity stock shall have the exclusive right, voting
separately as one class, to fill such newly created directorships (the other
directors to be elected by the classes or series of stock entitled to vote
therefor) at each meeting of stockholders duly held for the purpose of electing
directors.
Liquidation Preference. Neither the Commercial Common Stock nor the
Conservative Common Stock has a preference upon liquidation of the respective
corporation. The Conservative Preferred Stock is entitled to receive out of the
assets of Conservative available for distribution to stockholders, before any
distribution of assets shall be made to holders of shares of Common Stock, an
amount equal to $25.00 per share, plus an amount equal to all accumulated and
unpaid dividends on such shares of Preferred Stock.
Special Meetings of Stockholders. Commercial's articles of
incorporation provide that special meetings of stockholders of Commercial may be
called by a majority of the Board of Directors, by the holders of seventy-five
percent or more of the shares entitled to vote at such meeting, or by a duly
authorized committee of the Board of Directors. Special meetings of the holders
of Conservative's stock may be called by the President of Conservative, by a
majority of the Board of Directors, or by the holders of ten percent (10%) or
more of the shares of Conservative entitled to vote at such meeting.
Number and Term of Directors. Commercial's Board of Directors
consists of nine persons, divided into three classes. Under the terms of
Commercial's articles of incorporation, the number of directors may only be
changed by the affirmative vote of not less than 75.0% of all outstanding shares
of stock of the corporation entitled to vote generally, other than in the
election of directors, and the affirmative vote of the holders of not less than
a majority of the outstanding shares of stock of the corporation entitled to
vote generally, other than in the election of directors and other than
"Principal Stockholders" (as defined in the articles of incorporation).
Conservative's Board of Directors consists of seven persons, divided into three
classes in nearly equal number as possible. The authorized number of Directors
of Conservative may only be changed by an amendment to the bylaws, which
requires Board action or action by a majority vote of stockholders entitled to
vote at a meeting at which a quorum is present.
Advance Notice Requirements for Nominations of Directors and
Presentation of New Business at Annual Meeting of Stockholders. Commercial's
bylaws provide that any new business to be taken up at an annual meeting shall
be made in writing and filed with the Secretary of Commercial at least twenty
days before the date of the annual meeting. Conservative's bylaws provide that
nominations for the election of directors and proposals for any new business to
be taken up at any annual or special meeting of stockholders may be made by any
stockholder of Conservative. In order to make any such nomination or proposal,
a stockholder must give notice in writing, delivered or mailed to the Secretary
of Conservative, not less than twenty days prior to such meeting, together with
certain information relating to the nomination or proposal.
57
<PAGE>
Approval of Mergers, Consolidations, Sale of Substantially All Assets
and Dissolutions. Commercial's articles of incorporation require that any
merger, reorganization, or consolidation, or any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition of at least 25% of the fair
market value of the total assets of Commercial with any affiliate or any person
who beneficially owns in the aggregate 20% or more of the outstanding shares of
voting stock of Commercial must first be approved by the affirmative vote of the
holders of not less than 75% of the outstanding shares of voting stock and the
affirmative vote of the holders of not less than a majority of the outstanding
shares of voting stock held by shareholders other than a principal shareholder
(a person who owns at least 20% of the outstanding shares of Commercial's voting
stock). Commercial's articles of incorporation also require that certain fair
price criteria designed to ensure that Commercial's stockholders receive a fair
price for their shares in a business combination be met, unless a business
combination is first approved by three-quarters of the board of directors who
were directors prior to the time the person became a principal shareholder.
Conservative's articles of incorporation do not contain any approval
requirements for mergers or similar corporate action, other than those imposed
by Nebraska law generally.
Limitations on Directors' Liability. The Nebraska Business
Corporation Act does not expressly limit or eliminate the liability of
directors. However, both Conservative's and Commercial's articles of
incorporation provide that an "outside director" shall not be personally liable
to the respective corporation or its stockholders for monetary damages for
breach of his fiduciary duty as a director and authorizes the respective
corporation to indemnify such outside director against monetary damages for such
breach to the full extent permitted by law. This provision does not limit
---
liability for (i) any act or omission not in good faith which involves
intentional misconduct or a knowing violation of law, (ii) any transaction from
which the outside director derived an improper direct or indirect financial
benefit, (iii) paying a dividend or approving a stock repurchase in violation of
the Nebraska Business Corporation Act or (iv) any act or omission which violates
a declaratory or injunctive order obtained by the respective corporation or its
stockholders. "Outside director" is defined as any member of the Board of
Directors who is not an officer or a person who may control the conduct of the
respective corporation through management agreements, voting trusts,
directorships in related corporations or any other device or relationship.
There is no similar provision in either Conservative's or Commercial's articles
of incorporation which limits the liability of directors who are not "outside
directors."
Amendment of articles of incorporation, certificate of incorporation
and bylaws. Commercial's articles of incorporation may be amended upon the
approval of two-thirds of Commercial's shareholders. However, the affirmative
vote of 75% of all outstanding shares of the corporation entitled to vote
generally, other than in the election of directors, and the affirmative vote of
the holders of not less than a majority of outstanding shares entitled to vote
generally, other than in the election of directors other than "principal
shareholders" (as defined in Commercial's articles) are required to alter or
amend certain provisions in the articles, including provisions which: (i)
require that there be nine directors; (ii) classify the board into three classes
with staggered terms; (iii) provide that a director may only be removed upon the
affirmative vote of 75% of the shares entitled to vote; (iv) allow the board of
directors to fill vacancies on the board; (v) require a supermajority vote to
approve certain business combinations with a 20% or greater stockholder; (vi)
mandate that certain business combinations comply with the fair price provisions
contained in the articles; (vii) permit the stockholders to amend Commercial's
bylaws only upon the affirmative vote of 75% or more of the shares entitled to
vote. Commercial's bylaws may be amended either by the board of directors or by
the affirmative vote of 75% of the outstanding shares of Commercial's stock.
Conservative's articles of incorporation do not contain limitations on
amendment. As such, Conservative's articles of incorporation may be amended
only in accordance with Nebraska law, which requires the Board of Directors to
adopt a resolution setting forth the proposed amendment, which must then be
approved by a two-thirds vote of the stockholders entitled to vote on the
proposed amendment.
Rights Plan. On December 19, 1988, the Board of Directors of
Commercial adopted a Shareholder Rights Plan (the "Rights Plan") and declared a
distribution of stock purchase rights (the "Rights") payable to shareholders of
record on December 30, 1988. The Rights consist of primary rights (the "Primary
Rights"), which generally entitle the holders thereof to purchase shares of
Commercial Common Stock at 20% of the market price of such
58
<PAGE>
shares in the event any person acquires an interest in 15% or more of
Commercial's outstanding shares of common stock without complying with a
procedure intended to ensure fair treatment of all shareholders of Commercial,
and secondary rights (the "Secondary Rights"), which generally entitle the
holders thereof to purchase shares of Series A Junior Participating Cumulative
Preferred Stock of Commercial (the "Preferred Shares") in the event a person
acquires an interest in 25% or more of the outstanding shares of Commercial
Common Stock without complying with such procedural requirements. The December
30, 1988 distribution consisted of one Primary Right and One Secondary Right for
each share of Commercial Common Stock outstanding on that date and, subject to
adjustment under certain circumstances, unless the Rights expire or are earlier
redeemed, one Primary Right and one Secondary Right shall be issued with each
share of Commercial Common Stock issued following December 30, 1988 until the
Rights become exercisable under the terms of the Rights Plan.
The Primary Rights will become exercisable, subject to extension, 10
business days following a public announcement that any person (other than
certain entities who beneficially owned more than 15% of Commercial's
outstanding common stock as of the date of adoption of the Rights Plan and
certain persons who acquire their shares directly from Commercial) has acquired,
or has obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding shares of common stock and has not complied with the procedural
requirements set forth in the Rights Plan (such person being referred to as a
"15% Person"). Secondary Rights will become exercisable upon the earlier of (i)
one business day following a public announcement that any person (other than
Commercial or certain related entities) has acquired, or has obtained the right
to acquire, beneficial ownership of 25% or more of the outstanding shares of
Commercial's common stock, provided that such acquisition is not deemed a "Fair
Offer," as described in the Rights Plan (such person being known as a "25%
Person"), or (ii) one business day following the commencement of a tender offer,
other than a Fair Offer, or exchange offer, the consummation of which would
result in the beneficial ownership of 25% or more of the outstanding shares of
Commercial's common stock by any person other than Commercial or certain related
entities. A public announcement for this purpose shall be made by Commercial
or, as the case may be, by a 15% Person or a 25% Person.
The number of shares which may be purchased upon exercise of each
Primary Right is determined by dividing (i) that number of shares which equals
50% of the outstanding shares of Commercial Common Stock, as of the date a
person became a 15% Person, by (ii) the number of Primary Rights outstanding,
exclusive of Primary Rights beneficially owned by the 15% Person, which shall
become void. The per share exercise price of shares issued upon the exercise of
a Primary Right is 20% of the market price of such shares as of the date the 15%
Person became a 15% Person.
Unless the Secondary Rights are earlier redeemed, in the event a
person becomes a 25% Person, each holder of a Secondary Right (other than
Secondary Rights beneficially owned by such 25% Person, which will thereafter
become void) will have the Right to purchase one-hundredth of a share of
Preferred Shares at a price of $42.00 per one-hundredth of a share. Unless the
Secondary Rights are earlier redeemed, in the event that (i) Commercial is the
surviving corporation in a merger with a 25% Person and Commercial Common Stock
is not changed or exchanged in such merger, (ii) a 25% Person engages in one of
a number of "self dealing" transactions, including certain preferential sales,
transfers or exchanges of Commercial assets or securities, (iii) during such
time as there is a 25% Person, there shall be any reclassification of securities
or recapitalization of Commercial or any merger or consolidation of Commercial
with any of its subsidiaries or any other transaction or series of transactions
which has the effect of increasing by more than 1% the proportionate share of
the outstanding shares of any class of equity securities or of securities
exercisable for or convertible into securities of Commercial or any of its
subsidiaries which is beneficially owned by a 25% Person, or (iv) a person
(other than Commercial or certain related entities) becomes the beneficial owner
of 25% or more of the outstanding shares of Commercial's common stock (other
than pursuant to certain transactions set forth in the Rights Plan), then each
holder of a Secondary Right will have the right to receive, upon exercise and
payment of the Secondary Right exercise price, Commercial Common Stock having a
value equal to two times the then current Secondary Right exercise price.
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In the event Commercial is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
power is sold, each holder of a Secondary Right will thereafter have the right
to receive, upon the exercise and payment of the Secondary Right exercise price,
that number of shares of common stock of the acquiring company which at the time
of such transaction has a value equal to two times the then current Secondary
Right exercise price.
A majority of the independent directors of Commercial may authorize
the redemption of either or both of the Primary or Secondary Rights at a price
of $.01 per Right at any time prior to the close of business on the tenth
business day, subject to extension, following the date of a public announcement
that any person has become a 15% Person, other than pursuant to certain cash
tender offers described in the Rights Plan, and at any time prior to the public
announcement that any person has become a 25% Person, other than pursuant to
such a cash tender offer. Commercial's right of redemption with respect to the
Secondary Rights will be reinstated if each 25% Person reduces its beneficial
ownership to less than 15% of Commercial's outstanding common stock in a
transaction not involving a purchase by Commercial or its subsidiaries.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders thereof will be to receive the
redemption price.
The terms of the Rights may be amended by the Board of Directors of
Commercial without the consent of the holders of the Rights, except that
following the date on which the Rights become exercisable, such amendment may
not adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Commercial (other than rights resulting from such
holder's ownership of Commercial's common stock), including, without limitation,
the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire Commercial
without conditioning the offer on the Rights being redeemed or substantially all
of the Rights being acquired.
Conservative Shareholder Rights Plan. On May 24, 1989, the Board of
Directors of Conservative adopted a Shareholder Rights Plan (the "Conservative
Rights Plan") and declared a dividend of one right (a "Right") for each share of
Conservative Common Stock. The Conservative Rights Plan provides that until the
earlier to occur of (i) 20 days following a public announcement that a person or
group of affiliated or associated persons, including partnerships and
corporations (an "Acquiring Person"), has acquired or generally obtained the
right to acquire beneficial ownership of 15 percent or more of the outstanding
Conservative Common Stock, or (ii) 20 days following the commencement of a
tender offer or exchange offer for 25 percent or more of the outstanding
Conservative Common Stock (the earlier of such dates being referred to as the
"Distribution Date"), the Rights will not be evidenced by separate certificates
and will be transferable only in connection with the transfer of the underlying
shares of Conservative Common Stock.
The Rights are not exercisable until the Distribution Date. Each
Right entitles the registered holder initially to purchase from Conservative one
share of Conservative Common Stock at a price of $38.75 per share (the "Purchase
Price") subject to adjustment as described below. The Rights will expire on May
24, 1999 (the "Final Expiration Date"), unless earlier redeemed by Conservative
in whole, but not in part, at a price of $.01 per Right prior to the earlier of
the Distribution Date or the Final Expiration Date.
In the event that (i) an Acquiring Person merges into or otherwise
combines with Conservative and Conservative is the continuing or surviving
corporation and Conservative Common Stock is not changed or exchanged, or (ii)
an Acquiring Person engages in one of a number of self-dealing transactions
specified in the
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Conservative Rights Plan, or (iii) during such time as there is an Acquiring
Person, an event occurs which results in such Acquiring Person's ownership
interest being increased by more than one percent (1%), or (iv) a person or
group of affiliated or associated persons becomes the beneficial owner of
twenty-five percent (25%) or more of Conservative Common Stock then outstanding,
the Conservative Rights Plan requires that proper provision be made so that each
holder of a Right will thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Right, that number of shares
of Conservative Common Stock as shall equal the result obtained by multiplying
the Purchase Price by the number of shares for which a Right is then exercisable
and dividing that product by fifty-percent of the then current per share market
price of the Conservative Common Stock, except that Rights that are or were
beneficially owned by the Acquiring Person after the date upon which the
Acquiring Person became such shall thereupon be void.
In the event that (i) Conservative merges with or into any person and
Conservative is not the surviving corporation, (ii) any person merges with or
into Conservative and Conservative is the surviving corporation, but
Conservative Common Stock is changed or exchanged, or (iii) 50 percent or more
of Conservative's assets or earning power is sold to any person, the
Conservative Rights Plan requires that proper provision be made so that each
holder of a Right shall thereafter have the right to receive, upon the exercise
thereof, shares of common stock, (or, under certain circumstances, an
economically equivalent security or securities) of the surviving, resulting or
acquiring person which at the time of such transaction would have a market value
of two times the exercise price of the Right, except that Rights that are or
were beneficially owned by the Acquiring Person after the date upon which the
Acquiring Person became such shall thereupon be void.
In the event that any person notifies Conservative of its intention to
make an all cash tender offer for any and all of the Conservative Common Stock
and complies with certain procedural requirements including the delivery of
evidence that all necessary financing therefor is firmly committed or otherwise
available and an undertaking to pay the costs of any shareholders' meeting
called as described in (b) below, Conservative will, within 15 business day, at
its option, either (1) engage an investment banking firm to render an opinion as
to whether the tender offer purchase price is fair and adequate to
Conservative's shareholders, or (2) call a shareholders' meeting to vote upon
such tender offer. In the event that (a) the tender offer purchase price is
determined by such investment banking firm to be fair and adequate to the
shareholders, or (b) the tender offer is approved by a majority of the shares
voted at such meeting and beneficially owned by persons other than the offeror,
then, neither the commencement of such an all cash tender offer nor the
acquisition of Conservative Common Stock pursuant thereto will trigger the
distribution of Right Certificates.
On August 15, 1995, the Rights Plan was amended to provide that
neither the execution nor the delivery of the Merger Agreement or any agreement
required thereunder or any of the transactions contemplated pursuant to the
Merger Agreement or any agreement required thereunder will cause (a) the Rights
to become exercisable under the Conservative Rights Plan, (b) Commercial, the
Bank or their affiliates to be deemed an Acquiring Person, or (c) a Share
Acquisition Date, a Distribution Date or a Triggering Event (as these terms are
defined in the Conservative Rights Plan) to occur upon, as a result of, or in
connection with any such event.
This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Conservative Rights Plan.
A copy of the Conservative Rights Plan is available to the beneficial owners of
Conservative Common Stock upon written request to Conservative Savings Bank,
11207 West Dodge Road, Omaha, Nebraska 68154, Attention: Robert P. DeLay,
President.
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ADJOURNMENT OF SPECIAL MEETING
(Proposal 2 - Special Meeting)
In the event that there are not sufficient votes to approve the
Acquisition Merger and the Merger Agreement at the time of the Special Meeting,
such proposal could not be approved unless the Special Meeting were adjourned in
order to permit further solicitation of proxies. In order to allow proxies that
have been received by Conservative at the time of the Special Meeting to be
voted for such adjournment, if necessary, Conservative has submitted the
question of adjournment under such circumstances to its stockholders as a
separate matter for their consideration. A majority of the shares of
Conservative Common Stock and a majority of the shares of Conservative Preferred
Stock voting separately as a class represented and voting at the Special Meeting
is required in order to approve any such adjournment. The Board of Directors of
Conservative recommends that stockholders vote their proxies in favor of such
adjournment so that their proxies may be used for such purpose in the event it
should become necessary. Properly executed proxies will be voted in favor of
any such adjournment unless otherwise indicated thereon. Abstentions and broker
non-votes will not be voted in favor of this proposal. If it is necessary to
adjourn the Special Meeting, no notice of the time and place of the adjourned
meeting is required to be given to stockholders other than an announcement of
such time and place at the Special Meeting.
Conservative's Board of Directors unanimously recommends that
stockholders vote FOR the proposal to adjourn the Special Meeting if necessary
to permit further solicitation of proxies.
STOCKHOLDER PROPOSALS
Conservative will hold a 1996 Annual Meeting of Stockholders only if
the Merger is not consummated before the time of such meeting. In such event,
in order to be eligible for inclusion in Conservative's proxy solicitation
materials for its 1996 Annual Meeting of Stockholders, any stockholder proposal
to take action at such meeting is required to be received at Conservative's home
office at 11207 West Dodge Road, Omaha, Nebraska 68154, no later than November
28, 1995. Any such proposal would be subject to the requirements of the proxy
rules adopted under the Exchange Act. In the event the Merger is consummated,
stockholders of Conservative will become stockholders of Commercial. In order
to be eligible for inclusion in Commercial's proxy materials for next year's
Annual Meeting of Stockholders of Commercial, any stockholder proposal to take
action at such meeting must be received at Commercial's executive office at 2120
South 72nd Street, Omaha, Nebraska 68124, no later than June 8, 1996. Any such
proposal would be subject to the requirements of the proxy rules adopted under
the Exchange Act.
LEGAL MATTERS
The legality of the Commercial Common Stock to be issued pursuant to
the Merger Agreement will be passed upon for Commercial by Fitzgerald, Schorr,
Barmettler & Brennan, Omaha, Nebraska.
Certain other legal matters in connection with the Merger will be
passed upon for Commercial by Housley Goldberg Kantarian & Bronstein, P.C.,
Washington, D.C., and for Conservative by Baird, Holm, McEachen, Pedersen,
Hamann & Strashiem, Omaha, Nebraska.
EXPERTS
The consolidated financial statements of Commercial as of June 30,
1995 and 1994 and for each of the three years in the period ended June 30, 1995
incorporated in this Prospectus/Proxy Statement by reference from Commercial's
Annual Report on Form 10-K for the fiscal year ended June 30, 1995 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report which is incorporated by reference herein, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
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The consolidated financial statements of Conservative as of December
31, 1994 and 1993 and June 30, 1993, and for the year ended December 31, 1994,
the six months ended December 31, 1993 and each of the years in the two-year
period ended June 30, 1993, have been included herein and incorporated by
reference herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent certified public accountants, included herein and incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of Coopers & Lybrand L.L.P., Conservative's
independent certified public accountants, are expected to be present at the
Special Meeting. They will be afforded the opportunity to make a statement if
they desire to do so and are expected to be available to respond to appropriate
questions.
OTHER MATTERS
The Conservative Board of Directors is not aware of any business to
come before the Special Meeting other than those matters described in this Proxy
Statement/Prospectus. However, if any other matter should properly come before
the Special Meeting, it is intended that holders of the proxies will act in
accordance with their best judgment.
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________________________________________________________________________________
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 AS OF AUGUST 15, 1995
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
________________________________________________________________________________
<TABLE>
<S> <C>
ARTICLE I - THE MERGER AND RELATED MATTERS.................................. 2
1.1 Merger: Surviving Institution.................................... 2
1.2 Effective Time of the Merger..................................... 3
1.3 Conversion of Shares............................................. 3
1.4 Surviving Corporation in the Merger.............................. 5
1.5 Authorization for Issuance of Commercial Common Stock; Exchange
of Certificates................................................ 6
1.6 No Fractional Shares............................................. 9
1.7 Shareholders' Meeting............................................ 9
1.8 Company Stock Options............................................ 9
1.9 Registration Statement; Prospectus/Proxy Statement............... 9
1.10 Cooperation; Regulatory Approvals................................ 11
1.11 Closing.......................................................... 12
1.12 Closing of Transfer Books........................................ 12
1.13 Bank Merger...................................................... 12
1.14 Option Agreement................................................. 13
1.15 Rights Amendment................................................. 13
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF COMPANY AND SAVINGS.......... 13
2.1 Organization, Good Standing, Authority, Insurance, Etc........... 13
2.2 Capitalization................................................... 14
2.3 Ownership of Subsidiaries........................................ 15
2.4 Financial Statements and Reports................................. 15
2.5 Absence of Changes............................................... 17
2.6 Prospectus/Proxy Statement....................................... 17
2.7 No Broker's or Finder's Fees..................................... 18
2.8 Litigation and Other Proceedings................................. 18
2.9 Compliance with Law.............................................. 18
2.10 Corporate Actions................................................ 19
2.11 Authority........................................................ 19
2.12 Employment Arrangements.......................................... 20
2.13 Employee Benefits................................................ 20
2.14 Information Furnished............................................ 22
2.15 Property and Assets.............................................. 22
2.16 Agreements and Instruments....................................... 23
2.17 Material Contract Defaults....................................... 23
2.18 Tax Matters...................................................... 23
2.19 Environmental Matters............................................ 24
2.20 Loan Portfolio: Portfolio Management............................ 24
2.21 Real Estate Loans and Investments................................ 25
2.22 Derivatives Contracts............................................ 25
2.23 Insurance........................................................ 26
2.24 Preferred Stock.................................................. 26
</TABLE>
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<TABLE>
<S> <C>
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF COMMERCIAL AND THE BANK..... 27
3.1 Organization, Good Standing, Authority, Insurance, Etc............ 27
3.2 Capitalization.................................................... 27
3.3 Ownership of Subsidiaries......................................... 28
3.4 Financial Statements and Reports.................................. 28
3.5 Absence of Changes................................................ 29
3.6 Prospectus/Proxy Statement........................................ 29
3.7 No Broker's or Finder's Fees...................................... 30
3.8 Compliance With Law............................................... 30
3.9 Corporate Actions................................................. 31
3.10 Authority......................................................... 31
3.11 Information Furnished............................................. 31
3.12 Litigation and Other Proceedings.................................. 32
3.13 Agreements and Instruments........................................ 32
3.14 Cash Consideration................................................ 32
3.15 Tax Matters....................................................... 32
ARTICLE IV - COVENANTS...................................................... 32
4.1 Investigations; Access and Copies................................. 32
4.2 Conduct of Business of the Company and the Company Subsidiaries... 33
4.3 No Solicitation................................................... 35
4.4 Shareholder Approvals............................................. 35
4.5 Filing of Holding Company and Merger Applications................. 36
4.6 Consents.......................................................... 36
4.7 Resale Letter Agreements.......................................... 36
4.8 Publicity......................................................... 36
4.9 Cooperation Generally............................................. 36
4.10 Additional Financial Statements and Reports....................... 36
4.11 Stock Listing..................................................... 37
4.12 Allowance for Loan and Real Estate Owned Losses................... 37
4.13 D&O Indemnification and Insurance................................. 38
4.14 Tax Treatment..................................................... 38
4.15 Update Disclosure................................................. 38
ARTICLE V - CONDITIONS OF THE MERGER; TERMINATION OF AGREEMENT.............. 38
5.1 General Conditions................................................ 38
5.2 Conditions to Obligations of Commercial and Bank.................. 41
5.3 Conditions to Obligations of Company and Savings.................. 44
5.4 Termination of Agreement and Abandonment of Merger................ 45
ARTICLE VI - TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES................ 47
6.1 Termination; Lack of Survival of Representations and Warranties... 47
6.2 Payment of Expenses............................................... 47
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VII - CERTAIN POST-MERGER AGREEMENTS................................ 48
7.1 Reports to the SEC................................................ 48
7.2 Employees......................................................... 48
ARTICLE VIII - GENERAL...................................................... 48
8.1 Amendments........................................................ 48
8.2 Confidentiality................................................... 48
8.3 Governing Law..................................................... 49
8.4 Notices........................................................... 49
8.5 No Assignment..................................................... 50
8.6 Headings.......................................................... 50
8.7 Counterparts...................................................... 50
8.8 Construction and Interpretation................................... 50
8.9 Entire Agreement.................................................. 50
8.10 Severability...................................................... 51
8.11 No Third Party Beneficiaries...................................... 51
Schedules:
Schedule I Disclosure Schedule for the Company and Savings...............
Schedule II Disclosure Schedule for Commercial and the Bank...............
Exhibits:
Exhibit 1.1(a) Acquisition Plan of Merger................................
Exhibit 1.1(c) Bank Plan of Merger.......................................
Exhibit 1.14 Option Agreement..........................................
Exhibit 1.15 Rights Amendment..........................................
Exhibit 5.2(a) Form of Opinion of Counsel for the Company................
Exhibit 5.3(a) Form of Opinion of Counsel for Commercial.................
Exhibit 7.3(b) Severance Payment Policy..................................
</TABLE>
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REORGANIZATION AND MERGER AGREEMENT
================================================================================
THIS REORGANIZATION AND MERGER AGREEMENT ("Agreement") is dated as of
August 15, 1995, by and among COMMERCIAL FEDERAL CORPORATION, a Nebraska
corporation ("Commercial"), and COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK,
a Federally chartered savings bank and wholly-owned subsidiary of Commercial
("Bank"); and CONSERVATIVE SAVINGS CORPORATION, a Nebraska corporation
("Company"), and CONSERVATIVE SAVINGS BANK, FSB, a Federally chartered savings
bank and wholly-owned subsidiary of Company ("Savings").
WHEREAS, Commercial, a non-diversified, unitary savings and loan holding
company, with principal offices in Omaha, Nebraska, owns all of the issued and
outstanding capital stock of Bank, with its principal offices in Omaha,
Nebraska;
WHEREAS, Company, a non-diversified, unitary savings and loan holding
company, with principal offices in Omaha, Nebraska, owns all of the issued and
outstanding capital stock of Savings, with principal offices in Omaha, Nebraska;
WHEREAS, Commercial and Company desire to combine their respective holding
companies through a tax-free exchange so that the respective shareholders of
both Commercial and Company will have an equity ownership in the combined
holding company;
WHEREAS, following the combination of Commercial and Company, it is
intended that Bank and Savings will be merged such that the resulting holding
company will retain the advantage of a unitary savings and loan holding company
status and that the resulting savings institution will achieve certain economies
of scale and efficiencies as a result of such subsequent merger;
WHEREAS, it is intended that to accomplish this result, the Company will be
acquired by means of a merger (the "Acquisition Merger") of the Company with and
into Commercial, followed by the merger of Savings with and into the Bank (the
"Bank Merger"). The Acquisition Merger and the Bank Merger are collectively
referred to as the "Merger";
WHEREAS, it is intended that for federal income tax purposes, the Merger
shall qualify as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code") and this Agreement shall
constitute a plan of reorganization pursuant to Section 368 of the Code;
WHEREAS, as an inducement to and condition of Commercial's willingness to
enter into this Agreement, the Company will grant to
1
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Commercial an option pursuant to the Stock Option Agreement, the form of which
is attached hereto as Exhibit 1.14 (the "Option Agreement"; and
WHEREAS, the Boards of Directors of Commercial and the Company (at meetings
duly called and held) have determined that this Agreement and the transactions
contemplated hereby are in the best interests of Commercial and the Company,
respectively, and their respective stockholders and have approved this Agreement
and the Option Agreement. Consummation of the Merger is subject to the prior
approval of the Office of Thrift Supervision ("OTS") and the stockholders of the
Company, among other conditions specified herein.
NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger: Surviving Institution. Subject to the terms and conditions
-----------------------------
of this Agreement, and pursuant to the provisions of the Nebraska Business
Corporation Act ("NBCA"), Home Owners Loan Act, as amended ("HOLA"), and the
rules and regulations promulgated thereunder (the "Thrift Regulations"), (a) at
the Acquisition Merger Effective Time (as hereinafter defined), the Company
shall be merged with and into Commercial pursuant to the terms and conditions
set forth herein and in the Plan of Merger to be set forth as Exhibit 1.1(a)
attached hereto (the "Acquisition Plan of Merger"), (b) the separate corporate
existence of the Company shall cease, and (c) thereafter, at the Bank Merger
Effective Time (as hereinafter defined) Savings shall be merged with and into
the Bank pursuant to the terms and conditions set forth herein and in a plan of
merger set forth in Exhibit 1.1(c) (the "Bank Plan of Merger"). The Acquisition
Merger shall have the effects specified in the NBCA, Section 1.4(e) hereof and
the Acquisition Plan of Merger. Upon the consummation of the Acquisition Merger,
the separate corporate existence of the Company shall cease and Commercial shall
continue as the surviving corporation (sometimes referred to herein as the
"Surviving Corporation"). Upon consummation of the Bank Merger, the separate
existence of Savings shall cease and the Bank shall continue as the surviving
institution of the Bank Merger. The name of the Bank, as the surviving
institution of the Bank Merger, shall remain "Commercial Federal Bank, a Federal
Savings Bank". From and after the Bank Merger Effective Time, the Bank, as the
surviving institution of the Bank Merger, shall possess all of the properties
and rights and be subject to all of the liabilities and obligations of the Bank
and Savings, all as more fully described in the Thrift Regulations, Section 1.13
hereof and the
2
<PAGE>
Bank Plan of Merger. Commercial may at any time change the method of effecting
the Merger if and to the extent it deems such change to be desirable, provided,
--------
however, that no such change shall (A) alter or change the amount or kind of
- -------
consideration to be issued to holders of Company common stock and Company's
$1.52 Series A Cumulative Convertible Preferred Stock (the "Company Preferred
Stock") as provided for in this Agreement, (B) adversely affect the tax
treatment to Company shareholders as a result of receiving the consideration
described in Section 1.3 herein or (C) materially impede or delay the
consummation of the transactions contemplated by this Agreement.
1.2 Effective Time of the Merger. As soon as practicable after each of
----------------------------
the conditions set forth in Article V hereof have been satisfied or waived,
Commercial and the Company will file, or cause to be filed, articles of merger
with appropriate authorities of Nebraska for the Acquisition Merger and articles
of combination with the OTS for the Bank Merger which articles of merger and
articles of combination shall in each case be in the form required by and
executed in accordance with applicable provisions of law and the Thrift
Regulations, respectively. The Acquisition Merger shall become effective at the
time and date that the Nebraska articles of merger are filed with the
appropriate authorities of Nebraska (the "Acquisition Merger Effective Time"),
which shall be immediately following the Closing (as defined in Section 1.11
herein) and on the same day as the Closing if practicable. The Bank Merger shall
become effective at the time the articles of combination for such merger are
endorsed by the OTS pursuant to Section 552.13(k) of the Thrift Regulations (the
"Bank Merger Effective Time"). The parties shall cause the Acquisition Merger to
become effective prior to the Bank Merger.
1.3 Conversion of Shares.
--------------------
(a)(i) At the Acquisition Merger Effective Time, by virtue of the
Merger and without any action on the part of Commercial or Company or the
holders of shares of Commercial or Company common stock or Company Preferred
Stock, each outstanding share of Company common stock issued and outstanding at
the Acquisition Merger Effective Time shall be converted into and exchanged for
(a) $6.34 in cash (the "Common Stock Cash Consideration") and (b) shares of
Commercial common stock (the "Common Stock Stock Consideration") (the Common
Stock Stock Consideration and the Common Stock Cash Consideration are also
individually or, together with the Preferred Stock Stock Consideration and the
Preferred Stock Cash Consideration, as defined below, collectively referred to
herein, as the context requires, as the "Merger Consideration"), according to
the following Exchange Ratios (which shall be subject to adjustment as provided
in clause (a)(vi) of this Section):
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<PAGE>
(A) If the Average NYSE Closing Price, as defined below, is less
than $28.00, but equal to or greater than $26.00, the Exchange Ratio shall be
that number of shares of Commercial common stock equal to the quotient (carried
to four decimal places) that results by dividing $7.07 by the Average NYSE
Closing Price;
(B) If the Average NYSE Closing Price is equal to or greater
than $28.00 but equal to or less than $36.00, the Exchange Ratio shall be fixed
at .2525 shares of Commercial common stock;
(C) If the Average NYSE Closing Price is greater than $36.00,
the Exchange Ratio shall be that number of shares of Commercial common stock
equal to the quotient (carried to four decimal places) that results by dividing
$9.09 by the Average NYSE Closing Price; and
(D) In the event the Average NYSE Closing Price is less than
$26.00, the Exchange Ratio shall be fixed at .2719 shares of Commercial common
stock; provided, however, that in the event the Exchange Ratio is adjusted
-------- -------
pursuant to the proviso contained in Section 5.4(e) hereof the Exchange Ratio
shall be the Exchange Ratio as so adjusted.
(ii) At the Acquisition Merger Effective Time, by virtue of the
Merger and without any action on the part of Commercial, Bank or Company or the
holders of shares of Commercial or Company common stock or Company Preferred
Stock, each outstanding share of Company Preferred Stock issued and outstanding
at the Acquisition Merger Effective Time shall be converted into and exchanged
for (a) an amount of cash equal to $14.33 (the "Preferred Stock Cash
Consideration") and (b) a number of shares of Commercial common stock (the
"Preferred Stock Stock Consideration") equal to the product of 2.26 and the
Exchange Ratio.
(iii) Any shares of Company common stock or Company Preferred Stock
which are owned or held by Company or any of its subsidiaries (except shares
held in any 401(k) plan of the Company or any of its subsidiaries, shares
subject to Restricted Stock Agreements with the Company or held in a fiduciary
capacity) or by Commercial or any of Commercial's subsidiaries (other than in a
fiduciary capacity) at the Acquisition Merger Effective Time shall cease to
exist, and the certificates for such shares shall as promptly as practicable be
cancelled and no shares of capital stock of Commercial shall be issued or
exchanged therefor.
(iv) Each share of common stock of Commercial issued and outstanding
immediately prior to the Acquisition Merger Effective Time shall remain an
outstanding share of common stock of Commercial.
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(v) At the Acquisition Merger Effective Time, the holders of
certificates representing shares of Company common stock and Company Preferred
Stock shall cease to have any rights as stockholders of the Company, except the
right to receive the Merger Consideration as provided herein.
(vi) If the holders of Commercial common stock shall have received or
shall have become entitled to receive, without payment therefor, during the
period commencing on the date hereof and ending with the Acquisition Merger
Effective Time, additional shares of common stock or other securities for their
stock by way of a stock split, stock dividend, reclassification, combination of
shares or similar corporate rearrangement ("Stock Adjustment"), then the amount
of Commercial common stock to be exchanged at the Acquisition Merger Effective
Time for Company common stock or Company Preferred Stock shall be
proportionately adjusted to take into account such Stock Adjustment. In
addition, the Average NYSE Closing Price, as defined below, shall be
proportionately adjusted to compensate for any such Stock Adjustment.
(b) The term "NYSE Closing Price" shall mean the closing price per
share (carried to four decimal places) of the Commercial common stock on the New
York Stock Exchange. The term "Average NYSE Closing Price" shall mean the
arithmetic mean of the NYSE Closing Prices of the Commercial common stock for
the twenty-fifth through the sixth trading day, inclusive, immediately preceding
the business day prior to the later of (A) the date on which all requisite
federal and state regulatory approvals required to consummate the transactions
contemplated by this Agreement are obtained (and Commercial shall notify the
Company of the date when all such approvals are obtained), including for this
purpose the period of any requisite waiting periods in respect thereof, or (B)
the date of the Company's meeting of shareholders to be held pursuant to Section
1.7 herein (the "Determination Period").
(c) Each share of Commercial common stock to be issued to the
Company's shareholders pursuant to this Section 1.3 shall include the
corresponding number of rights associated with the Commercial common stock
pursuant to the Rights Agreement dated as of December 19, 1988 by and between
Commercial and Manufacturers Hanover Trust Company, as Rights Agent ("Commercial
Rights Agreement").
1.4 Surviving Corporation in the Merger.
-----------------------------------
(a) The name of the Surviving Corporation in the Acquisition Merger
shall be Commercial Federal Corporation.
(b) The Articles of Incorporation of Commercial as in effect on the
Acquisition Merger Effective Time shall be the Articles of Incorporation of the
Surviving Corporation as the Surviving Corporation.
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(c) The bylaws of Commercial, together with all amendments thereto,
if any, as in effect immediately prior to the Acquisition Merger Effective Time,
shall thereafter be the bylaws of the Surviving Corporation, until amended as
provided therein or by law.
(d) The directors and officers of Commercial in office immediately
prior to the Acquisition Merger Effective Time shall be the directors and
officers of the Surviving Corporation following the Acquisition Merger, until
their successors shall be duly elected and qualified.
(e) From and after the Acquisition Merger Effective Time:
(i) The Surviving Corporation shall possess all assets and
property of every description, and every interest in the assets and property,
wherever located, and the rights, privileges, immunities, powers, franchises,
and authority, of a public as well as of a private nature, of each of Commercial
and Company, and all obligations belonging or due to each of Commercial and
Company, all of which are vested in the Surviving Corporation without further
act or deed. Title to any real estate or any interest in the real estate vested
in Commercial or the Company shall not revert or in any way be impaired by
reason of the Acquisition Merger.
(ii) The Surviving Corporation is liable for all the obligations
of each of Commercial and Company. Any claim existing, or action or proceeding
pending, by or against the Company or Commercial, may be prosecuted to
judgement, with right of appeal, as if the Acquisition Merger had not taken
place, or the Surviving Corporation may be substituted in its place.
(iii) All the rights of creditors of each of Company and
Commercial are preserved unimpaired, and all liens upon the property of Company
and Commercial are preserved unimpaired, on only the property affected by such
liens immediately prior to the Acquisition Merger Effective Time.
1.5 Authorization for Issuance of Commercial Common Stock;
-------------------------------------------------------
Exchange of Certificates.
------------------------
(a) Commercial has reserved for issuance a sufficient number of
shares of its common stock for the purpose of issuing its shares to the
Company's shareholders in accordance with this Article I. Immediately prior to
the Acquisition Merger Effective Time, Commercial shall make available for
exchange or conversion, by transferring to an exchange agent appointed by
Commercial (the "Exchange Agent") for the benefit of the holders of Company
common stock and Company Preferred Stock: (i) such number of whole shares of
Company common stock as shall be issuable in connection with the payment of the
aggregate Common Stock Stock Consideration and
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Preferred Stock Stock Consideration, and (ii) such funds as may be payable in
connection with the aggregate Common Stock Cash Consideration and Preferred
Stock Cash Consideration and as may be payable in lieu of fractional shares of
Commercial common stock.
(b) After the Acquisition Merger Effective Time, holders of
certificates theretofore evidencing outstanding shares of Company common stock
or Company Preferred Stock (other than as provided in Section 1.3(a)(iii)), upon
surrender of such certificates to the Exchange Agent, shall be entitled to
receive certificates representing the number of whole shares of Commercial
common stock into which shares of Company common stock or Company Preferred
Stock theretofore represented by the certificates so surrendered shall have been
converted, as provided in Section 1.3 hereof, cash payable for the Common Stock
Cash Consideration and Preferred Stock Cash Consideration, and cash payments in
lieu of fractional shares as provided in Section 1.6 hereof. As soon as
practicable after the Acquisition Merger Effective Time, the Exchange Agent will
send a notice and transmittal form to each Company shareholder of record at the
Acquisition Merger Effective Time whose Company stock shall have been converted
into Commercial common stock advising such shareholder of the effectiveness of
the Acquisition Merger and the procedure for surrendering to the Exchange Agent
outstanding certificates formerly evidencing Company common stock or Company
Preferred Stock in exchange for new certificates for Commercial common stock and
for cash payable for the Common Stock Cash Consideration and the Preferred Stock
Cash Consideration and in lieu of any fractional interest. Upon surrender, each
certificate evidencing Company common stock and Company Preferred Stock shall be
cancelled.
(c) Until surrendered as provided in this Section 1.5 hereof, each
outstanding certificate which, prior to the Acquisition Merger Effective Time,
represented Company common stock or Company Preferred Stock (other than shares
cancelled at the Acquisition Merger Effective Time pursuant to Section
1.3(a)(iii) hereof) will be deemed for all corporate purposes to evidence
ownership of the number of whole shares of Commercial common stock into which
the shares of Company common stock or Company Preferred Stock formerly
represented thereby were converted and the right to receive cash payable for the
Common Stock Cash Consideration and the Preferred Stock Cash Consideration and
in lieu of any fractional interest. However, until such outstanding certificates
formerly representing Company common stock or Company Preferred Stock are so
surrendered, no dividend or distribution payable to holders of record of
Commercial common stock shall be paid to any holder of such outstanding
certificates, but upon surrender of such outstanding certificates by such holder
there shall be paid to such holder the amount of any dividends or distribution,
without interest, theretofore paid with respect to such whole shares of
Commercial common stock, but not paid to such holder, and which dividends or
distribution had a record date occurring on or
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subsequent to the Acquisition Merger Effective Time and the amount of any cash,
without interest, payable to such holder for the Common Stock Cash Consideration
and the Preferred Stock Cash Consideration and in lieu of fractional shares
pursuant to Section 1.6 hereof. After the Acquisition Merger Effective Time,
there shall be no further registration of transfers on the records of the
Company of outstanding certificates formerly representing shares of Company
common stock or Company Preferred Stock and, if a certificate formerly
representing such shares is presented to Commercial, it shall be forwarded to
the Exchange Agent for cancellation and exchange for certificates representing
shares of Commercial common stock as herein provided.
(d) All shares of Commercial common stock and cash for the Common
Stock Cash Consideration and the Preferred Stock Cash Consideration and in lieu
of any fractional share issued and paid upon the surrender for exchange of
Company common stock or Company Preferred Stock in accordance with the above
terms and conditions shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Company common stock or Company
Preferred Stock.
(e) If any new certificate for Commercial common stock is to be
issued in the name other than that in which the certificate surrendered in
exchange thereof is registered, it shall be a condition of the issuance therefor
that the certificate surrendered in exchange shall be properly endorsed and
otherwise in proper form for transfer and that the person requesting such
transfer pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of a new certificate for shares of Commercial common
stock in any name other than that of the registered holder of the certificate
surrendered, or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable.
(f) In the event any certificate for Company common stock or Company
Preferred Stock shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Commercial common stock and cash for the Common Stock Cash Consideration and the
Preferred Stock Cash Consideration and in lieu of fractional shares, if any, as
may be required pursuant hereto; provided, however, that Commercial may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate to deliver a bond in such
sum as it may direct as indemnity against any claim that may be made against
Commercial, the Company, the Exchange Agent or any other party with respect to
the certificate alleged to have been lost, stolen or destroyed.
8
<PAGE>
1.6 No Fractional Shares. Notwithstanding any term or provision hereof,
--------------------
no fractional shares of Commercial common stock, and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in exchange for
any shares of Company common stock or Company Preferred Stock; no dividend or
distribution with respect to Commercial common stock shall be payable on or with
respect to any fractional share interests; and no such fractional share interest
shall entitle the owner thereof to vote or to any other rights of a shareholder
of Commercial. In lieu of such fractional share interest, any holder of Company
common stock or Company Preferred Stock who would otherwise be entitled to a
fractional share of Commercial common stock will, upon surrender of his
certificate or certificates representing Company common stock or Company
Preferred Stock outstanding immediately prior to the Acquisition Merger
Effective Time, be paid the applicable cash value of such fractional share
interest, which shall be equal to the product of the fraction multiplied by the
Average NYSE Closing Price. For the purposes of determining any such fractional
share interests, all shares of Commercial common stock received by the holders
of the Company common stock and the Company Preferred Stock shall be combined so
as to calculate the maximum number of whole shares of Commercial common stock
issuable to such Company shareholder in the Acquisition Merger.
1.7 Shareholders' Meeting. The Company shall, at the earliest
---------------------
practicable date, hold a meeting of its shareholders (the "Company Shareholders'
Meeting") to submit for shareholder approval this Agreement and the Acquisition
Merger. The affirmative vote of the holders of at least two-thirds of the issued
and outstanding shares of Company common stock and two-thirds of the issued and
outstanding Company Preferred Stock entitled to vote shall be required for such
approval.
1.8 Company Stock Options. Immediately prior to the Acquisition Merger
---------------------
Effective Time, each holder of an option outstanding under the Company's
Employee Stock Compensation Program as Amended and Restated May 12, 1994 (the
"Company Option Plan"), whether or not the option is then exercisable, shall
receive in cancellation of such option (such cancellation to be reflected in a
written agreement) per share of Company common stock subject to such option a
cash payment in an amount equal to the sum of (A) $6.34 and (B) the product of
the Exchange Ratio and the Average NYSE Closing Price (as determined pursuant to
Section 1.3(b) hereof) less (C) the exercise price of such option, net of any
cash which must be withheld under federal and state income tax requirements.
Immediately thereafter, Company shall cancel each such option.
1.9 Registration Statement; Prospectus/Proxy Statement.
--------------------------------------------------
(a) For the purposes (i) of registering the Commercial common stock
to be issued to holders of Company common stock and
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<PAGE>
Company Preferred Stock in connection with the Merger with the Securities and
Exchange Commission ("SEC") and with applicable state securities authorities,
and (ii) of holding the Company Shareholders' Meeting, the parties hereto shall
cooperate in the preparation of an appropriate registration statement (such
registration statement, together with all and any amendments and supplements
thereto, being herein referred to as the "Registration Statement"), including
the prospectus/proxy statement satisfying all applicable requirements of
applicable state laws, and of the Securities Act of 1933, as amended (the "1933
Act") and the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the rules and regulations thereunder (such prospectus/proxy statement, together
with any and all amendments or supplements thereto, being herein referred to as
the "Prospectus/Proxy Statement").
(b) Commercial shall furnish such information concerning Commercial
and the Commercial Subsidiaries (as defined in Section 3.1 hereof) as is
necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to such corporations, to comply with Section 1.9(a) hereof. Commercial
agrees promptly to advise the Company if at any time prior to the Company
Shareholders' Meeting any information provided by Commercial in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide the information needed to correct such inaccuracy or
omission. Commercial shall promptly file such supplemental information as may be
necessary in order to cause such Prospectus/Proxy Statement, insofar as it
relates to Commercial and the Commercial Subsidiaries, to comply with Section
1.9(a).
(c) The Company shall furnish Commercial with such information
concerning the Company and the Company Subsidiaries (as defined in Section 2.1
hereof) as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to such corporations, to comply with Section 1.9(a)
hereof. The Company agrees promptly to advise Commercial if at any time prior to
the Company Shareholders' Meeting any information provided by the Company in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide Commercial with the information needed to correct such
inaccuracy or omission. The Company shall furnish Commercial with such
supplemental information as may be necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to the Company and the Company
Subsidiaries, to comply with Section 1.9(a).
(d) Commercial shall promptly file the Registration Statement with
the SEC and applicable state securities agencies. Commercial shall use all
reasonable efforts to cause the Registration Statement to become effective under
the 1933 Act and applicable state securities laws at the earliest practicable
date. The Company authorizes Commercial to utilize in the Registration Statement
the information concerning the Company and the Company
10
<PAGE>
Subsidiaries provided to Commercial for the purpose of inclusion in the
Prospectus/Proxy Statement. The Company shall have the right to review and
comment on the form of proxy statement included in the Registration Statement.
Commercial shall advise Company promptly when the Registration Statement has
become effective and of any supplements or amendments thereto, and Commercial
shall furnish Company with copies of all such documents. Prior to the
Acquisition Merger Effective Time or the termination of this Agreement, each
party shall consult with the other with respect to any material (other than the
Prospectus/Proxy Statement) that might constitute a "prospectus" relating to the
Merger within the meaning of the 1933 Act.
(e) The Company shall consult with Commercial in order to determine
whether any directors, officers or shareholders of the Company may be deemed to
be "affiliates" of Company ("affiliated persons") within the meaning of Rule 145
of the SEC promulgated under the 1933 Act. All shares of Commercial common stock
issued to such Company affiliated persons in connection with the Merger shall
bear a legend upon the face thereof stating that transfer of the securities is
or may be restricted by the provisions of the 1933 Act, and notice shall be
given to Commercial's transfer agent of such restriction, provided that such
legend shall be removed by delivery of a substitute certificate without such
legend if such Company affiliated person shall have delivered to Commercial a
copy of a letter from the staff of the SEC or an opinion of counsel, in form and
substance satisfactory to Commercial, to the effect that such legend is not
required for purposes of the 1933 Act, and, in any event, at any time after the
expiration of three years from the Acquisition Merger Effective Time unless, in
the opinion of the counsel for Commercial, such person was an "affiliate" of
Commercial within the meaning of Rule 145 within three months prior to the
expiration of such three year period. So long as shares of such Commercial
common stock bear such legend, no transfer of such Commercial common stock shall
be allowed unless and until the transfer agent is provided with such information
as may reasonably be requested by counsel for Commercial to assure that such
transfer will not violate applicable provisions of the 1933 Act, or rules,
regulations or policies of the SEC.
1.10 Cooperation; Regulatory Approvals. The parties shall cooperate and
---------------------------------
use reasonable best efforts to complete the transactions contemplated hereunder
at the earliest practicable date. Each party shall cause each of their
affiliates and subsidiaries to cooperate, in the preparation and submission by
them, as promptly as reasonably practicable, of such applications, petitions,
and other documents and materials as any of them may reasonably deem necessary
or desirable to the OTS, Federal Trade Commission ("FTC"), Department of Justice
("DOJ"), SEC, applicable Secretary of State, other regulatory authorities,
holders of the voting shares of common stock of the Company, and any other
persons for the purpose of obtaining any approvals or consents necessary to
11
<PAGE>
consummate the transactions contemplated by this Agreement. At the date hereof,
none of the parties is aware of any reason that the regulatory approvals
required to be obtained by it would not be obtained.
1.11 Closing. If (i) this Agreement has been duly approved by the
-------
shareholders of the Company, and (ii) all relevant conditions of this Agreement
have been satisfied or waived, a closing (the "Closing") shall take place as
promptly as practicable thereafter at the principal office of Commercial at
which the parties hereto will exchange certificates, opinions, letters and other
documents as required hereby and will make the filings described in Section 1.2
hereof. Such Closing will take place as soon as practicable as agreed by the
parties, provided, however, that the Closing shall be no more than thirty (30)
-------- -------
days after the satisfaction or waiver of all conditions and/or obligations
contained in Article V of this Agreement.
1.12 Closing of Transfer Books. At the Acquisition Merger Effective Time,
-------------------------
the transfer books for Company common stock and Company Preferred Stock shall be
closed, and no transfer of shares of Company common stock or Company Preferred
Stock shall thereafter be made on such books.
1.13 Bank Merger.
-----------
(a) At the Bank Merger Effective Time, each share of Savings Common
Stock issued and outstanding immediately prior thereto shall, by virtue of the
Bank Merger, be cancelled. No new shares of the capital stock or other
securities or obligations of the Bank shall be issued or be deemed issued with
respect to or in exchange for such cancelled shares, and such cancelled shares
of Savings Common Stock shall not be converted into any shares or other
securities or obligations of the Bank.
(b) The charter and bylaws of the Bank, as in effect immediately
prior to the Bank Merger Effective Time, shall be the charter and bylaws of the
Bank, as the surviving institution of the Bank Merger, and may thereafter be
amended in accordance with applicable law.
(c) The directors and officers of the Bank immediately prior to the
Bank Merger Effective Time shall be the directors and officers of the Bank, as
the surviving institution of the Bank Merger, and shall continue in office until
their successors are duly elected or otherwise duly selected.
(d) The liquidation account established by Savings pursuant to the
plan of conversion adopted in connection with its conversion from mutual to
stock form shall continue to be maintained by the Bank after the Bank Merger
Effective Time for the benefit of those persons and entities who were savings
account
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<PAGE>
holders of Savings on the eligibility record date for such conversion and who
continue from time to time to have rights therein. If required by the rules and
regulations of the OTS, the Bank shall amend its charter to specifically provide
for the continuation of the liquidation account established by Savings.
1.14 Option Agreement. In connection with the execution of this Agreement
----------------
by the parties, Commercial and the Company intend to execute the Stock Option
Agreement in the form of Exhibit 1.14.
1.15 Rights Amendment. The Board of Directors of the Company has approved
----------------
and has entered into, and shall keep in effect (including, to the extent
applicable, subsequent to termination of this Agreement), an Amendment No. 2
(the "Rights Amendment") to the Rights Agreement dated as of May 24, 1989 and
amended as of September 25, 1989 (the "Rights Agreement"), between the Company
(as successor to Savings under Amendment No. 1 to the Rights Agreement dated
September 25, 1989) and First National Bank of Omaha, as Rights Agent, pursuant
to which none of the execution or delivery of this Agreement, the Option
Agreement, the Acquisition Plan of Merger or the Bank Plan of Merger or any of
the transactions contemplated hereby or thereby (including without limitation
the purchase of shares pursuant to the Option Agreement), will cause (a) the
rights issued pursuant to the Rights Agreement (the "Rights") to become
exercisable under the Rights Agreement, (b) Commercial, Bank or any of their
affiliates to be deemed an "Acquiring Person" (as defined in the Rights
Agreement) or (c) a "Share Acquisition Date," a "Distribution Date" or a
"Triggering Event" (as defined in the Rights Agreement) to occur upon, as a
result of or in connection with any such event. The Company shall, upon the
request of Commercial, take such action, including without limitation, redeeming
all outstanding Rights immediately prior to the Acquisition Merger Effective
Time or thereafter at the applicable redemption price in order to render the
Rights inapplicable to the transactions contemplated hereby. The Rights
Amendment is attached hereto as Exhibit 1.15.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY AND SAVINGS
Company and Savings represent and warrant to Commercial and the Bank that,
except as disclosed in Schedule I attached hereto and except that Savings makes
no representations or warranties regarding Company:
2.1 Organization, Good Standing, Authority, Insurance, Etc. The Company
------------------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Nebraska. Section 2.1 of Schedule I lists each "subsidiary"
of the Company and Savings within the meaning of Section 10(a)(1)(G) of HOLA,
(individually a "Company Subsidiary" and collectively the "Company
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<PAGE>
Subsidiaries") (unless otherwise noted herein all references to a "Company
Subsidiary" or to the "Company Subsidiaries" shall include Savings). Each of the
Company Subsidiaries is duly organized, validly existing, and in good standing
under the laws of the respective jurisdiction under which it is organized, as
set forth in Section 2.1 of Schedule I. The Company and each Company Subsidiary
has all requisite power and authority and is duly qualified and licensed to own,
lease and operate its properties and conduct its business as it is now being
conducted. The Company has delivered to Commercial a true, complete and correct
copy of the articles of incorporation, charter, or other organizing document and
of the bylaws, as in effect on the date of this Agreement, of Company and each
Company Subsidiary. The Company and each Company Subsidiary is qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which qualification is necessary under applicable law, except to the extent
that any failures to so qualify would not, in the aggregate, have a material
adverse effect on the business, financial condition or results of operations of
the Company and the Company Subsidiaries, taken as a whole. Savings is a member
in good standing of the Federal Home Loan Bank of Topeka and all eligible
accounts issued by Savings are insured by the Savings Association Insurance Fund
("SAIF") to the maximum extent permitted under applicable law. Savings is a
"domestic building and loan association" as defined in Section 7701(a)(19) of
the Code and is a "qualified thrift lender" as defined in Section 10(m) of the
HOLA and the Thrift Regulations. The Company is duly registered as a savings and
loan holding company under the HOLA.
The minute books of the Company and the Company's Subsidiaries contain
complete and accurate records of all meetings and other corporate actions held
or taken of their respective shareholders and Boards of Directors (including the
committees of such Boards).
2.2 Capitalization. The authorized capital stock of the Company consists
--------------
of (i) 50,000,000 shares of common stock, par value $.01 per share, of which
1,846,005 shares were issued and outstanding as of the date of this Agreement,
and (ii) 5,000,000 shares of Preferred Stock, par value $.01 per share, of which
460,000 shares were outstanding as of the date of this Agreement. All
outstanding shares of Company common stock and Company Preferred Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except for outstanding options to purchase 118,264 shares of Company
common stock under the Company Option Plan, 1,039,600 shares of Company common
stock authorized for issuance upon conversion of Company Preferred Stock and as
contemplated by the Option Agreement and the Rights Agreement, as of the date of
this Agreement, there are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any of the Company's
capital stock from the Company and no oral or written agreement, contract,
arrangement, understanding, plan or instrument
14
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of any kind (collectively, "Stock Contract") to which the Company or any of its
affiliates is subject with respect to the issuance, voting or sale of issued or
unissued shares of the Company's capital stock. A true and complete copy of the
Company Option Plan, as in effect on the date of this Agreement, is attached as
Section 2.2 of Schedule I.
2.3 Ownership of Subsidiaries. All the outstanding shares of the capital
-------------------------
stock of the Company Subsidiaries are validly issued, fully paid, nonassessable
and owned beneficially and of record by the Company or a Company Subsidiary free
and clear of any lien, claim, charge, restriction or encumbrance (collectively,
"Encumbrance"). Except as set forth in Section 2.3 of Schedule I, all of the
outstanding capital stock or other ownership interests in all of the Company
Subsidiaries is owned either by the Company or Savings. There are no options,
convertible securities, warrants, or other rights (preemptive or otherwise) to
purchase or acquire any capital stock of any Company Subsidiary and no contracts
to which the Company or any of its affiliates is subject with respect to the
issuance, voting or sale of issued or unissued shares of the capital stock of
any of the Company Subsidiaries. Neither the Company nor any Company Subsidiary
owns any of the capital stock or other equity securities (including securities
convertible or exchangeable into such securities) of or profit participations in
any "company" (as defined in Section 10(a)(1)(C) of the HOLA) other than the
Federal Home Loan Bank of Topeka or except as set forth in Section 2.3 of
Schedule I.
2.4 Financial Statements and Reports.
--------------------------------
(a) No registration statement, proxy statement, schedule or report
filed by the Company or any Company Subsidiary with the SEC or the OTS under the
1933 Act or the 1934 Act ("SEC Reports"), on the date of effectiveness in the
case of such registration statements, or on the date of filing in the case of
such reports or schedules, or on the date of mailing in the case of such proxy
statements, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. For the past five years, the Company and the Company
Subsidiaries have timely filed all reports and documents required to be filed by
them with the SEC, the OTS, or the Federal Deposit Insurance Corporation (the
"FDIC") under various securities and financial institution laws and regulations
except to the extent that all failures to so file, in the aggregate, would not
have a material adverse effect on the business, financial condition or results
of operations of the Company and the Company Subsidiaries, taken as a whole; and
all such documents, as finally amended, complied in all material respects with
applicable requirements of law and, as of their respective date or the date as
amended, did not contain any untrue statement of a material fact or omit to
state a material fact
15
<PAGE>
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Except to
the extent stated therein, all financial statements and schedules included in
the documents referred to in the preceding sentences (or to be included in
similar documents to be filed after the date hereof) (i) are or will be (with
respect to financial statements in respect of periods ending after December 31,
1994) in accordance with the Company's books and records and those of any of the
Company Subsidiaries, and (ii) present (and in the case of financial statements
in respect of periods ending after December 31, 1994, will present) fairly the
consolidated statement of financial condition and the consolidated statements of
income, changes in stockholders' equity and cash flows of the Company and the
Company Subsidiaries as of the dates and for the periods indicated in accordance
with generally accepted accounting principles applied on a basis consistent with
prior periods (except for the omission of notes to unaudited statements, year
end adjustments to interim results and changes to generally accepted accounting
principles). The consolidated financial statements of the Company at December
31, 1994 and for the three years then ended and the consolidated financial
statements for all periods thereafter up to the Closing reflect or will reflect,
as the case may be, all liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due and regardless of when
asserted), as of their respective dates, of the Company and the Company
Subsidiaries required to be reflected in such financial statements according to
generally accepted accounting principles and contain or will contain, in the
opinion of management, adequate reserves for losses on loans and properties
acquired in settlement of loans, taxes and all other material accrued
liabilities and for all reasonably anticipated material losses, if any as of
such date. There exists no set of circumstances that could reasonably be
expected to result in any liability or obligation material to the Company or the
Company Subsidiaries, taken as a whole, except as disclosed in such consolidated
financial statements at December 31, 1994 or for transactions effected or
actions occurring or omitted to be taken after December 31, 1994 (i) in the
ordinary course of business, or (ii) as permitted by this Agreement.
(b) The Company has delivered to Commercial each SEC Report filed,
used or circulated by it with respect to periods since January 1, 1992 through
the date of this Agreement and will promptly deliver each such SEC Report filed,
used or circulated after the date hereof, each in the form (including exhibits
and any amendments thereto) filed with the SEC or the OTS (or, if not so filed,
in the form used or circulated), including, without limitation, its Annual
Reports on Form 10-K and its Quarterly Reports on Form 10-Q.
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2.5 Absence of Changes.
------------------
(a) Since December 31, 1994, there has been no material adverse
change in the business, properties, financial condition, results of operations
or assets of the Company and the Company Subsidiaries, taken as a whole, other
than any such change attributable to or resulting from any change in law,
regulation or generally accepted accounting principles which impairs both the
Company and Commercial in a substantially similar manner and other than any
change attributable to or resulting from changes in economic conditions
applicable to banking institutions generally or in general levels of interest
rates affecting both the Company and Commercial to a similar extent and in a
similar manner. There is no occurrence, event or development of any nature
existing or, to the best knowledge of the Company, threatened which may
reasonably be expected to have a material adverse effect upon the business,
properties, financial condition, operations or assets of Company or any Company
Subsidiary, other than the effects of any such change attributable to or
resulting from any change in law, regulation or generally accepted accounting
principles which impairs both the Company and Commercial in a substantially
similar manner and other than the effects of any change attributable to or
resulting from changes in economic conditions applicable to banking institutions
generally or in general levels of interest rates affecting both the Company and
Commercial to a similar extent and in a similar manner.
(b) Except as set forth in Section 2.5 of Schedule I, since December
31, 1994, each of the Company and the Company Subsidiaries has owned and
operated their respective assets, properties and businesses in the ordinary
course of business and consistent with past practice.
2.6 Prospectus/Proxy Statement. At the time the Prospectus/ Proxy
--------------------------
Statement is mailed to the shareholders of the Company for the solicitation of
proxies for the approvals referred to in Section 1.7(a) hereof and at all times
subsequent to such mailings up to and including the times of such approval, such
Prospectus/Proxy Statement (including any supplements thereto), with respect to
all information set forth therein relating to the Company (including the Company
Subsidiaries), its shareholders and representatives, Company common stock,
Company Preferred Stock and all other transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) Not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
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2.7 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf or under authority of the Company or any of the
Company Subsidiaries is or will be entitled to any broker's or finder's fee or
any other commission or similar fee directly or indirectly in connection with
the Merger or any other transaction contemplated hereby, except the Company has
engaged Dain Bosworth Incorporated to provide financial advisory services and to
deliver a "fairness opinion" to the effect that the consideration to be received
by the Company shareholders in the Merger is fair to the Company shareholders
from a financial point of view, whose fees and reasonable out-of-pocket expenses
will be paid by Company. A copy of the engagement agreement with Dain Bosworth
Incorporated is attached to Section 2.7 of Schedule I.
2.8 Litigation and Other Proceedings.
--------------------------------
(a) Except as set forth in Section 2.8 of Schedule I and except for
matters which would not have a material adverse effect on the business,
financial condition or results of operations of the Company and the Company
Subsidiaries taken as a whole, neither the Company nor any Company Subsidiary is
a defendant in, nor is any of its property subject to, any pending, or, to the
best knowledge of the management of the Company, threatened, claim, action,
suit, investigation, or proceeding, or subject to any judicial order, judgment
or decree.
(b) Section 2.8(b) of Schedule I sets forth all other claims, actions,
suits, investigations and proceedings in which the Company or any Company
Subsidiary is a defendent, and all other judicial order, judgment or decree to
which the Company or any Company Subsidiary is subject.
2.9 Compliance with Law.
-------------------
(a) The Company and the Company Subsidiaries are in compliance in all
material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither the Company nor any
Company Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
(b) The Company and each of its Subsidiaries have all material
permits, licenses, certificates of authority, orders and approvals of, and have
made all material filings, applications and registrations with, all federal,
state, local and foreign governmental or regulatory bodies that are required in
order to permit them to carry on their respective business as they are presently
conducted.
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2.10 Corporate Actions.
-----------------
(a) The Boards of Directors of the Company and Savings have duly
authorized their respective officers to execute and deliver (as applicable) this
Agreement, the Acquisition Plan of Merger, the Bank Plan of Merger, the Option
Agreement and the Rights Amendment and to take all action necessary to
consummate the Merger and the other transactions contemplated hereby. The Board
of Directors of the Company has authorized and directed the submission for
shareholders' approval of this Agreement, together with the Merger and any other
action requiring such approval. All corporate authorization by the Board of
Directors of the Company required for the consummation of the Merger has been
obtained.
(b) The Company's Board of Directors has taken or will take all
necessary action to exempt this Agreement, the Acquisition Plan of Merger, the
Bank Plan of Merger and the Option Agreement and the transactions contemplated
hereby and thereby from, (i) any applicable state takeover laws, (ii) any
Nebraska laws limiting or restricting the voting rights of shareholders, (iii)
any Nebraska laws requiring a shareholder approval vote in excess of the vote
normally required in transactions of similar type not involving a "related
person," "interested shareholder" or person or entity of similar type, and (iv)
any provision in its or any of the Company Subsidiaries' articles/certificate of
incorporation, charter or bylaws, (A) restricting or limiting stock ownership or
the voting rights of shareholders, or (B) requiring a shareholder approval vote
in excess of the vote normally required in transactions of similar type not
involving a "related person," interested shareholder" or person or entity of
similar type.
2.11 Authority. Except as set forth in Section 2.11 of Schedule I, the
---------
execution, delivery and performance of its obligations under this Agreement, the
Option Agreement and the Rights Amendment by the Company and Savings does not
violate any of the provisions of, or constitute a default under or give any
person the right to terminate or accelerate payment or performance under (i) the
articles of incorporation or bylaws of the Company, the articles of
incorporation, charter or bylaws of any Company Subsidiary, (ii) any regulatory
restraint on the acquisition of the Company or Savings or control thereof, (iii)
any law, rule, ordinance, or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which it or any of the
Company Subsidiaries is subject or (iv) any other material agreement, material
lease, material contract, note, mortgage, indenture, arrangement or other
obligation or instrument ("Contract") to which the Company or any of the Company
Subsidiaries is a party or is subject or by which any of their properties or
assets is bound. The parties acknowledge that the consummation of the Merger and
the other transactions contemplated hereby is subject to various regulatory
approvals. The Company and Savings, as applicable, have all requisite corporate
power and
19
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authority to enter into this Agreement, the Option Agreement, the Acquisition
Plan of Merger and the Rights Amendment and to perform their respective
obligations hereunder and thereunder, except, with respect to this Agreement and
the Acquisition Merger, the approval of the Company's shareholders required
under applicable law. Other than the receipt of Governmental Approvals (as
defined in Section 5.1(c)), the approval of shareholders, the consent of the
Rights Agent under the Rights Agreement (which consent was received prior to the
date of this Agreement) and the consents specified in Schedule I with respect to
the Contracts, no consents or approvals are required on behalf of Company in
connection with the consummation of the transactions contemplated by this
Agreement, the Option Agreement, the Acquisition Plan of Merger, the Bank Plan
of Merger and the Rights Amendment. This Agreement, the Option Agreement, the
Acquisition Plan of Merger, the Bank Plan of Merger and the Rights Amendment
constitute the valid and binding obligation of the Company and Savings, as
applicable, and each is enforceable in accordance with its terms, except as
enforceability may be limited by applicable laws relating to bankruptcy,
insolvency or creditors rights generally and general principles of equity.
2.12 Employment Arrangements. Except as disclosed in Section 2.12 of
-----------------------
Schedule I, there are no employment, severance or other agreements, plans or
arrangements with any current or former directors, officers or employees of
Company or any Company Subsidiary which may not be terminated without penalty
(including any augmentation or acceleration of benefits) on 30 days or less
notice to such person. The Severance Pay Guidelines established at the April 11,
1995 Senior Management meeting, a copy of which was furnished to Commercial on
August 7, 1995, are not legally enforceable by any director, officer or employee
of Company or any Company Subsidiary against, or binding upon, Company or any
Company Subsidiary or, following the Acquisition Merger Effective Time, the
Surviving Corporation or any subsidiary thereof. No payments to directors,
officers or employees of the Company or the Company Subsidiaries resulting from
the transactions contemplated hereby will cause the imposition of excise taxes
under Section 4999 of the Code or the disallowance of a deduction to the Company
or any Company Subsidiary pursuant to Sections 162, 280G or any other section of
the Code.
2.13 Employee Benefits.
-----------------
(a) Neither the Company nor any of the Company Subsidiaries maintains
any funded deferred compensation plans (including profit sharing, pension,
savings or stock bonus plans), unfunded deferred compensation arrangements or
employee benefit plans as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), other than any plans
("Employee Plans") set forth in Section 2.13 of Schedule I (true and correct
copies of which have been delivered to Commercial).
20
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None of Company or any of the Company Subsidiaries has incurred or reasonably
expects to incur any liability to the Pension Benefit Guaranty Corporation
except for required premium payments which, to the extent due and payable, have
been paid. The Employee Plans intended to be qualified under Section 401(a) of
the Code are so qualified, and Company is not aware of any fact which would
adversely affect the qualified status of such plans. Except as set forth in
Section 2.13 of Schedule I, neither the Company nor any of the Company
Subsidiaries (a) provides health, medical, death or survivor benefits to any
former employee or beneficiary thereof, or (b) maintains any form of current
(exclusive of base salary and base wages) or deferred compensation, bonus, stock
option, stock appreciation right, benefit, severance pay, retirement, incentive,
group or individual health insurance, welfare or similar plan or arrangement for
the benefit of any single or class of directors, officers or employees, whether
active or retired (collectively "Benefit Arrangements").
(b) Except as disclosed in Section 2.13 to Schedule I, all Employee
Plans and Benefit Arrangements which are in effect were in effect for
substantially all of calendar year 1994 and there has been no material amendment
thereof (other than amendments required to comply with applicable law) or no
material increase in the cost thereof or benefits payable thereunder on or after
January 1, 1994.
(c) To the best knowledge of the Company, with respect to all
Employee Plans and Benefit Arrangements, the Company and each Company Subsidiary
are in substantial compliance with the requirements prescribed by any and all
statutes, governmental or court orders, or rules or regulations currently in
effect, including but not limited to ERISA and the Code, applicable to such
Employee Plans or Benefit Arrangements. No condition exists that could
constitute grounds for the termination of any Employee Plan under Section 4042
of ERISA; no "prohibited transaction," as defined in Section 406 of ERISA and
Section 4975 of the Code, has occurred with respect to any Employee Plan, or any
other employee benefit plan maintained by Company or any Company Subsidiary
which is covered by Title I of ERISA, which could subject any person to
liability under Title I of ERISA or to the imposition of any tax under Section
4975 of the Code which could have an adverse effect on the business, assets,
financial condition, results of operations or prospects of Company or any
Company Subsidiary; nor to the best knowledge of Company has any Employee Plan
subject to Part III of Subtitle B of Title I of ERISA or Section 412 of the
Code, or both, incurred any "accumulated funding deficiency," as defined in
Section 412 of the Code, whether or not waived; nor has Company or any Company
Subsidiary failed to make any contribution or pay any amount due and owing as
required by the terms of any Employee Plan or Benefit Arrangement. To the best
of its knowledge, neither Company nor any Company Subsidiary has incurred or
expects to incur, directly or indirectly, any liability under Title IV
21
<PAGE>
of ERISA arising in connection with the termination of, or a complete or partial
withdrawal from, any plan covered or previously covered by Title IV of ERISA
which could constitute a liability of Commercial, or any of its affiliates at or
after the Acquisition Merger Effective Time.
2.14 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in writing by or on behalf of Company
to Commercial pursuant to this Agreement contains or will contain any untrue
statement of a material fact or any material omission. No information material
to the Merger and which is necessary to make (i) the representations and
warranties or (ii) the information provided and to be provided to Commercial for
purposes of its due diligence examination pursuant to Section 4.11 hereof not
misleading, to the best knowledge of the Company, has been withheld from
Commercial.
2.15 Property and Assets. The Company and the Company Subsidiaries have
-------------------
good and marketable title to all of their real property reflected in the
financial statements at December 31, 1994, referred to in Section 2.4 hereof, or
acquired subsequent thereto, free and clear of all Encumbrances, except for (a)
such items shown in such financial statements or in the notes thereto, (b) liens
for current real estate taxes not yet delinquent, (c) customary title exceptions
that have no material adverse effect upon the value of such property, (d)
property sold or transferred in the ordinary course of business since the date
of such financial statements, (e) pledges or liens incurred in the ordinary
course of business and (f) as otherwise specifically indicated in Section 2.15
of Schedule I. Company and the Company Subsidiaries enjoy peaceful and
undisturbed possession under all material leases for the use of real property
under which they are the lessee; all of such leases are valid and binding and in
full force and effect and neither Company nor any Company Subsidiary is in
default in any material respect under any such lease. No consent of the lessor
of any material real property or material personal property lease is required
for consummation of the Merger except as set forth in Section 2.15 of Schedule
I. Except as set forth in Section 2.15 of Schedule I, there has been no material
physical loss, damage or destruction, whether or not covered by insurance,
affecting the real properties of Company and the Company Subsidiaries since
December 31, 1994, except such loss, damage or destruction which does not have a
material adverse effect on the Company and the Company Subsidiaries, taken as a
whole. All property and assets material to their business and currently used by
Company and the Company Subsidiaries are, in all material respects, in good
operating condition and repair, normal wear and tear excepted.
22
<PAGE>
2.16 Agreements and Instruments. Except as set forth in Section 2.16 of
--------------------------
Schedule I, neither the Company nor any Company Subsidiary is a party to (a) any
material agreement, arrangement or commitment not made in the ordinary course of
business, (b) any agreement, indenture or other instrument relating to the
borrowing of money by the Company or any Company Subsidiary or the guarantee by
the Company or any Company Subsidiary of any such obligation (other than Federal
Home Loan Bank advances with a maturity of one year or less from the date
hereof), (c) any agreements to make loans or for the provision, purchase or sale
of goods, services or property between Company or any Company Subsidiary and any
director or officer of Company or Savings, or any member of the immediate family
or affiliate of any of the foregoing, (d) any agreements with or concerning any
labor or employee organization to which Company or any Company Subsidiary is a
party, (e) any agreements between Company or any Company Subsidiary and any five
percent or more shareholder of Company, and (f) any agreements, directives,
orders, or similar arrangements between or involving the Company or any Company
Subsidiary and any state or federal savings institution regulatory authority.
2.17 Material Contract Defaults. Neither the Company nor any Company
--------------------------
Subsidiary nor the other party thereto is in default in any respect under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which the Company or a Company Subsidiary is a party or by which
its respective assets, business, or operations may be bound or affected or under
which it or its respective assets, business, or operations receives benefits,
and which default is reasonably expected to have either individually or in the
aggregate a material adverse effect on the Company and any Company Subsidiary,
taken as a whole, and there has not occurred any event that, with the lapse of
time or the giving of notice or both, would constitute such a default.
2.18 Tax Matters.
-----------
The Company and each of the Company Subsidiaries have duly and
properly filed all federal, state, local and other tax returns required to be
filed by them and have made timely payments of all taxes due and payable,
whether disputed or not; the current status of audits of such returns by the
Internal Revenue Service ("IRS") and other applicable agencies is as set forth
in Section 2.18 of Schedule I; and, except as set forth in Section 2.18 of
Schedule I, there is no agreement by the Company or any Company Subsidiary for
the extension of time or for the assessment or payment of any taxes payable.
Except as set forth in Section 2.18 of Schedule I, neither the IRS nor any other
taxing authority is now asserting or, to the best knowledge of Company,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Company aware of any basis
for any such assertion or claim. The Company and each of the Company
Subsidiaries have complied in all material
23
<PAGE>
respects with applicable IRS backup withholding requirements and have filed all
appropriate information reporting returns for all tax years for which the
statute of limitations has not closed. The Company and each Company Subsidiary
have complied with all applicable state law sales and use tax collection and
reporting requirements.
(b) Adequate provision for any federal, state, local, or foreign
taxes due or to become due for the Company or any of the Company Subsidiaries
for any period or periods through and including December 31, 1994, has been made
and is reflected on the December 31, 1994 audited Company consolidated financial
statements and has been or will be made with respect to periods ending after
December 31, 1994.
2.19 Environmental Matters. Except as set forth in Section 2.19 of
---------------------
Schedule I, to the best knowledge of the Company, neither the Company nor any
Company Subsidiary owns or leases any properties affected by toxic waste, radon
gas or other hazardous conditions or constructed in part with the use of
asbestos. Except as set forth in Section 2.19 of Schedule I, neither the Company
nor any Company Subsidiary has knowledge of, nor has the Company or any Company
Subsidiary received written notice from any governmental or regulatory body of,
any conditions, activities, practices or incidents which is reasonably likely to
interfere with or prevent compliance or continued compliance with hazardous
substance laws or any regulation, order, decree, judgment or injunction, issued,
entered, promulgated or approved thereunder, or which may give rise to any
common law or legal liability, or otherwise form the basis of any claim, action,
suit, proceeding, hearing or investigation based on or related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling, or the emission, discharge, release or threatened
release into the environment, of any pollutant, contaminant or chemical, or
industrial, toxic or hazardous substance or waste. There is no civil, criminal
or administrative claim, action, suit, proceeding, hearing or investigation
pending or, to Company's knowledge, threatened against Company or any Company
Subsidiary relating in any way to such hazardous substance laws or any
regulation, order, decree, judgment or injunction issued, entered, promulgated
or approved thereunder.
2.20 Loan Portfolio: Portfolio Management.
-------------------------------------
(a) All evidences of indebtedness reflected as assets in the
consolidated balance sheet of Company as of December 31, 1994, or acquired since
such date, are (except with respect to those assets which are no longer assets
of the Company or any Company Subsidiary) binding obligations of the respective
obligers named therein except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors rights
generally, and except that the availability of
24
<PAGE>
equitable remedies, including specific performance, is subject to the discretion
of the court before which any proceeding may be brought, and the payment of no
material amount thereof (either individually or in the aggregate with other
evidences of indebtedness) is subject to any defenses which have been threatened
or asserted against the Company or any Company Subsidiary. All such indebtedness
which is secured by an interest in real property is secured by a valid and
perfected mortgage lien having the priority specified in the loan documents. All
loans originated or purchased by Savings were at the time entered into and at
all times since have been in compliance in all material respects with all
applicable laws (including, without limitation, all consumer protection laws)
and regulations. Savings administers its loan and investment portfolios
(including, but not limited to, adjustments to adjustable mortgage loans) in
accordance with all applicable laws and regulations and the terms of applicable
instruments. The records of Savings regarding all loans outstanding on its books
are accurate in all material respects and the risk classification system has
been established in accordance with the requirements of the OTS.
(b) Section 2.20 of Schedule I sets forth a list, accurate and
complete in all material respects, of the aggregate amounts of loans, extensions
of credit and other assets of Savings and its subsidiaries that have been
adversely designated, criticized or classified by it as of June 30, 1995,
separated by category of classification or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been adversely designated, classified or criticized as of the date
hereof by any representative of any government entity as "Special Mention,"
"Substandard," "Doubtful," "Loss" or words of similar import are excluded from
the amounts disclosed in the Asset Classification, other than amounts of loans,
extensions of credit or other assets that were charged off by it or any of its
Subsidiaries before the date hereof.
2.21 Real Estate Loans and Investments. Except for properties acquired in
---------------------------------
settlement of loans, there are no facts, circumstances or contingencies known to
the Company or any Company Subsidiary which exist which would require a material
reduction under generally accepted accounting principles in the present carrying
value of any of the real estate investments, joint ventures, construction loans,
other investments or other loans of the Company or any Company Subsidiary
(either individually or in the aggregate with other loans and investments).
2.22 Derivatives Contracts. Neither the Company nor any of its
---------------------
Subsidiaries is a party to or has agreed to enter into an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract or any other contract not included on its Balance Sheet which is a
derivatives contract (including various combinations thereof) (each, a
"Derivatives
25
<PAGE>
Contract") or owns securities that are identified in Thrift Bulletin No. 65 or
otherwise referred to as structured notes (each, a "Structured Note"), except
for those Derivatives Contracts and Structured Notes set forth in Section 2.22
of Schedule I, including a list, as applicable, of any of its or any of its
Subsidiaries' assets pledged as security for a Derivatives Contract.
2.23 Insurance. Except as set forth in Section 2.23 of Schedule I, the
---------
Company and the Company Subsidiaries have in effect insurance coverage with
reputable insurers which, in respect to amounts, types and risks insured, is
reasonably adequate for the business in which the Company and the Company
Subsidiaries are engaged. A schedule of all insurance policies in effect as to
the Company and the Company Subsidiaries (the "Insurance Policies") is as set
forth on Section 2.23 of Schedule I (other than policies pertaining to mortgage
loans made in the ordinary course of business). Except as set forth on Section
2.23 of Schedule I, all Insurance Policies are in full force and effect, all
premiums with respect thereto covering all periods up to and including the date
of this Agreement have been paid, such premiums covering all periods from the
date hereof up to and including the Acquisition Merger Effective Date shall have
been paid on or before the Acquisition Merger Effective Date, to the extent then
due and payable (other than retrospective premiums which may be payable with
respect to worker's compensation insurance policies, adequate reserves for which
are reflected in the Company's financial statements). The Insurance Policies are
valid, outstanding and enforceable in accordance with their respective terms and
will not in any way be affected by, or terminated or lapsed solely by reason of,
the transactions contemplated by this Agreement. Except as set forth on Section
2.23 of Schedule I, neither the Company nor any Company Subsidiary has been
refused any insurance with respect to any material properties, assets or
operations, nor has any coverage been limited or terminated by any insurance
carrier to which it has applied for any such insurance or with which it has
carried insurance during the last three years.
2.24 Preferred Stock.
---------------
(a) The Company is not in default or in arrears on dividends with
respect to the issued and outstanding shares of Company Preferred Stock, and
(ii) Company is not in default or in arrears with respect to the mandatory or
optional redemption, purchase or other acquisition, retirement or other
requirement of, or with respect to, any sinking or other similar fund or
agreement for the redemption, purchase or other acquisition, retirement or other
requirement of, or with respect to, any shares of Company Preferred Stock.
(b) The conversion price of the Company Preferred Stock, as adjusted
pursuant to Section 7(b) of Company's Statement Establishing Series of Preferred
Stock ($0.01 Par Value) $1.52
26
<PAGE>
Series A Cumulative Convertible Preferred Stock of Conservative Savings
Corporation, dated June 23, 1993 is $11.06195 per share of Company common stock
(equivalent to a rate of 2.26 shares of Company common stock for each share of
Company Preferred Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCIAL AND THE BANK
Commercial and the Bank represent and warrant to Company and Savings that,
except as disclosed in Schedule II attached hereto, and except that Bank makes
no representations or warranties regarding Commercial:
3.1 Organization, Good Standing, Authority, Insurance, Etc. Commercial
------------------------------------------------------
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Nebraska. Each of the subsidiaries of Commercial within
the meaning of Section 10(a)(1)(G) of HOLA (individually a "Commercial
Subsidiary" and collectively the "Commercial Subsidiaries") is duly organized,
validly existing, and in good standing under the laws of the respective
jurisdiction under which it is organized. Commercial and each Commercial
Subsidiary has all requisite power and authority and is duly qualified and
licensed to own, lease and operate its properties and conduct its business as it
is now being conducted. Commercial and each Commercial Subsidiary is qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which qualification is necessary under applicable law, except to
the extent that any failures to so qualify would not, in the aggregate, have a
material adverse effect on the business, financial condition or results of
operations of Commercial and the Commercial Subsidiaries, taken as a whole. The
Bank is a member in good standing of the Federal Home Loan Bank of Topeka, and
all eligible accounts issued by the Bank are insured by the SAIF to the maximum
extent permitted under applicable law. The Bank is a "domestic building and loan
association" as defined in Section 7701(a)(19) of the Code, and is a "qualified
thrift lender" as defined in Section 10(m) of the HOLA and the Thrift
Regulations. Commercial is duly registered as a savings and loan holding company
under the HOLA.
3.2 Capitalization. The authorized capital stock of Commercial consists
--------------
of 25,000,000 shares of Commercial common stock, par value $.01 per share, of
which 12,910,957 shares were issued and outstanding as of the date of this
Agreement and 10,000,000 shares of serial preferred stock, par value of $.01 per
share, of which no shares were outstanding as of the date of this Agreement. All
outstanding shares of Commercial common stock are duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights.
27
<PAGE>
3.3 Ownership of Subsidiaries. All the outstanding shares of the capital
-------------------------
stock of the Commercial Subsidiaries are validly issued, fully paid,
nonassessable and owned beneficially and of record by Commercial or a Commercial
Subsidiary free and clear of any Encumbrance. Except as disclosed in Section 3.3
of Schedule II, all of the outstanding capital stock or other ownership
interests in all of the Commercial Subsidiaries is owned either by Commercial or
the Bank. There are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any capital stock of any
Commercial Subsidiary and no contracts to which Commercial or any of its
affiliates is subject with respect to the issuance, voting or sale of issued or
unissued shares of the capital stock of any of the Commercial Subsidiaries.
3.4 Financial Statements and Reports. No registration statement, proxy
--------------------------------
statement, schedule or report filed by Commercial or any Commercial Subsidiary
with the SEC or the OTS under the 1933 Act, or the 1934 Act, on the date of
effectiveness in the case of such registration statements, or on the date of
filing in the case of such reports or schedules, or on the date of mailing in
the case of such proxy statements, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. For the past five years, Commercial and
the Commercial Subsidiaries have timely filed all documents required to be filed
by them with the SEC, the OTS, or the FDIC under various securities and
financial institution laws and regulations, except to the extent that all
failures to so file, in the aggregate, would not have a material adverse effect
on the business, financial condition or results of operations of Commercial and
the Commercial Subsidiaries, taken as a whole; and all such documents, as
finally amended, complied in all material respects with applicable requirements
of law and, as of their respective date or the date as amended, did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Except to
the extent stated therein, all financial statements and schedules included in
the documents referred to in the preceding sentences (or to be included in
similar documents to be filed after the date hereof) (i) are or will be (with
respect to financial statements in respect of periods ending after June 30,
1994) in accordance with Commercial's books and records and those of any of its
Subsidiaries, and (ii) present (and in the case of financial statements in
respect of periods ending after June 30, 1994 will present) fairly the
consolidated statement of financial condition and the consolidated statements of
operations, stockholders' equity and cash flows of Commercial and its
Subsidiaries as of the dates and for the periods indicated in accordance with
generally accepted accounting principles (except for the omission of notes to
28
<PAGE>
unaudited statements, year end adjustments to interim results and changes in
generally accepted accounting principles). The consolidated financial statements
of Commercial as of June 30, 1994 and for the three years then ended and the
consolidated financial statements for all periods thereafter up to the Closing
disclose or will disclose, as the case may be, all liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise, whether due or due to become
due and regardless of when asserted), as of their respective dates, of
Commercial and the Commercial Subsidiaries required to be reflected in such
financial statements according to generally accepted accounting principles,
other than liabilities which are not, in the aggregate, material to Commercial
and the Commercial Subsidiaries, taken as a whole, and contain or will contain
in the opinion of management adequate reserves for losses on loans and
properties acquired in settlement of loans, taxes and all other material accrued
liabilities and for all reasonably anticipated material losses, if any as of
such date. There exists no set of circumstances that could reasonably be
expected to result in any liability or obligation material to Commercial or the
Commercial Subsidiaries, taken as a whole, except as disclosed in such
consolidated financial statements at June 30, 1994, or for transactions effected
or actions occurring or omitted to be taken after June 30, 1994, (i) in the
ordinary course of business, or (ii) as permitted by this Agreement.
3.5 Absence of Changes. Since December 31, 1994, there has been no
------------------
material adverse change in the business, properties, financial condition,
results of operations or assets of Commercial and the Commercial Subsidiaries,
taken as a whole, other than any such change attributable to or resulting from
any change in law, regulation or generally accepted accounting principles which
impairs both the Company and Commercial in a substantially similar manner and
other than any change attributable to or resulting from changes in economic
conditions applicable to banking institutions generally or in general levels of
interest rates affecting both the Company and Commercial to a similar extent and
in a similar manner. There is no occurrence, event or development of any nature
existing or, to the best knowledge of Commercial, threatened which may
reasonably be expected to have a material adverse effect upon the business,
properties, financial condition, operations or assets of Commercial or any
Commercial Subsidiary, other than the effects of any such change attributable to
or resulting from any change in law, regulation or generally accepted accounting
principles which impairs both the Company and Commercial in a substantially
similar manner and other than the effects of any change attributable to or
resulting from changes in economic conditions applicable to banking institutions
generally or in general levels of interest rates affecting both the Company and
Commercial to a similar extent and in a similar manner.
3.6 Prospectus/Proxy Statement . At the time the Registration Statement
---------------------------
becomes effective and at the time the Prospectus/Proxy
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<PAGE>
Statement is mailed to the shareholders of the Company for the solicitation of
proxies for the approval referred to in Section 1.7 hereof and at all times
subsequent to such mailings up to and including the times of such approval, such
Registration Statement and Prospectus/Proxy Statement (including any amendments
or supplements thereto), with respect to all information set forth therein
relating to Commercial (including the Commercial Subsidiaries) and its
shareholders, Commercial common stock, this Agreement, the Merger and all other
transactions contemplated hereby, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
3.7 No Broker's or Finder's Fees. No agent, broker, investment banker,
----------------------------
person or firm acting on behalf or under authority of Commercial or any of the
Commercial Subsidiaries is or will be entitled to any broker's or finder's fee
or any other commission or similar fee directly or indirectly in connection with
the Merger or any other transaction contemplated hereby, except Commercial has
engaged Merrill Lynch & Co., an investment banking firm, to provide financial
advisory services and to deliver a "fairness opinion" as to whether or not the
Exchange Ratio is fair to Commercial's shareholders from a financial point of
view, whose fees and reasonable out-of-pocket expenses will be paid by
Commercial.
3.8 Compliance With Law.
-------------------
(a) Commercial and the Commercial Subsidiaries are in compliance in
all material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither Commercial nor any
Commercial Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
(b) Commercial and each of it Subsidiaries have all material permits,
licenses, certificates of authority, orders and approvals of, and have made all
material filings, applications and registrations with, all federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its respective business as it is presently conducted.
30
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3.9 Corporate Actions. The Boards of Directors of Commercial and the
-----------------
Bank have duly authorized their respective officers to execute and deliver (as
applicable) this Agreement, the Acquisition Plan of Merger, the Bank Plan of
Merger and the Option Agreement and to take all action necessary to consummate
the Merger and the other transactions contemplated hereby. All corporate
authorizations by the Board of Directors of Commercial required for the
consummation of the Merger have been obtained.
3.10 Authority. The execution, delivery and performance of this Agreement
---------
by Commercial and the Bank does not violate any of the provisions of, or
constitute a default under or give any person the right to accelerate payment or
performance under (i) the articles of incorporation or bylaws of Commercial, the
charter or bylaws of the Bank, or the articles of incorporation or bylaws or of
any other Commercial Subsidiary, (ii) any regulatory restraint on the
acquisition of the Company or Savings or control thereof, (iii) any law, rule,
ordinance or regulation or judgment, decree, order, award or governmental or
non-governmental permit or license to which Commercial or any of the Commercial
Subsidiaries is subject or (iv) any other Contract to which Commercial or any of
the Commercial Subsidiaries is a party or is subject to or by which any of their
properties or assets is bound which default, termination or acceleration would
have a material adverse effect on the financial condition, business or results
of operations of Commercial and the Commercial Subsidiaries, taken as a whole.
The parties acknowledge that the consummation of the Merger and the other
transactions contemplated hereby is subject to various regulatory approvals.
Commercial and the Bank have all requisite corporate power and authority to
enter into this Agreement and the Option Agreement and to perform their
obligations hereunder and thereunder. Other than the receipt of Governmental
Approvals, no consents or approvals are required on behalf of Commercial or any
Commercial Subsidiary in connection with the consummation of the transactions
contemplated by this Agreement, the Option Agreement or the Acquisition Plan of
Merger. This Agreement, the Option Agreement, the Acquisition Plan of Merger and
the Bank Plan of Merger constitute the valid and binding obligations of
Commercial and the Bank, and are enforceable in accordance with their terms,
except as enforceability may be limited by applicable laws relating to
bankruptcy, insolvency or creditors' rights generally and general principles of
equity.
3.11 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in writing by or on behalf of
Commercial to Company pursuant to this Agreement contains or will contain any
untrue statement of a material fact or any material omission. No information
material to the Merger and which is necessary to make the representations and
warranties not misleading, to the best knowledge of Commercial, has been
withheld from the Company.
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3.12 Litigation and Other Proceedings. Except for matters which would not
--------------------------------
have a material adverse effect on the business, financial condition or results
of operations of Commercial and the Commercial Subsidiaries taken as a whole,
neither Commercial nor any Commercial Subsidiary is a defendant in, nor is any
of its property subject to, any pending, or, to the best knowledge of the
management of Commercial, threatened, claim, action, suit, investigation, or
proceeding, or subject to any judicial order, judgment or decree.
3.13 Agreements and Instruments. As of the date of this Agreement, there
--------------------------
are no agreements, directives, orders or similar arrangements between or
involving Commercial or any Commercial Subsidiary and any state or federal
savings institution regulatory authority.
3.14 Cash Consideration. Commercial will have sufficient cash on hand to
------------------
pay the Common Stock Cash Consideration and the Preferred Stock Cash
Consideration as of the Acquisition Merger Effective Time.
3.15 Tax Matters. Commercial and each of the Commercial Subsidiaries
-----------
have duly and properly filed all federal, state, local and other tax returns
required to be filed by them and have made timely payments of all taxes due and
payable, whether disputed or not; except as set forth in Section 3.15 of
Schedule II, there is no agreement by Commercial or any Commercial Subsidiary
for the extension of time or for the assessment or payment of any taxes payable.
Except as set forth in Section 3.15 of Schedule II, neither the IRS nor any
other taxing authority is now asserting or, to the best knowledge of Commercial,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Commercial aware of any
basis for any such assertion or claim. Commercial and each of the Commercial
Subsidiaries have complied in all material respects with applicable IRS backup
withholding requirements and have filed all appropriate information reporting
returns for all tax years for which the statute of limitations has not closed.
Commercial and each Commercial Subsidiary have complied with all applicable
state law sales and use tax collection and reporting requirements.
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies. Between the date of this
---------------------------------
Agreement and the Acquisition Merger Effective Time, each party agrees to give
to the other party and its respective representatives and agents full access (to
the extent lawful) to all of the premises, books, records and employees of it
and its subsidiaries at all reasonable times, and to furnish and cause its
subsidiaries to furnish to the other party and its respective
32
<PAGE>
agents or representatives access to and true and complete copies of such
financial and operating data, all documents with respect to matters to which
reference is made in Articles II or III of this Agreement or on any list,
schedule or certificate delivered or to be delivered in connection herewith, and
such other documents, records, or information with respect to the business and
properties of it and its subsidiaries as the other party or its respective
agents or representative shall from time to time reasonably request; provided,
--------
however, that any such inspection (a) shall be conducted in such manner as not
- -------
to interfere unreasonably with the operation of the business of the entity
inspected and (b) shall not affect any of the representations and warranties
hereunder. Each party will also give prompt written notice to the other party of
any event or development (x) which, had it existed or been known on the date of
this Agreement, would have been required to be disclosed under this Agreement,
(y) which would cause any of its representations and warranties contained herein
to be inaccurate or otherwise materially misleading, or (z) which materially
relate to the satisfaction of the conditions set forth in Article V of this
Agreement.
4.2 Conduct of Business of the Company and the Company Subsidiaries.
---------------------------------------------------------------
Between the date of this Agreement and the Acquisition Merger Effective Time,
the Company and Savings agree:
(a) That the Company and the Company Subsidiaries shall conduct their
business only in the ordinary course, and maintain their books and records in
accordance with past practices and not to take any action that would (i)
adversely affect the ability to obtain the Governmental Approvals or (ii)
adversely affect the Company's ability to perform its obligations under this
Agreement or the Option Agreement;
(b) That the Company shall not, without the prior written consent of
Commercial: (i) declare, set aside or pay any dividend or make any other
distribution with respect to Company's capital stock, except for (i) the regular
quarterly dividends on the Company's common stock in an amount not to exceed
$0.03 per share per quarter, and (ii) the regular quarterly dividends on the
Company Preferred Stock in an amount not to exceed $0.38 per share per quarter,
in each case to be paid on the dates customarily fixed by the Company for the
payment of dividends; (ii) reacquire any of Company's outstanding shares of
capital stock; (iii) issue or sell or buy any shares of capital stock of the
Company or any Company Subsidiary, except shares of Company common stock issued
pursuant to the Company Option Plan; (iv) effect any stock split, stock dividend
or other reclassification of Company's common stock; or (v) grant any options or
issue any warrants exercisable for or securities convertible or exchangeable
into capital stock of Company or any Company Subsidiary or grant any stock
appreciation or other rights with respect to shares of capital stock of Company
or of any Company Subsidiary;
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(c) That Company and the Company Subsidiaries shall not, without the
prior written consent of Commercial: (i) sell or dispose of any significant
assets of the Company or of any Company Subsidiary other than in the ordinary
course of business consistent with past practices; (ii) merge or consolidate the
Company or any Company Subsidiary with or otherwise acquire any other entity, or
file any applications or make any contract with respect to branching by Savings
(whether de novo, purchase, sale or relocation) or acquire or construct, or
enter into any agreement to acquire or construct, any interest in real property
(other than with respect to security interests in properties securing loans and
properties acquired in settlement of loans in the ordinary course) or
improvements to real property; (iii) change the certificate of incorporation,
charter documents or other governing instruments of the Company or any Company
Subsidiary, except as provided in this Agreement; (iv) grant to any executive
officer, director or employee of the Company or any Company Subsidiary (A)
except as set forth in Section 4.2(c) of Schedule I, any increase in annual
compensation, or (B) except as set forth in Section 4.2(c) of Schedule I, any
bonus type payment; (v) adopt any new or amend or terminate any existing
Employee Plans or Benefit Arrangements of any type; (vi) authorize severance pay
or other benefits for any officer, director or employee of Company or any
Company Subsidiary; (vii) incur any material indebtedness or obligation or enter
into or extend any material agreement or lease, except in the ordinary course of
business consistent with past practices; (viii) engage in any lending activities
other than in the ordinary course of business consistent with past practices;
(ix) form any new subsidiary or cause or permit a material change in the
activities presently conducted by any Company Subsidiary or make additional
investments in subsidiaries; (x) purchase any debt securities or derivative
securities, including CMO or REMIC products, that are defined as "high risk
mortgage securities" under OTS Thrift Bulletin No. 52 dated January 10, 1992 as
revised or purchase any Derivatives Contracts or Structured Notes; (xi) purchase
any equity securities other than Federal Home Loan Bank stock; (xii) make any
investment which would cause Savings to not be a qualified thrift lender under
Section 10(m) of the HOLA, or not to be a "domestic building and loan
association" as defined in Section 7701(a)(19) of the Code; (xiii) make any loan
with a principal balance of $500,000 or more; (xiv) authorize capital
expenditures other than in the ordinary course of business; (xv) adopt or
implement any change in its accounting principles, practices or methods other
than as may be required by generally accepted accounting principles or adopt or
implement any change in its methods of accounting for Federal income tax
purposes; or (xvi) make any loan in which participation interests therein are to
be sold to other persons or entities or acquire a participation interest in a
loan originated by another person or entity. The limitations contained in this
Section 4.2(c) shall also be deemed to constitute limitations as to the making
of any commitment with respect to any of the matters set forth in this
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<PAGE>
Section 4.2(c). Notwithstanding the foregoing, Savings may engage in any of the
foregoing activities exclusively with the Bank.
4.3 No Solicitation. The Company will not authorize any officer,
---------------
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Company or any Company Subsidiary,
directly or indirectly, to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any "Takeover Proposal" (as such term
is defined below). Except as the fiduciary duties of the Company Board of
Directors may otherwise require (as determined in consultation with legal
counsel), the Company will not authorize any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of the Company or any Company Subsidiary, directly or indirectly,
(A) to cooperate with, or furnish or cause to be furnished any non-public
information concerning its business, properties or assets to, any person or
entity in connection with any Takeover Proposal; (B) to negotiate any Takeover
Proposal with any person or entity; or (C) to enter into any agreement, letter
of intent or agreement in principle as to any Takeover Proposal. The Company
will promptly give written notice to Commercial upon becoming aware of any
Takeover Proposal, such notice to contain, at a minimum, the identity of the
persons submitting the Takeover Proposal, a copy of any written inquiry or other
communication, the terms of any Takeover Proposal, any information requested or
discussions sought to be initiated and the status of any requests, negotiations
or expressions of interest. As used in this Agreement with respect to the
Company, "Takeover Proposal" shall mean any proposal, other than as contemplated
by this Agreement, for a merger or other business combination involving the
Company or Savings or for the acquisition of a ten percent (10%) or greater
equity interest in Company or Savings, or for the acquisition of a substantial
portion of the assets of Company or Savings (other than loans or securities sold
in the ordinary course).
4.4 Shareholder Approvals. The Company shall call the meeting of its
---------------------
shareholders to be held for the purpose of voting upon the Acquisition Merger
and related matters, as referred to in Section 1.7 hereof, as soon as
practicable, but in no event later than 45 days after the Registration Statement
becomes effective under the 1933 Act. In connection with such meeting, the
Company Board of Directors shall recommend approval of the Merger, except as the
fiduciary duties of the Company's Board of Directors may otherwise require. The
Company shall use its best efforts to solicit from its shareholders proxies in
favor of approval and to take all other action necessary or helpful to secure a
vote of the holders of the shares of Company common stock and Company Preferred
Stock in favor of the Merger, except as the fiduciary duties of the Boards of
Directors may otherwise require.
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4.5 Filing of Holding Company and Merger Applications. Commercial shall
-------------------------------------------------
use its best efforts promptly to prepare, submit and file a holding company
application to the OTS pursuant to 12 C.F.R. (S)574.3 for acquisition of control
of Company and Savings and a merger application to the OTS pursuant to the Bank
Merger Act and 12 C.F.R. 563.22(a) for the Bank Merger and any other
applications required to be filed in connection with the transactions
contemplated hereby.
4.6 Consents. Company and Savings will use their best efforts to obtain
--------
the consent or approval of each person whose consent or approval shall be
required in order to permit Company or Savings, as the case may be, to
consummate the Acquisition Merger and the Bank Merger.
4.7 Resale Letter Agreements. After execution of this Agreement, (i)
------------------------
Company shall use its best efforts to cause to be delivered to Commercial from
each person who may be deemed to be an "affiliate" of Company within the meaning
of Rule 145 under the 1933 Act, a written letter agreement regarding
restrictions on resale of the shares of Commercial common stock received by such
persons in the Merger to ensure compliance with applicable resale restrictions
imposed under the federal securities laws and (ii) neither Commercial nor the
Company (including the Company Subsidiaries) shall take any action which would
materially impede or delay consummation of the Merger, or prevent the
transactions contemplated hereby from qualifying as a reorganization within the
meaning of Section 368 of the Code; provided that nothing hereunder shall limit
the ability of Commercial to exercise its rights under the Option Agreement.
4.8 Publicity. Between the date of this Agreement and the Acquisition
---------
Merger Effective Time, neither Commercial, Company or any of their subsidiaries
shall, without the prior approval of the other, issue or make, or permit any of
its directors, employees, officers or agents to issue or make, any press
release, disclosure or statement to the press or any third party with respect to
the Merger or the transactions contemplated hereto, except as required by law.
The parties shall cooperate when issuing or making any press release, disclosure
or statement with respect to Merger or the transactions contemplated hereby,
except as required by law.
4.9 Cooperation Generally. Between the date of this Agreement and the
---------------------
Acquisition Merger Effective Time, Commercial, Company and their subsidiaries
shall use their best efforts, and take all actions necessary or appropriate, to
consummate the Merger and the other transactions contemplated by this Agreement
at the earliest practicable date.
4.10 Additional Financial Statements and Reports. As soon as reasonably
-------------------------------------------
practicable after they become publicly available, the Company shall furnish to
Commercial and Commercial shall furnish to
36
<PAGE>
the Company, respectively, its balance sheet and related statements of
operations, cash flows and stockholders' equity for all periods prior to the
Closing. Such financial statements will be prepared in conformity with generally
accepted accounting principles applied on a consistent basis and fairly present
the financial condition, results of operations and cash flows of the Company or
Commercial, as the case may be (subject, in the case of unaudited financial
statements, to (a) normal year-end audit adjustments, (b) any other adjustments
described therein and (c) the absence of notes which, if presented, would not
differ materially from those included in its most recent audited consolidated
balance sheet), and all of such financial statements will be prepared in
conformity with the requirements of Form 10-Q or Form 10-K, as the case may be,
under the 1934 Act.
4.11 Stock Listing. Commercial agrees to use all reasonable efforts to
-------------
cause to be listed on the New York Stock Exchange, subject to official notice of
issuance, the shares of Commercial common stock to be issued in the Merger.
4.12 Allowance for Loan and Real Estate Owned Losses. At the request of
-----------------------------------------------
Commercial and in an amount specified by Commercial, prior to the Acquisition
Merger Effective Time, the Company and Savings shall establish such additional
provisions for loan and real estate owned losses as may be necessary in the sole
determination of Commercial to conform the Company's and Savings' loan and real
estate owned allowance practices and methods to those of Commercial and the Bank
(as such practices and methods are to be applied to Company and Savings from and
after the Acquisition Merger Effective Time); provided, however, that Company
and Savings shall not be required to take such action until: (i) Company and
Savings provide to Commercial a written statement dated the date of Closing
certified by the Chairman of the Board, the President and the Chief Financial
Officer of the Company and Savings, that the conditions in Sections 5.1 and 5.2
to be satisfied by the Company or Savings or both of them have been satisfied by
either or both of them or, alternatively, setting forth in detail the
circumstances that have prevented such conditions from being satisfied (the
"Reliance Certificate"), and Commercial and Bank provide to Company and Savings
a Reliance Certificate relating to the satisfaction of the conditions in
Sections 5.1 and 5.3; and (ii) Commercial and the Bank, after reviewing the
Reliance Certificate, provide the Company and Savings a written waiver of any
right either entity may have to terminate the Agreement which waiver shall
contain an express condition precedent that Company and Savings have established
such additional provisions for loan and real estate losses as requested by
Commercial pursuant to this Section 4.12. No additional provision for loan and
real estate owned losses taken by Savings pursuant to this Section 4.12 shall be
deemed in and of itself to be a breach or violation of any representation,
warranty, covenant, condition or other provision of this Agreement.
37
<PAGE>
4.13 D&O Indemnification and Insurance. For a period of three (3) years
---------------------------------
following the Acquisition Merger Effective Time, Commercial agrees that the
Merger shall not affect or diminish any of the Company's duties and obligations
of indemnification existing as of the Acquisition Merger Effective Time in favor
of employees, agents, directors or officers of the Company or the Company
Subsidiaries arising by virtue of its Articles of Incorporation or Bylaws in the
form in effect at the date of this Agreement, or the resolutions dated August
23, 1992 contained in Section 4.13 of Schedule I, or arising by operation of
law. Commercial shall cause the persons serving as officers and directors of the
Company immediately prior to the Acquisition Merger Effective Time to be covered
for a period of 18 months from the Acquisition Merger Effective Time by the
directors' and officers' liability insurance policy maintained by the Company
(provided that Commercial may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are not materially
less advantageous than such policy) with respect to acts or omissions occurring
prior to the Acquisition Merger Effective Time which were committed by such
officers and directors in their capacity as such; provided, however, that in no
event shall Commercial be required to expend more than 150% of the amount
currently expended by the Company on an annual basis to maintain or procure
insurance coverage for such 18 month period pursuant hereto.
4.14 Tax Treatment. Commercial and Company shall use their best efforts
-------------
to cause the Merger to qualify as a reorganization under Section 368(a)(1) of
the Code.
4.15 Update Disclosure. From and after the date hereof until the
-----------------
Acquisition Merger Effective Time, Company shall promptly, but not less
frequently than monthly, update Schedule I hereto by notice to Commercial to
reflect any matters which have occurred from and after the date hereof which, if
existing on the date hereof, would have been required to be described therein
and which, in the case of all such updates other than the last such update prior
to the Acquisition Merger Effective Time, reflect a material change from the
information provided in Schedule I as of the date hereof; provided, however,
that no such update shall affect the conditions to the obligation of Company and
Savings to consummate the transactions contemplated hereby, and any and all
changes reflected in any such update shall be considered in determining whether
such conditions have been satisfied.
ARTICLE V
CONDITIONS OF THE MERGER; TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Commercial, the Bank, the
------------------
Company and Savings to effect the Acquisition Merger and the Bank Merger shall
be subject to the following conditions:
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(a) Stockholder Approval. The holders of the outstanding shares of
--------------------
Company common stock and Company Preferred Stock shall have approved this
Agreement and the Acquisition Merger as specified in Section 1.7 hereof or as
otherwise required by applicable law.
(b) No Proceedings. No order shall have been entered and remain in
--------------
force restraining or prohibiting the Merger in any legal, administrative,
arbitration, investigatory or other proceedings (collectively, "Proceedings") by
any governmental or judicial or other authority.
(c) Government Approvals. To the extent required by applicable law
--------------------
or regulation, all approvals of or filings with any governmental authority
(collectively, "Governmental Approvals"), including without limitation those of
the OTS, the FDIC, the Federal Trade Commission, DOJ, the SEC, and any state
securities or Blue Sky authorities, shall have been obtained or made and any
waiting periods shall have expired in connection with the consummation of the
Merger. All other statutory or regulatory requirements for the valid
consummation of the Merger and related transactions shall have been satisfied.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective and shall not be subject to a stop order of the SEC and,
if the offer and sale of Commercial's common stock in the Merger pursuant to
this Agreement is subject to the Blue Sky laws of any state, shall not be
subject to a stop order of any state securities commissioner.
(e) Federal Tax Opinion. Receipt of either an opinion of Deloitte &
-------------------
Touche LLP, or other tax advisor reasonably acceptable to Commercial and the
Company, or a private letter ruling from the IRS, in form and content reasonably
satisfactory to Commercial and the Company, and upon which Company shareholders
may rely to the effect that for federal income tax purposes:
. The Acquisition Merger should qualify as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. Company and Commercial
should each be a "party to a reorganization" within the meaning of
Code Section 368(b).
. Company should recognize no gain or loss on the transfer of its assets
to Commercial in exchange for the Commercial common stock, cash and
the assumption of its liabilities by Commercial, by reason of the
application of Code Sections 361(a), 361(b) and 357(a).
. No gain or loss should be recognized by Company upon the distribution
of the Commercial common stock to the
39
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Company shareholders, by reason of the application of Code Section
361(c)(1).
. No gain or loss should be recognized by Commercial on the receipt of
Company's assets in exchange for Commercial common stock, and the
assumption by Commercial of Company's liabilities, by reason of the
application of Code Section 1032(a).
. The basis of the assets of Company in the hands of Commercial should
be the same as the basis of such assets in the hands of Company
immediately prior to the Merger, by reason of the application of Code
Section 362(b).
. The holding period of the property acquired by Commercial from Company
should include the holding period of such property in the hands of
Company immediately prior to the Merger, by reason of the application
of Section 1223(2) of the Code.
. The gain, if any, to be realized by a Company shareholder who receives
Commercial stock and cash in exchange for Company stock will be
recognized, but not in excess of the amount of cash received. If the
exchange has the effect of the distribution of a dividend (determined
with application of Code Section 318(a)), then the amount of gain
recognized that is not in excess of each shareholder's ratable share
of undistributed earnings and profits will be treated as a dividend.
The determination of whether the exchange has the effect of the
distribution of a dividend will be made on a shareholder-by-
shareholder basis. No loss will be recognized on the exchange.
. The basis of the Commercial common stock (including fractional share
interests a Company shareholder would otherwise be entitled to
receive) received by a Company shareholder who exchanges Company
common stock for Commercial common stock and cash will be the same as
the basis of the Company common stock surrendered in the Merger,
decreased by the amount of cash received, and increased by the amount
of cash received that is treated as a dividend (if any), and by the
amount of gain recognized on the exchange (not including any portion
of that gain that was treated as a dividend).
. The holding period of the Commercial common stock (including
fractional share interests that they would otherwise be entitled to
receive) to be received by Company shareholders should, in each
instance, include the holding period of the Company shares surrendered
in the exchange, provided Company stock was held as a
40
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capital asset on the date of the Merger, by reason of the application
of Code Section 1223(1).
. Commercial as the Surviving Corporation should succeed to and take
into account as of the close of the day of the distribution or
transfer the items of Company described in Code Section 381(c),
subject to the conditions and limitations specified in Code Sections
381(b) and 381(c), by reason of the application of Code Section
381(a)(2).
. As provided in Code Section 381(c)(2) and Regulation Section
1.381(c)(2)-1 of the IRS, Commercial as the Surviving Corporation
should succeed to and take into account the earnings and profits, or
deficit in earnings and profits, of Company as of the date or dates of
transfer. Any deficit in earnings and profits of either Commercial or
Company will be used only to offset earnings and profits accumulated
after the date or dates of transfer.
. Cash received by a shareholder of Company otherwise entitled to
receive a fractional share of Commercial common stock in exchange for
his Company stock should be treated as if the fractional shares were
distributed as part of the Merger and then were redeemed by
Commercial. These cash payments should be treated as having been
received as distributions in full payment in exchange for the stock
redeemed as provided in Code Section 302(a). This receipt of cash
should result in gain or loss measured by the difference between the
basis of such fractional share interest and the cash received. Such
gain or loss should be capital gain or loss to the former Company
shareholder, provided the Company stock was a capital asset in such
former shareholder's hands and as such, will be subject to the
provisions and limitations of Subchapter P of Chapter 1 (Rev. Rul. 66-
365 and Rev. Rul. 77-41).
5.2 Conditions to Obligations of Commercial and Bank. The obligations of
------------------------------------------------
Commercial and Bank to effect the Merger and the transactions contemplated
herein shall be subject to the following additional conditions:
(a) Opinion of Counsel for Company. Commercial shall have received
------------------------------
from Baird, Holm, McEachen, Pedersen, Hamann & Straushiem, counsel to Company,
an opinion dated as of the Closing covering the matters to be set forth in
Exhibit 5.2(a).
(b) Required Consents. In addition to Governmental Approvals,
-----------------
Company and Savings shall have obtained all necessary third party consents or
approvals in connection with the Merger,
41
<PAGE>
the absence of which would materially and adversely affect Company and the
Company Subsidiaries, taken as a whole; in this connection, the Company and
Savings shall obtain consents from all lessors to their respective real estate
leases that may be required for consummation of the Merger.
(c) Company Accountants' Letter. Commercial shall have received
---------------------------
from Coopers & Lybrand LLP, letters dated the date of mailing the
Prospectus/Proxy Statement and the date of the Closing to the effect that: (i)
with respect to the Company they are independent accountants within the meaning
of the 1933 Act and 1934 Act and the applicable rules and regulations
thereunder, (ii) it is their opinion that the audited financial statements of
the Company included in the Prospectus/Proxy Statement comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and 1934 Act and the applicable published accounting rules and regulations
thereunder, (iii) on the basis of such procedures as are set forth therein but
without performing an examination in accordance with generally accepted auditing
standards nothing has come to their attention which would cause them to believe
that (A) any unaudited interim financial statements appearing in the
Prospectus/Proxy Statement do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and 1934 Act and the
published rules and regulations thereunder; (B) said financial statements are
not stated on a basis substantially consistent with that of the audited
financial statements; (C) (1) at the date of the latest available consolidated
financial statements of the Company and at a specific date not more than five
business days prior to the date of each such letter there has been, except as
specified in such letter, any increase in the outstanding capital stock, or
indebtedness for borrowed money of the Company (other than deposits and Federal
Home Loan Bank advances with a maturity of one year or less) or any decrease in
the stockholders' equity thereof as compared with amounts shown in the latest
statement of financial condition included in the Prospectus/Proxy Statement, or
(2) for the period from the date of the latest audited financial statements of
the Company included in the Prospectus/Proxy Statement to a specific date not
more than five business days prior to the date of each such letter, there were,
except as specified in such letter, any decreases, as compared with the
corresponding period in the preceding year, in consolidated net income for
Company or any increase, as compared with the corresponding period in the
preceding year, in the provision for loan losses for Company, (iv) they have
performed certain specific procedures as a result of which they determined that
certain information of an accounting, financial or statistical nature included
in the Prospectus/Proxy Statement and requested by Commercial and agreed upon by
such accountants, which is expressed in dollars (or percentages obtained from
such dollar amounts) and obtained from accounting records which are subject to
the internal controls of the Company's accounting system or which has been
derived directly from such
42
<PAGE>
accounting records by analysis or computation is in agreement with such records
or computations made therefrom (excluding any questions of legal
interpretation), and (v) on the basis of such procedures as are set forth in
such letter, nothing came to their attention with respect to the Company which
would cause them to believe that the pro forma financial statements had not been
properly compiled on the pro forma basis described therein.
(d) No Material Adverse Change. Between the date of this Agreement
--------------------------
and the date of Closing, there shall not have occurred any material adverse
change in the financial condition, business or results of operations of Company
and the Company Subsidiaries, taken as a whole, other than any such change
attributable to or resulting from any change in law, regulation or generally
accepted accounting principles which impair both the Company and Commercial in a
substantially similar manner, and other than any such change attributable to or
resulting from changes in economic conditions applicable to banking institutions
generally or in general levels of interest rates affecting both the Company and
Commercial to a similar extent and in a similar manner.
(e) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of the Company and
- ------------------------
Savings shall be true in all material respects at the Acquisition Merger
Effective Time with the same effect as though made at the Acquisition Merger
Effective Time (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); Company and Savings
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on their parts to be
performed or complied with at or prior to the Acquisition Merger Effective Time;
and Company shall have delivered to Commercial a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer and
chief financial officer, to such effect.
(f) No Litigation. Neither the Company nor any Company Subsidiary
-------------
shall be a party to any pending litigation, reasonably probable of being
determined adversely to the Company or any Company Subsidiary, which would have
a material adverse effect on the business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as a whole.
(g) Regulatory Approval. All Governmental Approvals required
-------------------
hereunder to consummate the transactions contemplated hereby shall have been
obtained without the imposition of any conditions which Commercial and the Bank
reasonably and in good faith determine to be unduly burdensome upon the conduct
of the business of Commercial or the Bank.
(h) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered
43
<PAGE>
hereunder shall be reasonably acceptable to Housley Goldberg Kantarian &
Bronstein, P.C., special counsel to Commercial and the Bank.
(i) Affiliates Letters. Commercial shall have received the letter
------------------
agreements from all affiliates of the Company as contemplated in Section 4.7(i)
herein.
(j) Fairness Opinion. Prior to mailing the Prospectus/Proxy
----------------
Statement, Commercial shall have received an updated written opinion from
Merrill Lynch & Co. to the effect that the Merger Consideration is fair to
Commercial from a financial point of view.
(k) Environmental Reports. Commercial, at its expense, shall have
---------------------
received a Phase I Environmental Risk Report (as contemplated in OTS Thrift
Bulletin #16) on (i) all commercial real estate owned of, (ii) all offices and
premises used as facilities by, and (iii) all properties which serve as security
for any commercial real estate loan having an original principal balance of
$1,000,000 or more of, the Company and Savings, such Reports or other reports
derived therefrom or supplemental thereto to be satisfactory to Commercial.
Commercial's right to terminate this Agreement due to failure of the condition
set forth in this Section 5.2(k) shall only be applicable if the costs to
cleanup, remove, remediate, or take any other action to bring any such property
or properties into material compliance with environmental laws exceed $100,000
in the aggregate and shall expire unless exercised by Commercial on or prior to
November 13, 1995.
(l) Rights Amendment. Neither a "Distribution Date" nor a "Share
----------------
Acquisition Date" nor a "Triggering Event" (as such terms are defined in the
Rights Agreement) shall have occurred, and the Rights shall not have become
redeemable or exercisable for capital stock of Commercial upon consummation of
the Acquisition Merger or the Bank Merger and the Company shall have, if
requested by Commercial, redeemed the Rights under the Rights Agreement for the
applicable redemption price immediately prior to the Acquisition Merger
Effective Time.
5.3 Conditions to Obligations of Company and Savings. The obligations of
------------------------------------------------
Company and Savings to effect the Acquisition Merger and the transactions
contemplated herein shall be subject to the following additional conditions:
(a) Opinion of Counsel for Commercial. Company shall have received
---------------------------------
from Housley Goldberg Kantarian & Bronstein, P.C., special counsel to
Commercial, and Fitzgerald, Schorr, Barmettler & Brennan, an opinion dated as of
the Closing covering the matters to be set forth in Exhibit 5.3(a).
44
<PAGE>
(b) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of Commercial and
- ------------------------
the Bank shall be true in all material respects at the Acquisition Merger
Effective Time with the same effect as though made at the Acquisition Merger
Effective Time (or on the date when made in the case of any representation or
warranty which specifically relates to an earlier date); Commercial and the Bank
shall have performed all obligations and complied with each covenant, in all
material respects, and all conditions under this Agreement on their parts to be
performed or complied with at or prior to the Acquisition Merger Effective Time;
and Commercial shall have delivered to Company a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer and
chief financial officer, to such effect.
(c) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered hereunder shall be
reasonably acceptable to Baird, Holm, McEachen, Pedersen, Hamann & Straushiem,
counsel to the Company.
(d) Fairness Opinion. Prior to mailing the Prospectus/Proxy
----------------
Statement, the Company shall have received an updated written opinion from Dain
Bosworth Incorporated to the effect that the consideration to be received by the
Company shareholders in the Acquisition Merger is fair from a financial point of
view to the stockholders of the Company.
(e) Commercial Common Stock. A certificate for the required number
-----------------------
of whole shares of Commercial common stock, as determined pursuant to Section
1.3 hereof, and cash for the Common Stock Cash Consideration and the Preferred
Stock Cash Consideration and for fractional share interests, as so determined,
shall have been delivered to the Exchange Agent.
(f) Required Consents. In addition to Governmental Approvals,
-----------------
Commercial and the Bank shall have obtained all necessary third party consents
or approvals in connection with the Merger, the absence of which would
materially and adversely affect Commercial and the Commercial Subsidiaries,
taken as a whole.
5.4 Termination of Agreement and Abandonment of Merger. This Agreement
--------------------------------------------------
and the Acquisition Plan of Merger may be terminated at any time before the
Acquisition Merger Effective Time, whether before or after approval thereof by
shareholders of Company, as provided below:
(a) Mutual Consent. By mutual consent of the parties, evidenced by
--------------
their written agreement.
(b) Closing Delay. At the election of either party, evidenced by
-------------
written notice, if the Closing shall not have occurred on or before June 30,
1996, or such later date as shall have been
45
<PAGE>
agreed to in writing by the parties; provided, however, that the right to
-------- -------
terminate under this Section 5.4(b) shall not be available to any party whose
failure to perform an obligation hereunder has been the cause of, or has
resulted in, the failure of the Closing to occur on or before such date.
(c) Conditions to Commercial Performance Not Met. By Commercial upon
--------------------------------------------
delivery of written notice of termination to Company if any event occurs which
renders impossible of satisfaction in any material respect one or more of the
conditions to the obligations of Commercial and the Bank to effect the Merger
set forth in Sections 5.1 and 5.2 and noncompliance is not waived by Commercial,
provided, however, that (i) Commercial's right to terminate this Agreement due
- -------- -------
to failure of the condition set forth in Section 5.2(k) shall expire unless
exercised by Commercial on or prior to November 13, 1995; and (ii) the right to
terminate under this Section 5.4(c) shall not be available to Commercial where
Commercial's or Bank's failure to perform an obligation hereunder has been the
cause of, or has resulted in, the failure of the Closing to occur on or before
such date.
(d) Conditions to Company Performance Not Met. By the Company upon
-----------------------------------------
delivery of written notice of termination to Commercial if any event occurs
which renders impossible of satisfaction in any material respect one or more of
the conditions to the obligations of Company and Savings to effect the Merger
set forth in Sections 5.1 and 5.3 and noncompliance is not waived by Company,
provided, however, that the right to terminate under this Section 5.4(d) shall
- -------- -------
not be available to the Company where the Company's or Savings' failure to
perform an obligation hereunder has been the cause of, or has resulted in, the
failure of the Closing to occur on or before such date.
(e) Average NYSE Closing Price. (i) By the Company at any time
--------------------------
during the two business day period commencing on the business day immediately
after the end of the Determination Period, if the Average NYSE Closing Price
shall be less than $26.00 (adjusted as indicated in Section 1.3(a)(vi)),
subject, however, to the following three sentences. If the Company elects to
exercise its termination right pursuant to this Section 5.4(e), it shall give
written notice to Commercial no later than the end of the aforementioned two day
period. During the two business day period commencing with the business day
after its receipt of such notice, Commercial shall have the option to increase
the consideration to be received by the holders of Company common stock and
Company Preferred Stock hereunder, by adjusting the Exchange Ratio to equal the
number (calculated to four decimal places) obtained by dividing (A) $7.07 by (B)
the Average NYSE Closing Price. If Commercial so elects within such two day
period, it shall give written notice to the Company no later than the end of the
aforementioned two day period of such election and the revised Exchange Ratio,
whereupon no termination shall have occurred pursuant to this Section 5.4(e)
46
<PAGE>
and this Agreement shall remain in effect in accordance with its terms (except
as the Exchange Ratio shall have been so modified).
(ii) By the Company if the Average NYSE Closing Price is less than $18.00,
in which event Commercial shall not have the option to increase the
consideration as provided in subparagraph (i) of this Section 5.4(e).
For purposes of this Section 5.4, "Average NYSE Closing Price" shall have
the meaning specified in Section 1.3(b) and "Determination Period" shall have
the meaning specified in Section 1.3(b).
ARTICLE VI
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
6.1 Termination; Lack of Survival of Representations and Warranties. In
---------------------------------------------------------------
the event of the termination and abandonment of this Agreement pursuant to
Section 5.4 of this Agreement, this Agreement shall become void and have no
effect, except that (i) the provisions of Sections 2.7 and 3.7 (Brokers and
Finders), 4.8 (Publicity), 6.2 (Expenses) and 8.2 (Confidentiality) of this
Agreement shall survive any such termination and abandonment, and (ii) a
termination pursuant to Sections 5.4(c) or 5.4(d) of this Agreement shall not
relieve the breaching party from liability for an uncured intentional and
willful breach of a representation, warranty, covenant, or agreement giving rise
to such termination.
The representations, warranties and agreements of the parties set forth in
this Agreement shall not survive the Acquisition Merger Effective Time, and
shall be terminated and extinguished at the Acquisition Merger Effective Time,
and from and after the Acquisition Merger Effective Time none of the parties
hereto shall have any liability to the other on account of any breach or failure
of any of those representations, warranties and agreement; provided, however,
-------- -------
that the foregoing clause shall not (i) apply to agreements of the parties which
by their terms are intended to be performed after the Acquisition Merger
Effective Time, and (ii) shall not relieve any person for liability for fraud,
deception or intentional misrepresentation.
6.2 Payment of Expenses. Each of the parties hereto shall bear and pay
-------------------
all costs and expenses incurred by it or on its behalf in connection with the
transactions contemplated hereunder.
Notwithstanding the above, Company and Savings shall reimburse Commercial
for all reasonable out-of-pocket expenses, not to exceed $500,000, actually
incurred by Commercial or any Commercial Subsidiary in connection with entering
into this Agreement and the Option Agreement and carrying out any or all of the
acts contemplated hereby if this Agreement is terminated under circumstances in
which the Board of Directors of the Company does
47
<PAGE>
not publicly recommend in the Prospectus/Proxy Statement that the Company's
stockholders approve and adopt this Agreement, or if after recommending in the
Prospectus/Proxy Statement that stockholders approve and adopt this Agreement,
the Board of Directors of the Company shall have withdrawn, modified or amended
such recommendation in any respect materially adverse to Commercial
ARTICLE VII
CERTAIN POST-MERGER AGREEMENTS
7.1 Reports to the SEC. Commercial shall continue to file all reports
------------------
and data with the SEC necessary to permit the shareholders of Company who may be
deemed "underwriters" (within the meaning of Rule 145 under the 1933 Act) of
Company common stock to sell the Company common stock received by them in
connection with the Merger pursuant to Rules 144 and 145(d) under such Act if
they would otherwise be so entitled.
7.2 Employees. Employees of the Company or Savings who become employees
---------
of Commercial or the Bank after the Acquisition Merger Effective Time shall be
eligible to participate in all benefit plans sponsored by Commercial or the Bank
to the same extent as other similarly situated Commercial or Bank employees.
Commercial shall honor all accrued vacation leave for the employees of Company
and the Company Subsidiaries following the Acquisition Merger Effective Time,
with full credit for prior service with Company or Savings for purposes of
vesting and eligibility for participation and co-payments and deductibles.
Commercial agrees that for a period of 90 days following the Acquisition Merger
Effective Time, any employee of the Company or Savings who is not, and has not
been, a party to an employment or severance agreement with Company or Savings
and whose employment terminates after the Acquisition Merger Effective Time
shall be entitled to receive payment for accrued vacation time, provided such
accrued vacation time does not exceed five weeks and a severance payment in
accordance with Exhibit 7.2 attached hereto.
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement may be
----------
amended, whether before or after any relevant approval of shareholders, by an
agreement in writing executed in the same manner as this Agreement and
authorized or ratified by the Boards of Directors of the parties hereto,
provided that, after the adoption of the Agreement by the shareholders of the
- -------------
Company, no such amendment without further shareholder approval may change the
amount or form of the consideration to be received by the Company shareholders
in the Merger.
8.2 Confidentiality. All information disclosed hereafter by any party to
---------------
this Agreement to any other party to this Agreement,
48
<PAGE>
including, without limitation, any information obtained pursuant to Sections 4.1
or 4.11 hereof, shall be kept confidential by such other party and shall not be
used by such other party otherwise than as herein contemplated except to the
extent that (i) it was known by such other party when received, (ii) it is or
hereafter becomes lawfully obtainable from other sources, (iii) it is necessary
or appropriate to disclose to the OTS, the FDIC or any other regulatory
authority having jurisdiction over the parties or their subsidiaries or as may
otherwise be required by law, or (iv) to the extent such duty as to
confidentiality is waived by the other party. In the event of the termination of
this Agreement, each party shall use all reasonable efforts to return upon
request to the other parties all documents (and reproductions thereof) received
from such other parties (and, in the case of reproductions, all such
reproductions made by the receiving party) that include information not within
the exceptions contained in the first sentence of this Section 8.2.
8.3 Governing Law. This Agreement and the legal relations between the
-------------
parties shall be governed by and construed in accordance with the laws of the
State of Nebraska without taking into account a provision regarding choice of
law, except to the extent certain matters may be governed by federal law by
reason of preemption.
8.4 Notices. Any notices or other communications required or permitted
-------
hereunder shall be sufficiently given if sent by registered mail or certified
mail, postage prepaid, addressed, if to Commercial or Company, to
Commercial Federal Corporation
2120 South 72nd Street
Omaha, Nebraska 68124
Attention: William A. Fitzgerald, Chairman of
the Board and Chief Executive
Officer
with a copy to:
Housley Goldberg Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, DC 20036
Attention: Gary R. Bronstein, Esq.
and
Conservative Savings Corporation
11207 West Dodge Road
Omaha, Nebraska 68154
Attention: Robert P. DeLay, President and Chief
Executive Officer
49
<PAGE>
with a copy to:
Baird, Holm, McEachen, Pedersen, Hamann & Strashiem
1500 Woodmen Tower
Omaha, Nebraska 68102
Attention: John S. Zeilinger, Esquire
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two business
days after the date of such mailing (except that the notice of change of address
shall not be deemed to have been given until received by the addressee). Notices
may also be sent by telegram, telex, facsimile transmission or hand delivery and
in such event shall be deemed to have been given as of the date received.
8.5 No Assignment. This Agreement may not be assigned by any of the
-------------
parties hereto, by operation of law or otherwise, except as contemplated hereby.
8.6 Headings. The description heading of the several Articles and
--------
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
8.7 Counterparts. This Agreement may be extended in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.8 Construction and Interpretation. Except as the context otherwise
-------------------------------
requires, (a) all references herein to any state or federal regulatory agency
shall also be deemed to refer to any predecessor or successor agency, and (b)
all references to state and federal statutes or regulations shall also be deemed
to refer to any successor statute or regulation.
8.9 Entire Agreement. This Agreement, together with the schedules,
----------------
lists, exhibits and certificates required to be delivered hereunder, and any
amendment hereafter executed and delivered in accordance with Section 8.1,
constitutes the entire agreement of the parties, and supersedes any prior
written or oral agreement or understanding among any of the parties hereto
pertaining to the Merger, except for the Confidentiality and Non-Disclosure
Agreement between the Company and Commercial dated October 7, 1994, as
supplemented July 13, 1995, which shall remain in full force and effect. This
Agreement is not intended to confer upon any other persons any rights or
remedies hereunder except as expressly set forth herein.
50
<PAGE>
8.10 Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
8.11 No Third Party Beneficiaries. Nothing in this Agreement shall
----------------------------
entitle any person (other than the Company, Savings, Commercial or the Bank and
their respective successors and assigns permitted hereby) to any claim, cause of
action, remedy or right of any kind, except as otherwise expressly provided
herein.
51
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunder duly authorized, all as of the
date set forth above.
COMMERCIAL FEDERAL CORPORATION CONSERVATIVE SAVINGS CORPORATION
By: ______________________________ By: ____________________
Name: Name: Robert P. DeLay
Title: Title: President and Chief
Chief Executive Officer
COMMERCIAL FEDERAL BANK, A CONSERVATIVE SAVINGS BANK, FSB
FEDERAL SAVINGS BANK
By: ______________________________ By: _____________________
Name: Name: Robert P. DeLay
Title: Title: President and Chief
Chief Executive Officer
52
<PAGE>
[DAIN BOSWORTH LOGO] CORPORATE FINANCE DEPARTMENT
August 15, 1995
The Board of Directors
Conservative Savings Corporation
11207 West Dodge Road
Omaha, Nebraska 68154
To the Board of Directors:
You have requested our opinion, as of the date hereof, as to the fairness, from
a financial point of view, to the stockholders of Conservative Savings
Corporation, a Nebraska corporation (the "Company"), of the consideration to be
received in connection with a Reorganization and Merger Agreement (the "Merger
Agreement") by and among Commercial Federal Corporation ("Commercial Federal")
and its wholly-owned subsidiary Commercial Federal Bank, a Federal Savings Bank
("Bank"), and the Company and its wholly-owned subsidiary Conservative Savings
Bank, FSB ("Savings"). Pursuant to the Merger Agreement, the Company will be
merged with and into Commercial Federal, and subsequently, Savings will be
merged with and into Bank (collectively, the "Merger").
The terms of the Merger are set forth in the Merger Agreement to be dated on or
about August 15, 1995, and are expected to include conversion of each share of
Company common stock into the right to receive $6.34 in cash, together with
fully registered and tradable common stock of Commercial Federal according to an
Exchange Ratio determined as follows: (i) a fraction of a share of Commercial
Federal's common stock determined by dividing $9.09 by the Average NYSE Closing
Price (defined below) of Commercial Federal's common stock if the Average NYSE
Closing Price is greater than $36.00; (ii) .2525 of a share of Commercial
Federal's common stock if the Average NYSE Closing Price is equal to or greater
than $28.00 but equal to or less than $36.00; (iii) a fraction of a share of
Commercial Federal's common stock determined by dividing $7.07 by the Average
NYSE Closing Price if the Average NYSE Closing Price is equal to or greater than
$26.00 but less than $28.00; and (iv) .2719 of a share of Commercial Federal's
common stock if the Average NYSE Closing Price is less than $26.00; provided
however, if the Average NYSE Closing Price is less than $26.00 but equal to or
greater than $18.00, the Exchange Ratio shall be adjusted if the Board of
Directors of the Company gives notice of its intention to terminate the Merger
and Commercial Federal subsequently exercises its right to nullify such
termination notice by increasing the stock portion of the consideration to be
received for each share of Company common stock such that the Exchange Ratio is
equal to a
<PAGE>
The Board of Directors
Conservative Savings Corporation
Page 2
fraction of a share of Commercial Federal's common stock determined by dividing
$7.07 by the Average NYSE Closing Price. If the Average NYSE Closing Price is
less than $18.00, the Board of Directors of the Company may terminate the Merger
without Commercial Federal having the right to complete the Merger by increasing
the consideration to be received by the Company's stockholders. Also, the Merger
Agreement is expected to specify that each share of the Company's outstanding
$1.52 Series A Cumulative Convertible Preferred Stock (the "Preferred Stock")
convertible into 2.26 shares of the Company's common stock shall be converted
into the right to receive $14.33 in cash, together with a number of shares of
Commercial Federal's common stock equal to the product of 2.26 and the Exchange
Ratio. In addition, the Merger will be subject to the approval of holders
representing two-thirds of the Company's issued and outstanding common stock and
two-thirds of the Company's issued and outstanding Preferred Stock. The Average
NYSE Closing Price will be based on the average closing price per share of
Commercial Federal's common stock on the New York Stock Exchange for the
twenty-fifth through sixth trading day, inclusive, immediately preceding the
business day prior to the later of the date (i) on which all requisite
regulatory approvals for the Merger are obtained and related waiting periods
have expired, and (ii) of the Company's meeting of stockholders to be held in
connection with the Merger.
Dain Bosworth Incorporated ("Dain Bosworth"), as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements, and valuations for estate, corporate, and other
purposes. In the ordinary course of business Dain Bosworth has published
research and made recommendations regarding the equity securities of the Company
and other companies in the thrift industry. Also, Dain Bosworth has acted as a
market maker in the equity securities of the Company and other publicly traded
companies in the thrift industry and, accordingly, periodically may have
positions in such securities. In addition, Dain Bosworth acted as managing
underwriter of a public offering of the Company's common stock and Preferred
Stock in June 1993.
In connection with this opinion, we have, among other things, reviewed certain
publicly available information regarding the Company and Commercial Federal and
other financial and operating information supplied to us by the Company,
including certain historical audited financial statements, certain internal
unaudited financial information, and certain financial projections relating to
the Company. We have visited the corporate offices of the Company and
Commercial Federal and have held discussions with members of the senior
management of both companies. In addition, we made inquiries of the management
of the Company and Commercial Federal regarding the past and current business
operations, financial condition, and future prospects for the respective
companies. We have reviewed preliminary drafts of the Merger Agreement and
drafts of selected other documents related to the Merger. In addition, we have
held discussions with senior management of both companies to understand their
reasons for completing the Merger.
<PAGE>
The Board of Directors
Conservative Savings Corporation
Page 3
We have analyzed the historical reported market prices and trading activity of
the common stock of the Company and Commercial Federal. We have compared
financial and stock market information on the Company and Commercial Federal to
similar information for certain publicly traded companies in the thrift
industry. We have also reviewed, to the extent publicly available, the terms of
selected relevant mergers and acquisitions, analyzed the general economic
outlook for companies in the thrift industry, and performed other studies and
analyses as we considered appropriate.
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independent verification of such information. It is understood that we were
retained by the Board of Directors of the Company, and that the Board of
Directors has not looked to us for independent verification with respect to the
financial and other information provided to us or publicly available, including
the projections provided to us relating to the Company. We have further relied
upon the assurances of management of the Company and Commercial Federal that
they are not aware of any facts that would make the information supplied to us,
or publicly available, inaccurate or misleading. Also, we have relied upon
assurances of management of the Company that their financial projections for the
Company have been prepared on a basis reflecting their best currently available
estimates and judgments. In addition, we have assumed that the Merger will
qualify as a tax-free reorganization within the meaning of Section 368 (a) of
the Internal Revenue Code of 1986.
Our opinion as expressed herein is limited to the fairness to stockholders of
the Company, from a financial point of view, of the consideration to be received
by such stockholders in connection with the Merger, and does not address the
Company's underlying business decision to proceed with the Merger. Furthermore,
we do not express any opinion as to the prices at which shares of Commercial
Federal's common stock may trade following the date of this opinion or at any
time in the future. We did not make an independent appraisal of the assets or
liabilities of either the Company or Commercial Federal, and we do not express
an opinion regarding the liquidation value of the Company or Commercial Federal.
Our opinion is based solely on information available to us on or before the date
hereof, and reflects general market, economic, financial, monetary, and other
conditions as of such date.
Dain Bosworth has acted as financial advisor to the Board of Directors of the
Company in connection with the Merger, has received a retainer in connection
with our retention as financial advisor, and will receive fees for our services
which are largely contingent upon our delivery of this opinion letter and upon
consummation of the Merger.
This opinion is for the Board of Directors of the Company, may not be
relied upon by any third party, and does not constitute a recommendation to any
stockholder of the Company as to how such stockholder should vote at the
stockholders' meeting to be held in connection with the Merger. Also, this
letter may not be reproduced, quoted, published, or referred to in any manner
<PAGE>
The Board of Directors
Conservative Savings Corporation
Page 4
in any registration statement, prospectus, proxy statement, or any other written
document, nor shall this letter be used for any other purposes, without Dain
Bosworth's prior written consent.
Based upon the foregoing, and other matters that we considered relevant, it is
our opinion that, as of the date hereof, the consideration to be received by the
stockholders of the Company pursuant to the terms of the Merger is fair to such
stockholders from a financial point of view.
Very truly yours,
/s/ Dain Bosworth Incorporated
DAIN BOSWORTH INCORPORATED
<PAGE>
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT dated as of August 16, 1995 between Commercial
Federal Corporation, a Nebraska Corporation ("Commercial"), and Conservative
Savings Corporation, a Nebraska Corporation ("Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Commercial and Company have approved a
Reorganization and Merger Agreement (the "Merger Agreement"), dated as of August
16, 1995, between Commercial and its wholly owned subsidiary, Commercial Federal
Bank, A Federal Savings Bank ("Bank"), and Company and its wholly owned
subsidiary, Conservative Savings Bank, FSB ("Savings"), providing, among other
things, for the acquisition of the Company by a wholly owned subsidiary of the
Bank (the "Acquisition Merger"). The Merger Agreement is being executed by the
parties simultaneously with this Agreement;
WHEREAS, as a condition to Commercial's entry into the Merger Agreement and
in consideration of such entry, the Company has agreed to grant to Commercial
the option set forth herein;
NOW THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Capitalized terms defined in the Merger Agreement and used herein
shall have the same meaning as in the Merger Agreement.
2.(a) The Company hereby grants to Commercial an option (the "Option"), to
be exercised in whole or in part from time to time as provided herein, to
purchase 367,354 shares of authorized and unissued or treasury shares of
Company's common stock at a price of $10.375 per share payable in cash as
provided in Section 3(f) hereof; provided, however, in the event the Company
issues or agrees to issue any shares of common stock (other than as permitted
under the Merger Agreement, including the exercise of outstanding stock options)
at a price less than $10.375 per share (as adjusted pursuant to Section 6
herein) such price shall be equal to such lesser price (such price, as adjusted
if applicable, the "Option Price"); and provided further, that such number of
shares shall be reduced by the number of shares, if any, beneficially owned by
Commercial as of the date of exercise. The number of shares of Company common
stock subject to option hereunder shall also be subject to adjustment as
provided in Section 6 herein.
(b) In the event that any additional shares of Company common stock are
issued or otherwise become outstanding after the date of this Agreement (other
than pursuant to this Agreement), the number of shares of Company common stock
subject to the Option shall be increased so that, after such issuance, it equals
19.9% of the number of shares of common stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the
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<PAGE>
Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement
shall be deemed to authorize Commercial or Company to breach any provision of
the Merger Agreement.
3.(a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, if, but only if, both an Initial Triggering Event (as hereinafter
defined) and a Subsequent Triggering Event (as hereinafter defined) shall have
occurred prior to the occurrence of an Exercise Termination Event (as
hereinafter defined), provided that the Holder shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 3) within
30 days following the first such Subsequent Triggering Event. Each of the
following shall be an Exercise Termination Event: (i) the Acquisition Merger
Effective Time (as defined in the Merger Agreement); (ii) termination of the
Merger Agreement in accordance with the provisions thereof if such termination
occurs prior to the occurrence of an Initial Triggering Event; or (iii) the
passage of twelve months after termination of the Merger Agreement if such
termination follows or occurs at the same time as the occurrence of an Initial
Triggering Event. The term "Holder" shall mean the holder or holders of the
Option (including Commercial or any subsequent transferee(s)).
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Company or any of its Subsidiaries (each a "Company
Subsidiary"), without having received Commercial's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person" for
purposes of this Agreement having the meaning assigned thereto in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, and the rules
and regulations thereunder (the "1934 Act") other than Commercial or any of
its Subsidiaries (each a "Commercial Subsidiary"). For purposes of this
Agreement, "Acquisition Transaction" shall mean (x) a merger or
consolidation, or any similar transaction, involving Company or any
Significant Subsidiary (as defined in Rule 1-02 of Regulation S-X
promulgated by the SEC) of Company, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of Company or any
Significant Subsidiary of Company, or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of
beneficial ownership of securities representing 10% or more of the Company
common stock or of any class of Company preferred stock or any Significant
Subsidiary of Company; provided that the term "Acquisition Transaction"
does not include any internal merger or consolidation involving only the
Company and/or Company Subsidiaries;
(ii)(A) Any person other than Commercial, or any Commercial
Subsidiary, or any Company Subsidiary acting in a fiduciary capacity
(collectively, "Excluded Persons"), alone or together with such person's
affiliates and associates (as such terms are defined in Rule 12b-2 under
the 1934 Act), shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 15% or more of the outstanding shares of
Company common stock or any class of Company preferred stock (the term
"beneficial ownership" for purposes of this Option Agreement having the
meaning assigned thereto in Section
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<PAGE>
13(d) of the 1934 Act, and the rules and regulations thereunder) or (B) any
group (as such term is defined in Section 13(d)(3) of the 1934 Act), other
than a group of which any Excluded Person is a member, shall have been
formed that beneficially owns 15% or more of the shares of Company common
stock or any class of Company preferred stock then outstanding;
(iii) Any person other than Commercial or any Commercial Subsidiary
shall have made a bona fide proposal to Company or its shareholders by
public announcement or written communication that is or becomes the subject
of public disclosure to (A) engage in an Acquisition Transaction or (B)
commence a tender or exchange offer the consummation of which would result
in such person acquiring beneficial ownership of securities representing
15% or more of Company's common stock or of any class of Company preferred
stock;
(iv) The Board of Directors of Company shall have failed to
recommend to its stockholders the adoption of the Merger Agreement or shall
have withdrawn, modified or changed in a manner adverse to Commercial such
recommendation or the Company shall fail to obtain shareholder approval of
the transactions contemplated by the Merger Agreement;
(v) Company shall have intentionally and knowingly breached any
representation, warranty, covenant or agreement contained in the Merger
Agreement and such breach (x) would entitle Commercial to terminate the
Merger Agreement (without regard to any grace period provided for therein)
and (y) shall not have been cured prior to the Notice Date (as defined
below); or
(vi) Any person other than Commercial or any Commercial Subsidiary,
other than in connection with a transaction to which Commercial has given
its prior written consent, shall have filed an application or notice with
the Office of Thrift Supervision ("OTS") or other federal or state bank
regulatory authority, which application or notice has been accepted for
processing, for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person other than an Excluded Person of
beneficial ownership of 25% or more of the then outstanding Company common
stock or of any class of Company preferred stock; or
(ii) The occurrence of the Initial Triggering Event described in
subparagraph (i) of subsection (b) of this Section 3, except that the
percentage referred to in clause (z) shall be 25%.
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<PAGE>
(d) Company shall notify Commercial promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event"), it being understood that the giving of such notice by
Company shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Company a written notice (the date of which is herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of the OTS or any other regulatory agency is
required in connection with such purchase, the Holder shall promptly file the
required notice or application for approval and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At each closing referred to in subsection (e) of this Section 3, the
Holder shall pay to Company the aggregate purchase price for the shares of
Company common stock purchased pursuant to the exercise of the Option in
immediately available funds by wire transfer to a bank account designated by
Company, provided that failure or refusal of Company to designate such a bank
account shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 3, Company shall
deliver to the Holder a certificate or certificates representing the number of
shares of Company common stock purchased by the Holder and, if the Option should
be exercised in part only, a new Option evidencing the rights of the Holder
thereof to purchase the balance of the shares purchasable hereunder.
(h) Certificates for Company common stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered holder
hereof and Company and to resale restrictions arising under the Securities
Act of 1933, as amended. A copy of such agreement is on file at the
principal office of Company and will be provided to the holder hereof
without charge upon receipt by Company of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933 ("1933 Act") in the above legend shall be removed
by delivery of substitute certificate(s) without such reference if the Holder
shall have delivered to Company a copy of a letter from the staff of the SEC, or
an opinion of counsel, in form and substance satisfactory to Company, to the
effect that such legend is not required for purposes of the 1933 Act; (ii) the
reference to the
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<PAGE>
provisions of this Agreement in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference; and (iii) the
legend shall be removed in its entirety if the conditions in the preceding
clauses (i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Company of the written notice of
exercise of the Option provided for under subsection (e) of this Section 3 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Company
common stock issuable upon such exercise, notwithstanding that the stock
transfer books of Company shall then be closed or that certificates representing
such shares of Company common stock shall not then be actually delivered to the
Holder. Company shall pay all expenses, and any and all United States federal,
state and local taxes and other charges that may be payable in connection with
the preparation, issue and delivery of stock certificates under this Section 3
in the name of the Holder or its assignee, transferee or designee.
4. Company agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
common stock so that the Option may be exercised without additional
authorization of common stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase common stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Company;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S)18a and regulations promulgated
thereunder and (y) in the event, under the Home Owners' Loan Act, as amended
("HOLA"), or the Change in Bank Control Act of 1978, as amended, or any state
banking law, prior approval of or notice to the OTS, or to any state regulatory
authority is necessary before the Option may be exercised, cooperating fully
with the Holder in preparing such applications or notices and providing such
information to the OTS or such state regulatory authority as they may require)
in order to permit the Holder to exercise the Option and Company duly and
effectively to issue shares of common stock pursuant hereto; and (iv) promptly
to take all action provided herein to protect the rights of the Holder against
dilution.
5. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Company, for other Agreements
providing for Options of different denominations entitling the holder thereof to
purchase, on the same terms and subject to the same conditions as are set forth
herein, in the aggregate the same number of shares of Company common stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein include
any Stock Option Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Company of evidence
reasonably
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<PAGE>
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Company will execute and deliver a new Agreement of
like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Company, whether
or not the Agreement so lost, stolen, destroyed or mutilated shall at any time
be enforceable by anyone.
6. In addition to the adjustment in the number of shares of Company common
stock that are purchasable upon exercise of the Option pursuant to Section 2 of
this Agreement, in the event of any change in Company common stock by reason of
stock dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares, distributions, or the like, the
type and number, and/or the price, of shares of Company common stock purchasable
upon exercise hereof shall be appropriately adjusted.
7. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Company shall, at the request of the Holder
delivered at the time of and together with a written notice of exercise in
accordance with Section 3(e) hereof (whether on its own behalf or on behalf of
any subsequent holder of this Option (or part thereof) or any of the shares of
Company common stock issued pursuant hereto), promptly prepare, file and keep
current a shelf registration statement under the 1933 Act covering any shares
issued or issuable pursuant to this Option and shall use its best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of common stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by the Holder. Company will
use its best efforts to cause such registration statement first to become
effective and then to remain effective for such period not in excess of 180 days
from the day such registration statement first becomes effective or such shorter
time as may be reasonably necessary to effect such sales or other dispositions.
The Holder shall have the right to demand not more than two such registrations
under this Agreement and all other agreements for which this agreement may be
exchanged pursuant to Section 5 hereof; provided, however, that Company shall be
required to bear the expenses related only to the first such registration, and
the Holder shall bear such expenses to the extent related to the second. The
foregoing notwithstanding, if, at the time of any request by the Holder for
registration of Option Shares as provided above, Company is in registration with
respect to an underwritten public offering of shares of Company common stock,
and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Holder's Option or Option Shares would interfere
with the successful marketing of the shares of Company common stock offered by
Company, the number of Option Shares otherwise to be covered in the registration
statement contemplated hereby may be reduced; and provided, however, that after
any such required reduction the number of Option Shares to be included in such
offering for the account of the Holder shall constitute at least 25% of the
total number of shares to be issued by the Holder and Company in the aggregate;
and provided further, however, that if such reduction occurs, then the Company
shall file a registration statement for the balance as promptly as practical and
no reduction shall thereafter occur. Each such Holder shall provide all
information
6
<PAGE>
reasonably requested by Company for inclusion in any registration statement to
be filed hereunder. If requested by any such Holder in connection with such
registration, Company shall become a party to any underwriting agreement
relating to the sale of such shares, but only to the extent of obligating itself
in respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements for the Company. Upon
receiving any request under this Section 7 from any Holder, Company agrees to
send a copy thereof to any other person known to Company to be entitled to
registration rights under this Section 7, in each case by promptly mailing the
same, postage prepaid, to the address of record of the persons entitled to
receive such copies.
8.(a) Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, (i) at the request of the Holder,
delivered within 30 days of such occurrence (or such later period as provided in
Section 11), Company shall repurchase the Option from the Holder at a price (the
"Option Repurchase Price") equal to (x) the amount by which (A) the market/offer
price (as defined below) exceeds (B) the Option Price, multiplied by the number
of shares for which this Option may then be exercised plus (y) Commercial's Out-
of-Pocket Expenses (as defined below) (to the extent not previously reimbursed)
and (ii) at the request of the owner of Option Shares from time to time (the
"Owner"), delivered within 30 days of such occurrence (or such later period as
provided in Section 9), Company shall repurchase such number of the Option
Shares from the Owner as the Owner shall designate at a price (the "Option Share
Repurchase Price") equal to (x) the market/offer price multiplied by the number
of Option Shares so designated plus (y) Commercial's Out-of-Pocket Expenses (to
the extent not previously reimbursed). The term "Out-of-Pocket Expenses" shall
mean Commercial's reasonable out-of-pocket expenses, not to exceed $500,000,
incurred in connection with the transactions contemplated by the Merger
Agreement, including, without limitation, legal, accounting and investment
banking fees. The term "market/offer price" shall mean the highest of (i) the
price per share of Company common stock at which a tender offer or exchange
offer therefor has been made, (ii) the price per share of Company common stock
to be paid by any third party pursuant to an agreement with Company, (iii) the
highest closing price for shares of Company common stock within the six-month
period immediately preceding the date the Holder gives notice of the required
repurchase of this Option or the Owner gives notice of the required repurchase
of Option Shares, as the case may be, or (iv) in the event of a sale of all or
substantially all of Company's assets, the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of Company
as determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, reasonably acceptable to the Company,
divided by the number of shares of common stock of Company outstanding at the
time of such sale. In determining the market/offer price, the value of
consideration other than cash shall be determined by a nationally recognized
investment banking firm selected by the Holder or Owner, as the case may be,
reasonably acceptable to the Company.
(b) The Holder and the Owner, as the case may be, may exercise its right
to require Company to repurchase the Option and any Option Shares pursuant to
this Section 8 by surrendering for such purpose to Company, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating
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<PAGE>
that the Holder or the Owner, as the case may be, elects to require Company to
repurchase this Option and/or the Option Shares in accordance with the
provisions of this Section 8. As promptly as practicable, and in any event
within five business days after the surrender of the Option and/or certificates
representing Option Shares and the receipt of such notice or notices relating
thereto, Company shall deliver or cause to be delivered to the Holder the Option
Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor
or the portion thereof that Company is not then prohibited under applicable law
and regulation from so delivering.
(c) To the extent that Company is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from repurchasing the
Option and/or the Option Shares in full, Company shall immediately so notify the
Holder and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the portion of the
Option Repurchase price and the Option Share Repurchase Price, respectively,
that it is no longer prohibited from delivering, within five business days after
the date on which Company is no longer so prohibited; provided, however, that if
Company at any time after delivery of a notice of repurchase pursuant to
paragraph (b) of this Section 8 is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from delivering to the
Holder and/or the Owner, as appropriate, the Option Repurchase Price and the
Option Share Repurchase Price, respectively, in full (and Company hereby
undertakes to use its best efforts to obtain all required regulatory and legal
approvals and to file any required notice of promptly as practicable in order to
accomplish such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the extent
of the prohibition, whereupon, in the latter case, Company shall promptly (i)
deliver to the Holder and/or the Owner, as appropriate, that portion of the
Option Purchase Price or the Option Share Repurchase Price that Company is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the
Holder, a new Stock Option Agreement evidencing the right of the Holder to
purchase that number of shares of common stock obtained by multiplying the
number of shares of common stock for which the surrendered Stock Option
Agreement was exercisable at the time of delivery of the notice of repurchase by
a fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator of which
is the Option Repurchase Price, or (B) to the Owner, a certificate for the
Option Share it is then so prohibited from repurchasing.
9. The 30-day period for exercise of certain rights under Sections 3, 7
and 8 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights, and for the expiration of all
statutory waiting periods; and (iii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
10. Company hereby represents and warrants to Commercial as follows:
(a) Company has full corporation power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly
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<PAGE>
and validly authorized by the Board of Directors of Company and no other
corporate proceedings on the part of Company are necessary to authorize this
Agreement or to consummate the transactions so contemplated. This Agreement has
been duly and validly executed and delivered by Company. This Agreement is the
valid and legally binding obligation of Company.
(b) Company has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Company common stock equal to the maximum number of shares of Company common
stock at any time and from time to time issuable hereunder, and all such shares,
upon issuance pursuant hereto, will be duly authorized, validly issued, fully
paid, nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Company has taken all necessary action to exempt this Agreement, and
the transactions contemplated hereby and thereby from, and this Agreement and
the transactions contemplated hereby and thereby are exempt from, (i) any
applicable state takeover laws, (ii) any state laws limiting or restricting the
voting rights of stockholders and (iii) any provision in its or any of its
subsidiaries' articles of incorporation, certificate of incorporation, charter
or bylaws restricting or limiting stock ownership or the voting rights of
stockholders. The Rights Amendment, as defined in the Merger Agreement, has been
executed by the parties thereto, is in full force and effect and will not be
rescinded, amended or terminated without the prior written consent of
Commercial. No other amendments will be made to the Rights Agreement (as defined
in the Merger Agreement) without the prior written consent of Commercial.
(d) The execution, delivery and performance of this Agreement does not or
will not, and the consummation by Company of any of the transactions
contemplated hereby will not, constitute or result in (i) a breach or violation
of, or a default under, its articles of incorporation or bylaws, or the
comparable governing instruments of any of its subsidiaries, or (ii) a breach or
violation of, or a default under, any agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation of it or any of its
subsidiaries (with or without the giving of notice, the lapse of time or both)
or under any law, rule, ordinance or regulation or judgment, decree, order,
award or governmental or nongovernmental permit or license to which it or any of
its subsidiaries is subject, that would, in any case referred to in this clause
(ii), give any other person the ability to prevent or enjoin Company's
performance under this Agreement in any material respect.
11. Commercial hereby represents and warrants to Company that:
(a) Commercial has corporate power and authority to enter into this
Agreement and, subject to any approvals or consents referred to herein, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action
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on the part of Commercial. This Agreement has been duly executed and delivered
by Commercial.
(b) This Option is not being acquired with a view to the public
distribution thereof and neither this Option nor any Option Shares will be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under applicable federal and state securities laws and
regulations.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except (i)
to any wholly-owned Subsidiary or (ii) that in the event a Subsequent Triggering
Event shall have occurred prior to an Exercise Termination Event, Commercial,
subject to the express provisions hereof, may assign in whole or in part its
rights and obligations hereunder to one or more transferees.
13. Each of Commercial and Company will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement.
14. Notwithstanding anything to the contrary herein, in the event that
the Holder or Owner or any Related Person thereof is a person making an offer or
proposal to engage in an Acquisition Transaction (other than the transactions
contemplated by the Merger Agreement), then (i) in the case of a Holder or any
Related Person thereof, the Option held by it shall immediately terminate and be
of no further force or effect and (ii) in the case of an Owner or any Related
Person thereof, the Option Shares held by it shall be immediately repurchasable
by Company at the Option Price. A Related Person of a Holder or Owner means any
Affiliate (as defined in Rule 12b-2 of the rules and regulations under the 1934
Act) of the Holder or Owner and any person that is the beneficial owner of 20%
or more of the voting power of the Holder or Owner, as the case may be.
15. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire the full number of shares of common
stock provided in Section 2(a) hereof (as adjusted pursuant to Section 2(b) or 6
hereof), it is the express intention of Company to allow the Holder to acquire
such lesser number of shares as may be permissible, without any amendment or
modification hereof.
10
<PAGE>
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
18. This Agreement shall be governed by and construed in accordance with
the laws of the State of Nebraska, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
19. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
20. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
21. Except as otherwise expressly provided herein, in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
COMMERCIAL FEDERAL CORPORATION
By: _________________________________
President
CONSERVATIVE SAVINGS CORPORATION
By: _________________________________
President
12
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment to Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
Amendment No. 1
CONSERVATIVE SAVINGS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
11207 West Dodge Road, Omaha, Nebraska
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Commission File Number 0-18831
Registrant hereby amends Item 6 in its Form 10-K Annual Report for the fiscal
year ended December 31, 1994, as set forth in the pages attached hereto.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSERVATIVE SAVINGS CORPORATION
By: /s/ Craig S. Allen
---------------------------
Craig S. Allen
Senior Vice President
Chief Financial Officer
Date: November 3, 1995
----------------
This document consists of 15 pages.
<PAGE>
On March 27, 1995 Conservative Savings Corporation (Conservative) filed SEC Form
10-K. Included therein information was provided pursuant to the requirements of
Item 6 - Selected Financial Data. Typographical errors have been found within
this Item which are hereby amended as described below:
Financial Condition Data:
<TABLE>
<CAPTION>
At June 30,
1993 1992 1991
--------------------------------------------------------------
As As As As As As
reported amended reported amended reported amended
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities available for
sale 163,966 54,090 54,090 40,622 40,622 29,825
<CAPTION>
At December 31,
1994 1993
-----------------------------------------
As As As As
reported amended reported amended
<S> <C> <C> <C> <C>
Other liabilities 1,981 1,926 1,435 1,255
</TABLE>
Selected Operations and Other
Data:
<TABLE>
<CAPTION>
Six months ended Fiscal year ended
December 31, June 30,
1992 1993
-----------------------------------------
As As As As
reported amended reported amended
<S> <C> <C> <C> <C>
Other income (loss) 1,413 1,403
Other expenses 4,683 4,673 2,409 9,409
Income (loss) before taxes and cumulative
effect of a change in accounting principle 11,085 4,085
Net income (loss) before cumulative effect of
a change in accounting principle 9,967 2,967
Net income 9,967 2,967
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
Summary of
Operations (1):
<TABLE>
<CAPTION>
For fiscal year ended June 30, 1993
Fourth Quarter
As reported As amended
-----------------------------------
<S> <C> <C>
Other income 1,155 1,129
Other expenses 2,430 2,404
</TABLE>
Attachment 1 details Item 6 as previously filed by Conservative on
March 27, 1995. The changes referred to above have been highlighted on this
attachment.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the financial
position of the Bank at the dates indicated.
Financial Condition Data:
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------- ---------------------------------------------
1994 1993 1993 1992 1991 1990
---------- --------- --------- --------- --------- ----------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Total assets.......................................... $ 392,454 $ 407,072 (1) $ 256,630 $ 249,908 $ 202,029 $ 186,659
Cash and cash equivalents............................. 5,634 7,631 10,159 5,553 682 12,024
wLoans receivable, net................................ 154,666 160,021 (1) 130,410 144,636 136,898 130,462
Investment securities available for sale.............. 22,034 (8) 45,642 43,409 41,312 18,770 10,803
Investment securities held-to-maturity................ 18,463 (8) - - - - -
Mortgage-backed securities available for sale......... 25,275 (8) 163,967 (2) 54,090 40,622 29,825 16,423
Mortgage-backed securities held-to-maturity........... 139,747 (8) - - - - -
Loans held for sale................................... 525 7,950 6,509 1,784 2,881 -
Federal Home Loan Bank stock.......................... 7,850 7,450 2,250 1,407 967 469
Certificates of deposit............................... - - - 295 788 5,367
Premises and equipment, net........................... 6,104 5,777 5,102 3,269 2,434 1,940
Real estate owned..................................... 955 29 29 1,284 1,379 2,289
Other assets.......................................... 8,582 (8) 5,997 (1) 2,679 7,103 5,093 4,909
Deposits.............................................. 207,114 229,428 (1) 193,923 223,717 170,629 166,588
FHLB borrowings....................................... 149,500 139,000 (2) 24,000 4,000 13,000 -
Other liabilities..................................... 1,926 1,255 1,477 2,152 881 1,737
Stockholders' equity.................................. 32,409 (8) 35,588 33,692 (3) 15,719 13,531 12,622
Book value per common share........................... 11.03 12.83 11.81 12.07 10.39 9.70
Tangible book value per common share.................. 8.87 10.41 10.90 7.48 7.18 6.72
Nonperforming assets to total assets.................. 0.33% 0.16% 0.16% .68% .94% 1.33%
Nonaccrual loans to total gross loans................. 0.17 0.36 0.27 .26 .36 .15
Allowance for estimated losses on loans to total
nonperforming loans................................... 292.0 182.4 205.9 195.0 213.2 352.3
</TABLE>
Selected Operations and Other Data:
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
------------------------ -------------------------
1994 1993 1993 1992
----------- ----------- ------- -----------
(Unaudited) (Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income.......................................... $ 27,838 $ 22,877 $ 12,410 $ 11,168
Interest expense......................................... (15,514) (11,640) (6,250) (6,009)
---------- ---------- ---------- ----------
Net interest income before provision for loan loss....... 12,324 11,237 6,160 5,159
Provision for loan loss (credit)......................... 190 (22) (22) 31
---------- ---------- --------- ----------
Net interest income after provision for loan loss........ 12,134 11,259 6,182 5,128
Other income (loss)...................................... 2,176 3,175 1,288 1,403
Other expenses........................................... 9,687 9,783 5,047 4,673
---------- ---------- --------- ----------
Income (loss) before taxes and cumulative effect of
a change in accounting principle................... 4,623 4,651 2,423 1,858
Income tax expense (benefit)............................. 1,132 1,008 509 619
---------- ---------- --------- ----------
Net income (loss) before cumulative effect of
a change in accounting principle................... 3,491 3,643 1,914 1,239
Cumulative effect of retroactive application of
a change in accounting principle (FAS 109)......... - 463 463 -
---------- ---------- --------- ----------
Net income............................................... $ 3,491 $ 4,106 $ 2,377 $ 1,239
========== ========== ========= ==========
Earnings (loss) per common and
common equivalent share.............................. $ 1.50 $ 2.35 $ 1.10 $ 0.94
========== ========== ========= ==========
Cash dividends per common share.......................... $ 0.120 $ 0.130 $ 0.080 (4) $ 0.075 (4)
========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
-------------------------------------------
1993 1992 1991 1990
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 21,635 $ 22,708 $ 17,815 $ 11,863
Interest expense......................................... (11,399) (13,826) (12,097) (8,321)
-------- -------- ------- --------
Net interest income before provision for loan loss....... 10,236 8,882 5,718 3,542
Provision for loan loss (credit)......................... 31 (219) 488 655
-------- -------- ------- --------
Net interest income after provision for loan loss........ 10,205 9,101 5,230 2,887
Other income (loss)...................................... 3,289 2,045 1,544 (18)
Other expenses........................................... 9,409 7,955 5,461 3,766
-------- -------- ------- --------
Income (loss) before taxes and cumulative effect of
a change in accounting principle................... 4,085 3,191 1,313 (897)
Income tax expense (benefit)............................. 1,118 906 403 (320)
-------- -------- ------- --------
Net income (loss) before cumulative effect of
a change in accounting principle................... 2,967 2,285 910 (577)
Cumulative effect of retroactive application of
a change in accounting principle (FAS 109)......... - - - -
-------- -------- ------- --------
Net income............................................... $ 2,967 $ 2,285 $ 910 $ (577)
======== ======== ======= ========
Earnings (loss) per common and
common equivalent share.............................. $ 2.22 $ 1.75 $ 0.70 $ (0.44)
======== ======== ======= ========
Cash dividends per common share.......................... $ 0.125 $ 0.075 $ - $ 0.185
======== ======== ======= ========
</TABLE>
Key Operating Ratios and Other Data:
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31, At or for fiscal year ended June 30,
------------------ ---------------- -----------------------------------------
1994 1993 1993 1992 1993 1992 1991 1990
------ ------ ------ ------ ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest margin....................... 3.19% 4.00% 3.88% 4.23% 4.20 % 3.97 % 3.41 % 3.11 %
Net interest spread....................... 2.88 3.63 3.58 4.05 4.02 3.75 2.78 2.49
Return (loss) on average assets........... 0.88 1.39 1.42 0.96 1.15 0.95 .52 (.48)
Return (loss) on average equity........... 10.30 15.58 13.71 15.26 17.32 15.39 6.75 (4.39)(5)
Dividend payout ratio..................... 1.00 5.54 7.27 7.98 5.62 4.27 - -
Stockholders' equity to total assets...... 8.26 8.74 8.74 6.41 13.13 6.20 7.73 10.87
Average interest-earning assets to
average interest-bearing liabilities 107.66 108.92 107.57 103.62 103.93 103.66 108.74 108.50
Ratio of earnings to fixed charges (6)
Including interest on deposits............ 1.30x 1.40x 1.39x 1.31x 1.36x 1.23x 1.11x .89x(7)
Excluding interest on deposits............ 1.74x 3.42x 2.85x 5.58x 5.02x 5.53x 29.23x -x(7)
Amount of loans serviced for others....... 527 23,341 23,341 286,230 30,388 340,949 204,800 177,537
Number of officers........................ 15 15 15 14 14 12 10 8
</TABLE>
(1) Includes the Overland Park, Kansas transaction of August 13, 1993, as
discussed in Item 7 and 8 contained herein. Also includes the impact of the
Bank's leveraged asset program commenced in July 1993, as discussed in Item
7 contained herein.
(2) Includes the impact of the Bank's leverage asset program commenced in July
1993, as discussed in Item 7 contained herein.
(3) Includes the impact of the $15.3 million of additional capital, in the form
of common and cumulative convertible preferred stock, raised in June 1993,
as discussed in Item 7 contained herein.
(4) Includes a $0.025 per common share special dividend during the quarters
ended September 30, 1993 and 1992, respectively.
(5) In 1990 a dividend of $0.185 was paid while the Bank recorded a net loss
per common share of $(0.445).
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before income taxes plus fixed charges. Fixed charges
represent interest expense plus one-third of net rental expense (which is
deemed representative of the interest factor).
(7) In 1990, earnings were inadequate to cover fixed charges by $897,000.
(8) Reflects the implementation of FAS 115, "Accounting for Certain Investment
in Debt Equity Securities."
3
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
For fiscal year ended
---------------------------------------------------------
December 31, 1994
---------------------------------------------------------
Fourth Third Second First
AVERAGE BALANCE SHEET DATA Quarter Quarter Quarter Quarter
- -------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets: (In thousands, except per share amounts)
Interest-earning deposits............................$ 1,936 $ 3,518 $ 9,058 $ 10,796
Certificates of deposit.............................. - - - -
Investment securities................................ 43,488 43,115 42,847 45,196
Mortgage-backed securities........................... 174,168 184,189 184,053 156,096
Loans:
Mortgages.......................................... 125,370 125,117 128,453 136,065
Consumer........................................... 27,744 26,821 24,765 23,743
------------ ------------ ----------- -------------
Total loans, net................................. 153,114 151,938 153,218 159,808
FHLB stock........................................... 7,850 7,850 7,726 7,450
------------ ------------ ----------- -------------
Total interest-earning assets...................... 380,556 390,610 396,902 379,346
Noninterest earning assets............................. 5,569 7,725 13,163 15,097
------------ ------------ ----------- -------------
Total assets.........................................$ 386,125 $ 398,335 $ 410,065 $ 394,443
============ ============ =========== =============
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................$ 161,887 $ 166,327 $ 168,787 $ 172,175
Savings............................................ 24,235 26,271 28,293 29,146
NOW and Money Market accounts...................... 23,381 24,570 25,556 26,120
------------ ------------ ----------- -------------
Total deposits.................................... 209,503 217,168 222,636 227,441
FHLB borrowings...................................... 141,003 145,735 147,801 126,091
------------ ------------ ----------- -------------
Total interest-bearing liabilities................. 350,506 362,903 370,437 353,532
Other noninterest-bearing liabilities.................. 3,273 3,373 4,303 5,011
------------ ------------ ----------- -------------
Total liabilities.................................... 353,779 366,276 374,740 358,543
Stockholders' equity................................... 32,346 32,059 35,325 35,900
------------ ------------ ----------- -------------
Total liabilities and stockholders' equity...........$ 386,125 $ 398,335 $ 410,065 $ 394,443
============ ============ =========== =============
<CAPTION>
SUMMARY OF OPERATIONS: (1)
- --------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits............................$ 23 $ 36 $ 88 $ 84
Certificates of deposit.............................. - - - -
Investment securities................................ 694 695 688 734
Mortgage-backed securities........................... 2,608 2,569 2,607 2,063
Loans:
Mortgages.......................................... 2,961 2,929 3,011 3,337
Consumer........................................... 598 584 537 521
------------ ------------ ----------- -------------
Interest on loans................................ 3,559 3,513 3,548 3,858
FHLB stock........................................... 109 109 106 147
------------ ------------ ----------- -------------
Total interest income.............................. 6,993 6,922 7,037 6,886
Interest expense:
Deposits:
Certificates....................................... 2,009 2,028 2,038 2,067
Savings............................................ 157 173 185 189
Now and Money Market accounts...................... 110 118 118 123
------------ ------------ ----------- -------------
Interest on deposits............................. 2,276 2,319 2,341 2,379
FHLB borrowings...................................... 1,939 1,693 1,499 1,068
------------ ------------ ----------- -------------
Total interest expense............................. 4,215 4,012 3,840 3,447
------------ ------------ ----------- -------------
Net interest income before loan loss provision......... 2,778 2,910 3,197 3,439
Provision for loan loss.............................. (42) 143 88 1
------------ ------------ ----------- -------------
Net interest income after provision for loan loss...... 2,820 2,767 3,109 3,438
Other income......................................... 474 730 433 540
Other expenses....................................... 2,285 2,416 2,377 2,610
------------ ------------ ----------- -------------
Income before taxes and cumulative effect of
a change in accounting principle................... 1,009 1,081 1,165 1,368
Income taxes......................................... 273 226 269 364
------------ ------------ ----------- -------------
Net income before cumulative effect of a
change in accounting principle..................... 736 855 896 1,004
Cumulative effect of retroactive application of a
change in accounting principle (FAS 109)........... - - - -
------------ ------------ ----------- -------------
Net Income.............................................$ 736 $ 855 $ 896 $ 1,004
============ ============ =========== =============
<CAPTION>
PER COMMON SHARE
- ----------------
<S> <C> <C> <C> <C>
Earnings per common and
common equivalent share............................$ 0.30 $ 0.36 $ 0.39 $ 0.45
Earnings per common share -
assuming full dilution............................. 0.25 0.29 0.31 0.35
Weighted average number of common and
common equivalent shares outstanding:
Primary............................................. 1,857,544 1,863,965 1,855,442 1,857,785
Fully diluted....................................... 2,897,144 2,903,562 2,895,041 2,897,382
Cash dividends declared and paid..................... 0.030 0.030 0.030 0.030
Market prices: (3)
High................................................ 12.50 13.75 12.75 13.00
Low................................................. 10.25 11.50 11.00 11.75
<CAPTION>
Six months ended For fiscal year ended
---------------------------- -----------------------------------------------
December 31, 1993 June 30, 1993
---------------------------- -----------------------------------------------
Second First Fourth Third Second First
AVERAGE BALANCE SHEET DATA Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------- ----------- ---------------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (In thousands, except per share amounts)
Interest-earning deposits............................$ 4,400 $ 9,041 $ 2,396 $ 6,335 $ 6,878 $ 2,599
Certificates of deposit.............................. - - - - 50 246
Investment securities................................ 45,115 45,129 43,379 45,121 46,394 44,522
Mortgage-backed securities........................... 125,059 74,197 54,343 51,661 51,143 45,182
Loans:
Mortgages.......................................... 148,809 127,487 117,785 116,366 121,105 122,391
Consumer........................................... 23,863 23,727 23,162 22,409 22,748 22,596
---------- ---------- ---------- --------- ----------- ----------
Total loans, net................................. 172,672 151,214 140,947 138,775 143,853 144,987
FHLB stock........................................... 5,182 2,430 1,999 1,414 1,407 1,407
---------- ---------- ---------- --------- ----------- ----------
Total interest-earning assets...................... 352,428 282,011 243,064 243,306 249,725 238,943
Noninterest earning assets............................. 18,057 18,395 12,262 14,843 14,448 14,534
---------- ---------- ---------- --------- ----------- ----------
Total assets.........................................$ 370,485 $ 300,406 $ 255,326 $ 258,149 $ 264,173 $ 253,477
========== ========== ========== ========= =========== ==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................$ 171,617 $ 166,781 $ 144,815 $ 157,327 $ 162,674 $ 166,929
Savings............................................ 29,897 29,395 26,850 25,550 24,302 24,474
NOW and Money Market accounts...................... 25,932 21,625 24,059 28,844 29,333 28,740
---------- ---------- ---------- --------- ----------- ----------
Total deposits.................................... 227,446 217,801 195,724 211,721 216,309 220,143
FHLB borrowings...................................... 102,489 42,071 34,682 24,452 24,000 11,159
---------- ---------- ---------- --------- ----------- ----------
Total interest-bearing liabilities................. 329,935 259,872 230,406 236,173 240,309 231,302
Other noninterest-bearing liabilities.................. 5,432 6,278 5,972 4,864 7,338 6,236
---------- ---------- ---------- --------- ----------- ----------
Total liabilities.................................... 335,367 266,150 236,378 241,037 247,647 237,538
Stockholders' equity................................... 35,118 34,256 18,948 17,112 16,526 15,939
---------- ---------- ---------- --------- ----------- ----------
Total liabilities and stockholders' equity...........$ 370,485 $ 300,406 $ 255,326 $ 258,149 $ 264,173 $ 253,477
========== ========== ========== ========= =========== ==========
<CAPTION>
SUMMARY OF OPERATIONS: (1)
- --------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits............................$ 45 $ 91 $ 24 $ 58 $ 53 $ 26
Certificates of deposit.............................. - - - - 1 6
Investment securities................................ 737 736 702 753 791 775
Mortgage-backed securities........................... 1,715 1,221 962 969 963 926
Loans:
Mortgages.......................................... 3,561 3,055 2,905 2,927 3,298 3,106
Consumer........................................... 545 570 562 534 568 605
---------- ---------- ---------- --------- ----------- ----------
Interest on loans................................ 4,106 3,625 3,467 3,461 3,866 3,711
FHLB stock........................................... 91 43 35 24 27 35
---------- ---------- ---------- --------- ----------- ----------
Total interest income.............................. 6,694 5,716 5,190 5,265 5,701 5,479
Interest expense:
Deposits:
Certificates....................................... 2,088 2,180 1,935 2,186 2,397 2,518
Savings............................................ 207 226 210 205 200 234
Now and Money Market accounts...................... 133 127 130 130 130 143
---------- ---------- ---------- --------- ----------- ----------
Interest on deposits............................. 2,428 2,533 2,275 2,521 2,727 2,895
FHLB borrowings...................................... 889 401 339 255 257 129
---------- ---------- ---------- --------- ----------- ----------
Total interest expense............................. 3,317 2,934 2,614 2,776 2,984 3,024
---------- ---------- ---------- --------- ----------- ----------
Net interest income before loan loss provision......... 3,377 2,782 2,576 2,489 2,717 2,455
Provision for loan loss.............................. (23) - - 1 3 28
---------- ---------- ---------- --------- ----------- ----------
Net interest income after provision for loan loss...... 3,400 2,782 2,576 2,488 2,714 2,427
Other income......................................... 634 656 1,129 757 606 797
Other expenses....................................... 2,733 2,316 2,404 2,319 2,287 2,399
---------- ---------- ---------- --------- ----------- ----------
Income before taxes and cumulative effect of
a change in accounting principle................... 1,301 1,122 1,301 926 1,033 825
Income taxes......................................... 216 293 309 189 370 250
---------- ---------- ---------- --------- ----------- ----------
Net income before cumulative effect of a
change in accounting principle..................... 1,085 829 992 737 663 575
Cumulative effect of retroactive application of a
change in accounting principle (FAS 109)........... - 463 - - - -
---------- ---------- ---------- --------- ----------- ----------
Net Income.............................................$ 1,085 $ 1,292 $ 992 $ 737 $ 663 $ 575
========== ========== ========== ========= =========== ==========
<CAPTION>
PER COMMON SHARE
- ----------------
<S> <C> <C> <C> <C>
Earnings per common and
common equivalent share............................$ 0.49 $ 0.60 $ 0.72 $ 0.56 $ 0.51 $ 0.44
Earnings per common share -
assuming full dilution............................. 0.38 0.45 0.70 0.56 0.51 0.44
Weighted average number of common and
common equivalent shares outstanding:
Primary............................................. 1,849,335 1,843,155 1,358,902 1,323,896 1,317,282 1,314,654
Fully diluted....................................... 2,889,875 2,885,311 1,419,562 1,325,746 1,319,536 1,314,876
Cash dividends declared and paid..................... 0.030 0.050 (2) 0.025 0.025 0.025 0.050 (2)
Market prices: (3)
High................................................ 12.50 11.50 11.50 11.00 9.75 8.75
Low................................................. 10.75 9.13 9.00 9.38 8.00 7.25
</TABLE>
___________________________
(1) Certain amounts from prior years have been reclassified to conform to
current year presentation.
(2) Includes a $0.025 per common share special dividend during the quarters
ended September 30, 1993, and 1992, respectively.
(3) Prices listed through August, 1992 represent the high and low bid in the
over-the-counter NASDAQ system.
4
<PAGE>
Average Balance Sheet
The table below sets forth for the periods indicated information with
regard to average balances of interest-earning assets and interest-bearing
liabilities, as well as the total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest spread, net interest margin and ratio of
average interest-earning assets to interest-bearing liabilities.
<TABLE>
<CAPTION>
For twelve months ended December 31,
----------------------------------------------------------------
1994 1993
---------------------------- --------------------------------
Average Interest Average Average Interest Average
balance earned yield or balance earned yield or
(1) or paid cost (2) (1) or paid cost (2)
------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits................... $ 6,327 $ 231 3.65 % $ 5,543 $ 219 3.95 %
Certificates of deposit..................... - - - - - -
Investment securities ...................... 43,661 2,810 6.44 44,686 2,940 6.58
Mortgage-backed securities.................. 174,626 9,847 5.64 76,315 4,867 6.38
Loans:
Real estate loans........................ 128,751 12,239 9.51 128,288 12,457 9.71
Consumer loans........................... 25,769 2,239 8.69 23,386 2,201 9.41
-------- -------- ------ -------- ------- -------
Total loans........................... 154,520 14,478 9.37 151,674 14,658 9.66
FHLB stock.................................. 7,719 471 6.10 2,756 193 7.00
-------- -------- ------ -------- ------- ------
Total interest-earning assets............ 386,853 27,837 7.20 280,974 22,877 8.14
-------- ------ ------- ------
Noninterest earning assets.................. 10,389 15,118
------- --------
Total assets............................. $ 397,242 $296,092
======== ========
Interest-bearing liabilities:
Deposits:
Certificates of deposit.................... $ 167,294 8,143 4.87 $ 159,498 8,389 5.26
Savings accounts........................... 26,986 703 2.61 28,137 847 3.01
Now and money market accounts.............. 24,907 469 1.88 25,136 521 2.07
-------- ------- ------ --------- ------- -------
Total deposits.......................... 219,187 9,315 4.25 212,771 9,757 4.59
FHLB borrowings............................... 140,158 6,199 4.42 45,182 1,883 4.17
-------- ------- ------ --------- ------- -------
Total deposits and
interest-bearing liabilities........ 359,345 15,514 4.32 257,953 11,640 4.51
------- ----- --------- ------- ------
Other noninterest-bearing liabilities........ 3,990 11,780
-------- ---------
Total liabilities........................ 363,335 269,733
Stockholders' equity......................... 33,907 26,359
-------- ---------
Total liabilities and
stockholders' equity................ $ 397,242 $ 296,092
======== ==========
Net interest income.......................... $ 12,323 $ 11,237
======= =======
Net interest spread.......................... 2.88 % 3.63 %
==== ====
Net interest margin.......................... 3.19 % 4.00 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 107.7% 108.9%
===== =====
<CAPTION>
For six months ended December 31,
-------------------------------------------------------------------
1993 1992
-------------------------------- ------------------------------
Average Interest Average Average Interest Average
balance earned yield or balance earned yield or
(1) or paid cost (2) (1) or paid cost (2)
------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits................... 6,721 $ 137 4.08 % $ 4,738 $ 78 3.29 %
Certificates of deposit..................... - - - 148 8 10.81
Investment securities ...................... 45,122 1,472 6.52 45,458 1,554 6.84
Mortgage-backed securities.................. 99,628 2,937 5.90 48,182 1,889 7.85
Loans:
Real estate loans........................ 138,148 8,818 9.58 121,749 6,404 10.52
Consumer loans........................... 23,795 1,115 9.37 22,672 1,173 10.35
--------- --------- -------- -------- -------- --------
Total loans........................... 161,943 7,731 9.55 144,421 7,577 10.49
FHLB stock.................................. 3,806 133 6.99 1,407 62 8.81
--------- --------- -------- -------- -------- --------
Total interest-earning assets............ 317,220 12,410 7.82 244,334 11,188 9.14
--------- -------- -------- --------
Noninterest earning assets.................. 18,226 14,491
--------- --------
Total assets............................. $ 335,446 $ 258,825
========= ========
Interest-bearing liabilities:
Deposits:
Certificates of deposit.................... $ 169,199 4,268 5.04 $ 164,801 4,914 5.96
Savings accounts........................... 29,646 433 2.92 24,388 434 3.56
Now and money market accounts.............. 23,779 260 2.18 29,037 274 1.88
--------- --------- -------- --------- -------- --------
Total deposits.......................... 222,624 4,961 4.46 218,226 5,622 5.16
FHLB borrowings............................... 72,280 1,289 3.56 17,580 387 4.40
--------- --------- -------- --------- -------- --------
Total deposits and
interest-bearing liabilities........ 294,904 6,250 4.24 235,806 6,009 5.10
--------- -------- -------- --------
Other noninterest-bearing liabilities........ 5,855 6,787
--------- ---------
Total liabilities........................ 300,759 242,593
Stockholders' equity......................... 34,687 16,232
--------- ---------
Total liabilities and
stockholders' equity................ $ 335,446 $ 258,825
========= =========
Net interest income.......................... $ 6,160 $ 5,159
========= ========
Net interest spread.......................... 3.58 % 4.05 %
==== ====
Net interest margin.......................... 3.88 % 4.22 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 107.6 % 103.6 %
===== ======
</TABLE>
____________________________________
(1) Average balances are based on daily averages and includes nonaccrual
loans.
(2) Average yields and costs are annualized.
5
<PAGE>
Average Balance Sheet (Continued)
The table below sets forth for the periods indicated information with
regard to average balances of interest-earning assets and interest-bearing
liabilities, as well as the total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest spread, net interest margin and ratio of
average interest-earning assets to interest-bearing liabilities.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------
1993
---------------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits............................................................ $ 4,552 $ 160 3.51 %
Certificates of deposit.............................................................. 74 8 10.81
Investment securities ............................................................... 44,854 3,021 6.74
Mortgage-backed securities........................................................... 50,582 3,820 7.55
Loans:
Real estate loans................................................................... 119,412 12,236 10.25
Consumer loans...................................................................... 22,729 2,269 9.98
------- ------- --------
Total loans........................................................................ 142,141 14,505 10.21
FHLB stock.......................................................................... 1,557 121 7.77
------- ------- --------
Total interest-earning assets....................................................... 243,760 21,635 8.88
------- --------
Noninterest earning assets........................................................... 14,021
-------
Total assets........................................................................ $ 257,781
=======
<CAPTION>
At June 30,
-----------------------------------
1992
-----------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- ------- --------
(Dollars in thousand)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits............................................................ $ 10,443 $ 602 5.76%
Certificates of deposit.............................................................. 752 70 9.31
Investment securities................................................................ 30,031 2,292 7.63
Mortgage-backed securities........................................................... 37,435 3,254 8.69
Loans:
Real estate loans................................................................... 121,164 13,466 11.11
Consumer loans...................................................................... 22,587 2,920 12.93
------- ------- -------
Total loans........................................................................ 143,751 16,386 11.40
FHLB stock........................................................................... 1,089 104 9.55
------- ------- -------
Total interest-earning assets....................................................... 223,501 22,708 10.16
------- -------
Noninterest earning assets........................................................... 16,100
-------
Total assets........................................................................ $ 239,601
=======
<CAPTION>
At June 30,
---------------------------------------
1993
---------------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................................................. $ 157,936 9,036 5.72
Savings accounts.................................................................... 25,294 848 3.35
Now and money market accounts....................................................... 27,744 535 1.93
------- -------- -------
Total deposits..................................................................... 210,974 10,419 4.94
FHLB borrowings...................................................................... 23,573 980 4.16
------- ------- -------
Total deposits and interest-bearing liabilities.................................... 234,547 11,399 4.86
------- -------
Other noninterest-bearing liabilities................................................ 6,103
-------
Total liabilities................................................................. 240,650
Stockholders' equity................................................................. 17,131
-------
Total liabilities and stockholders' equity............................................ $ 257,781
=======
Net interest income................................................................... $ 10,236
=======
Net interest spread.................................................................. 4.02 %
====
Net interest margin.................................................................. 4.20 %
====
Ratio of average interest-earning assets to average interest-bearing liabilities..... 103.93 %
======
<CAPTION>
At June 30,
-----------------------------------
1992
-----------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- ------- --------
(Dollars in thousand)
<S> <C> <C> <C>
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................................................. $ 160,420 11,530 7.19
Savings accounts.................................................................... 19,780 917 4.64
Now and money market accounts....................................................... 25,100 704 2.80
------- ------- ------
Total deposits..................................................................... 205,300 13,151 6.41
FHLB borrowings....................................................................... 10,314 675 6.54
------- ------- ------
Total deposits and interest-bearing liabilities..................................... 215,614 13,826 6.41
------- ------
Other noninterest-bearing liabilities................................................. 9,139
-------
Total liabilities................................................................... 224,753
Stockholders' equity................................................................. 14,848
Total liabilities and stockholders' equity............................................ -------
$ 239,601
=======
Net interest income................................................................... $ 8,882
=======
Net interest spread.................................................................. 3.75 %
====
Net interest margin.................................................................. 3.97 %
====
Ratio of average interest-earning assets to average interest-bearing liabilities..... 103.66 %
======
</TABLE>
____________________________
(1) Average blances are based on daily averages and inclueds nonaccrual loans.
(2) Average yields and cost are annualized.
6
<PAGE>
Rate / Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) change in rates (change
in rate multiplied by old volume), (2) change in volume (change in volume
multiplied by old rate), and (3) changes in rate volume (change in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
Twelve months ended Six months ended
Dec 31, 1994 vs. Dec 31, 1993 Dec 31, 1993 vs. Dec 31, 1992
increase (decrease) due to increase (decrease) due to
--------------------------------------- ---------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume volume Total
-------- ------ -------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income on:
Interest-bearing deposits.............. $ (16) $ 31 $ (3) $ 12 $ 18 $ 33 $ 8 $ 59
Certificates of deposit................ - - - - - (8) - (8)
Investment securities.................. (64) (67) 1 (130) (71) (11) - (82)
Mortgage-backed securities............. (564) 6,271 (727) 4,980 (469) 2,019 (502) 1,048
Loans:
Real estate loans.................... (262) 45 (1) (218) (574) 863 (77) 212
Consumer loans....................... (168) 224 (17) 39 (111) 58 (5) (58)
------- ------ ------- ------ ------- ------ ------ ------
Total loans........................ (430) 269 (18) (179) (685) 921 (82) 154
FHLB stock............................. (25) 347 (45) 277 (13) 105 (21) 71
------- ------ ------- ------ ------- ------ ------ ------
Total interest income................ (1,099) 6,851 (792) 4,960 (1,220) 3,059 (597) 1,242
------- ------ ------- ------ ------- ------ ------ ------
Interest expense on:
Deposits:
Certificates of deposit.............. (626) 410 (30) (246) (757) 131 (20) (646)
Savings accounts..................... (114) (35) 5 (144) (78) 94 (17) (1)
Demand and money market accounts..... (48) (5) 1 (52) 44 (49) (9) (14)
------- ------ ------- ------ ------- ------ ------ ------
Total deposits..................... (787) 371 (24) (442) (791) 176 (46) (661)
FHLB borrowings........................ 116 3,957 242 4,315 (73) 1,203 (228) 902
------- ------ ------- ------ ------- ------ ------ ------
Total interest expense............... (672) 4,327 218 3,873 (864) 1,379 (274) 241
------- ------ ------- ------ ------- ------ ------ ------
Net interest income.................... $ (427) $2,524 $(1,010) $1,087 $ (356) $1,680 $ (323) $1,001
======= ====== ======= ====== ======= ====== ====== ======
<CAPTION>
Fiscal year ended
June 30,1993 vs. June 30, 1992
increase (decrease) due to
-------------------------------------------
Rate/
Rate Volume volume Total
-------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits.............. $ (235) $ (340) $ 133 $ (442)
Certificates of deposit................ 11 (63) (10) (62)
Investment securities.................. (269) 1,131 (133) 729
Mortgage-backed securities............. (427) 1,143 (150) 566
Loans:
Real estate loans.................... (1,050) (195) 15 (1,230)
Consumer loans....................... (665) 18 (4) (651)
------- ------ ------ -------
Total loans........................ (1,715) (177) 11 (1,881)
FHLB stock............................. (20) 45 (8) 17
------- ------ ------ -------
Total interest income................ (2,655) 1,739 (157) (1,073)
------- ------ ------ -------
Interest expense on:
Deposits:
Certificates of deposit.............. (2,352) (179) 37 (2,494)
Savings accounts..................... (254) 256 (71) (69)
Demand and money market accounts..... (220) 74 (23) (169)
------- ------ ------ -------
Total deposits..................... (2,826) 151 (57) (2,732)
FHLB borrowings........................ (246) 867 (316) 305
------- ------ ------ -------
Total interest expense............... (3,072) 1,018 (373) (2,427)
------- ------ ------ -------
Net interest income.................... $ 417 $ 721 $ 216 $ 1,354
======= ====== ====== =======
</TABLE>
7
<PAGE>
LENDING ACTIVITIES
The Bank originates a wide variety of loans with an emphasis on one-to-four
family and multi-family mortgage loans, residential construction loans,and, to a
lesser extent, consumer loans. Mortgage loans secured by residential real estate
are expected to remain a major part of the Bank's business. The Bank's policy is
to originate ARMs, five-year and seven-year fixed-rate balloon loans and
selected 15-year fixed-rate mortgage loans for its own portfolio. Thirty-year
mortgage loans generally are sold servicing released to correspondent lenders on
a loan-by-loan basis. The bank had no agricultural loans at December 31, 1994.
Loan Originations. The table below sets forth the Bank's total loan
- -----------------
originations during the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
---------------------- -----------------------
1994 1993 1993 1992
--------- --------- ---------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family......................................$ 41,113 $ 107,732 $ 60,809 $ 51,287
Multi-family............................................ 5,852 11,207 3,497 4,638
Construction............................................ 19,775 19,863 9,829 8,834
Commercial.............................................. - - - -
Land.................................................... - - - -
Loans refinanced........................................ 4,342 4,579 2,127 5,327
---------- --------- ---------- ----------
Total real estate ................................. 71,082 143,381 76,262 70,086
Consumer...................................................... 19,531 18,059 9,119 8,323
---------- --------- ---------- ----------
Total loans originated.................................. 90,613 161,440 85,381 78,409
Loans purchased............................................... 23 41,263 40,995 201
Loans sold.................................................... (50,813) (109,810) (57,488) (46,722)
Loan principal repayments..................................... (52,189) (64,566) (35,212) (35,913)
Loans transferred to real estate owned........................ (1,534) (98) (72) (227)
Other increases (decreases)................................... 1,119 (5,132) (2,552) 2,707
---------- --------- ---------- ----------
Net change in loans.....................................$ (12,780) $ 23,097 $ 31,052 $ (1,545)
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
------------------------ -----------------------
1993 1992 1991 1990
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family......................................$ 98,210 $ 53,568 $ 41,774 $ 23,675
Multi-family............................................ 12,348 9,821 5,599 1,687
Construction............................................ 18,868 16,914 10,392 2,893
Commercial.............................................. - - - -
Land.................................................... - 600 - -
Loans refinanced........................................ 7,779 5,343 2,021 617
---------- ----------- ---------- ----------
Total real estate ................................. 137,205 86,246 59,786 28,872
Consumer...................................................... 17,263 15,337 14,735 13,014
---------- ----------- ---------- ----------
Total loans originated.................................. 154,468 101,583 74,521 41,886
Loans purchased............................................... 469 23,339 14,001 43,140
Loans sold.................................................... (99,044) (59,734) (44,163) (5,107)
Loan principal repayments..................................... (65,267) (55,457) (31,216) (21,558)
Loans transferred to real estate owned........................ (253) (656) (24) (49)
Other increases (decreases)................................... 127 (2,435) (3,802) (1,890)
---------- ----------- ---------- ----------
Net change in loans.....................................$ (9,500) $ 6,640 $ 9,317 $ 56,422
========== =========== ========== ==========
</TABLE>
Loan Portfolio Composition The table below sets forth the Bank's loan portfolio
- --------------------------
composition at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1994 1993
----------------- ----------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family....................$ 54,001 32.61 % $ 64,048 37.23 %
Multi-family.......................... 54,447 32.87 56,254 32.70
Construction.......................... 12,606 7.61 11,929 6.93
Commercial............................ 16,017 9.67 15,430 8.97
Land.................................. 169 0.10 176 0.10
-------- -------- -------- -------
Total real estate.............. 137,240 82.86 147,837 85.93
Consumer.............................. 28,383 17.14 24,214 14.07
-------- -------- -------- -------
Total loans, gross.............. 165,623 100.00 % 172,051 100.00 %
======== =======
Less:
Undisbursed portion of
loans in process.................. 7,272 7,191
Unearned discounts and
deferred loan fees................ 2,882 3,710
Allowance for estimated
losses on loans................... 803 1,129
------- ---------
Total loans, net......................$ 154,666 $ 160,021
======= =========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1993 1992 1991 1990
---------------- ---------------- ----------------- -------------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four-family.................... $ 54,597 39.03 % $ 77,700 50.40 % $73,137 51.01 % $ 84,424 63.46 %
Multi-family.......................... 33,890 24.23 28,266 18.33 26,234 18.30 6,734 5.06
Construction.......................... 11,712 8.37 8,515 5.52 3,585 2.50 2,076 1.56
Commercial............................ 15,572 11.13 16,202 10.51 15,601 10.88 15,383 11.56
Land.................................. 383 0.27 489 0.32 195 0.14 348 0.26
------- ------ ------ ------ ------- ------ ------- ------
Total real estate.............. 116,154 83.03 131,172 85.08 118,752 82.83 108,965 81.90
Consumer.............................. 23,739 16.97 22,996 14.92 24,622 17.17 24,077 18.10
------- ------ ------- ------ ------- ------ ------- ------
Total loans, gross.............. 139,893 100.00 % 154,168 100.00 % 143,374 100.00 % 133,042 100.00 %
====== ====== ====== ======
Less:
Undisbursed portion of
loans in process.................. 5,535 4,832 3,250 1,321
Unearned discounts and
deferred loan fees................ 3,179 3,914 2,098 558
Allowance for estimated
losses on loans................... 769 786 1,128 701
--------- ------- ------- -------
Total loans, net...................... $ 130,410 $ 144,636 $ 136,898 $ 130,462
========= ======= ======= =======
</TABLE>
Loan Origination Fees The table below sets forth information concerning loan
- ---------------------
origination fees and deferred origination fees on the
Bank's real estate loans for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
------------------ ------------------
1994 1993 1993 1992
--------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan origination fees received during the period...............$ 728 $1,108 $ 498 $ 732
Loan origination fees, expressed as a percentage of
total real estate loans originated during the period...... 1.02% 0.77% 0.65% 1.04%
Deferred loan origination fees on real estate loans
at the end of the period..................................$ 784 $ 933 $ 933 $ 664
<CAPTION>
Fiscal year ended June 30,
--------------------------------
1993 1992 1991 1990
------ ------- ------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loan origination fees received during the period...............$ 1,342 $ 1,181 $ 927 $ 162
Loan origination fees, expressed as a percentage of
total real estate loans originated during the period...... 0.98% 1.38% 1.55% 0.56%
Deferred loan origination fees on real estate loans
at the end of the period..................................$ 612 $ 654 $ 653 $ 558
</TABLE>
8
<PAGE>
Lending Activities (Continued)
Interest Rate Sensitivity. The table below sets forth the interest rate
-------------------------
sensitivity of the Bank's loan portfolio at December 31, 1994. This schedule
does not reflect the effects of possible prepayment or enforcement of due-on-
sale clauses.
<TABLE>
<CAPTION>
Total loans One-to-four family Multi-family Construction
----------------- ----------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate Amount Rate
------ ------- ------ --------- ------ ------- ------- ------
Adjustable rate loans due: (Dollars in thousands)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................$ 7,230 8.44% $ 113 6.27% $ 483 8.07% $ 6,634 8.50%
January 1, 1996 to December 31, 1997................ 526 6.61% 117 8.29% 409 6.12% - -
January 1, 1998 to December 31, 1999................ 202 8.62% 145 8.82% 57 8.12% - -
January 1, 2000 to December 31, 2004................ 9,647 8.41% 2,654 7.82% 6,993 8.63% - -
January 1, 2005 to December 31, 2014................ 17,675 7.92% 9,335 7.78% 8,340 8.07% - -
January 1, 2015 and following....................... 36,205 8.09% 16,910 7.43% 19,295 8.67% - -
--------- ------- ------- -------- --------- ------- ------ --------
Total.......................................... 71,485 8.11% $ 29,274 7.58% $ 35,577 8.48% $ 6,634 8.50%
--------- ------- ======= ======== ========= ======= ====== ========
<CAPTION>
Fixed rate loans due:
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 6,430 8.01% $ 96 10.27% $ 362 10.91% $ 5,972 7.79%
January 1, 1996 to December 31, 1997................ 2,728 10.05% 828 8.63% 1,900 10.67% - -
January 1, 1998 to December 31, 1999................ 3,776 8.66% 1,585 8.84% 2,191 8.53% - -
January 1, 2000 to December 31, 2004................ 5,192 8.77% 4,946 8.76% 246 8.80% - -
January 1, 2005 to December 31, 2014................ 8,252 8.35% 7,032 8.36% 1,220 8.30% - -
January 1, 2015 and following....................... 23,190 8.77% 10,239 8.88% 12,951 8.70% - -
--------- ------- ------- -------- --------- ------- ------ --------
Total.......................................... 49,568 8.66% $ 24,726 8.70% $ 18,870 8.90% $ 5,972 7.79%
--------- ------- ======= ======== ========= ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Commercial Land Consumer
-------------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
Adjustable rate loans due: (Dollars in thousands)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 1,687 9.36% $ 117 10.00% $ - - $ 1,570 9.31%
January 1, 1996 to December 31, 1997................ 278 6.95% 255 6.64% 3 10.50% 20 10.38%
January 1, 1998 to December 31, 1999................ 849 7.52% 815 7.41% - - 34 9.98%
January 1, 2000 to December 31, 2004................ 1,072 8.12% 1,009 8.00% - - 63 9.98%
January 1, 2005 to December 31, 2014................ 11,240 8.11% 10,950 8.10% 166 7.32% 124 10.00%
January 1, 2015 and following....................... 1,893 9.15% 1,089 8.72% - - 804 9.73%
-------- ------- -------- -------- ------- ------- ------- ---------
Total.......................................... 17,019 8.30% $ 14,235 8.09 $ 169 7.37% $ 2,615 9.50%
-------- ------- ======== ======== ======= ======= ======= =========
<CAPTION>
Fixed rate loans due:
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 2,666 8.58% $ 16 10.25% $ 1 11.23% $ 2,649 8.57%
January 1, 1996 to December 31, 1997................ 10,606 8.12% 416 10.03% - - 10,190 8.04%
January 1, 1998 to December 31, 1999................ 9,042 8.43% 43 7.75% - - 8,999 8.43%
January 1, 2000 to December 31, 2004................ 3,094 9.73% 150 10.36% - - 2,944 9.70%
January 1, 2005 to December 31, 2014................ 2,143 8.68% 1,157 9.35% - - 986 7.89%
January 1, 2015 and following....................... - - - - - - - -
-------- ------- -------- -------- ------- ------- ------- ---------
Total.......................................... 27,551 8.49% $ 1,782 9.56% $ 1 11.23% $ 25,768 8.41%
-------- ------- ======== ======== ======= ======= ======= =========
Total loans, gross................................... 165,623 8.36%
=======
Less:
Undisbursed portion of loans in process........... 7,272
Unearned discounts and deferred loan fees......... 2,882
Allowance for estimated losses on loans........... 803
---------
Total loans, net.....................................$ 154,666
=========
</TABLE>
9
<PAGE>
Nonperforming Assets
The Bank's nonperforming assets consist of nonaccrual loans and real estate
owned. Loans are placed on nonaccrual status when the collection of principal
and/or interest becomes doubtful. In addition, real estate loans and income-
producing property loans are placed on nonaccrual status when the loan becomes
90 days or more contractually delinquent. All consumer loans more than 120 days
delinquent are charged to allowance for loan losses. The Bank has no troubled
debt restructuring which involve forgiving a portion of interest or principal on
any loans or making loans (not delinquent more than 90 days) that management has
determined need to be closely monitored as the potential exists for increase
risk on these loans in the future.
The table below sets forth information regarding delinquent loans at
December 31, 1994. The amounts represent total remaining principal balances of
the related loans, rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Contractually Contractually
delinquent delinquent
60 to 89 days 90 days or more
------------------- -----------------------
Percent Percent
of total of total
delinquent delinquent
Amount loans Amount loans
------ -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family........................................................$ 251 53.18 % $ 17 6.18 %
Multi-family.............................................................. - - 116 42.18
Construction.............................................................. - - - -
Commercial................................................................ - - - -
Land...................................................................... - - - -
------- -------- --------- --------
Total delinquent real estate loans.................................... 251 53.18 133 48.36
Consumer loans.............................................................. 221 46.82 142 51.64
------- -------- --------- --------
Total delinquent loans................................................$ 472 100.00 % $ 275 100.00 %
======= ======== ========= ========
</TABLE>
The table below sets forth information with respect to the Bank's nonaccrual
loans, REO and total nonperforming assets at dates indicated.
<TABLE>
<CAPTION>
At
December 31, Fiscal year ended June 30,
------------------ -----------------------------------
1994 1993 1993 1992 1991 1990
-------- --------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate loans:
One-to-four-family...................................................$ 17 $ 120 $ 89 $ 113 $ 230 $ 29
Multi-family......................................................... 116 222 - 34 - -
Commercial........................................................... - - - - - -
Land................................................................. - 14 - - - -
Consumer................................................................. 142 263 284 256 299 170
------- ------ ------- ------ ------- -------
Total nonaccrual loans...............................................$ 275 $ 619 $ 373 $ 403 $ 529 $ 199
======= ====== ======= ====== ======= =======
Accruing loans delinquent more than 90 days:
Real estate loans:
One-to-four-family...................................................$ - $ - $ - $ - $ - $ -
Multi-family......................................................... - - - - - -
Commercial........................................................... - - - - - -
Land................................................................. - - - - - -
Consumer............................................................... - - - - - -
------- ------ ------- ------ ------- -------
Total accruing loans delinquent more than 90 days....................$ - $ - $ - $ - $ - $ -
======= ====== ======= ====== ======= =======
Other loans of concern:
Real estate loans:
One-to-four-family....................................................$ - $ - $ 107 $ 97 $ 85 $ 86
Multi-family........................................................... 911(3) 1,980 102 - - -
Commercial............................................................. - - - -(2) 1,060 1,485
Land................................................................... - - - - - -
Consumer............................................................... 401 673 809 978 1,484 289
------- ------ ------- ------ ------- -------
Total other loans of concern.........................................$ 1,312 $ 2,653 $ 1,018 $ 1,075 $ 2,629 $ 1,860
======= ====== ======= ====== ======= =======
Nonperforming assets:
Total nonperforming loans..............................................$ 275 619 373 403 $ 529 199
Real estate owned, gross............................................... 1,039 29 29 1,284 1,379 2,289
------- ------ ------- ------ ------- -------
Total nonperforming assets...........................................$ 1,314 648 402 1,687 $ 1,908 2,488
======= ====== ======= ====== ======= =======
Ratios:
Total nonperforming assets to total assets............................. 0.33 % 0.16 % 0.16 % 0.68 % 0.94 % 1.33 %
Total nonperforming loans to total assets.............................. 0.07 0.15 0.15 0.16 0.26 0.11
Total other loans of concern to total assets........................... 0.33 0.65 0.40 0.43 1.30 1.00
Total nonaccruing loans to total assets................................ 0.07 0.15 0.15 0.16 0.26 0.11
Allowance for estimated losses on loans to total nonperforming loans... 292.00 182.39 205.90 195.04 213.23 352.26
</TABLE>
_________________
(1) Interest income that would have been recorded on nonaccrual loans had they
remained current during the fiscal year ended December 31, 1994, the six
months ended December 31, 1993 and the fiscal years ended, June 30, 1992,
1991, and 1990 is not material in any period presented.
(2) Transferred $614,000 to real estate owned in November, 1991.
(3) Transferred $1,063,400 to real estate owned in fiscal year ended December
31, 1994.
10
<PAGE>
Allowance for Estimated Losses on Loans
The allowance for estimated losses on loans represents management's
recognition of the risks of extending credit and its evaluation of the loan
portfolio. The allowance is maintained at a level considered adequate to provide
for anticipated loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions and loss experience and an overall evaluation of the quality of the
underlying collateral, holding and disposal costs and costs of capital. The
allowance is increased by provisions charged to operations and reduced by loans
charged off, net of recoveries.
As a result of the decline in real estate market values in many parts of
the country and the significant losses experienced by many financial
institutions, there has been increased scrutiny by regulators of the loan
portfolios of financial institutions, particulary with regard to commercial real
estate and multi-family residential real estate loans. Management believes that
the Bank's allowance for estimated losses on loans is adequate to cover
anticipated losses and is in accordance with generally accepted accounting
principles. There can be no assurance, however, that management will not
determine to increase the allowance for estimated losses on loans or that
regulators, when reviewing the Bank's loan portfolio in the future, will not
request the Bank to increase such allowance, either of which would adversely
affect the Bank's earnings.
The table below sets forth information regarding changes in the Bank's
allowance for estimated losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended,
December 31, December 31,
------------------------ ------------------------
1994 1993 1993 1992
--------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period............................... $ 154,520 $ 151,674 $ 161,943 $ 144,421
========= ========= ========= =========
Allowance for loan losses:
Balance at beginning of period.................................. $ 1,129 $ 777 $ 768 $ 786
Charge-offs:
Real estate loans:
One-to-four family........................................ - - - (22)
Multi-family.............................................. (470) - - -
Commercial................................................ - - - -
Consumer loans............................................... (80) (55) (27) (36)
--------- --------- --------- ---------
Total charge-offs....................................... (550) (55) (27) (58)
Recoveries:
Real estate loans:
One-to-four family........................................ - - - -
Multi-family.............................................. - - - -
Commercial................................................ - - - -
Consumer loans............................................... 34 28 9 18
--------- --------- --------- ---------
Total recoveries.......................................... 34 28 9 18
--------- --------- --------- ---------
Net charge-offs................................................. (516) (27) (18) (40)
Provision charged (credited) to income............................. 190 (10) (23) 18
Market valuation allowance......................................... - 389 402 13
--------- --------- --------- ---------
Balance at end of period........................................... $ 803 $ 1,129 $ 1,129 $ 777
========= ========= ========= =========
Net charge-offs to average loans outstanding during period......... 0.33% 0.02% 0.01% 0.03%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
------------------------------------------------------
1993 1992 1991 1990
--------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period............................... $ 142,141 $ 143,751 $ 118,534 $ 80,317
========= ========= ========= =========
Allowance for loan losses:
Balance at beginning of period.................................. $ 786 $ 1,128 $ 701 $ 408
Charge-offs:
Real estate loans:
One-to-four family........................................ (22) (28) - -
Multi-family.............................................. - - - -
Commercial................................................ - -
Consumer loans............................................... (64) (147) (254) (408)
--------- --------- --------- ---------
Total charge-offs....................................... (86) (175) (254) (408)
Recoveries:
Real estate loans:
One-to-four family........................................ - 1 1 4
Multi-family.............................................. - - - -
Commercial................................................ - - - -
Consumer loans............................................... 37 30 53 43
--------- --------- ----------- ---------
Total recoveries.......................................... 37 31 54 47
--------- --------- ----------- ---------
Net charge-offs................................................. (49) (144) (200) (361)
Provision charged (credited) to income............................. 31 (219) 488 654
Market valuation allowance......................................... - 21 139 -
--------- --------- ----------- ---------
Balance at end of period........................................... $ 768 $ 786 $ 1,128 $ 701
========= ========= =========== =========
Net charge-offs to average loans outstanding during period......... 0.03% 0.10% 0.17% 0.45%
========= ========= =========== =========
</TABLE>
Allowances are provided for individual loans where ultimate collection is
questioned by management after reviewing collateral value and loans that are
contractually past due. The table below sets forth the allowance for estimated
losses on loans by loan category, at the dates indicated based upon management's
assessment of the risk associated with such categories.
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------- -----------------------------------------------
1994 1993 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unallocated allowance for loan losses: (In thousands)
Real estate loans:
One-to-four family............................... $ 67 $ 219 $ 144 $ 130 $ 241 $ 166
Multi-family..................................... 265 387 97 70 116 107
Commercial....................................... 34 15 1 39 98 119
Land............................................. - - 1 8 6 5
Consumer loans...................................... 437 508 525 539 667 304
-------- -------- -------- -------- -------- --------
Total unallocated allowance for loan losses............ $ 803 $ 1,129 $ 768 $ 786 $ 1,128 $ 701
======== ======== ======== ======== ======== ========
</TABLE>
11
<PAGE>
Investment Activities
The Bank maintains an investment portfolio comprised primarily of
obligations of agencies of the United States government, participation
certificates, real estate mortgage investment conduits and municipal bonds. The
Bank manages its investment portfolio to (i) complement Asset/Liability
management strategies, (ii) provide an adequate rate of return consistent with
targeted interest rate spread objectives, (iii) conform to the constraints of
applicable regulatory requirements and (iv) provide adequate liquidity. The
Bank's policy prohibits investment in high risk derivative securities, as
defined by the OTS.
The Bank has invested in municipal bonds to reduce its income tax expense.
The Bank's policy is to invest in general obligation municipal bonds rated AAA
or AA by Standard and Poor's in all states.
The table below sets forth the carrying values and estimated market value
of the Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1994 1993
------------------------------------- -------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
---------- --------- -------- --------- --------- --------
Available for sale: (Dollars in thousands)
- -------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government agencies......... $ 5,084 $ 4,750 7.38 % $ 23,818 $ 24,317 7.08 %
Municipal bonds.................. 17,136 17,284 6.26 21,824 23,668 9.20
-------- -------- ------ --------- --------- ------
Total....................... 22,220 22,034 6.51 45,642 47,985 8.09
-------- -------- ------ --------- --------- ------
Mortgage-backed securities:
Participation certificates....... 20,339 18,854 6.60 44,967 45,841 7.09
Real estate mortgage
investment conduits........... 6,735 6,421 6.59 118,999 119,190 5.24
-------- -------- ------ --------- --------- ------
Total....................... 27,074 $ 25,275 6.60 % $ 163,966 $ 165,031 5.75 %
-------- -------- ------ --------- --------- ------
Total securities
available for sale.............. $ 49,294 $ 47,309 6.56 % $ 209,608 $ 213,016 6.26 %
======== ======== ====== ========= ========= ======
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1993 1992
------------------------------------- -------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
---------- --------- -------- --------- --------- --------
Available for sale: (Dollars in thousands)
- -------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government agencies......... $ 23,855 $ 24,504 7.07 % $ 27,416 $ 28,253 7.81 %
Municipal bonds.................. 19,554 21,009 9.12 13,896 14,279 9.44
-------- -------- ------ --------- --------- ------
Total....................... 43,409 45,513 7.99 41,312 42,532 8.36
-------- -------- ------ --------- --------- ------
Mortgage-backed securities:
Participation certificates....... 43,844 45,469 7.60 21,396 22,228 9.08
Real estate mortgage
investment conduits........... 10,246 10,361 7.35 19,226 19,282 7.47
-------- -------- ------ --------- --------- ------
Total....................... $ 54,090 $ 55,830 7.55 % $ 40,622 $ 41,510 8.32 %
-------- -------- ------ --------- --------- ------
Total securities
available for sale.............. $ 97,499 $101,343 7.75 % $ 81,934 $ 84,042 8.34 %
======== ======== ====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity: At December 31, 1994
- ---------------- -------------------------------------------
Estimated
Amortized fair
cost value Yield
--------- --------- -------
Investment securities: (Dollars in thousands)
<S> <C> <C> <C>
U S government agencies........................................................ $ 15,492 $ 14,853 6.88 %
Municipal bonds................................................................ - - -
Corporate bonds................................................................ 2,971 2,940 7.42
-------- -------- -----
Total..................................................................... 18,463 17,793 6.96
-------- -------- -----
Mortgage-backed securities:
Participation certificates..................................................... - - -
Real estate mortgage investment conduits....................................... 139,747 131,450 5.20
-------- -------- -----
Total..................................................................... 139,747 131,450 5.20
-------- -------- -----
Total securities held-to-maturity................................................. $ 158,210 $ 149,243 5.40 %
======== ======== =====
</TABLE>
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities available for sale at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------
Total
------------------------------
Estimated
Amortized fair
cost value Yield
--------- --------- -----
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes........... $ 5,084 $ 4,750 7.38%
Municipal bonds....................................... 17,136 17,284 6.27
-------- -------- ------
Total............................................... 22,220 22,034 6.51
-------- -------- ------
Participation certificates:
Federal National Mortgage Association................. 2,434 2,284 7.01
Federal Home Loan Mortgage Corporation................ 17,905 16,570 6.56
-------- -------- ------
Total............................................... 20,339 18,854 6.61
-------- -------- ------
Real estate mortgage investment conduits:
Federal National Mortgage Association................. 5,020 4,767 6.52
Federal Home Loan Mortgage Corporation................ 1,479 1,429 6.71
Government National Mortgage Association.............. 236 226 7.39
-------- -------- ------
Total............................................... 6,735 6,421 6.59
-------- -------- ------
Total securities available for sale...................... $149,294 $ 47,309 6.56%
======== ======= ======
<CAPTION>
At December 31, 1994
-------------------------------------------------------------------
Within one year After one but less than five years
------------------------------ ----------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
--------- --------- ----- ---------- --------- -------
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes........... $ - $ - -% $ - $ - -%
Municipal bonds....................................... - - - 200 210 6.85
------- ------- ----- ------ ------ -----
Total............................................... - - - 200 210 6.85
------- ------- ----- ------ ------ -----
Participation certificates:
Federal National Mortgage Association................. - - - - - -
Federal Home Loan Mortgage Corporation................ - - - 3,100 2,932 6.90
------- ------- ----- ------ ------ -----
Total............................................... - - - 3,100 2,932 6.90
------- ------- ----- ------ ------ -----
Real estate mortgage investment conduits:
Federal National Mortgage Association................. - - - - - -
Federal Home Loan Mortgage Corporation................ - - - 1,001 973 6.49
Government National Mortgage Association.............. - - - - - -
------- ------- ----- ------ ------ -----
Total............................................... - - - 1,001 973 6.49
------- ------- ----- ------ ------ -----
Total securities available for sale...................... $ - $ - -% $4,301 $4,115 6.80%
======= ======= ===== ====== ====== =====
</TABLE>
12
<PAGE>
INVESTMENT ACTIVITIES (Continued)
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities available for sale at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
--------------------------------------------------------------------------
After five but within 10 years After 10 years
----------------------------------- ---------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
--------- --------- --------- --------- --------- -------
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes...... $ 5,084 $ 4,750 7.38 % $ - $ - - %
Muncipal bonds...................................... 7,823 8,121 6.69 9,113 8,953 5.88
-------- -------- -------- -------- -------- -------
Total.................................... 12,907 12,871 6.94 9,113 8,953 5.88
-------- -------- -------- -------- -------- -------
Participation certificates:
Federal National Mortgage Association............ - - - 2,434 2,284 7.01
Federal Home Loan Mortgage Corporation........... 1,228 1,124 5.56 13,577 12,514 6.57
-------- -------- -------- -------- -------- -------
Total.................................... 1,228 1,124 5.56 16,011 14,798 6.64
-------- -------- -------- -------- -------- -------
Real estate mortgage investment conduits:
Federal National Mortgage Association............ - - - 5,020 4,767 6.52
Federal Home Loan Mortgage Corporation........... - - - 478 455 7.17
Government National Mortgage Association......... - - - 236 226 7.39
-------- -------- -------- -------- -------- -------
Total.................................... - - - 5,734 5,448 6.61
-------- -------- -------- -------- -------- -------
Total securities available for sale................. $ 14,135 $ 13,995 6.83 % $ 30,858 $ 29,199 6.40 %
======== ======== ======== ======== ======== =======
</TABLE>
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities held-to-maturity at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------------------------------------------
After one but
Total Within one year within five years
-------------------- ----------------- --------------------
Amortized Amortized Amortized
Investment securities held-to-maturity: cost Yield cost Yield cost Yield
- --------------------------------------- --------- ----- ------ ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal Home Loan Bank bonds...................... $ 15,492 6.88 % $ - - % $ 10,492 6.53 %
Corporate bonds...................................... 2,971 7.42 - - 2,971 7.42
-------- ----- ----- ----- -------- -----
Total......................................... 18,463 6.96 - - 13,463 6.73
-------- ----- ----- ----- -------- -----
Real estate mortgage investment conduits:
Federal National Mortgage Association ............ 61,166 5.39 - - - -
Federal Home Loan Mortgage Corporation ........... 77,621 5.04 - - - -
Government National Mortgage Association.......... 960 6.52 - - - -
-------- ----- ----- ----- -------- -----
Total......................................... 139,747 5.20 - - - -
-------- ----- ----- ----- -------- -----
Total securities held-to-maturity ................... $ 158,210 5.41 % $ - - % $ 13,463 6.73 %
======== ===== ===== ===== ======== =====
<CAPTION>
At December 31, 1994
-----------------------------------------------
After five but
within 10 years After 10 years
-------------------- -------------------
Amortized Amortized
Investment securities held-to-maturity: cost Yield cost Yield
- --------------------------------------- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government agencies:
Federal Home Loan Bank bonds...................... $ - - % $ 5,000 7.60 %
Corporate bonds...................................... - - - -
-------- ----- -------- -----
Total......................................... - - 5,000 7.60
-------- ----- -------- -----
Real estate mortgage investment conduits:
Federal National Mortgage Association ............ - - 61,166 5.39
Federal Home Loan Mortgage Corporation ........... - - 77,621 5.04
Government National Mortgage Association.......... - - 960 6.52
-------- ----- -------- -----
Total......................................... - - 139,747 5.20
-------- ----- -------- -----
Total securities held-to-maturity ................... $ - - % $ 144,747 5.29 %
======== ===== ======== =====
</TABLE>
13
<PAGE>
Sources of Funds
The Bank's primary sources of funds were FHLB borrowings, scheduled loan
payments and prepayments, proceeds from loan sales and customer deposits.
Scheduled loan repayments are relatively stable sources of funds, while deposit
inflows and outflows and unscheduled loan repayments, which are influenced
significantly by general interest rate levels, interest rates available on other
investments, competition, economic conditions and other factors, are not.
Borrowings may be used on a short-term basis (one year or less) to compensate
for reductions in the sources of funds (such as deposit inflows at less than
projected levels). Borrowings may also be used on a long-term basis to support
expanded lending activities and to match the maturity or repricing intervals of
assets.
Deposit Activities
Deposit activities are affected by changes in economic conditions, changes
in interest rates (i.e. movement in the U.S. Treasury based yield curve) and
competition among depository institutions and other investment alternatives. The
Bank's current deposit products include savings accounts, checking accounts,
money market deposit accounts and certificates of deposit with varying
maturities ranging from 90 days to ten years. The Bank's certificate accounts
are issued in non-negotiable form through their branch offices.
Current management of the Bank emphasizes the development of core deposit
relationships because such deposits provide a more stable source of funds for
operations and because core deposit customers are more likely to purchase other
bank services. Core deposits include checking, savings and money market deposit
accounts. The Bank's market research indicates that its core deposit customers
purchase more bank services than its other customers. The Bank's retail sales
personnel have focused on developing long-term, core deposit relationships
designed to reduce the Bank's dependence on more costly, rate-sensitive CDs.
The following table sets forth the distribution of the Bank's deposits by type
of deposits at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1994 1993
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-certificate Accounts:
Noninterest-bearing accounts............................$ 1,337 0.65 % $ 3,171 1.38 %
NOW accounts........................................... 14,848 7.17 12,882 5.61
Money market accounts................................... 7,276 3.51 10,402 4.53
Savings accounts........................................ 24,075 11.62 29,077 12.67
-------- -------- -------- ---------
Total non-certificate accounts...................... 47,536 22.95 55,532 24.19
-------- -------- -------- ---------
Certificate accounts:
0-182 days.............................................. 6,100 2.95 15,180 6.62
7-23 months............................................ 105,008 50.70 91,292 39.79
24-29 months............................................ 15,541 7.50 25,117 10.95
30-41 months............................................ 9,791 4.73 14,100 6.15
42-84 months............................................ 21,277 10.27 24,882 10.85
120-132 months............................................ 1,860 0.90 3,326 1.45
-------- -------- -------- ---------
Total certificate accounts........................... 159,577 77.05 173,897 75.81
-------- -------- -------- ---------
Total deposits.............................................$ 207,113 100.00 % $ 229,429 100.00 %
======== ======== ======== =========
<CAPTION>
At June 30,
----------------------------------------------
1993 1992
---------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-certificate Accounts:
Noninterest-bearing accounts.......................$ 3,436 1.77 % $ 11,200 5.01 %
NOW accounts...................................... 10,424 5.37 7,689 3.43
Money market accounts.............................. 8,719 4.50 9,565 4.28
Savings accounts................................... 27,453 14.16 24,607 11.00
-------- -------- -------- ---------
Total non-certificate accounts................. 50,032 25.80 53,061 23.72
-------- -------- -------- ---------
Certificate accounts:
0-182 days......................................... 9,485 4.89 12,493 5.58
7-23 months....................................... 78,602 40.53 105,638 47.23
24-29 months....................................... 25,502 13.15 16,852 7.53
30-41 months....................................... 15,126 7.80 19,425 8.68
42-84 months....................................... 15,176 7.83 16,248 7.26
120-132 months....................................... - - - -
-------- -------- -------- ---------
Total certificate accounts...................... 143,891 74.20 170,656 76.28
-------- -------- -------- ---------
Total deposits........................................$ 193,923 100.00 % $ 223,717 100.00 %
======== ======== ======== =========
</TABLE>
The principal methods used by the Bank to attract deposits include the
offering of a wide variety of services and accounts, competitive interest rates,
and convenient office locations and service hours. The Bank utilizes traditional
marketing methods to attract new customers and deposits, including mass media
advertising and direct mailings. The development of new deposit accounts and
services within the past several years have enhanced the Bank's deposit
acquisition program.
The Bank's deposits are obtained primarily from persons who are residents
of Nebraska, Iowa, Kansas and Missouri. The Bank has not advertised for deposits
outside Nebraska, Iowa, Kansas, and Missouri. An insignificant amount of the
Bank's deposits were held by non-residents of Nebraska, Iowa, Kansas and
Missouri at December 31, 1994.
The following table sets forth information relating to the Bank's deposit flows
during the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended
December 31,
--------------------
1994 1993
-------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.........................................................$ 229,429 $ 218,069
--------- --------
Increase (decrease) in deposits before interest credited............................ (28,282) 3,341
Interest credited................................................................... 5,966 8,019
--------- --------
Net increase (decrease) in deposit accounts.................................... (22,316) 11,360
--------- --------
Total deposits at end of period.........................................................$ 207,113 $ 229,429
========= ========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.........................................................$ (1,834) $ (7,540)
NOW accounts......................................................................... 1,966 3,513
Money market accounts................................................................ (3,126) 1,028
Savings accounts..................................................................... (5,002) 4,108
Certificate accounts................................................................. (14,320) 10,251
--------- --------
Net increase (decrease) in deposit accounts..............................................$ (22,316) $ 11,360
========= ========
<CAPTION>
Six months ended
December 31,
------------------
1993 1992
------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.............................................................$ 193,923 $ 223,717
--------- ---------
Increase (decrease) in deposits before interest credited................................ 29,535 (12,023)
Interest credited....................................................................... 5,971 6,375
--------- ---------
Net increase (decrease) in deposit accounts........................................ 35,506 (5,648)
--------- ---------
Total deposits at end of period.............................................................$ 229,429 $ 218,069
========= =========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.............................................................$ (265) $ (489)
NOW accounts............................................................................. 2,458 1,680
Money market accounts.................................................................... 1,683 (191)
Savings accounts......................................................................... 1,624 362
Certificate accounts..................................................................... 30,006 (7,010)
--------- ---------
Net increase (decrease) in deposit accounts..................................................$ 35,506 $ (5,648)
========= =========
<CAPTION>
Fiscal years ended
June 30,
----------------------
1993 1992
-------- --------
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.................................................................$ 223,717 $ 170,629
-------- --------
Increase (decrease) in deposits before interest credited.................................... (38,217) 45,371
Interest credited........................................................................... 8,423 7,717
-------- --------
Net increase (decrease) in deposit accounts............................................ (29,794) 53,088
-------- --------
Total deposits at end of period.................................................................$ 193,923 $ 223,717
======== ========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.................................................................$ (7,764) $ 5,145
NOW accounts................................................................................. 2,735 2,486
Money market accounts........................................................................ (846) 1,033
Savings accounts............................................................................. 2,846 9,552
Certificate accounts......................................................................... (26,765) 34,872
-------- --------
Net increase (decrease) in deposit accounts......................................................$ (29,794) $ 53,088
======== ========
</TABLE>
The Bank offers a variety of accounts for depositors designed to attract
both short-term and long-term deposits. These accounts include CDs, regular
savings accounts, super savings accounts, money market accounts and checking and
negotiable order of withdrawal ("NOW") accounts and individual retirement
accounts ("IRAs"). These accounts generally earn interest at rates established
by management based on management's desire to increase or decrease certain types
or maturities, of deposits. At December 31, 1994, the Bank had no brokered
deposits.
14
<PAGE>
DEPOSIT ACTIVITIES (Continued)
The table below sets forth, by various interest rate categories, the amount
of certificate accounts at the dates indicated and such amounts maturing in
future periods.
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------- ----------------------
1994 1993 1993 1992
--------- --------- --------- ---------
Certificate Accounts: (Dollars in thousands)
<S> <C> <C> <C> <C>
2.00% - 4.99%................................................ $ 89,116 $ 110,537 $ 57,080 $ 28,054
5.00% - 6.99%................................................ 59,991 48,263 67,271 77,406
7.00% - 8.99%................................................ 10,346 14,257 18,684 64,242
9.00% - 10.99%............................................... 124 106 186 332
11.00% - over................................................. 0 734 670 622
-------- -------- -------- --------
Total certificate accounts....................................... $ 159,577 $ 173,897 $ 143,891 $ 170,656
======== ======== ======== ========
Amounts maturing in the periods indicated:
Certificate accounts:
Due January 1, 1995 to December 31, 1995.............................................................. $ 116,658
Due January 1, 1996 to December 31, 1996.............................................................. 26,841
Due January 1, 1997 to December 31, 1997.............................................................. 7,453
Due January 1, 1998 and following..................................................................... 8,625
--------
Total certificate accounts............................................................................... $ 159,577
========
</TABLE>
The table below sets forth the amount and maturity of CDs that had balances of
more than $100,000 at December 31, 1994.
<TABLE>
<CAPTION>
Amount
---------
(In thousands)
<S> <C>
Remaining maturity:
Three months or less............................................................................... $ 1,969
Greater than three to six months................................................................... 5,678
Greater than six to 12 months...................................................................... 6,076
Over 12 months..................................................................................... 1,324
--------
Total ................................................................................................... $ 15,047
========
</TABLE>
FHLB Borrowings
The Bank is a member of the FHLB system, consisting of 12 regional FHLBs.
The FHLB system functions as a central reserve bank providing credit for member
thrift and certain other financial institutions. As a member of the FHLB system,
the Bank is entitled to borrow funds from the FHLB of Topeka and required to own
stock in an amount determined by formula based upon the Bank's loans outstanding
and FHLB borrowings.
The Bank has a line of credit with the FHLB of Topeka, under which the Bank
may borrow up to $40.7 million expiring in April, 1995. The FHLB line of credit
reprices daily and is utilized to supplement short-term (less than 30 days)
operating needs. At December 31, 1994, the Bank has $17.0 FHLB line of credit
borrowings outstanding.
The Bank relies on FHLB borrowings to supplement its supply of lendable
funds, which are primarily gathered through retail customer deposits. The
interest rates on these borrowings, fixed and adjustable throughout their term,
vary from time to time in response to general economic conditions. These
borrowings have maturities ranging from 7 days to 10 years. At December 31,
1994, the Bank had $149.5 million of FHLB borrowings outstanding at an interest
rate of 6.31%. FHLB borrowings and line of credit borrowings are typically
collateralized by the Bank's investment in FHLB of Topeka stock and a portion of
the Bank's mortgage-backed securities and first mortgage loans.
The Bank is authorized to apply for borrowings on the security of its FHLB
of Topeka stock and certain of its loans and other assets (principally
securities that are obligations of, or guaranteed by, U.S. government). FHLB
borrowings are made pursuant to several different credit programs. Each credit
program has its own interest rates and range of maturities. Depending on the
particular program limitations, the amounts of borrowings are generally based on
the FHLB's assessment of the institution's creditworthiness. Under federal law,
an institution's record of lending to low and moderate income borrowers also may
be taken into account by the FHLB.
The Bank is required to own capital of the FHLB of Topeka in an amount of
at least equal to the greater of (i) 1.0% of the aggregrate outstanding balance
of home mortgage loans and similar obligations, (ii) 1/20th of borrowings and
letters of credit from the FHLB of Topeka or (iii) .03% of assets. The Bank
currently is in compliance with this requirement. The stock of the FHLB of
Topeka has been redeemable at par value, but there can be no assurance that this
will continue to be the case.
The Bank has signed a blanket pledge agreement to collateralize the
advances and borrowings. At December 31, 1994, assets of $196.5 million are
pedged to collateralize the pledge agreement.
The table below sets forth the Bank's FHLB borrowings outstanding for the
periods indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
----------------------- ------------------------
1994 1993 1993 1992
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due within one year:
Federal Home Loan Bank advances............................. $ 132,500 $ 139,000 $ 24,000 $ -
Federal Home Loan Bank line of credit....................... 17,000 - - -
Due within two years:
Federal Home Loan Bank advances............................. - - - 4,000
-------- -------- -------- --------
Total Federal Home Loan Bank borrowings........................ $ 149,500 $ 139,000 $ 24,000 $ 4,000
======== ======== ======== ========
Weighted average rate at end of period......................... 6.31 % 3.48 % 4.26 % 6.45 %
======== ======== ======== ========
Average borrowings outstanding for the period (1).............. $ 140,158 $ 72,280 $ 23,573 $ 10,314
======== ======== ======== ========
Weighted average rate for the period (2)....................... 4.42 % 3.57 % 4.16 % 6.55 %
======== ======== ======== ========
Maximum borrowings outstanding during the period............... $ 157,000 $ 149,000 $ 51,000 $ 13,000
======== ======== ======== ========
</TABLE>
- --------------------
(1) Average borrowings are based on daily averages.
(2) Weighted average rate is calculated by dividing interest expense by average
borrowings outstanding for the period.
15
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-18831
_______________________
CONSERVATIVE SAVINGS CORPORATION
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0730495
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
11207 WEST DODGE ROAD,
OMAHA, NEBRASKA 68154
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (402) 334-8475
_______________________
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934:
Common stock, par value $0.01 per share
_______________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
_______________________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant at March 8, 1995, was $15,909,516.
The number of shares outstanding of the Registrant's common stock on March
8, 1995 was 1,844,613.
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of stockholders of the company
to be held May 11, 1995, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1994.
================================================================================
1
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
INDEX TO ANNUAL REPORT
ON FORM 10-K
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART 1
Item 1 Business............................................................................. 3
Item 2 Properties........................................................................... 20
Item 3 Legal Proceedings.................................................................... 21
Item 4 Submission of Matters to a Vote of Security Holders.................................. 21
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................ 21
Item 6 Selected Financial Data.............................................................. 22
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 35
Item 8 Financial Statements and Supplementary Data.......................................... 41
Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. 60
PART III
Item 10 Directors and Executive Officers of the Registrant................................... 60
Item 11 Executive Compensation............................................................... 60
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 60
Item 13 Certain Relationships and Related Transactions....................................... 60
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 60
Exhibit Index
</TABLE>
2
<PAGE>
PART I
ITEM 1 - BUSINESS
Conservative Savings Corporation ("Conservative") is a savings and loan
holding company headquartered in Omaha, Nebraska. Conservative's sole subsidiary
is Conservative Savings Bank, F.S.B. (the "Bank"), a federally-chartered savings
bank that attracts deposits insured by the Federal Deposit Insurance Corporation
("FDIC"). Conservative originates one-to-four family and multi-family mortgage
loans, residential construction loans and consumer loans through five offices in
Omaha, two in Columbus, Nebraska, one in Bellevue, Nebraska, one in Harlan, Iowa
and one in Overland Park, Kansas. At December 31, 1994, Conservative had total
consolidated assets of $392 million, net loans receivable of $155 million, total
deposits of $207 million and total stockholders' equity of $32.4 million.
The Bank began operations in 1891 as a Nebraska-chartered mutual savings
and loan association. The Bank's deposits became federally insured and a member
of the Federal Home Loan Bank (the "FHLB") system in 1975. The Bank converted to
a Nebraska-chartered stock savings and loan association in 1985 and to a
federally-chartered stock savings bank in 1990. In 1989, the Bank completed a
holding company reorganization by becoming a wholly-owned subsidiary of
Conservative and the stockholders of the Bank became stockholders of
Conservative. Conservative, which was incorporated in Nebraska in 1989, had no
operating history prior to the reorganization. Conservative has no significant
operations or liabilities and owns no significant assets other than the Bank.
Conservative's principal executive offices are located at 11207 West
Dodge Road, Omaha, Nebraska, 68154, and its telephone number is (402) 334-
8475.
OPERATIONS
The principal business of Conservative, through the Bank, is attracting
funds, primarily in the form of savings deposits acquired from the general
public and originating or purchasing loans secured by liens on residential
properties and other real estate, including commercial real estate, multi-family
real estate, construction loans, automobile loans and other consumer loans.
Funds for the Bank's operations are also provided through borrowings from the
FHLB system, proceeds from the sales of loans and mortgage-backed and other
securities, funds from repayment of outstanding loans and purchased loans
serviced and earnings from operations. Earnings depend primarily upon the
difference between (i) revenues from loan, investments and other interest-
bearing assets and (ii) expenses incurred in payment of interest on deposit
accounts and borrowings, and general operating expenses.
GENERAL DEVELOPMENTS
Conservative's net income was $3.5 million for the fiscal year ended
December 31, 1994, total assets were $392 million, total net loans were $155
million and total deposits were $207 million at December 31, 1994. The following
is a discussion of general developments during 1994.
Loan Volume. Total loan originations decreased by 43.9% during 1994 to
$91 million from $161 million in 1993. This decrease occurred as interest rates
in the U.S. credit markets increased in excess of 300 basis points during 1994.
This has resulted in decreased prepayments of principal balances, a decrease in
new extensions of credit and a decrease in growth in total loans outstanding.
3
<PAGE>
Real Estate Owned. At December 31, 1994, the Bank held three properties
in Real Estate Owned (REO) status with a net book value of $955,000.
Approximately $805,000 is attributable to a 217 unit multi-family dwelling in
Omaha, Nebraska.
Gain on Sale of Premises and Equipment. In September 1994, the Bank sold
the 15,000 square foot facility it had utilized for storage and training. The
sale of this non-earning fixed asset resulted in the recognition of a $301,000
gain which was recognized in the quarter ended September 30, 1994.
Gain on Sale of Mortgage Servicing Rights. In November 1994, the Bank
sold $17.1 million and $35.0 million of GNMA and FHLMC mortgage servicing
rights, respectively. These sales resulted in the recognition of a $402,000 gain
which was recognized in the quarter ended December 31, 1994. In addition, other
assets were reduced by $187,000 as the dollars recorded as purchased mortgage
servicing rights premiums were removed due to the sale.
Loss on Investment Securities. During 1994, total loss on the sale of
investment securities was $152,000. These losses were recognized primarily as a
result of the sale of Nebraska and Iowa municipal securities in the quarter
ended December 31, 1994.
Adoption of Financial Accounting Standards No. 115. On January 1, 1994,
the Bank adopted FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities." In November 1993, an FASB staff announcement at an Emerging Issues
Task Force (EITF) meeting questioned whether mortgage securities that were not
"high risk" at acquisition could be classified as "held-to-maturity" under FAS
115. The Office of Thrift Supervision (OTS) questioned that ability as well and
did not allow such classification and on January 1, 1994, the Bank classified
its investment and mortgage-backed securities as "available-for-sale."
In July 1994, the OTS and the FASB reached an agreement stating that
mortgage-backed securities were eligible for "held-to-maturity" treatment under
FAS 115, and such holdings could be accounted for at amortized cost.
Accordingly, the Bank transferred $140 million of its mortgage-backed securities
to "held-to-maturity" from "available-for-sale." This transfer was made at the
fair market value of the mortgage-backed securities reclassified as "held-to-
maturity," with the $7.0 million of unrealized net loss being amortized over the
life of the securities transferred. This transfer occurred on August 8, 1994.
Interest Rate Spread. The Bank's net interest spread at December 31,
1994 was 2.88%, compared to 3.63% at December 31, 1993. The decrease in the
interest rate spread during 1994 was impacted by two factors; a $98 million
increase in the average balance of mortgage-backed securities and the impact of
six increases in interest rates by the Federal Reserve Bank throughout 1994. The
Bank commenced a program to leverage the additional capital it raised in June
1993 through investments in FHLMC and FNMA adjustable rate mortgage-backed
securities. These investments were funded through FHLB borrowings. The FHLMC and
FNMA investments earn interest income through adjustable rate indexes tied to
the 11th District Cost of Funds Index and the 10 year Constant Maturity Treasury
Rate.
COMPETITION
The Bank competes for loans and deposits with commercial banks, other
thrifts, mortgage bankers, credit unions, insurance companies and other
institutions in the scope and type of services offered, interest rates paid on
deposits, pricing of loans, and number and locations of branches, among other
things. Many of these competitors have substantially greater resources than the
Bank. The Bank also faces competition for investors' funds from mutual funds and
corporate and government securities.
4
<PAGE>
The Bank competes for loans principally through interest rates and loan
fees, the range and quality of the services it provides and the locations of its
branches. The Bank actively solicits deposit-related customers and competes for
deposits by offering depositors a variety of savings accounts, checking accounts
and other services.
EMPLOYEES
At March 8, 1995, Conservative had 122 full-time and 7 part-time
employees. Conservative has placed a high priority on staff development
including extensive sales, product and technical training. New employees are
selected on the basis of customer sales and service abilities and technical
skills. None of Conservative's employees are covered by a collective bargaining
agreement with Conservative and management believes that its relationship with
its employees is satisfactory.
REGULATION
INTRODUCTION
Conservative, as a savings and loan holding company, and the Bank, as a
federally-chartered savings bank with deposits insured by the FDIC, are subject
to extensive laws and regulations. These laws and regulations impose
restrictions on activities, minimum capital requirements, lending, deposit
taking and branching, among other things, and impose securities disclosure
obligations.
RECENT REGULATORY DEVELOPMENTS
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") was signed into law. The following is not intended to be a
complete description of FIRREA, but is intended to describe certain of the most
significant provisions applicable to Conservative. A number of significant
changes have resulted from this legislation and from new regulations issued
pursuant to FIRREA. Under FIRREA, the Bank's chartering authority, the Federal
Home Loan Bank Board (the "FHLBB"), was abolished and its thrift chartering and
certain regulatory functions passed to the newly created OTS, a bureau within
the Treasury Department. FIRREA also created a new independent agency known as
the Federal Housing Finance Board (the "FHFB"), which is the governing authority
for the FHLB System. Under FIRREA, the Federal Savings and Loan Insurance
Corporation (the "FSLIC") was also abolished and its role as the insurer of
thrift deposits passed to the FDIC through its Savings Association Insurance
Fund (the "SAIF").
Among other things, FIRREA also (i) for the first time, permitted bank
holding companies to acquire healthy savings associations, (ii) permitted
commercial banks that meet certain housing-related asset requirements to secure
advances and other financial services from their local Federal Home Loan Banks,
(iii) requires higher minimum capital levels for savings associations and (iv)
greatly enhances the regulators' enforcement powers by removing procedural
barriers, sharply increasing the civil and criminal penalties for violating
statutes and regulations and providing increased appropriations to the Justice
Department to finance prosecution of crimes against depository institutions.
In late 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted into law. FDICIA (i) requires federal regulators
under certain circumstances to impose a conservatorship or receivership on an
institution falling below a level of tangible capital set by the regulators
(which level must be a minimum of 2%), (ii) provides for the assessment of
deposit insurance premiums based on assessed risk in the institution's asset
portfolios, (iii) imposes charges for FDIC examinations, (iv) imposes liability
on holding companies, such as Conservative, for regulatory capital
5
<PAGE>
deficiencies in their insured subsidiaries under certain circumstances and (v)
requires holding companies to guarantee that undercapitalized subsidiaries will
comply with capital plans, among other significant changes.
FDICIA amended the grounds for the appointment of a conservator or
receiver for an insured depository institution to include, among other things:
(i) consent by the board of directors of the institution, (ii) cessation of the
institution's status as an insured depository institution, (iii) the institution
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized when required to do so, fails to timely submit an acceptable capital
plan or materially fails to implement an acceptable capital plan or (iv) the
institution is critically undercapitalized or otherwise has substantially
insufficient capital. FDICIA provides that an institutions' directors shall not
be liable to its stockholders or creditors for acquiescing in or consenting in
good faith to the appointment of the FDIC or the RTC as receiver or conservator
or to a supervisory acquisition of the institution.
FDICIA further provides the OTS with broad powers to take "prompt
corrective action" to resolve problems of insured depository institutions. The
extent of these powers depends upon whether the institutions in question are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." On September 29, 1992, the
OTS adopted final regulations implementing the "prompt corrective action"
provisions of FDICIA. These regulations became effective December 19, 1992. The
"prompt corrective action" regulations do not require specific prompt corrective
actions for "well capitalized" or "adequately capitalized" institutions.
Institutions with lower capital levels are, however, subject to increased
scrutiny and must submit a written capital restoration plan.
If an institution is significantly undercapitalized or is
undercapitalized and fails to timely submit an acceptable capital restoration
plan to the OTS or fails in any material respect to implement a plan accepted by
the OTS, the OTS is authorized under certain circumstances to take the following
corrective actions: placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional stock (including
voting stock) or requiring the institution to be acquired; pay on deposits;
ordering a new election of the institution board of directors; requiring that
certain senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; prohibiting the holding company from making
capital distributions without prior regulatory approval; and, ultimately,
appointing a receiver (or, with the concurrence of the FDIC, a conservator) for
the institution. The appropriate federal banking agency is required to appoint a
receiver (or, with the concurrence of the FDIC, a conservator) within 90 days
after an institution becomes critically undercapitalized unless certain specific
findings are made by such agency and the FDIC.
Under FDICIA, if an insured depository institution is undercapitalized,
the parent holding company is required to guarantee that the institution will
comply with any capital restoration plan submitted to and approved by the OTS in
an amount equal to the lesser of (i) 5% of the institution's total assets at the
time the institution became undercapitalized or (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the institution
failed to comply with the capital restoration plan.
FDICIA requires the federal bank regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate risk exposure, (v) asset growth and (vi) compensation, fees
and benefits. The compensation standards would prohibit employment contracts,
compensation or benefit arrangements, stock option plans, fee arrangements or
other compensatory arrangements that would provide excessive
6
<PAGE>
compensation, fees or benefits or could lead to material financial loss. In
addition, the federal banking regulatory agencies are required to prescribe by
regulation standards specifying (i) maximum classified assets to capital ratios,
(ii) minimum earnings sufficient to absorb losses without impairing capital and
(iii) to the extent feasible, a minimum ratio of market value to book value for
publicly traded shares of depository institutions and depository institution
holding companies. The federal banking agencies jointly issued proposed rules
concerning these standards, but final rules have not been issued.
FDICIA amended the Federal Deposit Insurance Act to prohibit insured
depository institutions that are not well-capitalized from accepting brokered
deposits unless a waiver has been obtained from the FDIC. Deposit brokers will
be required to register with the FDIC. FDICIA directs the FDIC to establish a
permanent risk-based assessment system for deposit insurance by January 1, 1994
and authorizes the FDIC to privately reinsure up to 10% of its risk of loss with
respect to an institution and base its assessment on the cost of such
reinsurance. On January 1, 1994, the FDIC implemented a new permanent system of
risk-related insurance premiums. See "Regulation - Insurance of Accounts."
Pursuant to FDICIA, the federal bank regulatory agencies, including the
OTS, have adopted uniform regulations, effective as of March 19, 1993, for real
estate mortgage and construction loans. FDICIA also requires federal bank
regulatory agencies to review biannually risk-based capital standards to ensure
that they adequately address interest rate risk, concentration of credit risk
and risks from non-traditional activities.
FDICIA seeks to encourage enforcement of existing consumer protection
laws and enacts new consumer-oriented provisions including a requirement of
notice to regulators and customers for any proposed branch closing and
provisions intended to encourage the offering of "lifeline" banking accounts and
lending in distressed communities. FDICIA also requires depository institutions
to make additional disclosures to depositors with respect to the rate of
interest and the terms of their deposit accounts.
The full effect that FIRREA and FDICIA will have is not known at this
time and cannot be predicted with certainty. However, these laws may have a
significant effect on the competitive balance between commercial banks and
thrift institutions and present significant opportunities for some institutions
while imposing additional capital, compliance and operating burdens and
enforcement risks for others.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") amended the Bank Holding Company
Act of 1956 (the "BHCA") to create certain interstate banking and branching
opportunities. The IBBEA generally applies only to traditional savings banks and
commercial banks. It does not alter the existing interstate branching authority
of federally chartered institutions regulated by the OTS, such as the Bank.
Under the IBBEA a bank holding company may acquire a bank located in any state,
provided that the acquisition does not result in the bank holding company
controlling more than 10% of the deposits in the United States, or 30% of
deposits in the state in which the bank to be acquired is located (unless the
state waives the 30% deposit limitation). The IBBEA permits individual states to
restrict the ability of an out-of-state bank holding company or bank to acquire
an in-state bank that has been in existence for less than five years and to
establish a state concentration limit of less than 30% if such reduced limit
does not discriminate against out-of-state bank holding companies or banks.
Effective June 1, 1997, the IBBEA authorizes an "adequately capitalized"
bank, with the approval of the appropriate federal banking agency, to merge with
another adequately capitalized bank in any state that has not opted out of
interestate branching. Such a bank may operate the target's offices as branches
if certain conditions are satisfied. The same national and state deposit
concentration limits and applicable state minimum-existence restrictions which
apply to interstate acquisitions (as discussed above) also apply
7
<PAGE>
to interstate mergers. The applicant also must comply with any nondiscriminatory
host state filing and notice requirements and demonstrate a record of compliance
with applicable federal and state community reinvestment laws. A state may opt
out of interestate branching by enacting a new law between September 29, 1994
and June 1, 1997, expressly prohibiting interstate merger transactions.
Under the IBBEA, the resulting bank in an interstate merger may establish
or acquire additional branches at any location in a state where any of the banks
involved in the merger could have established or acquired a branch. A bank also
may acquire one or more branches of an out-of-state bank without acquiring the
target out-of-state bank if the law of the target's home state permits such a
transaction. In addition, the IBBEA permits a bank to establish a de novo branch
in another state if the host state statutorily permits de novo interestate
branching.
Effective as of September 29, 1995, the IBBEA also permits a bank
subsidiary of a bank holding company to act as agent for other depository
institutions owned by the same holding company for purposes of receiving
deposits, renewing time deposits, closing of servicing loans and receiving loan
payments. Under the IBBEA, a savings association may perform similar agency
services for affiliated banks to the extent that the savings association was
affiliated with a bank on July 1, 1994, and satisfies certain additional
requirements.
The interestate banking, branching and affiliate banking opportunities
created by the IBBEA may further increase competition within the Bank's
existing market area.
REGULATORY CAPITAL REQUIREMENTS
FIRREA mandated significant new regulatory capital requirements for
thrift institutions. Under minimum regulatory capital regulations issued
pursuant to FIRREA by the OTS, thrift institutions are required to have
"tangible capital" equal to no less than 1.5% of adjusted total assets and "core
capital" equal to no less than 3% of adjusted total assets. In addition, thrift
institutions are required to maintain "risk-based capital" equal to 8% of risk-
weighted assets.
Under OTS regulations, adjusted total assets are a thrift institution's
total assets as determined under generally accepted accounting principles (GAAP)
increased, among other things, by investments in any subsidiary subject to
consolidation under the capital rules. Adjusted total assets are reduced by the
amount of assets that have been deducted from capital, the portion of the thrift
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.
Tangible Capital. Tangible capital consists of common stockholders'
equity, including retained earnings, noncumulative perpetual preferred stock and
related earnings and minority interests in equity accounts of fully consolidated
subsidiaries. In calculating tangible capital, certain items must be deducted,
including goodwill and other intangible assets, nonqualifying purchased mortgage
servicing rights and investments in subsidiaries engaged principally in
activities not permissible for national banks (except for a declining amount of
grandfathered investments described below).
With respect to purchased mortgage servicing rights, the amount that
qualifies to be included in tangible capital is the lowest of (i) 90% of fair
market value if determinable, (ii) 90% of original cost or (iii) the current
amortized book value, provided that the amount included does not exceed 50% of
the core capital or 100% of tangible capital, except for amounts recorded prior
to February 9, 1990.
8
<PAGE>
With respect to investments (both debt and equity) in subsidiaries
engaged before April 12, 1989 in an activity not then impermissible for a
national bank, a thrift institution must first deduct such investments from
assets and, thus, tangible capital by the amount by which such investments
exceed the amount of such investments held by the thrift institution as of April
12, 1989. The thrift institution must then deduct from assets and, thus,
tangible capital a percentage of the thrift institution's investment in and
loans to such subsidiaries at April 12, 1989 or as of the date of calculation,
whichever is less. Such percentage declines over a transition period as follows:
July 1, 1992 to June 30, 1993 - 60%; July 1, 1993 to June 30, 1994 - 40%;
thereafter - 0%. Additional investments in such subsidiaries after April 12,
1989 are fully deducted from tangible capital. To the extent the investment in
these subsidiaries is not deducted from tangible capital during the phase-in
period, the assets of the subsidiaries must be consolidated with those of the
thrift institution. The percentage may be further reduced by the FDIC during
such five-year transition period with respect to a particular thrift institution
on safety and soundness grounds.
Core Capital. "Core capital" is defined, essentially, as tangible
capital plus supervisory goodwill subject to limits discussed below, FSLIC
capital contributions and other qualifying intangible assets, meeting a three-
part test: separability, marketability and market valuation.
The amount of supervisory goodwill and FSLIC capital contributions that
may be included in core capital as a percent of total assets is as follows:
January 1, 1993 to December 31, 1993 - 0.75%; January 1, 1994 to December 31,
1994 - 0.375%; thereafter - 0%.
Risk-Based Capital. FIRREA and OTS capital regulations also impose a
risk-based capital requirement which is a percentage of capital to risk-adjusted
assets. A risk weight is assigned to both the on-balance sheet assets and off-
balance sheet commitments of a thrift institution. Representative risk weights
include: 0% for assets that are backed by the full faith and credit of the
United States; 20% for FHLB system stock, agency securities not backed by the
full faith and credit of the United States and certain high-quality mortgage-
related securities; 50% for qualifying mortgage loans and certain non-high-
quality mortgage-related securities; and 100% for consumer, commercial and other
loans. Residential construction loans are generally assigned a risk weight of
100%; however, pursuant to amendments to the OTS' risk-based capital regulation,
certain loans to finance the construction of pre-sold, one-to-four family
residences qualify for the 50% risk-weight category.
A thrift institution may use "supplementary capital" to satisfy the risk-
based capital requirement in an amount up to 100% of its core capital.
Supplementary capital includes certain permanent capital instruments such as
cumulative perpetual preferred stock and certain maturing capital instruments
issued pursuant to OTS regulations. Thrift institutions issuing maturing capital
instruments after November 7, 1989 may choose to include such instruments in
supplementary capital pursuant to one of two options: (i) at the beginning of
each of the last five years of the life of the instrument, the amount included
as supplementary capital is reduced by 20% of the original amount of the
instrument or (ii) only the aggregate amount of instruments maturing in any one
year during the seven years prior to an instrument's maturity that does not
exceed 20% of a thrift institution's capital will qualify as supplementary
capital. Once a thrift institution has selected an option, it may not switch to
the other option until all instruments issued pursuant to such option are no
longer outstanding. Subject to a five-year phase-out period ending June 30,
1994, thrift institutions also are required to deduct from risk-based capital
(i) those investments that would be considered equity investments under GAAP,
(ii) that portion of land loans and nonresidential construction loans that have
a loan-to-value ratio in excess of 80% and (iii) the amount of their investment
in certain real estate assets acquired in satisfaction of debts previously
contracted if the investment is to be held for a period longer than five years
(or such longer period as is approved by the OTS). The allowance for estimated
losses on loans and other valuation allowances established in
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<PAGE>
accordance with OTS regulations are included in supplementary capital in an
amount not to exceed 1.25% of risk-weighted assets.
Effective January 1, 1994, the OTS issued a final rule which adds an
interest rate risk (IRR) component to the risk-based capital requirement. Under
these rules, savings institutions with a greater than "normal" level of IRR
exposure will be subject to a deduction from total capital for purposes of
calculating the risk-based capital requirement. Interest rate exposure will be
measured as the decline in net portfolio value due to a 200 basis point increase
or decrease in market interest rates. The IRR component to be deducted from
total capital is equal to one-half the difference between an institution's
measured exposure and the "normal" level of exposure which is defined as 2% of
the estimated economic value of its assets.
The final rule established a two quarter "lag" between the reporting date
of the data used to calculate the IRR component and the effective date of each
quarter's IRR component. Under the final rule, the OTS director may waive or
defer an institution's IRR component, but not decrease it unless it is as the
result of an appeal.
In October 1994, the OTS delayed implementation of the IRR capital
deduction to allow for an appeals process to be developed. Accordingly, the OTS
has delayed the introduction of the IRR capital deduction to June 30, 1995. The
June 1995 deduction will be based on the lesser of the September 1994, December
1994 and March 1995 IRR components.
The OTS has the authority to impose higher capital requirements for
individual thrift institutions, such as the Bank, based on an assessment of the
risk a thrift institution presents to the deposit insurance fund or other
factors. The OTS also has the authority to raise the capital requirements over
the minimum levels set forth in FIRREA.
The following table sets forth the Bank's tangible, core and risk-based
capital levels, capital requirements and excess at December 31, 1994, December
31, 1993 and June 30, 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993 JUNE 30, 1993
----------------- ----------------- -------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital................ $34,201 8.67% $31,076 7.72% $32,391 12.68%
Tangible capital requirement.... 5,915 1.50 6,040 1.50 3,831 1.50
-------- -------- ------- ------- -------- ----------
Excess................... $28,286 7.17% $25,036 6.22% $28,520 11.18%
======== ======== ======= ======= ======== ==========
Core capital.................... $34,201 8.67% $31,076 7.72% $32,391 12.68%
Core capital requirement........ 11,831 3.00 12,080 3.00 7,662 3.00
-------- -------- ------- ------- -------- ----------
Excess................... $22,370 5.67% $18,996 4.72% $24,729 9.68%
======== ======== ======= ======= ======== ==========
Risk-based capital.............. $35,004 21.95% $32,206 20.18% $33,159 27.49%
Risk-based capital requirement.. 12,757 8.00 12,766 8.00 9,651 8.00
-------- -------- ------- ------- -------- ----------
Excess.................... $22,247 13.95% $19,440 12.18% $23,508 19.49%
======== ======== ======= ======= ======== ==========
</TABLE>
Certain interpretive issues are presented by the new capital rules. In
many instances, these issues have not been resolved by the OTS or other
regulatory authorities. Although the Bank believes its resolution of such
issues, together with the assumptions it has used in its regulatory capital
calculations,
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<PAGE>
are appropriate and reasonable, the Bank's calculations of capital may require
adjustment in the event the OTS or other regulatory authorities adopt differing
interpretations or use different assumptions.
In the event the Bank fails to comply with any of its existing or future
minimum regulatory capital requirements, it (i) would be required to file and
implement a capital plan with the appropriate regulatory agencies, (ii) would be
subjected to restrictions on growth and the payment of dividends, (iii) could
have restrictions imposed on its ability to establish new branches, invest in
service corporations and make equity investments, or (iv) could be precluded
from issuing securities as a means of raising additional capital, among other
negative effects. Such failure could also permit the OTS to require that the
Bank subject itself to a restrictive business plan or supervisory agreement that
could impose limits on internal growth and acquisitions, the payment of
dividends or other activities. Such restrictions could impair Conservative's
ability to pay dividends on the Common Stock or the Convertible Preferred Stock
or to pursue its acquisition and internal growth strategies. Such failure also
could permit the FDIC to initiate action resulting in the termination of deposit
insurance. The material failure of a thrift institution to comply with any plan,
regulation, written agreement, order or directive issued may be treated as an
unsafe or unsound practice which could result in the imposition of certain
penalties or sanctions including, but not limited to, the assessment of civil
monetary penalties, the issuance of a cease and desist order, or the appointment
of a conservator or receiver.
The Bank's ability to attain compliance with future increases in the
risk-based capital requirement or the core capital requirements (as the latter
is effectively increased by the phase-out of goodwill) may be adversely affected
by unanticipated losses or lower levels of earnings, by new or increased
regulatory capital requirements, an increase in its level of higher risk assets
or by other factors. In addition, there is virtually no limit on the authority
of the OTS or the FDIC to take any appropriate action with respect to conditions
or activities it considers unsafe and unsound, including failure to comply with
minimum regulatory capital requirements.
RESTRICTIONS ON DISTRIBUTIONS
Dividends or other capital distributions from the Bank to Conservative
will be necessary in order for Conservative to pay dividends on the Common Stock
and the Convertible Preferred Stock. The Bank's ability to make any such
distributions in the future will depend on its earnings and its ability to meet
minimum regulatory capital requirements in effect during future periods. See
"Regulation - Regulatory Capital Requirements."
Capital distributions by thrift institutions such as the Bank, including
dividends, stock repurchases, redemption of securities and cash-out mergers, are
subject to restrictions tied to the thrift institution's capital levels after
giving effect to such distributions.
Under an OTS regulation, thrift institutions identified as "Tier 1"
thrift institutions (see definitions below) generally are authorized to make
capital distributions during a calendar year up to the higher of (i) 100% of
their net income to date during the calendar year plus the amount that would
reduce by one-half their surplus capital ratio at the beginning of the calendar
year or (ii) 75% of their net income over the most recent four-quarter period.
"Surplus capital ratio" refers to the percentage by which a thrift institution's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirement to its assets.
Thrift institutions identified as "Tier 2" thrift institutions generally
are authorized to make capital distributions in accordance with the following
schedule: (i) if the thrift institution's current capital satisfies the risk-
based capital standard that would be applicable to it as of January 1, 1993
computed on the basis of its current portfolio, it may make capital
distributions of up to 75% of its net income over the most
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<PAGE>
recent four-quarter period and (ii) if a thrift institution's current capital
satisfies the risk-based capital standard applicable to it on January 1, 1991
computed on the basis of its current portfolio, it may make capital
distributions of up to 50% of its net income over the most recent four-quarter
period. For purposes of computing the foregoing amounts, a thrift institution
must deduct the amount of capital distributions it has previously made during
the most recent four-quarter period.
Thrift institutions identified as "Tier 3" thrift institutions would not
be permitted to make capital distributions unless they receive prior written OTS
approval or unless such a distribution is made in accordance with an approved
capital plan.
"Tier 1" thrift institutions are those that would have capital,
immediately prior to and on a pro forma basis after giving effect to a proposed
capital distribution, equal to or greater than the amount of their regulatory
capital requirements. "Tier 2" thrift institutions are those that would have
capital, immediately prior to and on a pro forma basis after giving effect to a
proposed capital distribution, equal to or in excess of their minimum regulatory
capital requirements. "Tier 3" thrift institutions are those that would have
capital, immediately prior to or on a pro forma basis after giving effect to a
proposed capital distribution, less than their minimum regulatory capital
requirements. The new capital distribution rule would also reflect any
individual minimum capital requirement and requirements tied to general minimum
capital requirements would need to be adjusted accordingly. Since the Bank does
not currently have an individual minimum capital requirement and exceeds the
fully phased-in regulatory capital requirements, the Bank is a "Tier 1" thrift
institution. At December 31, 1994, the Bank could pay dividends to Conservative
of approximately $12.3 million.
LIQUIDITY AND RESERVE REQUIREMENTS
FIRREA amended the Home Owners Loan Act ("HOLA") to require that the
Director of the OTS adopt regulations providing for a minimum liquidity
requirement for thrift institutions. The minimum liquidity requirement must be
in range of 4% to 10% of a thrift institution's withdrawable accounts and
borrowings payable on demand or with maturities of one year or less. Current OTS
regulations, which may be modified by the Director of the OTS in accordance with
FIRREA, provided that each thrift institution must maintain an average daily
balance for each calendar month of liquid assets (cash, certain time deposits,
certain bankers' acceptances, specified corporate obligations, and specified
U.S. government, state or federal agency obligations) equal to at least 5% of
the sum of its average daily balance of net withdrawable deposit accounts (the
amount of all withdrawable accounts less the unpaid balance of all loans secured
by such accounts) plus borrowings payable in one year or less. These regulations
also provide that each thrift institution must maintain an average daily balance
for each calendar month of short-term liquid assets (generally those having
maturities of six months or less or twelve months or less, depending on the type
of asset) equal to at least 1% of its average daily balance of net withdrawable
deposit accounts plus short-term debt.
The OTS has announced it has taken under consideration the adoption of
proposed rule-making to amend its liquidity regulation. The rule, if adopted,
would reduce the liquidity requirement from 5% to the statutory minimum of 4%,
change the daily calculation to a quarterly calculation and remove the 1% short-
term liquidity requirement. The OTS has not yet released its proposed rule. The
Bank's liquidity ratio currently is in excess of the existing requirements. For
a discussion of Conservative's compliance with the foregoing requirements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Sources of Funds."
The Bank also is subject to Federal Reserve Board reserve requirements
imposed under Regulation D by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). These
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<PAGE>
requirements, which are subject to change from time to time, call for minimum
levels of reserves based on amounts held in transaction accounts. At December
31, 1994 the Bank's liquidity ratio was 6.11%, which exceeded the current 5%
regulatory requirement.
INSURANCE OF ACCOUNTS
Under FIRREA, the Bank's deposits are insured by the FDIC up to $100,000
per insured depositor. FIRREA provides that the Bank will be assessed annual
deposit insurance premiums at rates equal to the following percentages of total
insured deposits: from January 1, 1994 through December 31, 1997 - 0.18%; and on
and after January 1, 1998 - 0.15%. In addition, FIRREA provides that after
December 31, 1994, the Board of Directors of the FDIC may, in order to meet
designated reserve ratios, increase deposit insurance rates not exceeding
0.325%, provided the increase in any one year may not exceed 0.075%.
On October 1, 1993, the FDIC adopted a permanent system of risk-related
insurance premiums that went into effect on January 1, 1994. Under this new
system, the SAIF premium rates are assigned to each thrift institution based on
its capital group and risk. Each thrift institution fits into one of three
capital groups, based on its capital ratio: group "1" (well capitalized), group
"2" (adequately capitalized) and group "3" (undercapitalized). Within each
capital group, thrift institutions are further divided into three subgroups
based on their risk to the insurance fund: (i) subgroup "A" which consists of
finally sound institutions with only a few minor weaknesses; (ii) subgroup "B"
which 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 SAIF or the Bank Insurance Fund (the "BIF"), also
administered by the FDIC; and (iii) subgroup "C" which consists of institutions
that pose a substantial probability of loss to the SAIF or BIF unless correction
action is taken. Under the current system adopted by the FDIC the actual
assessment rate for thrift institutions ranges from 0.23% to 0.31%.
The assessment rate for well-capitalized, subgroup "A" institutions is
0.23%. Adequately capitalized, subgroup "A" institutions and well capitalized,
subgroup "B" institutions pay an assessment rate of 0.26%. Undercapitalized,
subgroup "A" institutions, adequately capitalized, subgroup "B" institutions and
well-capitalized, subgroup "C" institutions pay an assessment rate of 0.29%. The
assessment rate for undercapitalized, subgroup "B" institutions and adequately
capitalized, subgroup "C" institutions is 0.30% and the assessment rate for
undercapitalized, subgroup "C" institutions is 0.31%.
On October 5, 1994, the FDIC issued an advance notice of proposed rule-
making seeking comment on whether the deposit insurance assessment base should
be redefined in light of the recent transition to a risk-based deposit insurance
system. The FDIC stated that, while it did not intend any redefinition of the
assessment base to have a significant impact on the total amount of assessments
industry-wide, there is a potential for significant change in the assessments
paid on an institution-by-institution basis. Depending on the type of activities
in which a particular institution, such as the Bank, is engaged, and the type of
products and services it offers, a change in the assessment base could have a
significant effect on the amount of the assessments such an institution pays.
The deadline for submitting written comments on the advanced notice of proposed
rule-making expired on February 2, 1995, and the FDIC has not yet issued a
proposed rule.
On February 16, 1995, the FDIC also issued a proposed rule to retain the
existing assessment rate schedule applicable to SAIF member institutions. The
effect of this proposal would be that the SAIF assessment rate to be paid by
SAIF members would continue to range from $0.23 per $100 of domestic deposits to
$0.31 per $100 of domestic deposits, depending on risk classification. On the
same date, the FDIC also announced it is proposing to establish a new assessment
rate schedule of 4 to 31 basis points for members of the BIF. At present, BIF
members are assessed the same rates for FDIC insurance as
13
<PAGE>
SAIF members - 23 basis points for the best risk classification to 31 basis
points for the riskiest classification. The comment period for both of these
proposed rules expires on April 17, 1995.
Since August 9, 1994, SAIF members may convert to the status of members
of the BIF or merge with or transfer assets to a BIF member. Each depository
institution participating in a SAIF-to-BIF conversion is required to pay an exit
fee to the SAIF and an entrance fee to the BIF, subject to certain exceptions.
QUALIFIED THRIFT LENDER
All thrift institutions, including the Bank, are required to meet the
Qualified Thrift Lender (QTL) test to avoid certain restrictions on their
operations. The QTL test requires 65% of a thrift institution's portfolio assets
(total assets less intangibles, properties used to conduct the thrift
institution's business, and liquid assets not exceeding 20% of total assets) to
be maintained in qualified thrift investments on a monthly average basis in nine
of every twelve months. Assets that will qualify without limitation for
inclusion as part of the 65% requirement are loans related to domestic
residential housing and manufactured housing, home equity loans, mortgage-backed
securities (where the mortgages are related to residential housing or
manufactured housing), stock of any FHLB, and direct or indirect obligations of
the FSLIC or the FDIC.
In addition, the following assets may be included in meeting the QTL
test, subject to an overall limit of 20% of the thrift institution's asset
portfolio: 50% of residential mortgage loans originated and sold within 90 days
of origination; 100% of investments in service corporations that meet certain
housing-related standards; 200% of loans related to the acquisition, development
and construction of one-to-four family housing meeting certain low-income
standards, 200% of certain loans in areas where credit needs of low and
moderate-income residents are not being adequately met; 100% of certain loans
for the purchase, construction, improvement or upkeep of churches, schools,
nursing homes and hospitals; 100% of consumer and educational loans (limited to
10% of total portfolio assets); and 100% of stock issued by the FHLMC and the
FNMA. At December 31, 1994, the Bank's QTL ratio was 88.95%, which exceeds the
65% regulatory requirement.
A thrift institution failing the QTL test is subject to a number of
restrictions, including (i) a requirement that the thrift institution not make
any new investment or engage in any new activity unless such investment or
activity would be permissible for a national bank and is also permissible for a
thrift institution, (ii) a requirement that the thrift institution not establish
any new branch office at any location at which a national bank located in the
thrift institution's home state may not establish a branch, (iii) ineligibility
for new FHLB advances and (iv) any restrictions on the payment of dividends to
which a national bank would not be subject.
Where a thrift institution still does not meet QTL requirements three
years from the date on which it should have and failed to do so, the thrift
institution will be required to divest any investment or discontinue any
activity that is impermissible for a national bank and will be required to repay
any outstanding FHLB advances. Any savings and loan holding company owning a
thrift institution that fails to meet the QTL test will, within one year after
the date on which the thrift institution should have become or ceases to be a
QTL, be deemed to be a bank holding company subject to all the provisions of the
Bank Holding Company Act of 1956 and other statutes applicable to bank holding
companies, which would impose a number of additional activity, capital and other
restrictions on any such savings and loan holding company.
14
<PAGE>
Another consequence of a thrift institution failing to maintain
sufficient qualifying real property loans is that such thrift institution would
no longer receive the benefit of certain favorable provisions regarding
deductions from taxable income for annual additions to its bad debt reserve.
Thrift institutions, such as the Bank, as subject to provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. However, thrift institutions such as the Bank which meet
certain conditions prescribed by the Code may benefit from provisions regarding
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 loan experience (the "Experience Method") or a percentage of taxable
income determined without regard to such deduction (the "Percentage of Taxable
Income Method"). The Bank files its income tax returns on a calendar year basis.
The Bank computed its bad debt reserve deduction utilizing the Experience Method
for calendar years 1990, 1991, 1993 and 1994 and the Percentage of Taxable
Income Method for calendar year 1992.
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%. The Percentage Bad Debt Deduction may be claimed as long as not
less than 60% of the total dollar amount of the assets of a thrift institutions
falls within certain designated categories. In the event the percentage of
assets in the designated categories falls below 60%, the thrift institution
could be required to recapture, generally over a period of up to four years, its
existing bad debt reserve, although net operating loss carry forwards available
to the thrift institution could be used to offset such recapture. At December
31, 1994, the Bank's assets falling within such categories exceeded the 60%
test.
The bad debt deduction under the Percentage of Taxable Income Method is
limited to the lesser of (i) 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% of such loans outstanding at such time or (ii) the amount, which
when added to the addition to the bad debt reserve for losses on nonqualifying
real property loans, equals the amount by which 12% 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 real estate loans.
LOANS TO AFFILIATES
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act ("Sections 23A and 23B") apply to all federally insured
thrift institutions and any "affiliate." Section 23A of the Federal Reserve Act
generally defines an "affiliate" of a thrift institution as any company that
controls the thrift institution or that is under common control with the thrift
institution. For the purposes of this definition, "control" is defined to
include the power to vote 25% or more of any class of voting securities or to
control in any manner the election of the majority of a board of directors.
Generally, Section 23A and 23B (i) limit the extent to which a thrift
institution or its subsidiaries may engage in certain covered transactions with
an affiliate to an amount equal to 10% of such thrift institution's capital
stock and surplus, (ii) contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital sock and surplus and
(iii) require that all such transactions be on terms substantially the same, or
at least as favorable to the thrift institution or subsidiary, as those provided
to
15
<PAGE>
a non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar types of
transactions.
In addition, applicable regulations provide that an SAIF-insured thrift
institution may not buy securities from an affiliate, except for shares of stock
of a subsidiary, and may not make any loan to an affiliate unless the affiliate
is engaged only in activities permissible for bank holding companies. Only the
Federal Reserve Board may grant exemptions from the restrictions of Section 23A
and 23B. The FDIC, however, may impose more stringent restrictions on thrift
institutions for reasons of safety and soundness. FIRREA permits the OTS to
adopt additional restrictions upon affiliate transactions.
Further FIRREA has extended to thrift institutions the restrictions
contained in Section 22(h) of the Federal Reserve Act ("Section 22(h)") on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to an executive officer and to a greater than 10% stockholder
("principal stockholder") of a thrift institution, and certain affiliated
entities of either, may not exceed, together with all other outstanding loans to
such person and affiliated entities the thrift institution's loan to one
borrower limit as established by FIRREA (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) as amended by the FDICIA, limits an association's
extension of credit to any executive officer, director or principal stockholder,
or to any affiliates of such persons, to an amount that, when aggregated with
the amount of all outstanding extensions of credit by that thrift institution to
its executive officers, directors, principal stockholders, and affiliates of the
foregoing, would not exceed the association's unimpaired capital and surplus.
Section 22(h) also prohibits loans, above amounts prescribed by the appropriate
federal banking agency, to directors, executive officers and principal
stockholders of a thrift institution, and their respective affiliates, unless
such loan is approved in advance by a majority of the disinterested directors of
the thrift institution, or unless a loan to an executive officer, made after
September 23, 1994, is secured by a first lien on the officer's residence. The
Federal Reserve Board has prescribed the loan amount as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
capital and unimpaired surplus. Prior Bank Board approval is also required for
any extension of credit to executive officers, directors, principal
shareholders, or any related interests of such persons, if such extensions of
credit, when aggregated with all other extensions of credit to such persons,
exceeds $500,000. Further, the Federal Reserve Board pursuant to 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 and not involve more than the normal risk of collectability. The
OTS amended its regulations governing loans to officers and directors to provide
that such transactions will be governed by Regulation O of the Federal Reserve
Board.
LOANS TO ONE BORROWER
Under FIRREA, loans to one borrower which are not fully secured, are
limited to 15% of a thrift institution's unimpaired capital and unimpaired
surplus, plus an additional 10% for loans fully secured by readily marketable
collateral. In addition, thrift institutions that meet their capital
requirements are permitted under FIRREA, to make loans to develop domestic
residential housing units, not to exceed the lesser of $30 million or 30% of the
thrift institution's unimpaired capital and unimpaired surplus, subject to
certain conditions and other limitations. In determining the maximum loans to
one borrower permitted for thrift institutions, the OTS applies a definition of
unimpaired capital and unimpaired surplus that is generally the same as the
definition employed by the OCC. At December 31, 1994, the Bank's limit on loans
to one borrower was $5.0 million. At December 31, 1994, the Bank was in
compliance with applicable limits on loans to one borrower. Management does not
expect these limitations to have a material effect on the Bank's lending
activities.
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<PAGE>
COMMUNITY REINVESTMENT
Under the Community Reinvestment Act (the "CRA"), as implemented by OTS
regulations, a thrift institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs to
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for thrift
institutions nor does it limit a thrift institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The Bank employs a full-time CRA
officer to monitor the Bank's compliance with OTS regulations. The CRA requires
the OTS, in connection with its examination of a thrift institution, to assess
the thrift institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications by
such thrift institution. FIRREA amended the CRA to require, effective July 1,
1990, public disclosure of a thrift institutions' CRA rating and to require that
the OTS provide a written evaluation of a thrift institution's CRA performance
utilizing a four-tiered description rating system in lieu of the existing five-
tiered numerical rating system. The Bank's most recent CRA rating, determined by
the OTS in June 1994 was "Outstanding", the highest rating.
On July 15, 1993, President Clinton announced a CRA reform initiative
which directed the federal banking agencies to develop CRA assessment standards
that are based on measurable and objective performance. The President's
initiative also calls for the agencies to develop standards that make CRA
examinations more consistent, ensure the public is provided with better
information on CRA evaluations, and seeks more effective agency sanctions
against financial institutions with consistently poor CRA performance. The
federal banking agencies released proposed rules pursuant to the President's CRA
reform initiative in December 1993, with the comment period expiring March 24,
1994. Final rules have not been issued.
LIMITATIONS ON INVESTMENTS
As a federally chartered thrift institution, the Bank is generally
prohibited from investing directly in equity securities and real estate (other
than that used for offices and related facilities or acquired through, or in
lieu of, foreclosure or on which a contract purchaser has defaulted). In
addition the Bank's authority to invest directly in service corporations is
limited to a maximum of 2% of the Bank's assets, plus an additional 1% of assets
if the amount over 2% is used for specified community or inner-city development
purposes. If its risk-based capital is in compliance with the then-applicable
minimum requirements, the Bank also is permitted to make additional loans not to
exceed 50% of its risk-based capital to service corporations of which the Bank
owns more than 10% of the stock at December 31, 1994.
OTHER REGULATORY CONSIDERATIONS
The Bank is subject to a wide array of other state and federal laws and
regulations, including, without limitation, usury laws, the Equal Credit
Opportunity Act, Electronic Funds Transfer requirements, the Truth-in-Lending
Act, the Truth-in-Savings Act and the Real Estate Settlement Procedures Act. The
Bank also is subject to laws and regulations that may impose liability on
lenders and owners for cleanup expenses and other costs stemming from hazardous
waste located on property securing real estate loans made by lenders or on real
estate that is owned by lenders following a foreclosure or otherwise. Some court
decisions also have expanded the circumstances under which lenders have been
held liable for hazardous wastes on such properties. Although the Bank's lending
procedures include measures designed to limit its liability for hazardous waste
clean up of other related liability, there can be no assurance that the Bank
will not become subject to such liability in the future.
17
<PAGE>
REGULATION OF HOLDING COMPANIES
Conservative is subject to regulation as a savings and loan holding
company. It is required to register with the OTS and is subject to OTS
regulations, examinations and reporting requirements relating to savings and
loan holding companies. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with Conservative
and with other companies affiliated with Conservative.
HOLA prohibits a savings and loan holding company, directly or indirectly,
from (i) acquiring control of another thrift institution (or a holding company
for such a thrift institution) without the prior approval of the OTS, (ii)
acquiring 5% or more of the voting shares of another thrift institution (or a
holding company for such a thrift institution) that is not a subsidiary or (iii)
acquiring control of a thrift institution not insured by the FDIC. Under HOLA,
the OTS is prohibited from approving an acquisition that would result in the
formation of a multiple savings and loan holding company controlling thrift
institutions in more than one state unless (i) such company, or a thrift
institution that is a subsidiary of such company, is authorized to acquire a
thrift institution, or to operate a home or branch office, in an additional
state pursuant to an emergency acquisition, (ii) such company controls an
insured thrift institution subsidiary that operated a home or branch office in
the additional state on March 5, 1987 or (iii) state law in the state of the
thrift institution to be acquired specifically authorizes such an acquisition.
Under FIRREA, thrift institutions may also be subject to the Change in Bank
Control Act if the foregoing provisions of HOLA do not apply.
HOLA authorizes the OTS or the FDIC to identify holding company activities
that present excessive risk to insured thrift institutions, and to restrict,
among other things, dividends to the holding company and other affiliate
transactions. If the Bank were to lose its status as a QTL, Conservative would
thereafter be treated as a multiple savings and loan holding company, and
possibly also as a bank holding company, resulting in additional restrictions on
its activities and other possible negative effects. See "Regulation -- Qualified
Thrift Lender."
RESTRICTIONS ON CHANGE IN CONTROL
Federal laws and regulations contain a number of provisions which affect
the acquisition of thrift institutions such as the Bank and savings and loan
holding companies such as Conservative. The Change in Bank Control Act provides
that no person, acting directly or indirectly or through or in concert with one
or more persons, may acquire control of a thrift institution or a savings and
loan holding company unless the OTS has been given 60 days' prior written notice
and the OTS does not issue a notice disapproving the proposed acquisition. In
addition, certain provisions of HOLA provide that no person may acquire direct
or indirect control of a thrift institution without prior approval of the OTS.
Any company that acquires such control becomes a "savings and loan holding
company" subject to restrictions, examinations and regulation by the OTS. See
"Regulation -- Regulation of Holding Companies."
Pursuant to applicable regulations, control of a thrift institution or a
savings and loan holding company is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of its
voting stock or the ability to control the election of a majority of its
directors. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of its voting
stock, or more than 25% of any class of its stock (whether voting or not) where
certain enumerated "control factors" are also present in the acquisition.
Control factors would include the acquiror's status as one of the two largest
holders of voting stock or when and whether the acquiror's nominees or
representatives would have more than one seat on the thrift institution's board
of directors.
18
<PAGE>
As indicated above, if a person's ownership of the stock of a thrift
institution or savings and loan holding company is below the threshold levels
for control, such person may nevertheless be deemed to be "acting in concert"
with one or more other persons that own stock in the thrift institution, in
which case all of the stock ownership of each person acting in concert will be
aggregated and attributed to each member of the group, thereby putting each one
over the control threshold. Under certain circumstances, acquirors will be
presumed to be acting in concert with other persons; however, such presumption
may be rebutted by the acquiror. Applicable circumstances include (i) a company
will be presumed to be acting in concert with a controlling stockholder or
management official under certain circumstances, (ii) a company controlling or
controlled by another company and companies under common control will be
presumed to be acting in concern and (iii) persons will be presumed to be acting
in concert where they constitute a group under Section 13 and 14 of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act").
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the thrift institution or savings and loan
holding company or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
The OTS's change in control regulations define "voting stock" to include
voting common stock such as the Common Stock and to include securities (such as
the Convertible Preferred Stock) that are convertible into voting stock. As a
result, a holder of Convertible Preferred Stock will be deemed to own the number
of shares of Common Stock issuable upon conversion thereof. Thus, prospective
purchasers that may become beneficial owners of 10% or more of Conservative's
Common Stock and/or Convertible Preferred Stock should consult with their
counsel regarding the application of the statutes and regulations outlined above
to their purchases of Conservative's Common Stock and Convertible Preferred
Stock.
ACQUISITIONS AND INTERSTATE OPERATIONS
The OTS regulations permit federal thrift institutions to branch in any
state or states of the United States and its territories subject to the
following limitations: (i) the federal thrift institution must qualify as a
"domestic building and loan association" under (S)7701(a)(19) of the Code or
satisfy the asset composition test thereunder and the total assets attributable
to all branches of the thrift institution in the state must qualify such
branches, taken as a whole, for treatment as a domestic building and loan
association; (ii) such branch may not result in formation of a prohibited multi-
state, multiple savings and loan holding company and violate certain statutory
restrictions on branching by thrift institutions subsidiaries of bank holding
companies. However, these limitations do not apply if, among other things,
interstate branching is otherwise permitted by applicable state law.
Notwithstanding the above, under the OTS regulations, federal thrift
institutions generally may not establish new branches unless the thrift
institution meets or exceeds minimum regulatory capital requirements. The OTS
will also consider the thrift institution's record of compliance with the CRA in
connection with any branch application.
HOLA and related regulations also allow a federal thrift institution to
acquire a failing thrift institution in a state other than the state in which
such federal thrift institution has its home office. Such federal thrift
institution also may receive branching rights in up to three additional states
or branching rights in the failing thrift institution's region if such thrift
institution's home state is included in a regional compact of states
specifically authorizing interstate branching. As a result of the acquisition of
its Harlan branch, the Bank acquired branching rights in Iowa.
19
<PAGE>
The formation of multi-state, multiple savings and loan holding companies
is permitted under certain circumstances that could permit Conservative to
acquire and operate as separate subsidiaries thrift institutions in certain
states. This could have the effect of allowing Conservative to operate thrift
institutions in states into which the Bank could not otherwise branch. The
acquisition of a healthy FDIC-insured thrift institution by Conservative would
cause Conservative to be treated as a multiple savings and loan holding company,
subject to certain restrictions on its activities. The acquisition of a bank
would cause Conservative to be treated as a bank holding company subject to the
Bank Holding Company Act of 1956, as amended, and regulations of the Federal
Reserve Board that would impose restrictions on its activities and obligate it
to meet additional minimum regulatory capital requirements, among other effects.
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
FHFB. The FHLB provide a central credit facility primarily for member
institutions. As a member of the FHLB of Topeka, the Bank must acquire and hold
shares of capital stock in the FHLB of Topeka in an amount at least equal to the
greater of 1% of the aggregate unpaid principal of the Bank's residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 5% of its then outstanding borrowings from the FHLB
of Topeka. The Bank was in compliance with this requirement at December 31, 1994
with investment in FHLB of Topeka stock of $7.9 million.
MONETARY POLICY
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rates paid by the Bank to obtain
its deposits and other borrowings, and the interest rates received by the Bank
on loans extended to its customers and on securities held in the Bank's
portfolio, comprises the major portion of the Bank's earnings. These rates are
highly sensitive to many factors that are beyond the control of the Bank, and
accordingly, its earnings and growth will be subject to the influence of
economic conditions generally, both domestic and foreign, including inflation,
recession and unemployment, and also to the monetary policies of the Federal
Reserve Board. The Federal Reserve Board implements national monetary policies
designed to curb inflation, combat recession and promote growth through, among
other means, its open-market dealings in U.S. government securities, by
adjusting the required level of reserves for financial institutions subject to
reserve requirements and through adjustments to the discount rate applicable to
borrowings by banks that are members of the Federal Reserve System. The nature
and timing of any future changes in such policies and their impact on
Conservative cannot be predicted.
STATE TAXATION
Nebraska has a Financial Institution Tax which subjects average deposits of
an institution to a .04% tax. This tax is limited to 3.25% of an institution's
net income before income taxes and extraordinary items.
ITEM 2. PROPERTIES
General. Conservative currently owns the real estate and buildings for four
of its offices in Omaha and one each in Bellevue, Nebraska, Columbus, Nebraska,
Harlan, Iowa and Overland Park, Kansas. It leases one office in Omaha and one
office in Columbus. Conservative also leases additional space near its corporate
office which is used for loan origination and consumer loan servicing.
20
<PAGE>
Management believes that Conservative has fully utilized its available
space and may need to expand its corporate facilities in order to support future
growth through acquisitions, although the cost and timing of such expansion is
not known. Management is considering various expansion alternatives.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Conservative's Common Stock has been traded on the NASDAQ National Market
System under the symbol "CONS" since September 1, 1992. From 1985 through August
1992, the Common Stock was traded in the over-the-counter market on the NASDAQ
System under the same symbol. The table below sets forth the high and low
closing bid prices for the Common Stock as reported on the NASDAQ System and,
after September 1, 1992, the high and low closing prices on the NASDAQ National
Market System and the cash dividends per share of Common Stock for the periods
indicated. The reported bid prices represent quotations between dealers and do
not include retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
DECLARED
LOW HIGH (PER SHARE)
--- ---- -----------
<S> <C> <C> <C>
Jul 1, 1992 - Sep 30, 1992................... 7.25 8.75 0.05(1)
Oct 1, 1992 - Dec 31, 1992................... 8.00 9.75 0.025
Jan 1, 1993 - Mar 31, 1993................... 9.38 11.00 0.025
Apr 1, 1993 - June 30, 1993.................. 9.00 11.50 0.025
Jul 1, 1993 - Sep 30, 1993................... 9.13 11.50 0.05(1)
Oct 1, 1993 - Dec 31, 1993................... 10.75 12.50 0.03
Jan 1, 1994 - Mar 31, 1994................... 11.75 13.00 0.03
Apr 1, 1994 - Jun 30, 1994................... 11.00 12.75 0.03
Jul 1, 1994 - Sep 30, 1994................... 11.50 13.75 0.03
Oct 1, 1994 - Dec 31, 1994................... 10.25 12.50 0.03
</TABLE>
_______________________
(1) Includes a $0.025 per share special dividend during the quarter ended
September 30, 1993 and 1992, respectively.
Cash dividends per common share have been restated to reflect the 100%
common stock dividend issued in December 1993.
The approximate number of stockholders as of March 8, 1995 of the
Registrant's Common Stock is 1,307.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the financial
position of the Bank at the dates indicated.
Financial Condition Data:
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------- ---------------------------------------------
1994 1993 1993 1992 1991 1990
---------- --------- --------- --------- --------- ----------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Total assets.......................................... $ 392,454 $ 407,072 (1) $ 256,630 $ 249,908 $ 202,029 $ 186,659
Cash and cash equivalents............................. 5,634 7,631 10,159 5,553 682 12,024
wLoans receivable, net................................ 154,666 160,021 (1) 130,410 144,636 136,898 130,462
Investment securities available for sale.............. 22,034 (8) 45,642 43,409 41,312 18,770 10,803
Investment securities held-to-maturity................ 18,463 (8) - - - - -
Mortgage-backed securities available for sale......... 25,275 (8) 163,967 (2) 163,966 54,090 40,622 16,423
Mortgage-backed securities held-to-maturity........... 139,747 (8) - - - - -
Loans held for sale................................... 525 7,950 6,509 1,784 2,881 -
Federal Home Loan Bank stock.......................... 7,850 7,450 2,250 1,407 967 469
Certificates of deposit............................... - - - 295 788 5,367
Premises and equipment, net........................... 6,104 5,777 5,102 3,269 2,434 1,940
Real estate owned..................................... 955 29 29 1,284 1,379 2,289
Other assets.......................................... 8,582 (8) 5,997 (1) 2,679 7,103 5,093 4,909
Deposits.............................................. 207,114 229,428 (1) 193,923 223,717 170,629 166,588
FHLB borrowings....................................... 149,500 139,000 (2) 24,000 4,000 13,000 -
Other liabilities..................................... 1,981 1,435 1,477 2,152 881 1,737
Stockholders' equity.................................. 32,409 (8) 35,588 33,692 (3) 15,719 13,531 12,622
Book value per common share........................... 11.03 12.83 11.81 12.07 10.39 9.70
Tangible book value per common share.................. 8.87 10.41 10.90 7.48 7.18 6.72
Nonperforming assets to total assets.................. 0.33% 0.16% 0.16% .68% .94% 1.33%
Nonaccrual loans to total gross loans................. 0.17 0.36 0.27 .26 .36 .15
Allowance for estimated losses on loans to total
nonperforming loans................................... 292.0 182.4 205.9 195.0 213.2 352.3
</TABLE>
Selected Operations and Other Data:
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
------------------------ -------------------------
1994 1993 1993 1992
----------- ----------- ------- -----------
(Unaudited) (Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income.......................................... $ 27,838 $ 22,877 $ 12,410 $ 11,168
Interest expense......................................... (15,514) (11,640) (6,250) (6,009)
---------- ---------- ---------- ----------
Net interest income before provision for loan loss....... 12,324 11,237 6,160 5,159
Provision for loan loss (credit)......................... 190 (22) (22) 31
---------- ---------- --------- ----------
Net interest income after provision for loan loss........ 12,134 11,259 6,182 5,128
Other income (loss)...................................... 2,176 3,175 1,288 1,413
Other expenses........................................... 9,687 9,783 5,047 4,683
---------- ---------- --------- ----------
Income (loss) before taxes and cumulative effect of
a change in accounting principle................... 4,623 4,651 2,423 1,858
Income tax expense (benefit)............................. 1,132 1,008 509 619
---------- ---------- --------- ----------
Net income (loss) before cumulative effect of
a change in accounting principle................... 3,491 3,643 1,914 1,239
Cumulative effect of retroactive application of
a change in accounting principle (FAS 109)......... - 463 463 -
---------- ---------- --------- ----------
Net income............................................... $ 3,491 $ 4,106 $ 2,377 $ 1,239
========== ========== ========= ==========
Earnings (loss) per common and
common equivalent share.............................. $ 1.50 $ 2.35 $ 1.10 $ 0.94
========== ========== ========= ==========
Cash dividends per common share.......................... $ 0.120 $ 0.130 $ 0.080 (4) $ 0.075 (4)
========== ========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
-------------------------------------------
1993 1992 1991 1990
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income.......................................... $ 21,635 $ 22,708 $ 17,815 $ 11,863
Interest expense......................................... (11,399) (13,826) (12,097) (8,321)
-------- -------- ------- --------
Net interest income before provision for loan loss....... 10,236 8,882 5,718 3,542
Provision for loan loss (credit)......................... 31 (219) 488 655
-------- -------- ------- --------
Net interest income after provision for loan loss........ 10,205 9,101 5,230 2,887
Other income (loss)...................................... 3,289 2,045 1,544 (18)
Other expenses........................................... 2,409 7,955 5,461 3,766
-------- -------- ------- --------
Income (loss) before taxes and cumulative effect of
a change in accounting principle................... 11,085 3,191 1,313 (897)
Income tax expense (benefit)............................. 1,118 906 403 (320)
-------- -------- ------- --------
Net income (loss) before cumulative effect of
a change in accounting principle................... 9,967 2,285 910 (577)
Cumulative effect of retroactive application of
a change in accounting principle (FAS 109)......... - - - -
-------- -------- ------- --------
Net income............................................... $ 9,967 $ 2,285 $ 910 $ (577)
======== ======== ======= ========
Earnings (loss) per common and
common equivalent share.............................. $ 2.22 $ 1.75 $ 0.70 $ (0.44)
======== ======== ======= ========
Cash dividends per common share.......................... $ 0.125 $ 0.075 $ - $ 0.185
======== ======== ======= ========
</TABLE>
Key Operating Ratios and Other Data:
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31, At or for fiscal year ended June 30,
------------------ ---------------- -----------------------------------------
1994 1993 1993 1992 1993 1992 1991 1990
------ ------ ------ ------ ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest margin....................... 3.19% 4.00% 3.88% 4.23% 4.20 % 3.97 % 3.41 % 3.11 %
Net interest spread....................... 2.88 3.63 3.58 4.05 4.02 3.75 2.78 2.49
Return (loss) on average assets........... 0.88 1.39 1.42 0.96 1.15 0.95 .52 (.48)
Return (loss) on average equity........... 10.30 15.58 13.71 15.26 17.32 15.39 6.75 (4.39)(5)
Dividend payout ratio..................... 1.00 5.54 7.27 7.98 5.62 4.27 - -
Stockholders' equity to total assets...... 8.26 8.74 8.74 6.41 13.13 6.20 7.73 10.87
Average interest-earning assets to
average interest-bearing liabilities 107.66 108.92 107.57 103.62 103.93 103.66 108.74 108.50
Ratio of earnings to fixed charges (6)
Including interest on deposits............ 1.30x 1.40x 1.39x 1.31x 1.36x 1.23x 1.11x .89x(7)
Excluding interest on deposits............ 1.74x 3.42x 2.85x 5.58x 5.02x 5.53x 29.23x -x(7)
Amount of loans serviced for others....... 527 23,341 23,341 286,230 30,388 340,949 204,800 177,537
Number of officers........................ 15 15 15 14 14 12 10 8
</TABLE>
(1) Includes the Overland Park, Kansas transaction of August 13, 1993, as
discussed in Item 7 and 8 contained herein. Also includes the impact of the
Bank's leveraged asset program commenced in July 1993, as discussed in Item
7 contained herein.
(2) Includes the impact of the Bank's leverage asset program commenced in July
1993, as discussed in Item 7 contained herein.
(3) Includes the impact of the $15.3 million of additional capital, in the form
of common and cumulative convertible preferred stock, raised in June 1993,
as discussed in Item 7 contained herein.
(4) Includes a $0.025 per common share special dividend during the quarters
ended September 30, 1993 and 1992, respectively.
(5) In 1990 a dividend of $0.185 was paid while the Bank recorded a net loss
per common share of $(0.445).
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before income taxes plus fixed charges. Fixed charges
represent interest expense plus one-third of net rental expense (which is
deemed representative of the interest factor).
(7) In 1990, earnings were inadequate to cover fixed charges by $897,000.
(8) Reflects the implementation of FAS 115, "Accounting for Certain Investment
in Debt Equity Securities."
22
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
For fiscal year ended
---------------------------------------------------------
December 31, 1994
---------------------------------------------------------
Fourth Third Second First
AVERAGE BALANCE SHEET DATA Quarter Quarter Quarter Quarter
- -------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets: (In thousands, except per share amounts)
Interest-earning deposits............................$ 1,936 $ 3,518 $ 9,058 $ 10,796
Certificates of deposit.............................. - - - -
Investment securities................................ 43,488 43,115 42,847 45,196
Mortgage-backed securities........................... 174,168 184,189 184,053 156,096
Loans:
Mortgages.......................................... 125,370 125,117 128,453 136,065
Consumer........................................... 27,744 26,821 24,765 23,743
------------ ------------ ----------- -------------
Total loans, net................................. 153,114 151,938 153,218 159,808
FHLB stock........................................... 7,850 7,850 7,726 7,450
------------ ------------ ----------- -------------
Total interest-earning assets...................... 380,556 390,610 396,902 379,346
Noninterest earning assets............................. 5,569 7,725 13,163 15,097
------------ ------------ ----------- -------------
Total assets.........................................$ 386,125 $ 398,335 $ 410,065 $ 394,443
============ ============ =========== =============
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................$ 161,887 $ 166,327 $ 168,787 $ 172,175
Savings............................................ 24,235 26,271 28,293 29,146
NOW and Money Market accounts...................... 23,381 24,570 25,556 26,120
------------ ------------ ----------- -------------
Total deposits.................................... 209,503 217,168 222,636 227,441
FHLB borrowings...................................... 141,003 145,735 147,801 126,091
------------ ------------ ----------- -------------
Total interest-bearing liabilities................. 350,506 362,903 370,437 353,532
Other noninterest-bearing liabilities.................. 3,273 3,373 4,303 5,011
------------ ------------ ----------- -------------
Total liabilities.................................... 353,779 366,276 374,740 358,543
Stockholders' equity................................... 32,346 32,059 35,325 35,900
------------ ------------ ----------- -------------
Total liabilities and stockholders' equity...........$ 386,125 $ 398,335 $ 410,065 $ 394,443
============ ============ =========== =============
SUMMARY OF OPERATIONS: (1)
- --------------------------
Interest income:
Interest-bearing deposits............................$ 23 $ 36 $ 88 $ 84
Certificates of deposit.............................. - - - -
Investment securities................................ 694 695 688 734
Mortgage-backed securities........................... 2,608 2,569 2,607 2,063
Loans:
Mortgages.......................................... 2,961 2,929 3,011 3,337
Consumer........................................... 598 584 537 521
------------ ------------ ----------- -------------
Interest on loans................................ 3,559 3,513 3,548 3,858
FHLB stock........................................... 109 109 106 147
------------ ------------ ----------- -------------
Total interest income.............................. 6,993 6,922 7,037 6,886
Interest expense:
Deposits:
Certificates....................................... 2,009 2,028 2,038 2,067
Savings............................................ 157 173 185 189
Now and Money Market accounts...................... 110 118 118 123
------------ ------------ ----------- -------------
Interest on deposits............................. 2,276 2,319 2,341 2,379
FHLB borrowings...................................... 1,939 1,693 1,499 1,068
------------ ------------ ----------- -------------
Total interest expense............................. 4,215 4,012 3,840 3,447
------------ ------------ ----------- -------------
Net interest income before loan loss provision......... 2,778 2,910 3,197 3,439
Provision for loan loss.............................. (42) 143 88 1
------------ ------------ ----------- -------------
Net interest income after provision for loan loss...... 2,820 2,767 3,109 3,438
Other income......................................... 474 730 433 540
Other expenses....................................... 2,285 2,416 2,377 2,610
------------ ------------ ----------- -------------
Income before taxes and cumulative effect of
a change in accounting principle................... 1,009 1,081 1,165 1,368
Income taxes......................................... 273 226 269 364
------------ ------------ ----------- -------------
Net income before cumulative effect of a
change in accounting principle..................... 736 855 896 1,004
Cumulative effect of retroactive application of a
change in accounting principle (FAS 109)........... - - - -
------------ ------------ ----------- -------------
Net Income.............................................$ 736 $ 855 $ 896 $ 1,004
============ ============ =========== =============
PER COMMON SHARE
- ----------------
Earnings per common and
common equivalent share............................$ 0.30 $ 0.36 $ 0.39 $ 0.45
Earnings per common share -
assuming full dilution............................. 0.25 0.29 0.31 0.35
Weighted average number of common and
common equivalent shares outstanding:
Primary............................................. 1,857,544 1,863,965 1,855,442 1,857,785
Fully diluted....................................... 2,897,144 2,903,562 2,895,041 2,897,382
Cash dividends declared and paid..................... 0.030 0.030 0.030 0.030
Market prices: (3)
High................................................ 12.50 13.75 12.75 13.00
Low................................................. 10.25 11.50 11.00 11.75
Six months ended For fiscal year ended
---------------------------- -----------------------------------------------
December 31, 1993 June 30, 1993
---------------------------- -----------------------------------------------
Second First Fourth Third Second First
AVERAGE BALANCE SHEET DATA Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------- ----------- ---------------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (In thousands, except per share amounts)
Interest-earning deposits............................$ 4,400 $ 9,041 $ 2,396 $ 6,335 $ 6,878 $ 2,599
Certificates of deposit.............................. - - - - 50 246
Investment securities................................ 45,115 45,129 43,379 45,121 46,394 44,522
Mortgage-backed securities........................... 125,059 74,197 54,343 51,661 51,143 45,182
Loans:
Mortgages.......................................... 148,809 127,487 117,785 116,366 121,105 122,391
Consumer........................................... 23,863 23,727 23,162 22,409 22,748 22,596
---------- ---------- ---------- --------- ----------- ----------
Total loans, net................................. 172,672 151,214 140,947 138,775 143,853 144,987
FHLB stock........................................... 5,182 2,430 1,999 1,414 1,407 1,407
---------- ---------- ---------- --------- ----------- ----------
Total interest-earning assets...................... 352,428 282,011 243,064 243,306 249,725 238,943
Noninterest earning assets............................. 18,057 18,395 12,262 14,843 14,448 14,534
---------- ---------- ---------- --------- ----------- ----------
Total assets.........................................$ 370,485 $ 300,406 $ 255,326 $ 258,149 $ 264,173 $ 253,477
========== ========== ========== ========= =========== ==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................$ 171,617 $ 166,781 $ 144,815 $ 157,327 $ 162,674 $ 166,929
Savings............................................ 29,897 29,395 26,850 25,550 24,302 24,474
NOW and Money Market accounts...................... 25,932 21,625 24,059 28,844 29,333 28,740
---------- ---------- ---------- --------- ----------- ----------
Total deposits.................................... 227,446 217,801 195,724 211,721 216,309 220,143
FHLB borrowings...................................... 102,489 42,071 34,682 24,452 24,000 11,159
---------- ---------- ---------- --------- ----------- ----------
Total interest-bearing liabilities................. 329,935 259,872 230,406 236,173 240,309 231,302
Other noninterest-bearing liabilities.................. 5,432 6,278 5,972 4,864 7,338 6,236
---------- ---------- ---------- --------- ----------- ----------
Total liabilities.................................... 335,367 266,150 236,378 241,037 247,647 237,538
Stockholders' equity................................... 35,118 34,256 18,948 17,112 16,526 15,939
---------- ---------- ---------- --------- ----------- ----------
Total liabilities and stockholders' equity...........$ 370,485 $ 300,406 $ 255,326 $ 258,149 $ 264,173 $ 253,477
========== ========== ========== ========= =========== ==========
SUMMARY OF OPERATIONS: (1)
- --------------------------
Interest income:
Interest-bearing deposits............................$ 45 $ 91 $ 24 $ 58 $ 53 $ 26
Certificates of deposit.............................. - - - - 1 6
Investment securities................................ 737 736 702 753 791 775
Mortgage-backed securities........................... 1,715 1,221 962 969 963 926
Loans:
Mortgages.......................................... 3,561 3,055 2,905 2,927 3,298 3,106
Consumer........................................... 545 570 562 534 568 605
---------- ---------- ---------- --------- ----------- ----------
Interest on loans................................ 4,106 3,625 3,467 3,461 3,866 3,711
FHLB stock........................................... 91 43 35 24 27 35
---------- ---------- ---------- --------- ----------- ----------
Total interest income.............................. 6,694 5,716 5,190 5,265 5,701 5,479
Interest expense:
Deposits:
Certificates....................................... 2,088 2,180 1,935 2,186 2,397 2,518
Savings............................................ 207 226 210 205 200 234
Now and Money Market accounts...................... 133 127 130 130 130 143
---------- ---------- ---------- --------- ----------- ----------
Interest on deposits............................. 2,428 2,533 2,275 2,521 2,727 2,895
FHLB borrowings...................................... 889 401 339 255 257 129
---------- ---------- ---------- --------- ----------- ----------
Total interest expense............................. 3,317 2,934 2,614 2,776 2,984 3,024
---------- ---------- ---------- --------- ----------- ----------
Net interest income before loan loss provision......... 3,377 2,782 2,576 2,489 2,717 2,455
Provision for loan loss.............................. (23) - - 1 3 28
---------- ---------- ---------- --------- ----------- ----------
Net interest income after provision for loan loss...... 3,400 2,782 2,576 2,488 2,714 2,427
Other income......................................... 634 656 1,155 757 606 797
Other expenses....................................... 2,733 2,316 2,430 2,319 2,287 2,399
---------- ---------- ---------- --------- ----------- ----------
Income before taxes and cumulative effect of
a change in accounting principle................... 1,301 1,122 1,301 926 1,033 825
Income taxes......................................... 216 293 309 189 370 250
---------- ---------- ---------- --------- ----------- ----------
Net income before cumulative effect of a
change in accounting principle..................... 1,085 829 992 737 663 575
Cumulative effect of retroactive application of a
change in accounting principle (FAS 109)........... - 463 - - - -
---------- ---------- ---------- --------- ----------- ----------
Net Income.............................................$ 1,085 $ 1,292 $ 992 $ 737 $ 663 $ 575
========== ========== ========== ========= =========== ==========
PER COMMON SHARE
- ----------------
Earnings per common and
common equivalent share............................$ 0.49 $ 0.60 $ 0.72 $ 0.56 $ 0.51 $ 0.44
Earnings per common share -
assuming full dilution............................. 0.38 0.45 0.70 0.56 0.51 0.44
Weighted average number of common and
common equivalent shares outstanding:
Primary............................................. 1,849,335 1,843,155 1,358,902 1,323,896 1,317,282 1,314,654
Fully diluted....................................... 2,889,875 2,885,311 1,419,562 1,325,746 1,319,536 1,314,876
Cash dividends declared and paid..................... 0.030 0.050 (2) 0.025 0.025 0.025 0.050 (2)
Market prices: (3)
High................................................ 12.50 11.50 11.50 11.00 9.75 8.75
Low................................................. 10.75 9.13 9.00 9.38 8.00 7.25
</TABLE>
___________________________
(1) Certain amounts from prior years have been reclassified to conform to
current year presentation.
(2) Includes a $0.025 per common share special dividend during the quarters
ended September 30, 1993, and 1992, respectively.
(3) Prices listed through August, 1992 represent the high and low bid in the
over-the-counter NASDAQ system.
23
<PAGE>
Average Balance Sheet
The table below sets forth for the periods indicated information with
regard to average balances of interest-earning assets and interest-bearing
liabilities, as well as the total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest spread, net interest margin and ratio of
average interest-earning assets to interest-bearing liabilities.
<TABLE>
<CAPTION>
For twelve months ended December 31,
----------------------------------------------------------------
1994 1993
---------------------------- --------------------------------
Average Interest Average Average Interest Average
balance earned yield or balance earned yield or
(1) or paid cost (2) (1) or paid cost (2)
------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Interest-bearing deposits................... $ 6,327 $ 231 3.65 % $ 5,543 $ 219 3.95 %
Certificates of deposit..................... - - - - - -
Investment securities ...................... 43,661 2,810 6.44 44,686 2,940 6.58
Mortgage-backed securities.................. 174,626 9,847 5.64 76,315 4,867 6.38
Loans:
Real estate loans........................ 128,751 12,239 9.51 128,288 12,457 9.71
Consumer loans........................... 25,769 2,239 8.69 23,386 2,201 9.41
-------- -------- ------ -------- ------- -------
Total loans........................... 154,520 14,478 9.37 151,674 14,658 9.66
FHLB stock.................................. 7,719 471 6.10 2,756 193 7.00
-------- -------- ------ -------- ------- ------
Total interest-earning assets............ 386,853 27,837 7.20 280,974 22,877 8.14
-------- ------ ------- ------
Noninterest earning assets.................. 10,389 15,118
------- --------
Total assets............................. $ 397,242 $296,092
======== ========
Interest-bearing liabilities:
Deposits:
Certificates of deposit.................... $ 167,294 8,143 4.87 $ 159,498 8,389 5.26
Savings accounts........................... 26,986 703 2.61 28,137 847 3.01
Now and money market accounts.............. 24,907 469 1.88 25,136 521 2.07
-------- ------- ------ --------- ------- -------
Total deposits.......................... 219,187 9,315 4.25 212,771 9,757 4.59
FHLB borrowings............................... 140,158 6,199 4.42 45,182 1,883 4.17
-------- ------- ------ --------- ------- -------
Total deposits and
interest-bearing liabilities........ 359,345 15,514 4.32 257,953 11,640 4.51
------- ----- --------- ------- ------
Other noninterest-bearing liabilities........ 3,990 11,780
-------- ---------
Total liabilities........................ 363,335 269,733
Stockholders' equity......................... 33,907 26,359
-------- ---------
Total liabilities and
stockholders' equity................ $ 397,242 $ 296,092
======== ==========
Net interest income.......................... $ 12,323 $ 11,237
======= =======
Net interest spread.......................... 2.88 % 3.63 %
==== ====
Net interest margin.......................... 3.19 % 4.00 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 107.7% 108.9%
===== =====
<CAPTION>
For six months ended December 31,
-------------------------------------------------------------------
1993 1992
-------------------------------- ------------------------------
Average Interest Average Average Interest Average
balance earned yield or balance earned yield or
(1) or paid cost (2) (1) or paid cost (2)
------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits................... 6,721 $ 137 4.08 % $ 4,738 $ 78 3.29 %
Certificates of deposit..................... - - - 148 8 10.81
Investment securities ...................... 45,122 1,472 6.52 45,458 1,554 6.84
Mortgage-backed securities.................. 99,628 2,937 5.90 48,182 1,889 7.85
Loans:
Real estate loans........................ 138,148 8,818 9.58 121,749 6,404 10.52
Consumer loans........................... 23,795 1,115 9.37 22,672 1,173 10.35
--------- --------- -------- -------- -------- --------
Total loans........................... 161,943 7,731 9.55 144,421 7,577 10.49
FHLB stock.................................. 3,806 133 6.99 1,407 62 8.81
--------- --------- -------- -------- -------- --------
Total interest-earning assets............ 317,220 12,410 7.82 244,334 11,188 9.14
--------- -------- -------- --------
Noninterest earning assets.................. 18,226 14,491
--------- --------
Total assets............................. $ 335,446 $ 258,825
========= ========
Interest-bearing liabilities:
Deposits:
Certificates of deposit.................... $ 169,199 4,268 5.04 $ 164,801 4,914 5.96
Savings accounts........................... 29,646 433 2.92 24,388 434 3.56
Now and money market accounts.............. 23,779 260 2.18 29,037 274 1.88
--------- --------- -------- --------- -------- --------
Total deposits.......................... 222,624 4,961 4.46 218,226 5,622 5.16
FHLB borrowings............................... 72,280 1,289 3.56 17,580 387 4.40
--------- --------- -------- --------- -------- --------
Total deposits and
interest-bearing liabilities........ 294,904 6,250 4.24 235,806 6,009 5.10
--------- -------- -------- --------
Other noninterest-bearing liabilities........ 5,855 6,787
--------- ---------
Total liabilities........................ 300,759 242,593
Stockholders' equity......................... 34,687 16,232
--------- ---------
Total liabilities and
stockholders' equity................ $ 335,446 $ 258,825
========= =========
Net interest income.......................... $ 6,160 $ 5,159
========= ========
Net interest spread.......................... 3.58 % 4.05 %
==== ====
Net interest margin.......................... 3.88 % 4.22 %
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities..... 107.6 % 103.6 %
===== ======
</TABLE>
____________________________________
(1) Average balances are based on daily averages and includes nonaccrual
loans.
(2) Average yields and costs are annualized.
24
<PAGE>
Average Balance Sheet (Continued)
The table below sets forth for the periods indicated information with
regard to average balances of interest-earning assets and interest-bearing
liabilities, as well as the total dollar amounts of interest income from
interest-earning assets and interest expense on interest-bearing liabilities,
resultant yields or costs, net interest spread, net interest margin and ratio of
average interest-earning assets to interest-bearing liabilities.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------
1993
---------------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits............................................................ $ 4,552 $ 160 3.51 %
Certificates of deposit.............................................................. 74 8 10.81
Investment securities ............................................................... 44,854 3,021 6.74
Mortgage-backed securities........................................................... 50,582 3,820 7.55
Loans:
Real estate loans................................................................... 119,412 12,236 10.25
Consumer loans...................................................................... 22,729 2,269 9.98
------- ------- --------
Total loans........................................................................ 142,141 14,505 10.21
FHLB stock.......................................................................... 1,557 121 7.77
------- ------- --------
Total interest-earning assets....................................................... 243,760 21,635 8.88
------- --------
Noninterest earning assets........................................................... 14,021
-------
Total assets........................................................................ $ 257,781
=======
<CAPTION>
At June 30,
-----------------------------------
1992
-----------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- ------- --------
(Dollars in thousand)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits............................................................ $ 10,443 $ 602 5.76%
Certificates of deposit.............................................................. 752 70 9.31
Investment securities................................................................ 30,031 2,292 7.63
Mortgage-backed securities........................................................... 37,435 3,254 8.69
Loans:
Real estate loans................................................................... 121,164 13,466 11.11
Consumer loans...................................................................... 22,587 2,920 12.93
------- ------- -------
Total loans........................................................................ 143,751 16,386 11.40
FHLB stock........................................................................... 1,089 104 9.55
------- ------- -------
Total interest-earning assets....................................................... 223,501 22,708 10.16
------- -------
Noninterest earning assets........................................................... 16,100
-------
Total assets........................................................................ $ 239,601
=======
<CAPTION>
At June 30,
---------------------------------------
1993
---------------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................................................. $ 157,936 9,036 5.72
Savings accounts.................................................................... 25,294 848 3.35
Now and money market accounts....................................................... 27,744 535 1.93
------- -------- -------
Total deposits..................................................................... 210,974 10,419 4.94
FHLB borrowings...................................................................... 23,573 980 4.16
------- ------- -------
Total deposits and interest-bearing liabilities.................................... 234,547 11,399 4.86
------- -------
Other noninterest-bearing liabilities................................................ 6,103
-------
Total liabilities................................................................. 240,650
Stockholders' equity................................................................. 17,131
-------
Total liabilities and stockholders' equity............................................ $ 257,781
=======
Net interest income................................................................... $ 10,236
=======
Net interest spread.................................................................. 4.02 %
====
Net interest margin.................................................................. 4.20 %
====
Ratio of average interest-earning assets to average interest-bearing liabilities..... 103.93 %
======
<CAPTION>
At June 30,
-----------------------------------
1992
-----------------------------------
Average Interest Average
balance earned yield or
(1) or paid cost (2)
------- ------- --------
(Dollars in thousand)
<S> <C> <C> <C>
Interest-bearing liabilities:
Deposits:
Certificates of deposit............................................................. $ 160,420 11,530 7.19
Savings accounts.................................................................... 19,780 917 4.64
Now and money market accounts....................................................... 25,100 704 2.80
------- ------- ------
Total deposits..................................................................... 205,300 13,151 6.41
FHLB borrowings....................................................................... 10,314 675 6.54
------- ------- ------
Total deposits and interest-bearing liabilities..................................... 215,614 13,826 6.41
------- ------
Other noninterest-bearing liabilities................................................. 9,139
-------
Total liabilities................................................................... 224,753
Stockholders' equity................................................................. 14,848
Total liabilities and stockholders' equity............................................ -------
$ 239,601
=======
Net interest income................................................................... $ 8,882
=======
Net interest spread.................................................................. 3.75 %
====
Net interest margin.................................................................. 3.97 %
====
Ratio of average interest-earning assets to average interest-bearing liabilities..... 103.66 %
======
</TABLE>
____________________________
(1) Average blances are based on daily averages and inclueds nonaccrual loans.
(2) Average yields and cost are annualized.
25
<PAGE>
Rate / Volume Analysis
The following table sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) change in rates (change
in rate multiplied by old volume), (2) change in volume (change in volume
multiplied by old rate), and (3) changes in rate volume (change in rate
multiplied by the change in volume).
<TABLE>
<CAPTION>
Twelve months ended Six months ended
Dec 31, 1994 vs. Dec 31, 1993 Dec 31, 1993 vs. Dec 31, 1992
increase (decrease) due to increase (decrease) due to
--------------------------------------- ---------------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume volume Total
-------- ------ -------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income on:
Interest-bearing deposits.............. $ (16) $ 31 $ (3) $ 12 $ 18 $ 33 $ 8 $ 59
Certificates of deposit................ - - - - - (8) - (8)
Investment securities.................. (64) (67) 1 (130) (71) (11) - (82)
Mortgage-backed securities............. (564) 6,271 (727) 4,980 (469) 2,019 (502) 1,048
Loans:
Real estate loans.................... (262) 45 (1) (218) (574) 863 (77) 212
Consumer loans....................... (168) 224 (17) 39 (111) 58 (5) (58)
------- ------ ------- ------ ------- ------ ------ ------
Total loans........................ (430) 269 (18) (179) (685) 921 (82) 154
FHLB stock............................. (25) 347 (45) 277 (13) 105 (21) 71
------- ------ ------- ------ ------- ------ ------ ------
Total interest income................ (1,099) 6,851 (792) 4,960 (1,220) 3,059 (597) 1,242
------- ------ ------- ------ ------- ------ ------ ------
Interest expense on:
Deposits:
Certificates of deposit.............. (626) 410 (30) (246) (757) 131 (20) (646)
Savings accounts..................... (114) (35) 5 (144) (78) 94 (17) (1)
Demand and money market accounts..... (48) (5) 1 (52) 44 (49) (9) (14)
------- ------ ------- ------ ------- ------ ------ ------
Total deposits..................... (787) 371 (24) (442) (791) 176 (46) (661)
FHLB borrowings........................ 116 3,957 242 4,315 (73) 1,203 (228) 902
------- ------ ------- ------ ------- ------ ------ ------
Total interest expense............... (672) 4,327 218 3,873 (864) 1,379 (274) 241
------- ------ ------- ------ ------- ------ ------ ------
Net interest income.................... $ (427) $2,524 $(1,010) $1,087 $ (356) $1,680 $ (323) $1,001
======= ====== ======= ====== ======= ====== ====== ======
<CAPTION>
Fiscal year ended
June 30,1993 vs. June 30, 1992
increase (decrease) due to
-------------------------------------------
Rate/
Rate Volume volume Total
-------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits.............. $ (235) $ (340) $ 133 $ (442)
Certificates of deposit................ 11 (63) (10) (62)
Investment securities.................. (269) 1,131 (133) 729
Mortgage-backed securities............. (427) 1,143 (150) 566
Loans:
Real estate loans.................... (1,050) (195) 15 (1,230)
Consumer loans....................... (665) 18 (4) (651)
------- ------ ------ -------
Total loans........................ (1,715) (177) 11 (1,881)
FHLB stock............................. (20) 45 (8) 17
------- ------ ------ -------
Total interest income................ (2,655) 1,739 (157) (1,073)
------- ------ ------ -------
Interest expense on:
Deposits:
Certificates of deposit.............. (2,352) (179) 37 (2,494)
Savings accounts..................... (254) 256 (71) (69)
Demand and money market accounts..... (220) 74 (23) (169)
------- ------ ------ -------
Total deposits..................... (2,826) 151 (57) (2,732)
FHLB borrowings........................ (246) 867 (316) 305
------- ------ ------ -------
Total interest expense............... (3,072) 1,018 (373) (2,427)
------- ------ ------ -------
Net interest income.................... $ 417 $ 721 $ 216 $ 1,354
======= ====== ====== =======
</TABLE>
26
<PAGE>
LENDING ACTIVITIES
The Bank originates a wide variety of loans with an emphasis on one-to-four
family and multi-family mortgage loans, residential construction loans,and, to a
lesser extent, consumer loans. Mortgage loans secured by residential real estate
are expected to remain a major part of the Bank's business. The Bank's policy is
to originate ARMs, five-year and seven-year fixed-rate balloon loans and
selected 15-year fixed-rate mortgage loans for its own portfolio. Thirty-year
mortgage loans generally are sold servicing released to correspondent lenders on
a loan-by-loan basis. The bank had no agricultural loans at December 31, 1994.
Loan Originations. The table below sets forth the Bank's total loan
- -----------------
originations during the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
---------------------- -----------------------
1994 1993 1993 1992
--------- --------- ---------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family......................................$ 41,113 $ 107,732 $ 60,809 $ 51,287
Multi-family............................................ 5,852 11,207 3,497 4,638
Construction............................................ 19,775 19,863 9,829 8,834
Commercial.............................................. - - - -
Land.................................................... - - - -
Loans refinanced........................................ 4,342 4,579 2,127 5,327
---------- --------- ---------- ----------
Total real estate ................................. 71,082 143,381 76,262 70,086
Consumer...................................................... 19,531 18,059 9,119 8,323
---------- --------- ---------- ----------
Total loans originated.................................. 90,613 161,440 85,381 78,409
Loans purchased............................................... 23 41,263 40,995 201
Loans sold.................................................... (50,813) (109,810) (57,488) (46,722)
Loan principal repayments..................................... (52,189) (64,566) (35,212) (35,913)
Loans transferred to real estate owned........................ (1,534) (98) (72) (227)
Other increases (decreases)................................... 1,119 (5,132) (2,552) 2,707
---------- --------- ---------- ----------
Net change in loans.....................................$ (12,780) $ 23,097 $ 31,052 $ (1,545)
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
------------------------ -----------------------
1993 1992 1991 1990
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family......................................$ 98,210 $ 53,568 $ 41,774 $ 23,675
Multi-family............................................ 12,348 9,821 5,599 1,687
Construction............................................ 18,868 16,914 10,392 2,893
Commercial.............................................. - - - -
Land.................................................... - 600 - -
Loans refinanced........................................ 7,779 5,343 2,021 617
---------- ----------- ---------- ----------
Total real estate ................................. 137,205 86,246 59,786 28,872
Consumer...................................................... 17,263 15,337 14,735 13,014
---------- ----------- ---------- ----------
Total loans originated.................................. 154,468 101,583 74,521 41,886
Loans purchased............................................... 469 23,339 14,001 43,140
Loans sold.................................................... (99,044) (59,734) (44,163) (5,107)
Loan principal repayments..................................... (65,267) (55,457) (31,216) (21,558)
Loans transferred to real estate owned........................ (253) (656) (24) (49)
Other increases (decreases)................................... 127 (2,435) (3,802) (1,890)
---------- ----------- ---------- ----------
Net change in loans.....................................$ (9,500) $ 6,640 $ 9,317 $ 56,422
========== =========== ========== ==========
</TABLE>
Loan Portfolio Composition The table below sets forth the Bank's loan portfolio
- --------------------------
composition at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1994 1993
----------------- ----------------
Amount % Amount %
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family....................$ 54,001 32.61 % $ 64,048 37.23 %
Multi-family.......................... 54,447 32.87 56,254 32.70
Construction.......................... 12,606 7.61 11,929 6.93
Commercial............................ 16,017 9.67 15,430 8.97
Land.................................. 169 0.10 176 0.10
-------- -------- -------- -------
Total real estate.............. 137,240 82.86 147,837 85.93
Consumer.............................. 28,383 17.14 24,214 14.07
-------- -------- -------- -------
Total loans, gross.............. 165,623 100.00 % 172,051 100.00 %
======== =======
Less:
Undisbursed portion of
loans in process.................. 7,272 7,191
Unearned discounts and
deferred loan fees................ 2,882 3,710
Allowance for estimated
losses on loans................... 803 1,129
------- ---------
Total loans, net......................$ 154,666 $ 160,021
======= =========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------
1993 1992 1991 1990
---------------- ---------------- ----------------- -------------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four-family.................... $ 54,597 39.03 % $ 77,700 50.40 % $73,137 51.01 % $ 84,424 63.46 %
Multi-family.......................... 33,890 24.23 28,266 18.33 26,234 18.30 6,734 5.06
Construction.......................... 11,712 8.37 8,515 5.52 3,585 2.50 2,076 1.56
Commercial............................ 15,572 11.13 16,202 10.51 15,601 10.88 15,383 11.56
Land.................................. 383 0.27 489 0.32 195 0.14 348 0.26
------- ------ ------ ------ ------- ------ ------- ------
Total real estate.............. 116,154 83.03 131,172 85.08 118,752 82.83 108,965 81.90
Consumer.............................. 23,739 16.97 22,996 14.92 24,622 17.17 24,077 18.10
------- ------ ------- ------ ------- ------ ------- ------
Total loans, gross.............. 139,893 100.00 % 154,168 100.00 % 143,374 100.00 % 133,042 100.00 %
====== ====== ====== ======
Less:
Undisbursed portion of
loans in process.................. 5,535 4,832 3,250 1,321
Unearned discounts and
deferred loan fees................ 3,179 3,914 2,098 558
Allowance for estimated
losses on loans................... 769 786 1,128 701
--------- ------- ------- -------
Total loans, net...................... $ 130,410 $ 144,636 $ 136,898 $ 130,462
========= ======= ======= =======
</TABLE>
Loan Origination Fees The table below sets forth information concerning loan
- ---------------------
origination fees and deferred origination fees on the
Bank's real estate loans for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
------------------ ------------------
1994 1993 1993 1992
--------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan origination fees received during the period...............$ 728 $1,108 $ 498 $ 732
Loan origination fees, expressed as a percentage of
total real estate loans originated during the period...... 1.02% 0.77% 0.65% 1.04%
Deferred loan origination fees on real estate loans
at the end of the period..................................$ 784 $ 933 $ 933 $ 664
<CAPTION>
Fiscal year ended June 30,
--------------------------------
1993 1992 1991 1990
------ ------- ------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loan origination fees received during the period...............$ 1,342 $ 1,181 $ 927 $ 162
Loan origination fees, expressed as a percentage of
total real estate loans originated during the period...... 0.98% 1.38% 1.55% 0.56%
Deferred loan origination fees on real estate loans
at the end of the period..................................$ 612 $ 654 $ 653 $ 558
</TABLE>
<PAGE>
Lending Activities (Continued)
Interest Rate Sensitivity. The table below sets forth the interest rate
-------------------------
sensitivity of the Bank's loan portfolio at December 31, 1994. This schedule
does not reflect the effects of possible prepayment or enforcement of due-on-
sale clauses.
<TABLE>
<CAPTION>
Total loans One-to-four family Multi-family Construction
----------------- ----------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate Amount Rate
------ ------- ------ --------- ------ ------- ------- ------
Adjustable rate loans due: (Dollars in thousands)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................$ 7,230 8.44% $ 113 6.27% $ 483 8.07% $ 6,634 8.50%
January 1, 1996 to December 31, 1997................ 526 6.61% 117 8.29% 409 6.12% - -
January 1, 1998 to December 31, 1999................ 202 8.62% 145 8.82% 57 8.12% - -
January 1, 2000 to December 31, 2004................ 9,647 8.41% 2,654 7.82% 6,993 8.63% - -
January 1, 2005 to December 31, 2014................ 17,675 7.92% 9,335 7.78% 8,340 8.07% - -
January 1, 2015 and following....................... 36,205 8.09% 16,910 7.43% 19,295 8.67% - -
--------- ------- ------- -------- --------- ------- ------ --------
Total.......................................... 71,485 8.11% $ 29,274 7.58% $ 35,577 8.48% $ 6,634 8.50%
--------- ------- ======= ======== ========= ======= ====== ========
<CAPTION>
Fixed rate loans due:
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 6,430 8.01% $ 96 10.27% $ 362 10.91% $ 5,972 7.79%
January 1, 1996 to December 31, 1997................ 2,728 10.05% 828 8.63% 1,900 10.67% - -
January 1, 1998 to December 31, 1999................ 3,776 8.66% 1,585 8.84% 2,191 8.53% - -
January 1, 2000 to December 31, 2004................ 5,192 8.77% 4,946 8.76% 246 8.80% - -
January 1, 2005 to December 31, 2014................ 8,252 8.35% 7,032 8.36% 1,220 8.30% - -
January 1, 2015 and following....................... 23,190 8.77% 10,239 8.88% 12,951 8.70% - -
--------- ------- ------- -------- --------- ------- ------ --------
Total.......................................... 49,568 8.66% $ 24,726 8.70% $ 18,870 8.90% $ 5,972 7.79%
--------- ------- ======= ======== ========= ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Commercial Land Consumer
-------------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
Adjustable rate loans due: (Dollars in thousands)
- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 1,687 9.36% $ 117 10.00% $ - - $ 1,570 9.31%
January 1, 1996 to December 31, 1997................ 278 6.95% 255 6.64% 3 10.50% 20 10.38%
January 1, 1998 to December 31, 1999................ 849 7.52% 815 7.41% - - 34 9.98%
January 1, 2000 to December 31, 2004................ 1,072 8.12% 1,009 8.00% - - 63 9.98%
January 1, 2005 to December 31, 2014................ 11,240 8.11% 10,950 8.10% 166 7.32% 124 10.00%
January 1, 2015 and following....................... 1,893 9.15% 1,089 8.72% - - 804 9.73%
-------- ------- -------- -------- ------- ------- ------- ---------
Total.......................................... 17,019 8.30% $ 14,235 8.09 $ 169 7.37% $ 2,615 9.50%
-------- ------- ======== ======== ======= ======= ======= =========
<CAPTION>
Fixed rate loans due:
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1, 1995 to December 31, 1995................ 2,666 8.58% $ 16 10.25% $ 1 11.23% $ 2,649 8.57%
January 1, 1996 to December 31, 1997................ 10,606 8.12% 416 10.03% - - 10,190 8.04%
January 1, 1998 to December 31, 1999................ 9,042 8.43% 43 7.75% - - 8,999 8.43%
January 1, 2000 to December 31, 2004................ 3,094 9.73% 150 10.36% - - 2,944 9.70%
January 1, 2005 to December 31, 2014................ 2,143 8.68% 1,157 9.35% - - 986 7.89%
January 1, 2015 and following....................... - - - - - - - -
-------- ------- -------- -------- ------- ------- ------- ---------
Total.......................................... 27,551 8.49% $ 1,782 9.56% $ 1 11.23% $ 25,768 8.41%
-------- ------- ======== ======== ======= ======= ======= =========
Total loans, gross................................... 165,623 8.36%
=======
Less:
Undisbursed portion of loans in process........... 7,272
Unearned discounts and deferred loan fees......... 2,882
Allowance for estimated losses on loans........... 803
---------
Total loans, net.....................................$ 154,666
=========
</TABLE>
28
<PAGE>
Nonperforming Assets
The Bank's nonperforming assets consist of nonaccrual loans and real estate
owned. Loans are placed on nonaccrual status when the collection of principal
and/or interest becomes doubtful. In addition, real estate loans and income-
producing property loans are placed on nonaccrual status when the loan becomes
90 days or more contractually delinquent. All consumer loans more than 120 days
delinquent are charged to allowance for loan losses. The Bank has no troubled
debt restructuring which involve forgiving a portion of interest or principal on
any loans or making loans (not delinquent more than 90 days) that management has
determined need to be closely monitored as the potential exists for increase
risk on these loans in the future.
The table below sets forth information regarding delinquent loans at
December 31, 1994. The amounts represent total remaining principal balances of
the related loans, rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Contractually Contractually
delinquent delinquent
60 to 89 days 90 days or more
------------------- -----------------------
Percent Percent
of total of total
delinquent delinquent
Amount loans Amount loans
------ -------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four-family........................................................$ 251 53.18 % $ 17 6.18 %
Multi-family.............................................................. - - 116 42.18
Construction.............................................................. - - - -
Commercial................................................................ - - - -
Land...................................................................... - - - -
------- -------- --------- --------
Total delinquent real estate loans.................................... 251 53.18 133 48.36
Consumer loans.............................................................. 221 46.82 142 51.64
------- -------- --------- --------
Total delinquent loans................................................$ 472 100.00 % $ 275 100.00 %
======= ======== ========= ========
</TABLE>
The table below sets forth information with respect to the Bank's nonaccrual
loans, REO and total nonperforming assets at dates indicated.
<TABLE>
<CAPTION>
At
December 31, Fiscal year ended June 30,
------------------ -----------------------------------
1994 1993 1993 1992 1991 1990
-------- --------- ------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate loans:
One-to-four-family...................................................$ 17 $ 120 $ 89 $ 113 $ 230 $ 29
Multi-family......................................................... 116 222 - 34 - -
Commercial........................................................... - - - - - -
Land................................................................. - 14 - - - -
Consumer................................................................. 142 263 284 256 299 170
------- ------ ------- ------ ------- -------
Total nonaccrual loans...............................................$ 275 $ 619 $ 373 $ 403 $ 529 $ 199
======= ====== ======= ====== ======= =======
Accruing loans delinquent more than 90 days:
Real estate loans:
One-to-four-family...................................................$ - $ - $ - $ - $ - $ -
Multi-family......................................................... - - - - - -
Commercial........................................................... - - - - - -
Land................................................................. - - - - - -
Consumer............................................................... - - - - - -
------- ------ ------- ------ ------- -------
Total accruing loans delinquent more than 90 days....................$ - $ - $ - $ - $ - $ -
======= ====== ======= ====== ======= =======
Other loans of concern:
Real estate loans:
One-to-four-family....................................................$ - $ - $ 107 $ 97 $ 85 $ 86
Multi-family........................................................... 911(3) 1,980 102 - - -
Commercial............................................................. - - - -(2) 1,060 1,485
Land................................................................... - - - - - -
Consumer............................................................... 401 673 809 978 1,484 289
------- ------ ------- ------ ------- -------
Total other loans of concern.........................................$ 1,312 $ 2,653 $ 1,018 $ 1,075 $ 2,629 $ 1,860
======= ====== ======= ====== ======= =======
Nonperforming assets:
Total nonperforming loans..............................................$ 275 619 373 403 $ 529 199
Real estate owned, gross............................................... 1,039 29 29 1,284 1,379 2,289
------- ------ ------- ------ ------- -------
Total nonperforming assets...........................................$ 1,314 648 402 1,687 $ 1,908 2,488
======= ====== ======= ====== ======= =======
Ratios:
Total nonperforming assets to total assets............................. 0.33 % 0.16 % 0.16 % 0.68 % 0.94 % 1.33 %
Total nonperforming loans to total assets.............................. 0.07 0.15 0.15 0.16 0.26 0.11
Total other loans of concern to total assets........................... 0.33 0.65 0.40 0.43 1.30 1.00
Total nonaccruing loans to total assets................................ 0.07 0.15 0.15 0.16 0.26 0.11
Allowance for estimated losses on loans to total nonperforming loans... 292.00 182.39 205.90 195.04 213.23 352.26
</TABLE>
_________________
(1) Interest income that would have been recorded on nonaccrual loans had they
remained current during the fiscal year ended December 31, 1994, the six
months ended December 31, 1993 and the fiscal years ended, June 30, 1992,
1991, and 1990 is not material in any period presented.
(2) Transferred $614,000 to real estate owned in November, 1991.
(3) Transferred $1,063,400 to real estate owned in fiscal year ended December
31, 1994.
29
<PAGE>
Allowance for Estimated Losses on Loans
The allowance for estimated losses on loans represents management's
recognition of the risks of extending credit and its evaluation of the loan
portfolio. The allowance is maintained at a level considered adequate to provide
for anticipated loan losses based on management's assessment of various factors
affecting the loan portfolio, including a review of problem loans, business
conditions and loss experience and an overall evaluation of the quality of the
underlying collateral, holding and disposal costs and costs of capital. The
allowance is increased by provisions charged to operations and reduced by loans
charged off, net of recoveries.
As a result of the decline in real estate market values in many parts of
the country and the significant losses experienced by many financial
institutions, there has been increased scrutiny by regulators of the loan
portfolios of financial institutions, particulary with regard to commercial real
estate and multi-family residential real estate loans. Management believes that
the Bank's allowance for estimated losses on loans is adequate to cover
anticipated losses and is in accordance with generally accepted accounting
principles. There can be no assurance, however, that management will not
determine to increase the allowance for estimated losses on loans or that
regulators, when reviewing the Bank's loan portfolio in the future, will not
request the Bank to increase such allowance, either of which would adversely
affect the Bank's earnings.
The table below sets forth information regarding changes in the Bank's
allowance for estimated losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended Six months ended,
December 31, December 31,
------------------------ ------------------------
1994 1993 1993 1992
--------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period............................... $ 154,520 $ 151,674 $ 161,943 $ 144,421
========= ========= ========= =========
Allowance for loan losses:
Balance at beginning of period.................................. $ 1,129 $ 777 $ 768 $ 786
Charge-offs:
Real estate loans:
One-to-four family........................................ - - - (22)
Multi-family.............................................. (470) - - -
Commercial................................................ - - - -
Consumer loans............................................... (80) (55) (27) (36)
--------- --------- --------- ---------
Total charge-offs....................................... (550) (55) (27) (58)
Recoveries:
Real estate loans:
One-to-four family........................................ - - - -
Multi-family.............................................. - - - -
Commercial................................................ - - - -
Consumer loans............................................... 34 28 9 18
--------- --------- --------- ---------
Total recoveries.......................................... 34 28 9 18
--------- --------- --------- ---------
Net charge-offs................................................. (516) (27) (18) (40)
Provision charged (credited) to income............................. 190 (10) (23) 18
Market valuation allowance......................................... - 389 402 13
--------- --------- --------- ---------
Balance at end of period........................................... $ 803 $ 1,129 $ 1,129 $ 777
========= ========= ========= =========
Net charge-offs to average loans outstanding during period......... 0.33% 0.02% 0.01% 0.03%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
------------------------------------------------------
1993 1992 1991 1990
--------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period............................... $ 142,141 $ 143,751 $ 118,534 $ 80,317
========= ========= ========= =========
Allowance for loan losses:
Balance at beginning of period.................................. $ 786 $ 1,128 $ 701 $ 408
Charge-offs:
Real estate loans:
One-to-four family........................................ (22) (28) - -
Multi-family.............................................. - - - -
Commercial................................................ - -
Consumer loans............................................... (64) (147) (254) (408)
--------- --------- --------- ---------
Total charge-offs....................................... (86) (175) (254) (408)
Recoveries:
Real estate loans:
One-to-four family........................................ - 1 1 4
Multi-family.............................................. - - - -
Commercial................................................ - - - -
Consumer loans............................................... 37 30 53 43
--------- --------- ----------- ---------
Total recoveries.......................................... 37 31 54 47
--------- --------- ----------- ---------
Net charge-offs................................................. (49) (144) (200) (361)
Provision charged (credited) to income............................. 31 (219) 488 654
Market valuation allowance......................................... - 21 139 -
--------- --------- ----------- ---------
Balance at end of period........................................... $ 768 $ 786 $ 1,128 $ 701
========= ========= =========== =========
Net charge-offs to average loans outstanding during period......... 0.03% 0.10% 0.17% 0.45%
========= ========= =========== =========
</TABLE>
Allowances are provided for individual loans where ultimate collection is
questioned by management after reviewing collateral value and loans that are
contractually past due. The table below sets forth the allowance for estimated
losses on loans by loan category, at the dates indicated based upon management's
assessment of the risk associated with such categories.
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------- -----------------------------------------------
1994 1993 1993 1992 1991 1990
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Unallocated allowance for loan losses: (In thousands)
Real estate loans:
One-to-four family............................... $ 67 $ 219 $ 144 $ 130 $ 241 $ 166
Multi-family..................................... 265 387 97 70 116 107
Commercial....................................... 34 15 1 39 98 119
Land............................................. - - 1 8 6 5
Consumer loans...................................... 437 508 525 539 667 304
-------- -------- -------- -------- -------- --------
Total unallocated allowance for loan losses............ $ 803 $ 1,129 $ 768 $ 786 $ 1,128 $ 701
======== ======== ======== ======== ======== ========
</TABLE>
30
<PAGE>
Investment Activities
The Bank maintains an investment portfolio comprised primarily of
obligations of agencies of the United States government, participation
certificates, real estate mortgage investment conduits and municipal bonds. The
Bank manages its investment portfolio to (i) complement Asset/Liability
management strategies, (ii) provide an adequate rate of return consistent with
targeted interest rate spread objectives, (iii) conform to the constraints of
applicable regulatory requirements and (iv) provide adequate liquidity. The
Bank's policy prohibits investment in high risk derivative securities, as
defined by the OTS.
The Bank has invested in municipal bonds to reduce its income tax expense.
The Bank's policy is to invest in general obligation municipal bonds rated AAA
or AA by Standard and Poor's in all states.
The table below sets forth the carrying values and estimated market value
of the Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1994 1993
------------------------------------- -------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
---------- --------- -------- --------- --------- --------
Available for sale: (Dollars in thousands)
- -------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government agencies......... $ 5,084 $ 4,750 7.38 % $ 23,818 $ 24,317 7.08 %
Municipal bonds.................. 17,136 17,284 6.26 21,824 23,668 9.20
-------- -------- ------ --------- --------- ------
Total....................... 22,220 22,034 6.51 45,642 47,985 8.09
-------- -------- ------ --------- --------- ------
Mortgage-backed securities:
Participation certificates....... 20,339 18,854 6.60 44,967 45,841 7.09
Real estate mortgage
investment conduits........... 6,735 6,421 6.59 118,999 119,190 5.24
-------- -------- ------ --------- --------- ------
Total....................... 27,074 $ 25,275 6.60 % $ 163,966 $ 165,031 5.75 %
-------- -------- ------ --------- --------- ------
Total securities
available for sale.............. $ 49,294 $ 47,309 6.56 % $ 209,608 $ 213,016 6.26 %
======== ======== ====== ========= ========= ======
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1993 1992
------------------------------------- -------------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
---------- --------- -------- --------- --------- --------
Available for sale: (Dollars in thousands)
- -------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government agencies......... $ 23,855 $ 24,504 7.07 % $ 27,416 $ 28,253 7.81 %
Municipal bonds.................. 19,554 21,009 9.12 13,896 14,279 9.44
-------- -------- ------ --------- --------- ------
Total....................... 43,409 45,513 7.99 41,312 42,532 8.36
-------- -------- ------ --------- --------- ------
Mortgage-backed securities:
Participation certificates....... 43,844 45,469 7.60 21,396 22,228 9.08
Real estate mortgage
investment conduits........... 10,246 10,361 7.35 19,226 19,282 7.47
-------- -------- ------ --------- --------- ------
Total....................... $ 54,090 $ 55,830 7.55 % $ 40,622 $ 41,510 8.32 %
-------- -------- ------ --------- --------- ------
Total securities
available for sale.............. $ 97,499 $101,343 7.75 % $ 81,934 $ 84,042 8.34 %
======== ======== ====== ======== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity: At December 31, 1994
- ---------------- -------------------------------------------
Estimated
Amortized fair
cost value Yield
--------- --------- -------
Investment securities: (Dollars in thousands)
<S> <C> <C> <C>
U S government agencies........................................................ $ 15,492 $ 14,853 6.88 %
Municipal bonds................................................................ - - -
Corporate bonds................................................................ 2,971 2,940 7.42
-------- -------- -----
Total..................................................................... 18,463 17,793 6.96
-------- -------- -----
Mortgage-backed securities:
Participation certificates..................................................... - - -
Real estate mortgage investment conduits....................................... 139,747 131,450 5.20
-------- -------- -----
Total..................................................................... 139,747 131,450 5.20
-------- -------- -----
Total securities held-to-maturity................................................. $ 158,210 $ 149,243 5.40 %
======== ======== =====
</TABLE>
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities available for sale at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------
Total
------------------------------
Estimated
Amortized fair
cost value Yield
--------- --------- -----
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes........... $ 5,084 $ 4,750 7.38%
Municipal bonds....................................... 17,136 17,284 6.27
-------- -------- ------
Total............................................... 22,220 22,034 6.51
-------- -------- ------
Participation certificates:
Federal National Mortgage Association................. 2,434 2,284 7.01
Federal Home Loan Mortgage Corporation................ 17,905 16,570 6.56
-------- -------- ------
Total............................................... 20,339 18,854 6.61
-------- -------- ------
Real estate mortgage investment conduits:
Federal National Mortgage Association................. 5,020 4,767 6.52
Federal Home Loan Mortgage Corporation................ 1,479 1,429 6.71
Government National Mortgage Association.............. 236 226 7.39
-------- -------- ------
Total............................................... 6,735 6,421 6.59
-------- -------- ------
Total securities available for sale...................... $149,294 $ 47,309 6.56%
======== ======= ======
<CAPTION>
At December 31, 1994
-------------------------------------------------------------------
Within one year After one but less than five years
------------------------------ ----------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
--------- --------- ----- ---------- --------- -------
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes........... $ - $ - -% $ - $ - -%
Municipal bonds....................................... - - - 200 210 6.85
------- ------- ----- ------ ------ -----
Total............................................... - - - 200 210 6.85
------- ------- ----- ------ ------ -----
Participation certificates:
Federal National Mortgage Association................. - - - - - -
Federal Home Loan Mortgage Corporation................ - - - 3,100 2,932 6.90
------- ------- ----- ------ ------ -----
Total............................................... - - - 3,100 2,932 6.90
------- ------- ----- ------ ------ -----
Real estate mortgage investment conduits:
Federal National Mortgage Association................. - - - - - -
Federal Home Loan Mortgage Corporation................ - - - 1,001 973 6.49
Government National Mortgage Association.............. - - - - - -
------- ------- ----- ------ ------ -----
Total............................................... - - - 1,001 973 6.49
------- ------- ----- ------ ------ -----
Total securities available for sale...................... $ - $ - -% $4,301 $4,115 6.80%
======= ======= ===== ====== ====== =====
</TABLE>
31
<PAGE>
INVESTMENT ACTIVITIES (Continued)
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities available for sale at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
--------------------------------------------------------------------------
After five but within 10 years After 10 years
----------------------------------- ---------------------------------
Estimated Estimated
Amortized fair Amortized fair
cost value Yield cost value Yield
--------- --------- --------- --------- --------- -------
Investment securities available for sale: (Dollars in thousands)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal National Mortgage Association notes...... $ 5,084 $ 4,750 7.38 % $ - $ - - %
Muncipal bonds...................................... 7,823 8,121 6.69 9,113 8,953 5.88
-------- -------- -------- -------- -------- -------
Total.................................... 12,907 12,871 6.94 9,113 8,953 5.88
-------- -------- -------- -------- -------- -------
Participation certificates:
Federal National Mortgage Association............ - - - 2,434 2,284 7.01
Federal Home Loan Mortgage Corporation........... 1,228 1,124 5.56 13,577 12,514 6.57
-------- -------- -------- -------- -------- -------
Total.................................... 1,228 1,124 5.56 16,011 14,798 6.64
-------- -------- -------- -------- -------- -------
Real estate mortgage investment conduits:
Federal National Mortgage Association............ - - - 5,020 4,767 6.52
Federal Home Loan Mortgage Corporation........... - - - 478 455 7.17
Government National Mortgage Association......... - - - 236 226 7.39
-------- -------- -------- -------- -------- -------
Total.................................... - - - 5,734 5,448 6.61
-------- -------- -------- -------- -------- -------
Total securities available for sale................. $ 14,135 $ 13,995 6.83 % $ 30,858 $ 29,199 6.40 %
======== ======== ======== ======== ======== =======
</TABLE>
The table below sets forth the maturities of the Bank's investment and
mortgage-backed securities held-to-maturity at December 31, 1994 and the
weighted average yields of such securities (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------------------------------------------
After one but
Total Within one year within five years
-------------------- ----------------- --------------------
Amortized Amortized Amortized
Investment securities held-to-maturity: cost Yield cost Yield cost Yield
- --------------------------------------- --------- ----- ------ ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government agencies:
Federal Home Loan Bank bonds...................... $ 15,492 6.88 % $ - - % $ 10,492 6.53 %
Corporate bonds...................................... 2,971 7.42 - - 2,971 7.42
-------- ----- ----- ----- -------- -----
Total......................................... 18,463 6.96 - - 13,463 6.73
-------- ----- ----- ----- -------- -----
Real estate mortgage investment conduits:
Federal National Mortgage Association ............ 61,166 5.39 - - - -
Federal Home Loan Mortgage Corporation ........... 77,621 5.04 - - - -
Government National Mortgage Association.......... 960 6.52 - - - -
-------- ----- ----- ----- -------- -----
Total......................................... 139,747 5.20 - - - -
-------- ----- ----- ----- -------- -----
Total securities held-to-maturity ................... $ 158,210 5.41 % $ - - % $ 13,463 6.73 %
======== ===== ===== ===== ======== =====
<CAPTION>
At December 31, 1994
-----------------------------------------------
After five but
within 10 years After 10 years
-------------------- -------------------
Amortized Amortized
Investment securities held-to-maturity: cost Yield cost Yield
- --------------------------------------- --------- ----- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government agencies:
Federal Home Loan Bank bonds...................... $ - - % $ 5,000 7.60 %
Corporate bonds...................................... - - - -
-------- ----- -------- -----
Total......................................... - - 5,000 7.60
-------- ----- -------- -----
Real estate mortgage investment conduits:
Federal National Mortgage Association ............ - - 61,166 5.39
Federal Home Loan Mortgage Corporation ........... - - 77,621 5.04
Government National Mortgage Association.......... - - 960 6.52
-------- ----- -------- -----
Total......................................... - - 139,747 5.20
-------- ----- -------- -----
Total securities held-to-maturity ................... $ - - % $ 144,747 5.29 %
======== ===== ======== =====
</TABLE>
32
<PAGE>
Sources of Funds
The Bank's primary sources of funds were FHLB borrowings, scheduled loan
payments and prepayments, proceeds from loan sales and customer deposits.
Scheduled loan repayments are relatively stable sources of funds, while deposit
inflows and outflows and unscheduled loan repayments, which are influenced
significantly by general interest rate levels, interest rates available on other
investments, competition, economic conditions and other factors, are not.
Borrowings may be used on a short-term basis (one year or less) to compensate
for reductions in the sources of funds (such as deposit inflows at less than
projected levels). Borrowings may also be used on a long-term basis to support
expanded lending activities and to match the maturity or repricing intervals of
assets.
Deposit Activities
Deposit activities are affected by changes in economic conditions, changes
in interest rates (i.e. movement in the U.S. Treasury based yield curve) and
competition among depository institutions and other investment alternatives. The
Bank's current deposit products include savings accounts, checking accounts,
money market deposit accounts and certificates of deposit with varying
maturities ranging from 90 days to ten years. The Bank's certificate accounts
are issued in non-negotiable form through their branch offices.
Current management of the Bank emphasizes the development of core deposit
relationships because such deposits provide a more stable source of funds for
operations and because core deposit customers are more likely to purchase other
bank services. Core deposits include checking, savings and money market deposit
accounts. The Bank's market research indicates that its core deposit customers
purchase more bank services than its other customers. The Bank's retail sales
personnel have focused on developing long-term, core deposit relationships
designed to reduce the Bank's dependence on more costly, rate-sensitive CDs.
The following table sets forth the distribution of the Bank's deposits by type
of deposits at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1994 1993
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-certificate Accounts:
Noninterest-bearing accounts............................$ 1,337 0.65 % $ 3,171 1.38 %
NOW accounts........................................... 14,848 7.17 12,882 5.61
Money market accounts................................... 7,276 3.51 10,402 4.53
Savings accounts........................................ 24,075 11.62 29,077 12.67
-------- -------- -------- ---------
Total non-certificate accounts...................... 47,536 22.95 55,532 24.19
-------- -------- -------- ---------
Certificate accounts:
0-182 days.............................................. 6,100 2.95 15,180 6.62
7-23 months............................................ 105,008 50.70 91,292 39.79
24-29 months............................................ 15,541 7.50 25,117 10.95
30-41 months............................................ 9,791 4.73 14,100 6.15
42-84 months............................................ 21,277 10.27 24,882 10.85
120-132 months............................................ 1,860 0.90 3,326 1.45
-------- -------- -------- ---------
Total certificate accounts........................... 159,577 77.05 173,897 75.81
-------- -------- -------- ---------
Total deposits.............................................$ 207,113 100.00 % $ 229,429 100.00 %
======== ======== ======== =========
<CAPTION>
At June 30,
----------------------------------------------
1993 1992
---------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-certificate Accounts:
Noninterest-bearing accounts.......................$ 3,436 1.77 % $ 11,200 5.01 %
NOW accounts...................................... 10,424 5.37 7,689 3.43
Money market accounts.............................. 8,719 4.50 9,565 4.28
Savings accounts................................... 27,453 14.16 24,607 11.00
-------- -------- -------- ---------
Total non-certificate accounts................. 50,032 25.80 53,061 23.72
-------- -------- -------- ---------
Certificate accounts:
0-182 days......................................... 9,485 4.89 12,493 5.58
7-23 months....................................... 78,602 40.53 105,638 47.23
24-29 months....................................... 25,502 13.15 16,852 7.53
30-41 months....................................... 15,126 7.80 19,425 8.68
42-84 months....................................... 15,176 7.83 16,248 7.26
120-132 months....................................... - - - -
-------- -------- -------- ---------
Total certificate accounts...................... 143,891 74.20 170,656 76.28
-------- -------- -------- ---------
Total deposits........................................$ 193,923 100.00 % $ 223,717 100.00 %
======== ======== ======== =========
</TABLE>
The principal methods used by the Bank to attract deposits include the
offering of a wide variety of services and accounts, competitive interest rates,
and convenient office locations and service hours. The Bank utilizes traditional
marketing methods to attract new customers and deposits, including mass media
advertising and direct mailings. The development of new deposit accounts and
services within the past several years have enhanced the Bank's deposit
acquisition program.
The Bank's deposits are obtained primarily from persons who are residents
of Nebraska, Iowa, Kansas and Missouri. The Bank has not advertised for deposits
outside Nebraska, Iowa, Kansas, and Missouri. An insignificant amount of the
Bank's deposits were held by non-residents of Nebraska, Iowa, Kansas and
Missouri at December 31, 1994.
The following table sets forth information relating to the Bank's deposit flows
during the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended
December 31,
--------------------
1994 1993
-------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.........................................................$ 229,429 $ 218,069
--------- --------
Increase (decrease) in deposits before interest credited............................ (28,282) 3,341
Interest credited................................................................... 5,966 8,019
--------- --------
Net increase (decrease) in deposit accounts.................................... (22,316) 11,360
--------- --------
Total deposits at end of period.........................................................$ 207,113 $ 229,429
========= ========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.........................................................$ (1,834) $ (7,540)
NOW accounts......................................................................... 1,966 3,513
Money market accounts................................................................ (3,126) 1,028
Savings accounts..................................................................... (5,002) 4,108
Certificate accounts................................................................. (14,320) 10,251
--------- --------
Net increase (decrease) in deposit accounts..............................................$ (22,316) $ 11,360
========= ========
<CAPTION>
Six months ended
December 31,
------------------
1993 1992
------- ---------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.............................................................$ 193,923 $ 223,717
--------- ---------
Increase (decrease) in deposits before interest credited................................ 29,535 (12,023)
Interest credited....................................................................... 5,971 6,375
--------- ---------
Net increase (decrease) in deposit accounts........................................ 35,506 (5,648)
--------- ---------
Total deposits at end of period.............................................................$ 229,429 $ 218,069
========= =========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.............................................................$ (265) $ (489)
NOW accounts............................................................................. 2,458 1,680
Money market accounts.................................................................... 1,683 (191)
Savings accounts......................................................................... 1,624 362
Certificate accounts..................................................................... 30,006 (7,010)
--------- ---------
Net increase (decrease) in deposit accounts..................................................$ 35,506 $ (5,648)
========= =========
<CAPTION>
Fiscal years ended
June 30,
----------------------
1993 1992
-------- --------
<S> <C> <C>
Deposit activity:
Deposits at beginning of period.................................................................$ 223,717 $ 170,629
-------- --------
Increase (decrease) in deposits before interest credited.................................... (38,217) 45,371
Interest credited........................................................................... 8,423 7,717
-------- --------
Net increase (decrease) in deposit accounts............................................ (29,794) 53,088
-------- --------
Total deposits at end of period.................................................................$ 193,923 $ 223,717
======== ========
Change in deposit accounts:
Increase (decrease) in:
Noninterest-bearing accounts.................................................................$ (7,764) $ 5,145
NOW accounts................................................................................. 2,735 2,486
Money market accounts........................................................................ (846) 1,033
Savings accounts............................................................................. 2,846 9,552
Certificate accounts......................................................................... (26,765) 34,872
-------- --------
Net increase (decrease) in deposit accounts......................................................$ (29,794) $ 53,088
======== ========
</TABLE>
The Bank offers a variety of accounts for depositors designed to attract
both short-term and long-term deposits. These accounts include CDs, regular
savings accounts, super savings accounts, money market accounts and checking and
negotiable order of withdrawal ("NOW") accounts and individual retirement
accounts ("IRAs"). These accounts generally earn interest at rates established
by management based on management's desire to increase or decrease certain types
or maturities, of deposits. At December 31, 1994, the Bank had no brokered
deposits.
33
<PAGE>
DEPOSIT ACTIVITIES (Continued)
The table below sets forth, by various interest rate categories, the amount
of certificate accounts at the dates indicated and such amounts maturing in
future periods.
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------- ----------------------
1994 1993 1993 1992
--------- --------- --------- ---------
Certificate Accounts: (Dollars in thousands)
<S> <C> <C> <C> <C>
2.00% - 4.99%................................................ $ 89,116 $ 110,537 $ 57,080 $ 28,054
5.00% - 6.99%................................................ 59,991 48,263 67,271 77,406
7.00% - 8.99%................................................ 10,346 14,257 18,684 64,242
9.00% - 10.99%............................................... 124 106 186 332
11.00% - over................................................. 0 734 670 622
-------- -------- -------- --------
Total certificate accounts....................................... $ 159,577 $ 173,897 $ 143,891 $ 170,656
======== ======== ======== ========
Amounts maturing in the periods indicated:
Certificate accounts:
Due January 1, 1995 to December 31, 1995.............................................................. $ 116,658
Due January 1, 1996 to December 31, 1996.............................................................. 26,841
Due January 1, 1997 to December 31, 1997.............................................................. 7,453
Due January 1, 1998 and following..................................................................... 8,625
--------
Total certificate accounts............................................................................... $ 159,577
========
</TABLE>
The table below sets forth the amount and maturity of CDs that had balances of
more than $100,000 at December 31, 1994.
<TABLE>
<CAPTION>
Amount
---------
(In thousands)
<S> <C>
Remaining maturity:
Three months or less............................................................................... $ 1,969
Greater than three to six months................................................................... 5,678
Greater than six to 12 months...................................................................... 6,076
Over 12 months..................................................................................... 1,324
--------
Total ................................................................................................... $ 15,047
========
</TABLE>
FHLB Borrowings
The Bank is a member of the FHLB system, consisting of 12 regional FHLBs.
The FHLB system functions as a central reserve bank providing credit for member
thrift and certain other financial institutions. As a member of the FHLB system,
the Bank is entitled to borrow funds from the FHLB of Topeka and required to own
stock in an amount determined by formula based upon the Bank's loans outstanding
and FHLB borrowings.
The Bank has a line of credit with the FHLB of Topeka, under which the Bank
may borrow up to $40.7 million expiring in April, 1995. The FHLB line of credit
reprices daily and is utilized to supplement short-term (less than 30 days)
operating needs. At December 31, 1994, the Bank has $17.0 FHLB line of credit
borrowings outstanding.
The Bank relies on FHLB borrowings to supplement its supply of lendable
funds, which are primarily gathered through retail customer deposits. The
interest rates on these borrowings, fixed and adjustable throughout their term,
vary from time to time in response to general economic conditions. These
borrowings have maturities ranging from 7 days to 10 years. At December 31,
1994, the Bank had $149.5 million of FHLB borrowings outstanding at an interest
rate of 6.31%. FHLB borrowings and line of credit borrowings are typically
collateralized by the Bank's investment in FHLB of Topeka stock and a portion of
the Bank's mortgage-backed securities and first mortgage loans.
The Bank is authorized to apply for borrowings on the security of its FHLB
of Topeka stock and certain of its loans and other assets (principally
securities that are obligations of, or guaranteed by, U.S. government). FHLB
borrowings are made pursuant to several different credit programs. Each credit
program has its own interest rates and range of maturities. Depending on the
particular program limitations, the amounts of borrowings are generally based on
the FHLB's assessment of the institution's creditworthiness. Under federal law,
an institution's record of lending to low and moderate income borrowers also may
be taken into account by the FHLB.
The Bank is required to own capital of the FHLB of Topeka in an amount of
at least equal to the greater of (i) 1.0% of the aggregrate outstanding balance
of home mortgage loans and similar obligations, (ii) 1/20th of borrowings and
letters of credit from the FHLB of Topeka or (iii) .03% of assets. The Bank
currently is in compliance with this requirement. The stock of the FHLB of
Topeka has been redeemable at par value, but there can be no assurance that this
will continue to be the case.
The Bank has signed a blanket pledge agreement to collateralize the
advances and borrowings. At December 31, 1994, assets of $196.5 million are
pedged to collateralize the pledge agreement.
The table below sets forth the Bank's FHLB borrowings outstanding for the
periods indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
----------------------- ------------------------
1994 1993 1993 1992
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due within one year:
Federal Home Loan Bank advances............................. $ 132,500 $ 139,000 $ 24,000 $ -
Federal Home Loan Bank line of credit....................... 17,000 - - -
Due within two years:
Federal Home Loan Bank advances............................. - - - 4,000
-------- -------- -------- --------
Total Federal Home Loan Bank borrowings........................ $ 149,500 $ 139,000 $ 24,000 $ 4,000
======== ======== ======== ========
Weighted average rate at end of period......................... 6.31 % 3.48 % 4.26 % 6.45 %
======== ======== ======== ========
Average borrowings outstanding for the period (1).............. $ 140,158 $ 72,280 $ 23,573 $ 10,314
======== ======== ======== ========
Weighted average rate for the period (2)....................... 4.42 % 3.57 % 4.16 % 6.55 %
======== ======== ======== ========
Maximum borrowings outstanding during the period............... $ 157,000 $ 149,000 $ 51,000 $ 13,000
======== ======== ======== ========
</TABLE>
- --------------------
(1) Average borrowings are based on daily averages.
(2) Weighted average rate is calculated by dividing interest expense by average
borrowings outstanding for the period.
34
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL OVERVIEW
On September 27, 1991, the Bank assumed $37.1 million of deposit
liabilities and related accrued interest payable accounts and acquired $40.4
million of selected assets of a former savings and loan association in Harlan,
Iowa from the RTC. Conservative paid a premium of $136,000 to effect this
transaction.
On August 13, 1993, the Bank assumed $61.7 million of deposit liabilities
and related accrued interest payable accounts and acquired $46.3 million of
selected assets of a former savings and loan association in Overland Park,
Kansas from the RTC. Conservative recorded a premium of $3.4 million to effect
this transaction.
LIQUIDITY AND SOURCES OF FUNDS
The Bank's primary sources of funds are customer deposits and advances from
the FHLB of Topeka. These funds, together with loan repayments, loan sales and
retained earnings, are used to make loans, to acquire investment securities and
other assets and to fund continuing operations. Management anticipates that the
Bank will continue to rely primarily upon customer deposits, short- and long-
term borrowings from the FHLB or other lenders, loan repayments, loan sales and
retained earnings to provide liquidity and will use funds so provided primarily
to make loans and to purchase investment securities. Management anticipates that
these sources will provide adequate liquidity for operations during 1995.
Current OTS regulations require thrift institutions to maintain an average
daily balance of liquid assets greater than or equal to 5% of the average daily
balance of net withdrawable accounts and borrowings payable on demand in one
year or less during the preceding calendar month, of which short-term liquid
assets must consist of not less than 1%. At December 31, 1994, the Bank's
liquidity ratio was 6.11%, compared to 5.27% at December 31, 1993. The Bank's
liquidity ratio may vary from time to time, depending on economic conditions,
deposit flows and loan funding needs.
During the fiscal year ended December 31, 1994, cash of approximately $5.2
million was provided in operating activities. The major item contributing to
this result was the realization of cash proceeds from loans held-for-sale.
In July 1993, the Bank implemented a leveraged asset program which was
designed to leverage the $15.2 million of capital which was raised in June 1993.
Adjustable Rate FHLMC and FNMA collateralized mortgage obligation assets have
been funded by short term FHLB borrowings. The Bank anticipates the leveraged
asset program will continue in 1995.
Total FHLB borrowings increased to $150 million at December 31, 1994 from
$139 million at December 31, 1993. In July 1993, Conservative commenced a
strategy to leverage the capital raised in June 1993. Accordingly, short-term
FHLB borrowings were utilized to provide the liquidity necessary to invest in
adjustable rate mortgage-backed securities. The FHLB requires its member
institutions to fully collateralize their FHLB borrowings. Accordingly, the size
of the Bank's credit line with the FHLB is based on the level of qualifying
collateral.
35
<PAGE>
FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1993
Overview. Net income decreased $614,000 for the fiscal year ended December
31, 1994 to $3.5 million from $4.1 million for the fiscal year ended December
31, 1993. An increase of $875,000 in net interest income after provision for
loan loss and a decrease of $96,000 in noninterest expense were offset by a
decrease of $998,000 in noninterest income. In addition, a $463,000 decrease in
net income is due to the effect of FAS 109 adoption by the Bank during the
fiscal year ended December 31, 1993.
Interest Income. Interest income increased $5.0 million, or 21.7%, for the
fiscal year ended December 31, 1994 to $27.8 million from $22.9 million for the
fiscal year ended December 31, 1993. Of this increase, $6.9 million resulted
from an increase of $106 million in the average balance of interest-earning
assets, which was offset $1.9 million from a decrease to 7.20% from 8.14% in the
average yield on interest-earning assets.
Interest Expense. Interest expense increased $3.9 million, or 33.3%, for
the fiscal year ended December 31, 1994 to $15.5 million from $11.6 million for
the fiscal year ended December 31, 1993. Of this increase, $4.3 million resulted
from a $101 million increase in the average balance of interest-bearing
liabilities, which was offset $400,000 by a decrease to 4.32% from 4.51% in the
average cost of interest-bearing liabilities.
Net Interest Income. Net interest income increased $1.1 million, or 9.7%,
for the fiscal year ended December 31, 1994 to $12.3 million from $11.2 million
for the fiscal year ended December 31, 1993. During the fiscal year ended
December 31, 1994, the interest rate spread decreased to 2.88% from 3.63%, while
average interest-bearing assets, predominantly investments in mortgage-backed
securities, increased $106 million.
Provision for Loan Losses. The provision for loan losses increased by
$212,000 to $190,000 for the fiscal year ended December 31, 1994 from a $22,000
benefit for the fiscal year ended December 31, 1993. During 1994, the increase
in the provision for loan loss was attributable to a 217 unit multi-family loan
which was transferred to REO status. Prior to its transfer to REO status, the
multi-family loan had an outstanding balance of approximately $1.3 million, and
an appraised value of $875,000.
Noninterest Income. Noninterest income decreased $998,000 for the fiscal
year ended December 31, 1994 to $2.2 million from $3.2 million for the fiscal
year ended December 31, 1993.
Gain on sale of loans decreased during the fiscal year ended December 31,
1994 by $431,000, or 39.6%, to $658,000. Total loan originations decreased by
43.9% during 1994 to $91 million from $161 million in 1993. This decrease
resulted as interest rates in the U.S. credit markets increased in excess of 300
basis points during 1994. As total loan originations decreased in 1994, loans
sold on a servicing released basis decreased and gains recognized on sale of
loans decreased throughout 1994. Income reported in this income statement
category during 1995 will depend upon the direction of the U.S. credit markets
and the level of real estate loan originations.
Gain on sale of premises and equipment increased $312,000 during the fiscal
year ended December 31, 1994 to $305,000. In September 1994, the Bank sold the
15,000 square foot facility it had utilized for storage and training. This sale,
which is nonrecurring in nature, resulted in the recognition of a $301,000 gain
during the quarter ended September 30, 1994.
Gain on sale of mortgage servicing rights increased by $416,000, net,
during the fiscal year ended December 31, 1994 to $402,000, compared to a net
loss of $14,000. In November 1994, the Bank sold
36
<PAGE>
$17.1 million and $35.0 million of GNMA and FHLMC mortgage servicing rights,
respectively. The Bank does not estimate that these types of sales will recur
during 1995.
Loss on investment securities was $152,000 during the fiscal year ended
December 31, 1994, compared to a gain on sale of investments of $411,000 for the
fiscal year ended December 31, 1993. The losses during 1994 were recognized
primarily through the sale of municipal bonds during the quarter ended December
31, 1994. During 1995, the Bank may determine that sales of investment
securities are necessary to provide necessary liquidity, control IRR or provide
funding for loan originations. If sales were to transpire, gains or losses may
be recognized.
Gain on sale of real estate owned was $349,000 during the fiscal year ended
December 31, 1993. This resulted from a sale of an REO property during 1993
which did not recur in 1994. At December 31, 1994, the Bank held three
properties in REO status with a net book value of $955,000. Approximately
$805,000 is attributable to a 217 unit multi-family dwelling in Omaha, Nebraska.
The Bank is actively pursuing the sale of these REO assets and if sold during
1995, a gain or loss may be recognized.
Noninterest Expense. Noninterest expense decreased $96,000 during the
fiscal year ended December 31, 1994 to $9.7 million from $9.8 million for the
fiscal year ended December 31, 1993.
Provision for loss on REO increased to $91,000 for the fiscal year ended
December 31, 1994, compared to $5,000 for the fiscal year ended December 31,
1993. As previously described herein, the Bank is pursuing the sale of a 217
unit multi-family REO asset. During 1995, additional provisions for loss on REO
may be required. The adequacy of the REO provision is analyzed by the Bank's
Asset Classification Committee on a quarterly basis.
Adoption of Financial Accounting Standard 115 (FAS 115). On January 1,
1994, the Bank adopted FAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." In November 1993, an FASB staff announcement at an EITF
meeting questioned whether mortgage-backed securities that were not "high risk"
at acquisition could be classified as "held-to-maturity" under FAS 115. The OTS
questioned that ability as well and did not allow such classification and on
January 1, 1994 the Bank classified its investment and mortgage-backed
securities as "available-for-sale."
In July 1994, the OTS and the FASB reached an agreement stating that
mortgage-backed securities were eligible for "held-to-maturity" treatment under
FAS 115, and such holdings could be accounted for at amortized cost.
Accordingly, the Bank transferred $140 million of its mortgage-backed securities
to "held-to-maturity" from "available-for-sale." This transfer was made at the
fair market value of the mortgage-backed securities reclassified as "held-to-
maturity," with the $7.0 million unrealized net loss being amortized over the
life of the securities transferred. This transfer occurred on August 8, 1994.
SIX MONTHS ENDED DECEMBER 31, 1993 AND 1992
Overview. Net income increased $1.1 million for the six-month fiscal year
ended December 31, 1993 to $2.4 million from $1.3 million for the six months
ended December 31, 1992. An increase of $1.1 million in net interest income
after provision for loan loss and the $462,700 positive impact of the cumulative
effect of applying Financial Accounting Standard 109 (Income Taxes) was
partially offset by an increase of $374,000 in non-interest expense and a
decrease of $115,000 in non-interest income.
Interest Income. Interest income increased $1.2 million, or 11.1%, for the
six-month fiscal year ended December 31, 1993 to $12.4 million from $11.2
million for the six months ended December 31, 1992. Of this increase, $3.0
million resulted from an increase of $72.9 million in the average balance of
37
<PAGE>
interest-earning assets, which was offset $1.8 million from a decrease to 7.82%
from 9.14% in the average yield on interest-earning assets.
Interest Expense. Interest expense increased $241,000 for the six-month
fiscal year ended December 31, 1993 to $6.3 million from $6.0 million for the
six months ended December 31, 1992. Of this increase, $1.4 million resulted from
a $59.1 million increase in the average balance of interest-bearing liabilities,
which was offset $1.2 million by a decrease to 4.24% from 5.10% in the average
cost of interest-bearing liabilities.
Net Interest Income. Net interest income increased $1.0 million for the
six- month fiscal year ended December 31, 1993 to $6.2 million from $5.2
million for the six months ended December 31, 1992. During the six-month fiscal
year ended December 31, 1993, the interest rate spread decreased to 3.58% from
4.05%, while average interest-bearing assets increased $72.9 million. The
Asset/Liability Committee continued to aggressively manage the asset and
liability rates of return and respective volumes.
Provision for Loan Losses. The provision for loan losses decreased by
$53,000 to a credit of $23,000 for the six-month fiscal year ended December 31,
1993 from $31,000 for the six months ended December 31, 1992. Quarterly, the
Bank performs formal asset classification procedures consistent with OTS
regulations and procedures. The results of these classifications determine the
quarterly increase or decrease in the provision for loan losses.
Noninterest Income. Noninterest income decreased $115,000 for the six-month
fiscal year ended December 31, 1993 to $1.3 million from $1.4 million for the
six months ended December 31, 1992. Gain on sale of real estate loans increased
by $115,000 to $615,000 for the six-month fiscal year ended December 31, 1993 as
real estate mortgage loans sold on a servicing released basis to correspondent
lenders increased during this period.
Loss from loan servicing decreased $113,000 to $35,000 for the six-month
fiscal year ended December 31, 1993 from $148,000 for the six months ended
December 31, 1992. In March and June 1993, Conservative sold approximately $235
million of loan servicing. These transactions improved the performance of the
loan servicing portfolio.
Noninterest Expense. Noninterest expense increased by $374,000 for the six-
month fiscal year ended December 31, 1993 to $5.0 million from $4.7 million for
the six months ended December 31, 1992. On August 13, 1993, the Bank acquired
selected assets and assumed deposit liabilities of a former savings and loan
association in Overland Park, Kansas from the RTC. Noninterest expense
associated with this transaction was $385,000.
FISCAL YEARS ENDED JUNE 30, 1993 AND 1992
Overview. Net income increased $683,000 for the fiscal year ended June 30,
1993 to $3.0 million from $2.3 million for the fiscal year ended June 30, 1992.
An increase of $1.1 million in net interest income after provision for loan loss
and a $1.3 million increase in non-interest income were partially offset by an
increase of $1.5 million in non-interest expense.
Interest Income. Interest income decreased $1.1 million, or 4.7%, for the
fiscal year ended June 30, 1993 to $21.6 million from $22.7 million for the
fiscal year ended June 30, 1992. Of this decrease, $2.8 million resulted from a
decrease to 8.88% from 10.16% in the average yield on interest-earning assets,
which was offset $1.7 million from an increase of $20.3 million, or 9.1%, in the
average balance of interest-earning assets.
38
<PAGE>
Interest Expense. Interest expense decreased $2.4 million for the fiscal
year ended June 30, 1993 to $11.4 million from $13.8 million for the fiscal year
ended June 30, 1992 of this decrease, $3.4 million resulted from a decrease to
4.86% from 6.41% in the average cost of interest-bearing liabilities, which was
offset $1.0 million from an increase of $18.9 million, or 8.8%, in the average
balance of interest-bearing liabilities.
Net Interest Income. Net interest income increased $1.4 million for the
fiscal year ended June 30, 1993 to $10.3 million from $8.9 million for the
fiscal year ended June 30, 1992. This increase resulted from an increase in the
interest rate spread to 4.02% from 3.75% as well as increases in the average
balances on interest-earning assets and interest-bearing liabilities. During the
fiscal year ended June 30, 1993, management increased the interest rate spread
by aggressively reducing the average cost of interest-bearing liabilities. In
addition, the interest rate spread benefitted during the fiscal year ended June
30, 1993 from a negative interest rate gap position in a declining interest rate
environment, which resulted in interest-bearing liabilities repricing more
frequently than interest-earning assets.
Provision for Loan Losses. The provision for loan losses increased by
$250,000 to $31,000 for the fiscal year ended June 30, 1993 from a credit of
$219,000 for the fiscal year ended June 30, 1992. Quarterly, the Bank performs
formal asset classification procedures consistent with OTS regulations and
procedures. The results of these classifications determine the quarterly
increase or decrease in the provision for loan losses.
Noninterest Income. Non-interest income increased $1.3 million, or 62.1%,
for the fiscal year ended June 30, 1993 to $3.3 million from $2.0 million for
the fiscal year ended June 30, 1992. Gain on sale of REO increased to $314,000
for the fiscal year ended June 30, 1993 from $430 for the fiscal year ended June
30, 1992. On February 12, 1993, the Bank sold its ownership interest in the Del
Lago Resort and Conference Center REO assets and recorded a $273,000 gain during
its third fiscal quarter. In addition, on February 26, 1993, the Bank sold its
64-unit multi-family REO asset located in Omaha, Nebraska and recorded a $32,000
gain during its third fiscal quarter.
Gain on sale of investments increased to $696,000 for the fiscal year ended
June 30, 1993 from $114,000 for the fiscal year ended June 30, 1992. The Bank
continued to manage its Asset/Liability process by selling certain investment
securities during the fiscal year ended June 30, 1993.
The Bank reported a loss from loan servicing of $112,000 for the fiscal
year ended June 30, 1993 compared to income from loan servicing of $316,000 for
the fiscal year ended June 30, 1992. This decrease was attributable to
accelerated pre-payments, and refinances of mortgage loans which was consistent
with declining interest rates in the United States. During April 1993, the Bank
sold the rights to service approximately $204 million of FHLMC and FNMA mortgage
loans. A $325,000 loss on the sale of these purchased mortgage servicing rights
was recorded. During June 1993, the Bank sold the rights to service
approximately $30.8 million of FHLMC and FNMA mortgage loans which were
generated internally by the Bank. A $311,000 gain on the sale of these mortgage
servicing rights was recorded.
Noninterest Expense. Noninterest expense increased by $1.5 million, or
18.6%, to $9.4 million for the fiscal year ended June 30, 1993 from $7.9 million
for the fiscal year ended June 30, 1992. Employee compensation increased by $1.1
million, or 32.6%, to $4.5 million for the fiscal year ended June 30, 1993 from
$3.4 million for the fiscal year ended June 30, 1992. This increase was
partially attributable to an increase in the number of employees. In addition,
competitive benefit and compensation plans were implemented to provide
incentives to employees , including bonuses and deferred compensation plans
based upon increased profitability and targeted return on equity ratios.
Occupancy and equipment
39
<PAGE>
expense increased by $457,000, or 47.4%, to $1.4 million for the fiscal year
ended June 30, 1993 from $964,000 for the fiscal year ended June 30, 1992. An
upgrade to the Bank's computer system, the leasing of an additional 5,000 square
feet of office space, the opening of the Bank's Bellevue, Nebraska branch office
and the depreciation expense associated with these activities contributed to
this increase.
SUBSEQUENT EVENTS
In January 1995, the Bank commenced consideration of the level of
profitability, the location and on-going viability of one of its branch
locations in Omaha, Nebraska. Management is considering three options for this
branch; 1) close the branch location and sell the building. Deposit liabilities
assigned to this branch location would be serviced from the remaining Bank
branch locations in Omaha; 2) Sell the branch building, the furniture and the
deposit liabilities to an existing financial institution, or 3) allow the branch
location to remain open and dedicate additional marketing, personnel and product
resources to improve its operations. At December 31, 1994, the branch had $6.0
million in deposit liabilities. Management is expected to decide upon the most
prudent alternative by June 30, 1995. None of the selective above alternatives
would be expected to have a significant unfavorable impact upon Conservative's
financial condition in 1995.
On February 27, 1995, the Bank has signed an agreement to sell a vacant
tract of land immediately south of its corporate headquarters in Omaha,
Nebraska. This transaction is expected to close on or before May 31, 1995 at a
total price of $435,000, before sales commissions and expenses. At February 28,
1995, the Bank's net book value of the land was $107,000.
NEW ACCOUNTING STANDARDS
During the second quarter of 1993, the Financial Accounting Standards Board
issued Financial Accounting Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by Financial Accounting Statement No. 118,
"Accounting by Creditors for Impairment of a Loan -Income Recognition and
Disclosures," (FAS 114). FAS 114 requires that impaired loans be measured based
on the present value of expected future cash flows discounted at the loan's
effective interest rate, which is the contractual interest rate adjusted for any
deferred loan fees or costs, premium, or discount existing at the inception or
acquisition of the loan. FAS 114 is effective for fiscal years beginning after
December 15, 1994, with early adoption permitted. The Bank chose not to adopt
FAS 114 prior to its effective date and will adopt FAS 114 in the first quarter
of 1995. Presently, the Bank is unable to quantify the impact that adoption of
FAS 114 will have on the consolidated financial statements but Management
estimates that the impact will not be material.
IMPACT OF INFLATION
The primary impact of inflation on Conservative's operations is increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.
40
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
The Board of Directors and Stockholders
Conservative Savings Corporation
We have audited the accompanying consolidated statements of financial condition
of Conservative Savings Corporation as of December 31, 1994 and 1993 and June
30, 1993, and the related consolidated statements of income, stockholders'
equity and cash flows for the year ended December 31, 1994, the six months in
the period ended December 31, 1993 and each of the two years in the period
ended June 30, 1993. These financial statements are the responsibility of the
Bank'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.
As discussed in Note 1(b) to the consolidated financial statements the Bank
changed its method of accounting for investments.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conservative Savings Corporation as of December 31, 1994 and 1993 and June 30,
1993, and the consolidated results of its operations and its consolidated cash
flows for the year ended December 31, 1994, the six months in the period ended
December 31, 1993 and each of the two years in the period ended June 30, 1993,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P
Omaha, Nebraska
February 3, 1995
41
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
Conservative Savings Corporation
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
At December 31, At June 30,
------------------------------- -------------
1994 1993 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash............................................................................$ 3,933,792 $ 2,631,085 $ 3,259,429
Federal funds sold.............................................................. 1,700,000 5,000,000 6,900,000
------------- ------------- -------------
Total cash and cash equivalents................................................. 5,633,792 7,631,085 10,159,429
Investment securities available for sale (estimated market value
$22,033,756, $47,985,397, and $45,512,672 respectively).................... 22,033,756 45,641,746 43,409,111
Investment securities held-to-maturity,
(estimated market value $17,793,281)....................................... 18,463,124 - -
Mortgage-backed securities available for sale (estimated market value
$25,274,779, $165,030,594, and $55,830,072 respectively).................. 25,274,779 163,966,552 54,090,062
Mortgage-backed securities held-to-maturity (estimated
market value $131,450,374)................................................ 139,747,321 - -
Loans held for sale (estimated market value $541,399,
$8,069,124, and $6,602,634, respectively)................................. 525,229 7,950,493 6,509,001
Real estate loans receivable, net............................................... 126,710,650 136,286,818 107,152,478
Consumer loans receivable, net.................................................. 27,955,508 23,734,128 23,257,985
Federal Home Loan Bank stock, at cost........................................... 7,850,000 7,450,000 2,250,000
Accrued interest receivable..................................................... 2,618,216 2,607,466 1,991,677
Real estate owned, net.......................................................... 954,894 28,865 28,865
Office premises and equipment, net.............................................. 6,104,386 5,777,525 5,101,735
Deferred taxes.................................................................. 3,231,044 25,000 -
Other........................................................................... 5,351,418 5,972,267 2,679,445
------------- ------------- -------------
Total assets..............................................................$ 392,454,117 $ 407,071,945 $ 256,629,788
============= ============= =============
</TABLE>
__________________________________________________________
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Deposits........................................................................$ 207,113,531 $ 229,428,531 $ 193,922,799
Federal Home Loan Bank borrowings............................................... 149,500,000 139,000,000 24,000,000
Advances by borrowers for taxes and insurance................................... 1,284,939 1,496,173 1,206,408
Accrued interest payable........................................................ 165,551 123,517 1,821,091
Other liabilities............................................................... 1,925,701 1,255,331 1,476,849
Current income taxes payable.................................................... 55,263 179,998 47,915
Deferred income taxes payable................................................... _ - 462,700
------------ ------------ ------------
Total liabilities............................................................... 360,044,985 371,483,550 222,937,762
------------ ------------ ------------
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
460,000, 460,000 and 460,000 respectively, issued and outstanding... 4,600 4,600 4,600
Common Stock, $.01 par value, 10,000,000 shares authorized, 1,833,074,
1,823,480, and 910,503, respectively, issued and outstanding........ 18,331 18,235 9,105
Additional paid-in capital................................................ 21,041,998 20,927,663 20,910,158
Retained income........................................................... 17,210,523 14,637,897 12,768,163
Net unrealized loss on securities, net of $3,022,043 tax benefit.......... (5,866,320) - -
------------ ------------ ------------
Total stockholders' equity.......................................... 32,409,132 35,588,395 33,692,026
------------ ------------ ------------
Total liabilities and stockholders' equity......................................$ 392,454,117 $ 407,071,945 $ 256,629,788
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Conservative Savings Corporation
================================================================================
<TABLE>
<CAPTION>
Fiscal year ended Six months ended Fiscal year ended
December 31, December 31, June 30,
-------------------------- -------------------------- --------------------------
1994 1993 1993 1992 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend Income: (Unaudited) (Unaudited)
Loans....................................$ 14,478,978 $ 14,658,255 $ 7,730,411 $ 7,577,450 $ 14,505,294 $ 16,385,161
Mortgage-backed securities............... 9,846,710 4,867,544 2,936,907 1,889,457 3,820,094 3,254,257
Investment securities.................... 2,810,347 2,939,847 1,472,390 1,553,351 3,020,808 2,291,614
Other interest-earning deposits.......... 231,209 218,755 136,961 86,001 167,795 672,982
Dividends on Federal Home Loan
Bank stock.............................. 470,502 192,995 133,412 61,893 121,476 103,839
Total interest and dividend
------------ ------------ ------------ ------------ ------------ ------------
income................................ 27,837,746 22,877,396 12,410,081 11,168,152 21,635,467 22,707,853
------------ ------------ ------------ ------------ ------------ ------------
Interest expense:
Deposits................................. 9,315,267 9,757,373 4,961,083 5,622,439 10,418,729 13,150,715
FHLB borrowings.......................... 6,198,680 1,882,990 1,289,121 386,725 980,594 675,381
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense................. 15,513,947 11,640,363 6,250,204 6,009,164 11,399,323 13,826,096
------------ ------------ ------------ ------------ ------------ ------------
Net interest income before provision for
loan loss............................... 12,323,799 11,237,033 6,159,877 5,158,988 10,236,144 8,881,757
Provision (credit) for loan loss....... 189,932 (22,010) (22,597) 30,503 31,090 (218,990)
Net interest income after provision
------------ ------------ ------------ ------------ ------------ ------------
for loan loss........................... 12,133,867 11,259,043 6,182,474 5,128,485 10,205,054 9,100,747
------------ ------------ ------------ ------------ ------------ ------------
Noninterest Income:
Income from operations of real estate
held for investment, net................ - - - 21,754 21,754 43,253
(Loss) from operations of real estate
owned................................... (84,185) (42,588) (1,709) (4,401) (45,280) (46,903)
Gain on sale of loans.................... 657,680 1,088,490 615,127 499,808 973,171 728,281
Gain (loss) on sale of real estate
owned................................... (2,716) 349,324 42,778 7,615 314,161 430
Gain (loss) on investment
securities.............................. (152,072) 411,489 123,558 407,799 695,730 113,649
Gain (loss) on sale of premises and
equipment............................... 304,504 (7,507) - (4,448) (11,955) -
Gain on sale of mortgage servicing
rights.................................. 399,500 310,898 - - 310,898 -
Gain (loss) on sale of purchased
mortgage servicing rights............... 2,878 (324,800) - - (324,800) -
Income (loss) from loan servicing........ 61,366 1,663 (35,116) (148,375) (111,596) 315,579
Other.................................... 989,603 1,387,987 543,827 623,586 1,467,746 890,895
------------ ------------ ------------ ------------ ------------ ------------
Total noninterest income............... 2,176,558 3,174,956 1,288,465 1,403,338 3,289,829 2,045,184
------------ ------------ ------------ ------------ ------------ ------------
Noninterest expense:
Employee compensation and benefits....... 4,431,570 4,799,603 2,456,740 2,137,731 4,480,594 3,378,420
Advertising and promotions............... 446,500 486,098 314,174 200,462 372,386 389,777
Occupancy and equipment.................. 1,588,773 1,542,615 759,110 638,367 1,421,872 964,394
SAIF premiums and special
assessments............................. 519,784 478,542 228,315 257,304 507,531 452,529
Provision for losses on real
estate owned............................ 91,014 5,093 - 362,570 367,663 755,933
Professional service expense............. 199,259 175,811 77,572 102,782 201,021 218,383
Other general and administrative
expenses................................ 2,410,360 2,295,354 1,211,541 974,590 2,058,403 1,795,658
------------ ------------ ------------ ------------ ------------ ------------
Total noninterest expense.............. 9,687,260 9,783,116 5,047,452 4,673,806 9,409,470 7,955,094
------------ ------------ ------------ ------------ ------------ ------------
Income before taxes and cumulative effect of
a change in accounting principle.......... 4,623,165 4,650,883 2,423,487 1,858,017 4,085,413 3,190,837
------------ ------------ ------------ ------------ ------------ ------------
Tax Provision (Benefit)
Current............................... 1,315,797 787,330 534,400 785,370 1,038,300 1,051,000
Deferred.............................. (184,000) 220,700 (25,000) (166,000) 79,700 (145,000)
------------ ------------ ------------ ------------ ------------ ------------
Provision for income taxes............ 1,131,797 1,008,030 509,400 619,370 1,118,000 906,000
------------ ------------ ------------ ------------ ------------ ------------
Net income before cumulative effect of a
change in accounting principle............ 3,491,368 3,642,853 1,914,087 1,238,647 2,967,413 2,284,837
Cumulative effect of retroactive
application of a change in
accounting principle (FAS 109)........ - 462,700 462,700 - - -
------------ ------------ ------------ ------------ ------------ ------------
Net income.................................$ 3,491,368 $ 4,105,553 $ 2,376,787 $ 1,238,647 $ 2,967,413 $ 2,284,837
============ ============ ============ ============ ============ ============
Net income applicable to common
shareholders..............................$ 2,792,168 $ 3,744,298 $ 2,027,187 $ 1,238,647 $ 2,955,919 $ 2,284,837
============ ============ ============ ============ ============ ============
Per share amounts:
Earnings per common and common equivalent share:
Income before cumulative effect of
accounting change.........................$ 1.505 $ 2.056 $ 0.849 $ 0.940 $ 2.220 $ 1.755
Cumulative effect of accounting
change.................................... - 0.290 0.251 - - -
------------ ------------ ------------ ------------ ------------ -----------
Net income.............................$ 1.505 $ 2.346 $ 1.100 $ 0.940 $ 2.220 $ 1.755
============ ============ ============ ============ ============ ===========
Earnings per common share - assuming full dilution:
Income before cumulative effect of
accounting change.......................$ 1.206 $ 1.701 $ 0.662 $ 0.940 $ 2.200 $ 1.755
Cumulative effect of accounting
change.................................. - 0.216 0.160 - - -
------------ ------------ ------------ ------------ ------------ -----------
Net income.............................$ 1.206 $ 1.917 $ 0.822 $ 0.940 $ 2.200 $ 1.755
============ ============ ============ ============ ============ ===========
Weighted average common and common
equivalent shares outstanding....... 1,855,849 1,596,084 1,846,392 1,315,277 1,329,036 1,303,090
============ ============ ============ ============ ============ ===========
Weighted average common and common
equivalent shares outstanding,
assuming full dilution.............. 2,895,449 2,141,304 2,889,016 1,320,437 1,346,552 1,303,090
============ ============ ============ ============ ============ ===========
Cash dividends per common share.........$ 0.120 $ 0.130 $ 0.080 $ 0.075 $ 0.125 $ 0.075
============ ============ ============ ============ ============ ===========
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Conservative Savings Corporation
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Preferred stock paid-in
-------------------- -------------------
Shares Amount Shares Amount capital
--------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1991........................... 651,075 $ 6,511 - $ - $ 5,748,579
Net income....................................
Cash dividends................................
----------- -------- --------- -------- ----------
Balance, June 30, 1992........................... 651,075 6,511 - - 5,748,579
Net income....................................
Cash dividends................................
Issuance of common stock...................... 259,428 2,594 4,371,083
Issuance of preferred stock................... 460,000 4,600 10,790,496
----------- -------- --------- -------- ----------
Balance, June 30, 1993........................... 910,503 9,105 460,000 4,600 20,910,158
Net income....................................
Cash dividends................................
Issuance of common stock...................... 1,237 13 26,622
Stock split-up................................ 911,740 9,117 (9,117)
----------- -------- --------- -------- ----------
Balance, December 31, 1993....................... 1,823,480 18,235 460,000 4,600 20,927,663
Cumulative effect of adopting SFAS 115:
Unrealized gain on securities available
for sale, net of $1,158,616 tax............
Net income....................................
Cash dividends................................
Issuance of common stock...................... 9,594 96 114,335
Net change in net unrealized loss on
securities, net of tax benefit and accretion.
----------- -------- --------- -------- ----------
Balance, December 31, 1994....................... 1,833,074 $ 18,331 460,000 $ 4,600 $21,041,998
=========== ======== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
Net
unrealized Total
Retained loss on Stockholders'
earnings investments Equity
----------- ----------- -----------
<S> <C> <C> <C>
Balance, June 30, 1991...........................$ 7,776,389 $ - $ 13,531,479
Net income.................................... 2,284,837 2,284,837
Cash dividends................................ (97,661) (97,661)
----------- ----------- -----------
Balance, June 30, 1992........................... 9,963,565 - 15,718,655
Net income.................................... 2,967,413 2,967,413
Cash dividends................................ (162,815) (162,815)
Issuance of common stock...................... 4,373,677
Issuance of preferred stock................... 10,795,096
----------- ----------- -----------
Balance, June 30, 1993........................... 12,768,163 - 33,692,026
Net income.................................... 2,376,787 2,376,787
Cash dividends................................ (507,053) (507,053)
Issuance of common stock...................... 26,635
Stock split-up................................ 0
----------- ----------- -----------
Balance, December 31, 1993....................... 14,637,897 - 35,588,395
Cumulative effect of adopting SFAS 115:
Unrealized gain on securities available
for sale, net of $1,158,616 tax............ 2,249,077 2,249,077
Net income.................................... 3,491,368 3,491,368
Cash dividends................................ (918,742) (918,742)
Issuance of common stock...................... 114,431
Net change in net unrealized loss on
securities, net of tax benefit and accretion. (8,115,397) (8,115,397)
----------- ----------- -----------
Balance, December 31, 1994.......................$ 17,210,523 $ (5,866,320) $ 32,409,132
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For fiscal year ended Six months ended
December 31, December 31,
------------------------------------ --------------------
1994 1993 1993
-------------- ---------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..........................................................$ 3,491,368 $ 4,105,553 $ 2,376,787
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Cumulative effect of a change in accounting principle............... - (462,700) (462,700)
Amortization of:
Investment security premiums and accretion of discounts.......... 48,825 81,635 38,675
Mortgage-backed security premiums and accretion
of discounts................................................ 175,179 121,748 77,749
Deferred loan origination fees................................... (383,182) (286,419) (154,776)
Discounts on loans purchased..................................... (730,125) (627,373) (384,750)
Cost of purchased mortgage servicing rights...................... 103,285 580,733 128,492
Core deposit intangible.......................................... 458,795 318,495 202,127
(Gain) loss on:
Sale of investment and mortgage-backed securities................ 152,072 (411,489) (123,558)
Sale of loans.................................................... (657,680) (1,088,490) (615,127)
Sale of purchased mortgage servicing rights...................... (402,378) 13,902 -
Sale of repossessed assets....................................... 9,387 1,365 (1,253)
Sale of real estate owned........................................ 2,716 (349,324) (42,778)
Sale of premises and equipment................................... (304,504) 7,507 -
Provision (credit) for:
Loan loss........................................................ 189,932 (22,010) (22,597)
Loss on real estate owned........................................ 91,014 (5,093) -
Writedown of real estate owned...................................... - - -
Dividends on Federal Home Loan Bank stock........................... - - -
Depreciation........................................................ 720,607 664,893 325,912
Purchase of:
Investment securities............................................ - (10,588,246) (5,771,310)
Mortgage-backed securities....................................... - (129,531,101) (120,748,485)
Origination of loans held for sale.................................. (43,386,358) (117,301,356) (58,894,273)
Proceeds from sale of:
Investment securities............................................ - 10,849,648 3,500,000
Mortgage servicing rights........................................ - 310,898 -
Mortgage-backed securities....................................... - 24,604,839 7,560,743
Loans held for sale.............................................. 44,891,769 65,701,277 37,951,642
Proceeds from:
Maturity of investments available for sale....................... - 101,500 -
Repayment of mortgage-backed securities available for sale....... - 34,827,215 23,473,329
Decrease (increase) in:
Accrued interest receivable...................................... (10,750) (271,000) (428,433)
Deferred tax asset............................................... (184,000) (25,000) (25,000)
Other assets..................................................... 253,070 (85,433) (227,255)
Increase (decrease) in:
Accrued interest payable......................................... 42,034 (529,338) (2,151,204)
Other liabilities................................................ 742,387 (191,744) (32,527)
Current income taxes payable..................................... (124,735) 275,727 132,083
Deferred income taxes payable.................................... - (61,357) -
---------------- ----------------- -----------------
Net cash provided (used) in operating activities.....................$ 5,188,728 $ (119,270,538) $ (114,318,487)
---------------- ----------------- -----------------
<CAPTION>
Six months ended Fiscal year ended
December 31 June 30
--------------- ---------------------------
1992 1993 1992
--------------- ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..........................................................$ 1,238,647 $ 2,967,413 $ 2,284,837
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Cumulative effect of a change in accounting principle............... - - -
Amortization of:
Investment security premiums and accretion of discounts.......... 103,825 146,785 149,718
Mortgage-backed security premiums and accretion
of discounts................................................ 29,047 73,046 22,760
Deferred loan origination fees................................... (183,770) (315,413) (212,873)
Discounts on loans purchased..................................... (411,998) (654,621) (888,900)
Cost of purchased mortgage servicing rights...................... 912,646 1,364,887 1,150,491
Core deposit intangible.......................................... 116,369 232,737 223,439
(Gain) loss on:
Sale of investment and mortgage-backed securities................ (407,799) (695,730) (113,649)
Sale of loans.................................................... (499,808) (973,171) (728,281)
Sale of purchased mortgage servicing rights...................... - 13,902 -
Sale of repossessed assets....................................... 5,089 7,707 (1,646)
Sale of real estate owned........................................ (7,615) (314,161) (430)
Sale of premises and equipment................................... 4,448 11,955 200
Provision (credit) for:
Loan loss........................................................ 30,503 31,090 (218,990)
Loss on real estate owned........................................ 362,570 367,663 755,933
Writedown of real estate owned...................................... - - 4,411
Dividends on Federal Home Loan Bank stock........................... - - (103,839)
Depreciation........................................................ 253,424 592,405 408,804
Purchase of:
Investment securities............................................ (11,278,938) (16,095,874) (29,738,760)
Mortgage-backed securities....................................... - (8,785,261) (17,478,706)
Origination of loans held for sale.................................. (48,756,948) (86,089,390) (53,620,324)
Proceeds from sale of:
Investment securities............................................ 4,036,408 11,386,056 6,067,563
Mortgage servicing rights........................................ - 310,898 -
Mortgage-backed securities....................................... - 18,142,058 5,622,228
Loans held for sale.............................................. 30,187,141 40,629,138 43,818,935
Proceeds from:
Maturity of investments available for sale....................... 2,902,187 3,003,687 7,000,000
Repayment of mortgage-backed securities available for sale....... 8,718,987 18,967,656 8,956,546
Decrease (increase) in:
Accrued interest receivable...................................... 32,887 190,320 (134,365)
Deferred tax asset............................................... - - -
Other assets..................................................... (193,172) 19,802 (229,662)
Increase (decrease) in:
Accrued interest payable......................................... (2,328,992) (707,126) 95,254
Other liabilities................................................ 112,920 (46,298) 595,131
Current income taxes payable..................................... 88,662 (5,043) (45,720)
Deferred income taxes payable.................................... (96,292) 79,700 (145,000)
--------------- -------------- -------------
Net cash provided (used) in operating activities.....................$ (15,029,572) $ (16,143,183) $ (26,504,895)
--------------- -------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes are not integral of the consolidated financial
statements.
45
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Conservative Savings Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal year ended For six months
December 31, December 31,
--------------------------- ---------------------
1994 1993 1993
------------ ------------ ---------------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from investing activities:
Maturity of certificates of deposit.................................... $ - $ - $ -
Proceeds from sale of:
Investment securities available for sale............................. 21,383,377 - -
Mortgage-backed securities available for sale........................ 22,732,474 - -
Real estate owned.................................................... 58,696 1,179,723 42,778
Repossessed assets................................................... 61,373 20,051 6,700
Office premises and equipment........................................ 862,269 8,905 -
Purchased mortgage servicing rights.................................. 137,315 2,457,385 -
Proceeds from:
Maturity of investments available for sale.......................... 2,125,000 - -
Repayment of:
Mortgage-backed securities available for sale.................. 15,187,804 - -
Mortgage-backed securities held-to-maturity.................... 240,038 - -
Purchase of:
Investment securities available for sale............................ (320,046) - -
Investment securities held-to-maturity.............................. (18,460,000) - -
Mortgage-backed securities available for sale....................... (41,486,235) - -
Purchased mortgage servicing rights................................. - - -
Core deposits....................................................... - (3,401,633) (3,401,633)
Federal Home Loan Bank stock........................................ (400,000) (6,043,000) (5,200,000)
Office premises and equipment....................................... (1,605,231) (1,858,963) (1,001,702)
Cash equivalents acquired and cash received from
Resolution Trust Corporation........................................ 21,350,598 21,752,231
Loans put back to the Resolution Trust Corporation..................... - - -
Decrease (increase) in:
Loans receivable.................................................... 5,214,180 26,292,570 10,743,932
Real estate owned................................................... (14,472) - -
Real estate held for investment..................................... - - -
------------- ------------ -------------
Net cash provided by investing activities.............................. 5,716,542 40,005,636 22,942,306
------------- ------------ -------------
Cash flows from financing activities:
Net (increase) decrease in:
Deposits............................................................ (22,315,000) (49,182,612) (25,036,388)
Advances by borrowers for taxes and insurance....................... (211,234) (657,358) (446,363)
Principal and interest received on loans serviced for others........ (72,018) (594,510) (188,994)
Federal Home Loan Bank borrowings................................... 10,500,000 115,000,000 115,000,000
Proceeds from issuance of stock........................................ 114,431 15,195,408 26,635
Dividends paid......................................................... (918,742) (572,207) (507,053)
-------------- ------------ --------------
Net cash provided by financing activities.............................. (12,902,563) 79,188,721 88,847,837
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (1,997,293) (76,181) (2,528,344)
Cash and cash equivalents at beginning of period....................... 7,631,085 7,707,266 10,159,429
------------- ------------- --------------
Cash and cash equivalents at end of period................................ $ 5,633,792 $ 7,631,085 $ 7,631,085
============= ============ ==============
Supplemental disclosure:
Cash paid during the year for:
Interest on deposits and Federal Home Loan Bank borrowings................ $ 8,712,380 $ 5,114,158 $ 2,789,749
Income taxes.............................................................. 1,419,434 817,332 400,000
Cash received from income tax refund...................................... - - -
Noncash activities:
Mortgage loans securitized................................................ 6,577,533 44,738,076 20,116,266
Unrealized net loss on available for sale securities...................... (8,888,363) - -
Transfer of:
Mortgage-backed securities available for sale to
mortgage-backed securities held-to-maturity............................ 146,888,358 - -
Loans receivable to real estate owned..................................... 1,063,983 71,981 71,981
Real estate owned to loans receivable..................................... - 368,000 368,000
Real estate held for investment to office premises........................ - - -
<CAPTION>
For six months ended Fiscal year ended
December 31, June 30,
-------------------- ----------------------
1992 1993 1992
-------------------- ---------- ----------
Cash flows from investing activities: (Unaudited)
<S> <C> <C> <C>
Maturity of certificates of deposit.................................... $ 295,000 $ 295,000 $ 2,874,075
Proceeds from sale of:
Investment securities available for sale............................. - - -
Mortgage-backed securities available for sale........................ - - -
Real estate owned.................................................... - 1,494,759 55,005
Repossessed assets................................................... 60,037 73,388 153,632
Office premises and equipment........................................ 743 9,648 5,256
Purchased mortgage servicing rights.................................. - 2,457,385 -
Proceeds from:
Maturity of investments available for sale.......................... - - -
Repayment of:
Mortgage-backed securities available for sale.................. - - -
Mortgage-backed securities held-to-maturity.................... - - -
Purchase of:
Investment securities available for sale............................ - - -
Investment securities held-to-maturity.............................. - - -
Mortgage-backed securities available for sale....................... - - -
Purchased mortgage servicing rights................................. - - (3,170,092)
Core deposits....................................................... - - (136,287)
Federal Home Loan Bank stock........................................ - (843,000) (336,561)
Office premises and equipment....................................... (1,127,470) (1,984,731) (1,234,081)
Cash equivalents acquired and cash received from
Resolution Trust Corporation........................................ - - 4,865,472
Loans put back to the Resolution Trust Corporation..................... - - 8,417,830
Decrease (increase) in:
Loans receivable.................................................... 3,902,926 14,853,677 11,907,235
Real estate owned................................................... (40,352) (40,352) (4,418)
Real estate held for investment..................................... - - (1,768)
----------- ------------- ------------
Net cash provided by investing activities.............................. 3,090,884 16,315,774 23,395,298
----------- ------------- ------------
Cash flows from financing activities:
Net (increase) decrease in:
Deposits............................................................ (5,647,943) (29,794,167) 16,606,212
Advances by borrowers for taxes and insurance....................... 65,292 (145,703) (156,535)
Principal and interest received on loans serviced for others........ (227,122) (632,638) 629,112
Federal Home Loan Bank borrowings................................... 20,000,000 20,000,000 (9,000,000)
Proceeds from issuance of stock........................................ - 15,168,773 -
Dividends paid......................................................... (97,661) (162,815) (97,661)
----------- ------------ -----------
Net cash provided by financing activities.............................. 14,092,566 4,433,450 7,981,128
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 2,153,878 4,606,041 4,871,531
Cash and cash equivalents at beginning of period....................... 5,553,388 5,553,388 681,857
----------- ------------ -----------
Cash and cash equivalents at end of period................................ $ 7,707,266 $ 10,159,429 $ 5,553,388
=========== ============ ===========
Supplemental disclosure:
Cash paid during the year for:
Interest on deposits and Federal Home Loan Bank borrowings................ $ 1,704,554 $ 4,028,963 $ 6,013,842
Income taxes.............................................................. 630,000 1,047,332 880,000
Cash received from income tax refund...................................... - - 446,333
Noncash activities:
Mortgage loans securitized................................................ 17,096,370 41,708,275 7,837,407
Unrealized net loss on available for sale securities...................... - - -
Transfer of:
Mortgage-backed securities available for sale to
mortgage-backed securities held-to-maturity............................ - - -
Loans receivable to real estate owned..................................... 181,019 253,000 715,344
Real estate owned to loans receivable..................................... - - -
Real estate held for investment to office premises........................ 454,259 454,259 -
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Conservative Savings Corporation
- --------------------------------------------------------------------------------
1. (a) Consolidation:
SIGNIFICANT The consolidated financial statements include the accounts
ACCOUNTING of Conservative Savings Corporation (the "Corporation")
POLICIES and its wholly owned subsidiary, Conservative Savings
Bank, F.S.B. (the "Bank").
(b) Investment and mortgage-backed securities: On January 1,
1994, the Bank adopted Financial Accounting Statement No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115") which requires that investment
securities available for sale be reported at fair value with
any unrealized gains or losses excluded from earnings and
reflected as a separate component of stockholders' equity.
The adoption of FAS 115 did not affect the Bank's
methodology for determining the carrying value of its
securities held-to-maturity. Additionally, FAS 115 specifies
accounting principles in regard to transfers among the
portfolios and the conditions that would permit such
transfers. Investment securities available for sale are
classified as such due to the fact that management may
decide to sell certain securities prior to maturity for
liquidity , tax planning or other valid business purposes.
Investment securities are held in two portfolios: (i) held-
to-maturity securities, and (ii) securities available for
sale. Investment securities held-to-maturity are stated at
cost adjusted for amortization of premiums and accretion of
discounts. With regard to investment securities held-to-
maturity, management has the intent and ability to to hold
such securities until maturity. The adoption of FAS 115
resulted in the addition of $2.2 million to stockholders'
equity at January 1, 1994, representing the tax-effected net
unrealized gain on the Bank's available for sale portfolio
at that date. The tax-effected unrealized loss of $5.9
million at December 31, 1994, is reflected as a reduction of
stockholders' equity. Subsequent increases and decreases in
the net unrealized gain/loss on the portfolio of securities
available for sale will be reflected as adjustments to the
carrying value of the portfolio and as adjustments to the
components of stockholders' equity.
During all periods prior to the date of adoption, the Bank
reported securities available for sale at the lower-of-cost-
or-market with any valuation adjustment reflected in
earnings as required by generally accepted accounting
principles at that time.
Amortization of premiums and accretion of discounts on
investment securities are recognized in interest income
using a method that approximates the level yield method. Net
gains and losses on the sale of investment securities,
computed principally on the specific identification method,
are shown separately in noninterest income in the
"Consolidated Statements of Income."
(c) Loans held for sale:
Mortgage loans originated and intended for sale to
correspondents or securitization in the secondary market are
carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized in a
valuation allowance by charges to income.
(d) Loans receivable:
Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses, and net deferred loan
origination fees and discounts.
The allowance for loan losses is established through
provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when
management believes that the collectibility of the principal
is unlikely. The allowance is an amount that management
believes will be adequate to absorb losses inherent in
existing loans, based on evaluation of the collectibility of
loans and prior loss experience. The evaluations take into
consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality,
review of loan concentrations and specific problem loans,
and current economic conditions that may affect the
borrowers' ability to pay.
Loan origination fees from underwriting and closing mortgage
loans are deferred. The deferred fees and discounts are
recognized as income over the entire term of the loans using
the level yield method.
Discount on loans received from the Resolution Trust
Corporation ("RTC"), resulting from acquisitions, are being
amortized over the remaining life of the respective loans
acquired.
Loans are placed on nonaccrual status when either a payment
is more than ninety days past due or when any serious doubts
as to borrower's ability to perform under the loan terms
exists, unless the loan is well secured and in the process
of collection. Interest payment on nonaccrual loans is
recorded as cost recovery or interest income depending on
management's assessment of the ultimate collectibility of
the loan principal. At the time a loan is placed on
nonaccrual status, interest previously accrued and
uncollected is charged against income.
(e) Real estate owned:
Real estate acquired through foreclosure is recorded at the
lower of cost or fair value less estimated costs to sell.
Valuations are periodically performed by management, and an
allowance for loss is established by a charge to operations
for the excess of the cost of a property over its estimated
fair value.
(f) Office premises and equipment:
Office premises and equipment are carried at cost less
accumulated depreciation and are depreciated using the
straight line method over the estimated useful life of the
respective asset. Expenditures for maintenance and repairs
are charged to expense as incurred. The gain or loss on
disposal of assets is reflected in noninterest income.
(g) Purchased mortgage servicing rights:
The cost of purchased mortgage servicing rights acquired is
amortized in proportion to, and over the period of,
estimated net servicing revenues. The cost of mortgage
servicing rights purchased and the amortization thereon is
periodically evaluated in relation to estimated future net
servicing revenues. The Bank evaluates the carrying value of
the servicing portfolio by estimating the future net
servicing income of the portfolio based on management's best
estimate of remaining loan lives.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
________________________________________________________________________________
1. (h) Intangibles:
SIGNIFICANT The core deposit intangible arising from the acquisition of
ACCOUNTING selected assets and the assumption of deposit liabilities of a
POLICIES former savings and loan institution is being amortized on a
(Continued) straight-line basis over the estimated remaining lives of the
deposits assumed.
(i) Income taxes:
Effective July 1, 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires the use of the liability method. Under
this method, deferred tax liabilities and assets are
determined based on the difference between the financial
statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which differences
are expected to reverse (see note 16.)
The Corporation and the Bank file a consolidiated federal
income tax return. Current and deferred tax expense are
allocated based on the liability each would have as a separate
taxpayer.
Prior to July 1, 1993, deferred income taxes are provided on
components of income that are recognized for financial
accounting purposes in periods different from such items that
are recognized for income tax purposes under the deferred
method.
(j) Earnings per share:
Earnings per common and common equivalent share is computed by
dividing net income applicable to common sharehloders by the
weighted average number of common and common equivalent shares
outstanding for the period. Common stock equivalents include
shares issuable under options granted pursuant to the employee
stock option program, computed using the treasury stock
method. Net income applicable to common shareholders adjusts
net income for dividends applicable to the convertible
preferred stock for the period. Earnings per common share-
assuming full dilution is computed by dividing net income by
the weighted average number of common and common equivalent
shares and assumes conversion of preferred stock for the
period outstanding. In November, 1993, a two-for-one stock
split was effected in the form of a 100% stock dividend on its
common stock. All references to the number of common shares
and per common share amounts have been restated to reflect the
split.
(k) Statement of cash flows:
Cash equivalents include cash and federal funds sold. For
purposes of the statement of cash flows, the Bank considers
all highly liquid debt instruments with maturities of three
months or less when purchased to be cash equivalents.
(l) Reclassifications:
Certain amounts from prior years have been reclassified to
conform to current period presentation.
(m) Accounting period:
In October, 1993 the Corporation elected to change its year
for financial reporting purposes from a fiscal year ending on
June 30 to a calendar year.
2. (a) On September 27, 1991, the Bank purchased selected assets
ACQUISITION of two branches of a former savings and loan institution
OF SELECTED from the RTC through the assumption of deposit liabilities,
ASSETS AND related accrued interest payable accounts, and a premium
ASSUMPTION payment. The selected assets acquired and certain
OF DEPOSITS liabilities assumed were recorded at their estimated fair
values at the date of acquisition.
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents..............................................$ 18,659,832
Real estate loans receivable........................................... 19,806,501
Consumer loans receivable.............................................. 1,768,257
Other assets........................................................... 210,205
--------------
Total................................................................ 40,444,795
--------------
LIABILITIES:
Deposits............................................................... 36,481,652
Interest payable and escrow balances assumed........................... 631,628
--------------
Total................................................................ 37,113,280
--------------
Excess assets.......................................................... 3,331,515
Less cash due to the RTC............................................. (3,467,802)
--------------
Premium paid...........................................................$ 136,287
=============
</TABLE>
The purchase and assumption agreement enabled the Bank to put
assets back to the RTC at prices, and for intervals, as
specified in the agreement. Loans receivable include
$8,417,830 of loans put back to the RTC for which funds were
received from the RTC in March 1992.
In February 1992, the RTC remitted cash of approximately
$2,671,671 to the Bank as payment for discounted values at
which the selected assets were acquired. The loan discounts
received are being recognized as income over the term of the
loans acquired.
In December 1991, the Bank elected not to exercise its option,
granted under the terms of the RTC's purchase and assumption
agreement, to acquire the branch building in Avoca, Iowa. All
account relationships were transferred to the Bank's Harlan,
Iowa office. In connection with the purchase and assumption
agreement, the premium paid of $136,287 has been allocated to
the computed value of the core deposits assumed.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
2. (b) On August 13, 1993, the Bank purchased selected assets of
ACQUISITION a former savings and loan institution from the RTC
OF SELECTED through the assumption of deposits and related accrued
ASSETS AND interest payable accounts and a premium payment. The
ASSUMPTION selected assets acquired and certain liabilities assumed
OF DEPOSITS are as follows:
(Continued)
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents............................................$ 6,320,679
Loans receivable..................................................... 39,792,291
Interest receivable.................................................. 187,356
----------
Total............................................................. 46,300,326
LIABILITIES: ----------
Deposits............................................................. 60,542,120
Interest payable and escrow balances assumed......................... 1,189,758
----------
Total............................................................. 61,731,878
----------
Excess liabilities................................................... (15,431,552)
Less cash received from the RTC................................... 12,029,919
----------
Premium paid.........................................................$ (3,401,633)
==========
</TABLE>
On October 7, 1993, the RTC remitted cash of approximately
$879,488 to the Bank as payment for the discounted values
at which selected assets were acquired. The discounts are
being recognized as income over the term of the selected
assets acquired.
________________________________________________________________________________
3.
Under the regulations of the Office of Thrift
STOCKHOLDERS' Supervision ("OTS"), the Bank is required to meet
EQUITY mininium core capital and tangible capital requirements,
which are defined as 3% and 1.5% of total assets,
respectively. The Bank had core capital (as defined) of
$34,201,000 at December31, 1994, which exceeded its
required core capital requirement of approximately
$11,831,000 by $22,370,000.
In October 1985, the Bank converted to a State of Nebraska
charter stock association from a mutual savings and loan
association. At the time of conversion, The Bank
established a liquidation account in the amount of
$6,306,991, equal to the Bank's net worth at March 31,
1985. This account was established for the benefit of
account holders on the eligibility record date of December
31, 1984, who continue to maintain their deposit accounts
with the Bank. The purpose of the account is to grant a
priority interest to eligible account holders in the event
of a future complete liquidation. This account is reduced
annually in proportion to the reduction of eligible account
balances. The Bank may not declare or pay a cash dividend
that would reduce retained income below the amount required
for the liquidation account or the regulatory capital. On
August 9, 1990, the Bank was converted to a federally
chartered stock savings bank.
Regulatory approval is required if total dividends declared
by the Bank during a calendar year exceed the higher of (a)
net income to date during the year plus the amount that
would reduce by one-half their surplus capital ratio at
the beginning of the year, or (b) 75% of net income over
the most recent four quarter period. At December 31, 1994,
dividends of approximately $12,968,000 were available from
the Bank without such approval.
Dividends on the preferred stock are cumulative at an
annual rate of $1.52 per share. The preferred stock is
convertible by the holder at any time at a conversion price
of approximately $11.06 per share (equivalent to a rate of
2.26 shares of Common Stock for each share of Convertible
Preferred Stock.) The preferred stock may be redeemed at
the option of the Corporation prior to June 30, 1996, if
certain conditions are met, and at any time after June 29 ,
1996 at prices ranging from $26.50 to $25.00.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
================================================================================
4. Investment securities consist of the following:
INVESTMENT
SECURITIES
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------------------------
Amortized Gross unrealized Estimated
------------------------
Investments available for sale: cost gains losses fair value
------------------------------ -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government obligations......................$ 5,084,384 $ - $ (334,384) $ 4,750,000
Municipal bonds.................................. 17,136,417 428,541 (281,202) 17,283,756
-------------- ---------- ----------- -------------
Total......................................$ 22,220,801 $ 428,541 $ (615,586) $ 22,033,756
============== ========== =========== =============
<CAPTION>
Investment securities held-to-maturity:
--------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations......................$ 15,492,220 $ - $ (638,939) $ 14,853,281
Corporate bonds.................................. 2,970,904 - (30,904) 2,940,000
-------------- ---------- ----------- -------------
Total......................................$ 18,463,124 $ - $ (669,843) $ 17,793,281
============== ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1993
-----------------------------------------------------
Amortized Gross unrealized Estimated
------------------------
Investments available for sale: cost gains losses fair value
------------------------------ -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government obligations......................$ 23,817,447 $ 504,432 $ (4,806)$ 24,317,073
Municipal bonds.................................. 21,824,299 1,847,687 (3,662) 23,668,324
-------------- ---------- ----------- -------------
Total......................................$ 45,641,746 $2,352,119 $ (8,468)$ 47,985,397
============== ========== =========== =============
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1993
------------------------------------------------------
Amortized Gross unrealized Estimated
------------------------
Investments available for sale: cost gains losses fair value
------------------------------ -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Government obligations......................$ 23,854,974 $ 654,381 $ (5,601) $ 24,503,754
Municipal bonds.................................. 19,554,137 1,456,006 (1,225) 21,008,918
-------------- ---------- ----------- -------------
Total......................................$ 43,409,111 $2,110,387 $ (6,826) $ 45,512,672
============== ========== =========== =============
</TABLE>
At December 31, 1994, the Bank had Federal Home Loan Bank
notes and Federal National Mortgage Association notes with
costs of $5,497,258 and $5,084,385, respectively, pledged
as collateral.
Interest income from municipal bonds approximated
$1,328,000 and $1,273,000 for the twelve months ended
December 31, 1994 and 1993, respectively, and $654,000 and
$513,000 for six months ending December 31, 1993, and
1992, respectively, and $1,131,000 for the fiscal year
ending June 30, 1993.
The maturity distribution and weighted average yield of
the investment securities available for sale of the Bank
as of December 31, 1994, are summarized in the table set
forth below:
<TABLE>
<CAPTION>
Due under 1 year Due 1 - 5 years
---------------------------------- ----------------------------------
Estimated Amortized Estimated Amortized
Investments available for sale: fair value cost Yield fair value cost Yield
------------------------------ ----------- ----------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations......$ - $ - - % $ - $ - - %
Municipal bonds.................. - - - 209,786 200,000 6.85
------------ ------------ ------- ------------ ----------- -----
Total......................$ - $ - - % $ 209,786 $ 200,000 6.85 %
============ ============ ======= ============ =========== =====
<CAPTION>
Due 5 - 10 years Due over 10 years
---------------------------------- ---------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
----------- ----------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations......$ 4,750,000 $ 5,084,384 7.38 % $ - $ - - %
Municipal bonds.................. 8,120,626 7,823,537 6.69 8,953,344 9,112,880 5.88
------------ ------------ ------- ------------ ----------- -----
Total......................$ 12,870,626 $ 12,907,921 6.96 % $ 8,953,344 $ 9,112,880 5.88 %
============ ============ ======= ============ =========== =====
</TABLE>
The maturity distribution and weighted average yield of
the investment securities held-to-maturity of the Bank as
of December 31, 1994, are summarized in the table set
forth below:
<TABLE>
<CAPTION>
Investment securities held-to-maturity:
--------------------------------------
Due under 1 year Due 1 - 5 years
---------------------------------- ---------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations............$ - $ - - % $ 10,233,281 $ 10,492,220 6.53 %
Corporate bonds........................ - - - 2,940,000 2,970,904 7.42
------------ ------------ ------- ------------ ------------ ------
Total...............................$ - $ - - % $ 13,173,281 $ 13,463,124 6.73 %
============ ============ ======= ============ ============ ======
<CAPTION>
Due 5 - 10 years Due over 10 years
---------------------------------- ---------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
----------- ----------- -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations............$ - $ - - % $ 4,620,000 $ 5,000,000 7.60 %
Corporate bonds........................ - - - - - -
------------ ------------ ------- ----------- ----------- -----
Total...............................$ - $ - - % $ 4,620,000 $ 5,000,000 7.60 %
============ ============ ======= =========== =========== =====
</TABLE>
Weighted average yield is calculated by dividing income
within each maturity range by the outstanding amount of
the related investment.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. Mortgage-backed securities consist of the following:
MORTGAGE- At December 31, 1994
BACKED -------------------------------------------------------
SECURITIES Mortgage-backed securities available for sale: Amortized Gross unrealized Estimated
---------------------------------------------- -------------------------
cost gains losses fair value
------------ ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Real Estate Mortgage Investment Conduits.................. $ 6,734,903 $ 4 $ (313,725) $ 6,421,182
U.S. Agency and private issue participation certificates.. 20,338,669 - (1,485,072) 18,853,597
------------- -------- ------------- --------------
Total............................................... $ 27,073,572 $ 4 $ (1,798,797) $ 25,274,779
============= ========= ============= ==============
Mortgage-backed securities held-to-maturity: At December 31, 1994
------------------------------------------- --------------------------------------------------------
Amortized Gross unrealized Estimated
----------------
cost gains losses fair value
------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Real Estate Mortgage Investment Conduits..................$ 139,747,321 $ - $ (8,296,947) $ 131,450,374
U.S. Agency and private issue participation certificates.. - - - -
-------------- ---------- -------------- ---------------
Total...............................................$ 139,747,321 $ - $ (8,296,947) $ 131,450,374
=============== ========== ============== ==============
Mortgage-backed securities available for sale: At December 31, 1993
--------------------------------------------- -------------------------------------------------------
Amortized Gross unrealized Estimated
----------------
cost gains losses fair value
------------ ---------- -------------- ---------------
<S> <C> <C> <C> <C>
Real Estate Mortgage Investment Conduits.................. $ 118,998,812 $ 749,978 $ (558,394) $ 119,190,396
U.S. Agency and private issue participation certificates.. 44,967,740 993,337 (120,879) 45,840,198
------------- ---------- -------------- ----------------
Total............................................... $ 163,966,552 $1,743,315 $ (679,273) $ 165,030,594
============= ========== ============== ===============
Mortgage-backed securities available for sale: At June 30, 1993
--------------------------------------------- -----------------------------------------------------
Amortized Gross unrealized Estimated
----------------
cost gains losses fair value
----------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Real Estate Mortgage Investment Conduits.................. $ 10,246,488 $ 132,264 $ (17,836) $ 10,360,916
U.S. Agency and private issue participation certificates.. $ 43,843,574 1,644,327 (18,745) 45,469,156
------------ ---------- ------------ ---------------
Total............................................... $ 54,090,062 $1,776,591 $ (36,581) $ 55,830,072
============= ========== ============== ===============
</TABLE>
The maturity distribution and weighted average yield of the
mortgage-backed securities of the Bank as of December 31, 1994,
are summarized in the table set forth below:
Mortgage-backed securities available for sale:
---------------------------------------------
<TABLE>
<CAPTION>
Due under 1 year Due 1 - 5 years
------------------------------------------- -----------------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
Real Estate Mortgage ------------ ----------- ----------- ------------- ------------- -----------
Investment Conduits......$ - $ - - % $ 973,490 $ 1,000,774 6.49 %
U.S. Agency and private issue
participation certificate - - - 2,932,146 3,099,563 6.90
------------ ---------- ---- ------------- ---------------- ----
Total.................$ - $ - - % $ 3,905,636 $ 4,100,337 6.80 %
============ ========== ==== ============= ================ ====
Due in 5 - 10 years Due over 10 years
------------------------------------------- ---------------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
------------- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Mortgage
Investment Conduits......$ - $ - - % $ 5,447,692 $ 5,734,129 6.61 %
U.S. Agency and private issue
participation
certificate 1,124,139 1,228,014 5.56 14,797,312 16,011,092 6.63
------------ ------------ ---- ---------- -------------- ----
Total.................$ 1,124,139 $ 1,228,014 5.56 % $20,245,004 $ 21,745,221 6.62 %
============ =========== ==== =========== ================ ====
Mortgage-backed securities held-to-maturity:
-------------------------------------------
Due under 1 year Due 1 - 5 years
------------------------------------------- ------------------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
------------ ------------ ------------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Mortgage
Investment Conduits...$ - $ - - % $ - $ - - %
U.S. Agency and private issue
participation certificates - - - - - -
------------ ------------ ---- ------------- ------------- ----
Total.................$ - $ - - % $ - $ - - %
============ ============ ==== ============= ============= ====
Due 5 -10 years Due over 10 years
-------------------------------------------- -----------------------------------------
Estimated Amortized Estimated Amortized
fair value cost Yield fair value cost Yield
------------ ------------ ------------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Mortgage
Investment Conduits...$ - $ - - % $ 131,450,374 $ 139,747,321 5.20 %
U.S. Agency and private issue
participation
certificates - - - - - -
------------ ------------- ---- -------------- -------------- ----
Total.................$ - $ - - % $ 131,450,374 $ 139,747,321 5.20 %
============ ============= ==== ============== ============== ====
</TABLE>
Weighted average yield is calculated by dividing income within
each maturity range by the outstanding amount of the related
investment.
Securities with an amortized cost of $146,888,358 were
transferred from available for sale to held-to-maturity during
1994. This transfer occurred as various regulatory authorities
provided additional guidance allowing these reclassifications.
The unrealized loss of $7,034,090 at the date of the transfer
will be amortized over the remaining lives of the securities
using the interest method.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
6. Unrealized losses included as a separate component of stockholders'
equity at December 31, 1994 is comprised of the following:
UNREALIZED
LOSS
STOCKHOLDERS'
EQUITY
<TABLE>
<S> <C>
Net unrealized losses on available for sale securities net of $675,185 tax benefit..................$ 1,310,653
Net unrealized losses on securities transferred from available for sale
to held-to-maturity, net of $2,346,858 tax benefit and accretion................................. 4,555,667
----------
Net unrealized loss on securities, net of $3,022,043 tax benefit....................................$ 5,866,320
==========
</TABLE>
- --------------------------------------------------------------------------------
7. The components of loans held for sale are as follows:
LOANS
HELD FOR SALE
<TABLE>
<CAPTION>
December 31, At June 30,
------------------------ ------------
1994 1993 1993
----------- ----------- ------------
<S> <C> <C> <C>
Loans to be securitized with FHLMC or FNMA..........................$ - $ 2,443,325 $ 3,264,514
Loans to be sold to correspondent lenders........................... 525,229 5,507,168 3,244,487
--------- ----------- -------------
Balance at end of period.........................................$ 525,229 $ 7,950,493 $ 6,509,001
========= =========== =============
</TABLE>
- --------------------------------------------------------------------------------
8. The components of loans receivable are as follows:
LOANS
RECEIVABLE
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------------- -------------
1994 1993 1993
----------- ------------- -------------
<S> <C> <C> <C>
Real estate:
One-to-four family.................................................$ 54,000,588 $ 64,048,456 $ 54,597,249
Multi-family....................................................... 54,447,189 56,253,713 33,889,824
Construction....................................................... 12,605,808 11,928,862 11,711,866
Commercial......................................................... 16,016,862 15,429,653 15,572,502
Land............................................................... 169,430 176,045 382,785
------------ ------------ ------------
Total real estate loans......................................... 137,239,877 147,836,729 116,154,226
------------ ------------ ------------
Consumer:
Consumer........................................................... 25,508,130 22,598,183 22,421,916
Commercial......................................................... 1,498,375 1,087,077 910,223
Loans secured by deposits.......................................... 492,633 255,236 317,686
Other.............................................................. 884,224 273,145 88,890
------------ ------------ ------------
Total consumer loans............................................ 28,383,362 24,213,641 23,738,715
------------ ------------ ------------
Total gross loans..................................................... 165,623,239 172,050,370 139,892,941
Less:
Undisbursed portion of loans in process............................ 7,272,378 7,190,611 5,535,096
Allowance for loan losses.......................................... 803,041 1,129,310 768,476
Deferred loan origination fees..................................... 759,667 932,770 517,682
Discounts on loans purchased....................................... 2,121,995 2,776,733 2,661,224
------------ ------------ ------------
Loans receivable, net.................................................$ 154,666,158 $ 160,020,946 $ 130,410,463
============ ============ ============
</TABLE>
The Bank expects to have in the future, banking transactions with
officers, directors and their immediate families directly, or
indirectly through entities in which they are principal owners. The
table below sets forth the loans to officers, directors and other
related parties:
<TABLE>
<CAPTION>
At December 31, At June 30,
---------------------- ------------------------
1994 1993 1993 1992
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Beginning balance.............................................. $ 1,447,204 $ 1,333,258 $ 896,969 $ 724,819
Loans originated............................................ 234,867 475,618 1,120,750 514,571
Principal payments received................................. (760,721) (361,672) (684,461) (342,421)
---------- ---------- ---------- -----------
Ending balance................................................. $ 921,350 $ 1,447,204 $ 1,333,258 $ 896,969
========== ========== ========== ===========
</TABLE>
At December 31, 1994 and 1993 and June 30, 1993 and 1992, the Bank
was servicing real estate loans for others of approximately
$527,354, $23,341,000, $30,387,000 and $340,949,000, respectively.
- --------------------------------------------------------------------------------
9. Accrued interest receivable consists of the following:
ACCRUED
INTEREST
RECEIVABLE
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------- -----------
1994 1993 1993
------------- ----------- -----------
<S> <C> <C> <C>
Loans receivable...................................................... $ 995,366 $ 1,072,183 $ 917,553
Investment securities................................................. 748,038 757,148 745,874
Mortgage-backed securities............................................ 890,502 791,049 358,421
------------- ----------- ----------
Total.............................................................. 2,633,906 2,620,380 2,021,848
Less allowance for uncollectible interest............................. (15,690) (12,914) (30,171)
------------- ----------- ----------
Total accrued interest receivable, net............................. $ 2,618,216 $ 2,607,466 $ 1,991,677
============= =========== ==========
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
10. The following is a summary of changes in the allowance for loan
ALLOWANCE loss:
FOR LOSS
<TABLE>
<CAPTION>
Fiscal year ended, Six months ended, Fiscal year ended,
December 31, December 31, June 30,
----------------------- --------------------- ----------------------
1994 1993 1993 1992 1993 1992
--------- --------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.......$ 1,129,310 $ 776,646 $ 768,476 $ 786,428 $ 786,428 $ 1,127,625
Charge-offs:
Real estate loans: 21,647 21,647 28,150
One-to-four family............. - - - - - -
Multi-family................... 469,785 - - - - -
Commercial..................... - - - - - -
Consumer loans.................... 80,186 54,281 26,741 36,473 64,013 146,464
---------- ---------- ---------- --------- ---------- ----------
Total charge-offs.............. 549,971 54,281 26,741 58,120 85,660 174,614
---------- ---------- ---------- --------- ---------- ----------
Recoveries:
Real estate loans:
One-to-four family............. - - - - - 1,500
Multi-family................... - - - - - -
Commercial..................... - - - - - -
Consumer loans.................... 33,770 27,322 8,539 17,835 36,618 29,620
---------- ---------- ---------- --------- ---------- ----------
Total recoveries............... 33,770 27,322 8,539 17,835 36,618 31,120
---------- ---------- ---------- --------- ---------- ----------
Net charge-offs...................... (516,201) (26,959) (18,202) (40,285) (49,042) (143,494)
Provision (credit) for loan loss.. 189,932 (22,010) (22,597) 30,503 31,090 (218,990)
Market valuation allowance........ - 401,633 401,633 - - 21,287
---------- ---------- ---------- --------- ---------- ----------
Balance at end of period,............$ 803,041 $ 1,129,310 $ 1,129,310 $ 776,646 $ 768,476 $ 786,428
========== ========== ========== ========= ========= ==========
</TABLE>
- -------------------------------------------------------------------------------
11. The following is a summary of activity in real estate owned:
REAL ESTATE
OWNED
<TABLE>
<CAPTION>
Fiscal year ended, Six months ended, Fiscal year ended,
December 31, December 31, June 30,
----------------------- --------------------- ----------------------
1994 1993 1993 1992 1993 1992
--------- --------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period......$ 33,959 $ 2,192,528 $ 33,959 $ 1,965,792 $ 1,965,792 $ 1,383,098
Additions........................ 1,078,454 - - 293,352 293,352 719,762
Write-downs...................... (11,886) (1,042,337) - (2,250) (1,044,587) (82,494)
Sales............................ (61,411) (1,116,232) - (64,366) (1,180,598) (54,574)
---------- ---------- --------- ------------ ----------- -----------
Real estate owned, gross...... 1,039,116 33,959 33,959 2,192,528 33,959 1,965,792
Allowance for loss............... (84,222) (5,094) (5,094) (1,044,587) (5,094) (682,018)
---------- ---------- --------- ------------ ----------- -----------
Balance at end of period, net.......$ 954,894 $ 28,865 $ 28,865 $ 1,147,941 $ 28,865 $ 1,283,774
========== ========== ========= ============ =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
12. The following is a summary of changes in the allowance for loss
ALLOWANCE on real eastate owned:
FOR LOSS ON
REAL ESTATE
OWNED
<TABLE>
<CAPTION>
Fiscal year ended, Six months ended, Fiscal year ended,
December 31, December 31, June 30,
----------------------- --------------------- ----------------------
1994 1993 1993 1992 1993 1992
--------- --------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period......$ 5,094 $ 1,042,338 $ 5,094 $ 682,018 $ 682,018 $ 4,168
Charge-offs......................... (11,886) (1,042,337) - (2,250) (1,044,587) (78,083)
Provision for loss.................. 91,014 5,093 - 362,570 367,663 755,933
-------- ---------- -------- ---------- ----------- --------
Balance at end of period,...........$ 84,222 $ 5,094 $ 5,094 $ 1,042,338 $ 5,094 $ 682,018
======== ========== ======== ========== =========== ========
</TABLE>
- --------------------------------------------------------------------------------
13. Office premises and equipment consists of the following:
OFFICE
PREMISES AND
EQUIPMENT
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------- ---------------
1994 1993 1993
------------ ------------ ---------------
<S> <C> <C> <C>
Buildings and improvements................................. $ 4,396,897 $ 3,896,109 $ 3,379,095
Equipment.................................................. 3,644,464 3,077,478 2,890,577
------------ ----------- -------------
8,041,361 6,973,587 6,269,672
Less accumulated depreciation.............................. (3,426,444) (2,848,787) (2,536,867)
------------ ----------- -------------
4,614,917 4,124,800 3,732,805
Land....................................................... 1,489,469 1,652,725 1,368,930
------------ ----------- -------------
Office premises and equipment, net......................... $ 6,104,386 $ 5,777,525 $ 5,101,735
============ =========== =============
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Bank
- --------------------------------------------------------------------------------
14. The components of deposits are as follows:
DEPOSITS
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------------------------- --------------------
1994 1993 1993
------------------- --------------------- ---------------------
Checking accounts: Amount % Amount % Amount %
----------- ----- ------------ ------ -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing....................$ 1,337,676 0.6 % $ 3,171,205 1.4 % $ 3,436,274 1.8%
NOW accounts:
1.75% to 2.25%, 2.00%, 2.50%,
and 3.50%, respectively............. 14,847,781 7.2 12,881,311 5.6 10,423,539 5.4
----------- ----- ----------- ----- ----------- ------
16,185,457 7.8 16,052,516 7.0 13,859,813 7.2
----------- ----- ----------- ----- ----------- ------
Money market account:
1.75% to 2.96%, 1.75% to 2.80%,
2.00% to 3.05% and 2.30% to
3.85%, respectively............... 7,276,120 3.5 10,402,161 4.5 8,718,908 4.5
----------- ----- ----------- ----- ----------- ------
7,276,120 3.5 10,402,161 4.5 8,718,908 4.5
----------- ----- ----------- ----- ----------- ------
Savings accounts:
2.25% to 4.937%, 2.25% to 2.75%,
2.75% to 3.75% and 0.00% to
4.99%, respectively.............. 24,074,829 11.6 29,076,712 12.7 27,453,015 14.2
----------- ----- ----------- ----- ----------- ------
24,074,829 11.6 29,076,712 12.7 27,453,015 14.2
----------- ----- ----------- ----- ----------- ------
Certificate accounts:
2.00% to 4.99%....................... 89,116,037 43.0 110,535,859 48.2 57,079,997 29.4
5.00% to 6.99%....................... 59,991,598 29.0 48,263,828 21.0 67,271,400 34.7
7.00% to 8.99%....................... 10,345,794 5.0 14,256,939 6.2 18,683,515 9.6
9.00% to 10.99%...................... 123,696 0.1 105,996 0.1 186,034 0.1
11.00 % and over....................... - - 734,520 0.3 670,117 0.3
----------- ----- ----------- ----- ----------- ------
159,577,125 77.1 173,897,142 75.8 143,891,063 74.1
----------- ----- ----------- ----- ----------- ------
Total deposits...........................$ 207,113,531 100.0 % $ 229,428,531 100.0 % $ 193,922,799 100.0 %
=========== ====== ========== ===== =========== ======
</TABLE>
Deposits at December 31, 1994 and 1993, and June 30, 1993,
include $9,395,702, $11,957,256, and $6,938,094, respectively,
in public fund deposits. Investment securities with a book
value of $10,581,643, $13,096,418, and $11,084,826 were pledged
as collateral on these deposits, respectively.
<TABLE>
<CAPTION>
At
December 31,
-----------
Certificates mature as follow: 1994
----------------------------- -----------
<S> <C>
Within one year..........................................................................$ 116,657,889
Greater than one to two years............................................................ 26,841,579
Greater than two to three years.......................................................... 7,453,084
Thereafter............................................................................... 8,624,573
-------------
Total certificate accounts..................................................................$ 159,577,125
=============
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSERVATIVE SAVINGS CORPORATION
- --------------------------------------------------------------------------------
14. Deposit interest expense by type consists of the following:
DEPOSITS
(continued)
<TABLE>
<CAPTION>
For fiscal year ended Six months ended Fiscal year ended
December 31, December 31, June 30,
------------------------ ------------------------ -------------------------
1994 1993 1993 1992 1993 1992
----------- ----------- ----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts..................$ 8,143,377 $ 8,385,253 $ 4,264,298 $ 4,924,749 $ 9,045,704 $ 11,530,499
Savings accounts...................... 706,907 847,544 433,002 423,828 838,370 916,780
Checking and money market accounts.... 464,983 524,576 263,783 273,862 534,655 703,436
----------- ----------- ----------- ----------- ----------- ------------
Total interest on deposits..........$ 9,315,287 $ 9,757,373 $ 4,961,083 $ 5,622,439 $ 10,418,729 $ 13,150,715
=========== =========== =========== =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
15.
FEDERAL HOME Federal Home Loan Bank borrowings consist of the following:
AND BANK
BORROWINGS
<TABLE>
<CAPTION>
At December 31, At June 30,
--------------------------- ------------
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Due within one year:
--------------------
Federal Home Loan Bank borrowings........................................$ 132,500,000 $ 139,000,000 $ 24,000,000
Federal Home Loan Bank line of credit.................................... 17,000,000 -- --
------------ ------------ ------------
Total Federal Home Loan bank borrowings outstanding........................$ 149,500,000 $ 139,000,000 $ 24,000,000
============ ============ ============
Weighted average interest rate............................................. 6.31% 3.48% 4.26%
===== ===== =====
</TABLE>
The Bank has signed a blanket pledge agreement to collateralize
the advances and borrowings. At December 31, 1994, assets of
$196.5 million are pledged to collateralize the pledge agreement.
Additionally, the Bank has a $40.7 million line of credit with the
Federal Home Loan Bank expiring in April, 1995.
The weighted average interest rate is calculated by dividing
interest expense by the outstanding amount of the total
borrowings.
- --------------------------------------------------------------------------------
16.
INCOME TAXES Effective July 1, 1993 the Corporation adopted FAS 109. The
cumulative effect of this change as of July 1, 1993 increased net
income by $462,700, which has been reflected separately in the
consolidated statement of income. Excluding the amount recognized
as the cumulative effect of applying FAS 109 on net income, there
was no significant effect applying FAS 109 on net income for the
six months ended December 31, 1993. Prior years' financial
statements have not been restated.
The Bank is allowed a special bad debt deduction limited generally
to 8% in 1994, 1993 and 1992 of the otherwise taxable income,
subject to certain limitations based on the aggregate loan and
deposit balances at the end of the year. If the amounts that
qualify as deductions for federal income tax purposes are later
used for purposes other than for bad debt losses, they will be
subject to federal income tax at the then current corporate rate.
Retained income for federal income tax purposes at December 31,
1994, includes approximately $2,284,000 for which a deferred tax
liability of $777,000 has not been recognized.
The components of the net deferred tax asset as of December 31,
1994 and 1993, respectively, were as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------
1994 1993
----------- ------------
<S> <C> <C>
Deferred tax asset:
Urealized loss on securities............................................................$ 3,022,044 $ --
Reserve for loan losses................................................................. 170,764 209,100
Deferred compensation................................................................... 201,522 179,300
REO properties.......................................................................... 36,327 --
Other................................................................................... 10,069 13,100
----------- ------------
Total deferred tax asset.............................................................. 3,440,726 401,500
----------- ------------
Deferred tax liability:
FHLB stock.............................................................................. 91,528 193,300
Premises and equipment.................................................................. -- 64,000
Municipal bonds......................................................................... 22,457 --
Other assets............................................................................ 95,697 24,700
----------- ------------
Total deferred tax liability.......................................................... 209,682 282,000
----------- ------------
Net deferred tax asset before valuation allowance......................................... 3,231,044 119,500
Valuation allowance....................................................................... -- 94,500
----------- ------------
Net deferred tax asset....................................................................$ 3,231,044 $ 25,000
=========== ============
</TABLE>
Income tax expense (benefit) differs from that computed using the
statutory 34% rate as follows:
<TABLE>
<CAPTION>
Twelve months ended Six months ended Fiscal year ended
December 31, December 31, June 30,
------------------------ ------------------------ -------------------------
1994 1993 1994 1993 1994 1993
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates................$ 1,571,876 $ 1,581,302 $ 823,988 $ 631,726 $ 1,389,040 $ 1,084,908
Increase (decrease) in taxes:
Nontaxable interest, net............ (437,936) (422,285) (217,176) (170,864) (375,979) (210,232)
State tax........................... 66,898 82,570 44,135 28,710 87,145 66,006
Dividend exclusion.................. -- (52,010) (31,752) (21,044) (41,302) (35,305)
Other, net.......................... (69,041) (181,547) (109,795) 150,842 79,090 623
----------- ----------- ----------- ----------- ----------- ------------
Total income tax expense..............$ 1,131,797 $ 1,008,030 $ 509,400 $ 619,370 $ 1,118,000 $ 906,000
=========== =========== =========== =========== =========== ============
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
16. During the years ended June 30, 1993, and 1992, deferred
INCOME TAXES income tax expense (benefit) resulted from timing differences
(Continued) in the recognition of income and expenses for income tax and
financial statement purposes. The source of the timing
differences and related income tax effects were as follows:
<TABLE>
<CAPTION>
Fiscal year ended
June 30,
---------------------------
1993 1992
------------- -----------
<S> <C> <C>
Accelerated depreciation.............................................................$ (34,952)$ (5,868)
Provisions for loan losses........................................................... 282,057 114,182
Provisions for REO losses............................................................ (18,190) (257,017)
Deferred compensation................................................................ (44,917) -
Other, net........................................................................... (104,298) 3,703
------------- -------------
Total deferred tax expense (benefit)..............................................$ 79,700 $ (145,000)
============= =============
</TABLE>
- --------------------------------------------------------------------------------
17. The Bank sponsors a defined benefit plan (the Plan) covering
EMPLOYEE substantially all of its employees. The benefits are based on
BENEFIT PLANS years of credited services and levels of compensation. The
Bank's funding policy is to fund amounts as are necessary on
an accrual basis to provide assets sufficient to meet the
benefits to be paid to plan members in accordance with the
requirements of ERISA. There were no charges to expense for
the twelve months ended December 31, 1994, the six months
ended December 31, 1993, and fiscal years ended June 30,
1993, and 1992.
The table below sets forth the Plan's funded status:
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------ ------------
1994 1993 1993
------------ ---------- -----------
<S> <C> <C> <C>
Accumulated benefit obligations:
Vested...............................................................$ 850,506 $ 778,373 $ 684,680
Nonvested............................................................ 61,725 66,077 47,872
------------ ----------- -----------
Total...................................................................$ 912,231 $ 844,450 $ 732,552
=========== =========== ===========
Projected benefit obligation............................................$ (1,341,460) $(1,103,286) $ (870,285)
Plan assets (principally common and preferred
stocks, bonds, U.S. Treasury notes and pooled
trust funds) at fair value........................................ 1,537,876 1,583,909 1,551,270
------------ ----------- -----------
Plan assets in excess of projected benefit obligation................... 196,416 480,623 680,985
Unrecognized net (gain) loss......................................... 78,172 (33,671) (174,645)
Unrecognized transition asset........................................ (349,214) (370,099) (380,542)
------------- ----------- -----------
Prepaid (accrued) pension cost....................................$ (74,626) $ 76,853 $ 125,798
============= =========== ===========
Net pension costs included the following components:
<CAPTION>
Twelve months Six months
ended ended Fiscal year ended
December 31, December 31, June 30,
----------------------
1994 1993 1993 1992
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Service costs...................................................$ 213,360 $ 84,539 $ 113,963 $ 69,417
Interest costs.................................................. 85,592 37,205 54,461 47,734
Actual return on plan assets................................... (1,630) (52,423) (178,807) (161,428)
Net amortization and deferrals.................................. (145,843) (20,376) 43,530 33,202
---------- ---------- --------- ----------
Net periodic pension cost (benefit).............................$ 151,479 $ 48,945 $ 33,147 $ (11,075)
========== ========== ========= ==========
Principal assumptions:
Discount rate................................................... 8.00% 7.50% 7.50% 8.00%
Rate of increase in future compensation levels.................. 4.00 4.00 4.00 4.00
Expected long-term rate of return on assets..................... 8.50 8.50 8.50 8.50
</TABLE>
The Bank also has a defined contribution plan which provides
retirement benefits to those employees who elect to
participate. The Bank's contributions, which are based on a
percentage of employees' contributions, are charged against
income as incurred, amounted to $46,532, $61,684 and $66,356
in 1992, 1993, and 1994, respectively. The present value of
vested accrued benefits is based on actuarial assumptions
that anticipate the Plan will continue as an ongoing plan.
- -------------------------------------------------------------------------------
18. The Bank is a party to financial instruments with off-balance
OFF-BALANCE sheet risk in the normal course of business to meet the
SHEET RISK financing needs of its customers and reduce its own exposure
to fluctuations in interest rates. These financial
instruments include various guarantees and commitments to
extend credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the
amount recognized in the financial statements. The contract
amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the counterparty to the financial
instrument for commitments to extend credit is represented by
the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments. The Bank has no significant concentration of
credit risk with any individual counterparty to originate
loans. The Bank's lending is concentrated in the Omaha and
Columbus, Nebraska, Harlan, Iowa and Overland Park, Kansas
metropolitan area.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment does
not necessarily represent future cash requirements.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
18. At December 31, 1994, and 1993, and at June 30, 1993, the Bank had
OFF-BALANCE loan commitments (predominately fixed rate loans) of approximately
SHEET RISK $3,821,000, $8,894,000, and $15,538,000, respectively. Commitments
(Continued) which are undisbursed subject to certain limitations, extend over
periods of time with the majority of executed commitments disbursed
within one year.
At December 31, 1994, and 1993, and at June 30, 1993, the Bank had
commitments of unused lines of credit of approximately $2,205,000,
$1,842,000, and $1,691,000, respectively.
On October 5, 1993, the Bank entered into a Master Committment with
the Federal Home Loan Mortgage Corporation ("FHLMC"), to deliver
approximately $20.0 million in fixed-rate, one-to-four-family,
fully amortized conventional mortgage and/or five-and seven-year
Balloon/Reset Mortgages. In addition, the Master Commitment
includes the option to deliver an additional $10.0 million to FHLMC
under the same terms as the $20.0 million mandatory delivery. The
contract for FHLMC Master Commitment, entered into on a "without
recourse" basis, was scheduled to expire on April 30, 1994. The
Master Commitment was satisfied prior to the expiration date and
the Bank had no outstanding commitments to deliver loans to the
FHLMC at December 31, 1994.
- --------------------------------------------------------------------------------
19. The Bank has an Employee Stock Compensation Plan ("the Plan") for
EMPLOYEE the benefit of officers and selected key employees. The Plan
STOCK OPTION provides for 130,214 shares of authorized common stock to be
PLAN reserved for future issuance pursuant to the exercise of any option
or the vesting of any performance share which would be granted
under the Plan. Stock appreciation rights, which enable the
recipient, on exercise, to receive payment in stock or in cash of
increase in the market value of the stock from the date of the
grant, are also authorized under the Plan.
In addition, on May 14, 1993, the board of directors of the Bank
approved the reservation of an additional 51,750 shares of
authorized but unissued Common Stock for future issuance to key
employees of the Bank pursuant to stock option or stock incentive
plans and was adopted by the board and approved by stockholders of
the Bank at the annual meeting held on May 12, 1994.
Twenty percent (20%) of the options granted become exercisable on
the date of the grant. An additional 20% become exercisable each
year thereafter. The options lapse ten years after the grant date.
If an optionee ceases to be employed for any reason other than
death or disability, his options are immediately terminated. At
December 31, 1994 options to purchase 63,700 shares were available
for future grants under the Plan. Options granted to date are set
forth in the table below:
<TABLE>
<CAPTION>
Excersise Options Exercisable
------------------------------- ----------------
Date of grant price granted terminated outstanding % Options
------------- --------- -------- ---------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
August 24, 1989.....................$ 6.375 16,000 8,736 7,264 100 % 7,264
September 27, 1990.................. 5.250 16,000 3,000 13,000 100 13,000
September 26, 1991.................. 5.625 10,000 0 10,000 80 8,000
December 19, 1991................... 5.875 9,000 0 9,000 80 7,200
October 8, 1992..................... 8.000 19,000 0 19,000 60 11,400
December 21, 1993................... 11.500 60,000 0 60,000 40 24,000
--------- -------- --------- ---------
130,000 11,736 118,264 70,864
========= ======== ========= =========
</TABLE>
- --------------------------------------------------------------------------------
20. The Board of Directors adopted a Stockholders' Rights Plan in
STOCKHOLDERS'fiscal year 1989. The Board declared a dividend of one right per
RIGHTS PLAN share of outstanding common stock as of the record date of June 5,
1989, (1,302,150 shares). The rights become exercisable at $19.375
per share after a person or affiliated group does one of two
things: (1) acquire beneficial ownership of 15% or more of the
outstanding common stock, or (2) makes a tender offer or exchange
offer for 25% or more of the outstanding common shares.
- --------------------------------------------------------------------------------
21. During the second quarter of 1993, the Financial Accounting
NEW Standards Board ("FASB") issued Financial Accounting Statement No.
ACCOUNTING 114, "Accounting by Creditors for Impairment of a Loan", as amended
STANDARDS by Financial Accounting Statement No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures",
("FAS 114"). FAS 114 requires that impaired loans be measured based
on the present value of expected future cash flows discounted at
the loan's effective interest rate, which is the contractual
interest rate adjusted for any deferred loan fees or costs,
premium, or discount existing at the inception or acquisition of
the loan. FAS 114 is effective for fiscal years beginning after
December 15, 1994, with early adoption permitted. Conservative
chose not to adopt FAS 114 prior to its effective date and will
adopt FAS 114 in the first quarter of 1995. Presently, Conservative
is unable to quantify the impact that adoption of FAS 114 will have
on the consolidiated financial statements, but management
anticipates that the impact will not be material.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
- --------------------------------------------------------------------------------
22. Financial Accounting Statement No. 107, "Disclosure about Fair
DISCLOSURE Value of Financial Instruments" ("FAS 107") requires disclosure
ABOUT FAIR of fair value information about financial instruments, whether or
VALUE OF not recognized on the face of the balance sheet, for which it is
FINANCIAL practicable to estimate that value. The assumptions used in the
INSTRUMENTS estimation of the fair value of the Company's financial
instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using the
discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparision to independent
markets and, in many cases, could not be realized in immediate
settlement of the instrument. The Company has not undertaken any
steps to value any intangibles associated with the Company's core
deposits which is permitted by the provisions of FAS 107.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and cash equivalents and interest bearing deposits with
other banks: Fair value equals the carrying value of such
assets.
Investment securities available for sale: Fair value for
investment securities are based on quoted market prices.
Mortgage-backed securities available for sale: Fair value for
mortgage-backed securities are based on quoted market prices.
Loans held for sale: Fair value of loans held for sale are based
on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for any differences
in loan characteristics, with servicing retained.
Real estate and consumer loans receivable: The fair value of the
Company's real estate loans, commercial loans and installment
loans were valued using discounted cash flows. The discount
rate used to determine the present value of the loans was
based on interest rates currently being charged by the Bank on
comparable loans as to credit risk and term.
Federal Home Loan Bank stock: Fair value of Federal Home Loan
Bank stock approximates the carrying amount.
Deposits: The fair value of demand deposits are equal to the
carrying value of such deposits. Demand deposits include non-
interest bearing deposits, savings accounts, NOW accounts, and
money market demand accounts. The fair value of variable rate
certificates of deposits and fixed rate certificates of
deposit, with maturities greater than six months, are
estimated by discounting the future cash flows using the
current rates at which similar deposits would be made.
FHLB borrowings: Fair value of the Company's FHLB borrowings are
estimated using discounted cash flows, based on the Company's
current incremental borrowing rates for similar types of
borrowing arrangements.
Off-balance sheet instruments: The Company's loan commitments
are negotiated at current market rates and are relatively
short-term in nature, therefore, the estimated fair value of
the Company's loan commitments approximates the carrying
amount.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1994 1993
------------------------------------
Carrying Estimated Carrying
FINANCIAL INSTRUMENTS: amount fair value amount
--------- ------------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents.....................$ 5634 $ 5,634 $ 7,631
Investment securities available for sale...... 22,034 22,034 45,642
Investment securities held-to-maturity........ 18,463 17,793 -
Mortgage-backed securities
available for sale........................ 25,275 25,275 163,967
Mortgage-backed securities
held-to-maturity......................... 139,747 131,450 -
Loans held for sale............................ 525 541 7,950
Real estate loans receivable, net.............. 126,711 109,840 138,287
Consumer loans receivable, net................. 27,956 20,658 23,734
Federal Home Loan Bank stock................... 7,850 7,850 7,450
Liabilities:
Noninterest bearing deposits................... 1,338 1,338 3,171
NOW accounts................................... 14,848 14,848 12,881
Money market accounts.......................... 7,276 7,276 10,402
Savings accounts............................... 24,075 24,075 29,077
Certificates of deposit........................ 159,577 146,725 173,897
FHLB borrowings................................ 149,500 149,111 139,000
Off-balance sheet instruments.................. - - -
<CAPTION> At December 31,
At June 30, 1993 1993
------------------------- ----------------
Estimated Carrying Estimated
FINANCIAL INSTRUMENTS: fair value amount fair value
------------ ----------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Assets:
Cash and cash equivalents..................... $ 10,159 $ 10,159 $ 7,631
Investment securities available for sale...... 43,409 45,513 47,985
Investment securities held-to-maturity........ - - -
Mortgage-backed securities
available for sale........................ 54,090 55,830 165,031
Mortgage-backed securities
held-to-maturity......................... - - -
Loans held for sale............................ 6,509 6,603 8,069
Real estate loans receivable, net.............. 107,152 116,481 152,228
Consumer loans receivable, net................. 23,258 23,546 24,670
Federal Home Loan Bank stock................... 2,250 2,250 7,450
Liabilities:
Noninterest bearing deposits................... 3,436 3,436 3,171
NOW accounts................................... 10,424 10,424 12,881
Money market accounts.......................... 8,719 8,719 10,402
Savings accounts............................... 27,453 27,453 29,077
Certificates of deposit........................ 143,891 153,213 178,942
FHLB borrowings................................ 24,000 24,880 141,890
Off-balance sheet instruments.................. - - -
</TABLE>
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conservative Savings Corporation
================================================================================
23. The following sets forth the condensed information of
Conservative Savings Corporation on a stand-alone basis:
PARENT
COMPANY ONLY STATEMENT OF FINANCIAL CONDITION
--------------------------------
FINANCIAL DATA
<TABLE>
<CAPTION>
At
At December 31, June 30,
---------------------------- ----------
1994 1993 1993
------------ ------------- ----------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................$ 109,904 $ 95,145 $ -
Other assets......................................... 5,526 3,314 77,595
Office premises and equipment........................ 4,056 7,195 8,916
Investment in Conservative Savings Bank............. 32,290,152 35,490,552 33,605,515
------------ ------------ -------------
Total assets....................................$ 32,409,638 $ 35,596,206 $ 33,692,026
============ ============ =============
Liabilities.........................................$ 506 $ 7,811 $ -
Preferred stock..................................... 4,600 4,600 4,600
Common stock........................................ 18,331 18,235 9,105
Paid in capital..................................... 21,041,998 20,927,663 20,910,158
Retained earnings................................... 11,344,203 14,637,897 12,768,163
---------- ---------- ----------
Total liabilities and stockholders' equity.......$ 32,409,638 $ 35,596,206 $ 33,692,026
============ ============ =============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1994 1993 1993 1992
------------ ------------- ----------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Fee income.....................................$ 224,013 $ 235,467 $ 126,657 $ 106,795
Dividend income................................ 918,742 572,208 507,054 97,661
------------ ------------- ----------- --------------
Total income................................ 1,142,755 807,675 633,711 204,456
------------ ------------- ----------- --------------
EXPENSES:
Employee compensation and benefits............. 164,174 178,627 96,441 77,279
Other expenses................................. 38,702 29,188 18,885 13,497
------------ ------------- ----------- --------------
Total expenses................................. 202,876 207,815 115,326 90,776
------------ ------------- ----------- --------------
Equity in undistributed income of Bank......... 2,551,489 3,505,693 1,858,402 1,124,967
------------ ------------- ----------- --------------
Net income..................................$ 3,491,368 $ 4,105,553 $ 2,376,787 $ 1,238,647
============ ============= =========== ==============
<CAPTION>
Fiscal year ended
June 30,
---------------------------
1993 1992
------------ -------------
<S> <C> <C>
REVENUE:
Fee income.....................................$ 215,605 $ 187,735
Dividend income................................ 162,815 97,661
-------------- -----------
Total income................................ 378,420 285,396
-------------- -----------
Expenses:
Employee compensation and benefits............. 159,465 142,006
Other expenses................................. 23,800 17,569
-------------- -----------
Total expenses................................. 183,265 159,575
-------------- -----------
Equity in undistributed income of Bank......... 2,772,258 2,159,016
-------------- -----------
Net income..................................$ 2,967,413 $ 2,284,837
============= ===========
</TABLE>
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Fiscal year ended Six months ended
December 31, December 31,
--------------------------- ---------------------------
1994 1993 1993 1992
------------ ------------- ----------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Activities:
Net income ....................................$ 3,491,368 $ 4,105,553 $ 2,376,787 $ 1,238,647
Adjustment to reconcile net income to
net cash provided by operations:
Depreciation............................. 3,861 2,781 1,720 1,233
Equity in undistributed income of Bank... (2,551,489) (3,505,693) (1,858,402) (1,124,967)
Net changes in other assets and
other liabilities..................... (9,517) 67,805 82,094 (15,499)
------------ ------------- ----------- --------------
Net cash provided in operating activities....... 934,223 670,446 602,199 99,414
------------ ------------- ----------- --------------
Investing Activities:
Purchase of office premises and equipment...... (722) (3,093) - (1,753)
Capital contribution to subsidiary............. (114,431) (15,195,408) (26,635) -
------------ ------------- ----------- --------------
Net cash used in investing activities........... (115,153) (15,198,501) (26,635) (1,753)
------------ ------------- ----------- --------------
Financing Activities:
Dividends paid................................. (918,742) (572,208) (507,054) (97,661)
Issuance of preferred stock.................... - 10,795,096 - -
Issuance of common stock....................... 114,431 4,400,312 26,635 -
------------ ------------- ----------- --------------
Net cash provided (used) in
financing activities........................ (804,311) 14,623,200 (480,419) (97,661)
------------ ------------- ----------- --------------
Net increase in cash........................... 14,759 95,145 95,145 -
Cash and cash equivalents
at beginning of period................... 95,145 - - -
------------ ------------- ----------- --------------
Cash and cash equivalents at end of period........$ 109,904 $ 95,145 $ 95,145 $ -
============ ============= =========== ==============
<CAPTION>
Fiscal year ended
June 30,
---------------------------
1993 1992
-------------- ------------
<S> <C> <C>
Operating Activities:
Net income ....................................$ 2,967,413 $ 2,284,837
Adjustment to reconcile net income to
net cash provided by operations:
Depreciation............................. 2,294 1,984
Equity in undistributed income of Bank... (2,772,258) (2,159,016)
Net changes in other assets and
other liabilities..................... (29,788) (27,734)
------------ ------------
Net cash provided in operating activities....... 167,661 100,071
------------ ------------
Investing Activities:
Purchase of office premises and equipment...... (4,846) (2,410)
Capital contribution to subsidiary............. (15,168,773) -
------------ ------------
Net cash used in investing activities........... (15,173,619) (2,410)
------------ ------------
Financing Activities:
Dividends paid................................. (162,815) (97,661)
Issuance of preferred stock.................... 10,795,096 -
Issuance of common stock....................... 4,373,677 -
------------ ------------
Net cash provided (used) in
financing activities........................ 15,005,958 (97,661)
------------ ------------
Net increase in cash........................... - -
Cash and cash equivalents
at beginning of period................... - -
------------ ------------
Cash and cash equivalents at end of period........$ - $ -
============ ============
</TABLE>
- --------------------------------------------------------------------------------
24. On February 27, 1995, the Bank has signed an agreement to
SUBSEQUENT sell a vacant tract of land immediately south of its
EVENT corporate headquarters in Omaha, Nebraska. This
transaction is expected to close on or before May 31, 1995
at a total price of $435,000, before sales commissions and
expenses. At February 28, 1995, the Bank's net book value
of the land was $107,000.
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers of the Registrant
is incorporated herein by reference from the Bank's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 11, 1995, a copy of
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 1994.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Bank's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 11, 1995, a copy of which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Bank's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 11, 1995, a
copy of which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is
incorporated herein by reference from the Bank's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 11, 1995, a copy of which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 1994.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES, AND REPORTS ON 8-K
(a) (1) Financial Statements:
Financial statements are included in Item 8 herein.
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements included in Item 8 herein.
60
<PAGE>
<TABLE>
<CAPTION>
(a) (3) Exhibits:
REGULATION S-K DOCUMENT REFERENCE TO PRIOR SEQUENTIAL PAGE NUMBER
-------- ------------------ ----------------------
EXHIBIT NUMBER FILING OR EXHIBIT WHERE ATTACHED EXHIBITS ARE
- -------------- ----------------- ---------------------------
10-K REPORT NUMBER ATTACHED LOCATED IN THIS FORM 10-K
- ----------- -------------- -------------------------
HERETO REPORT
------ ------
<S> <C> <C> <C>
2 Agreement and Plan of Merger and (2) Not applicable
Reorganization dated September 25,
1989
3.1 Articles of Incorporation (3.1) Not applicable
3.2 Amended Bylaws dated December 31, (3.2) Not applicable
1993
4.1 Shareholders Rights Plan dated June (4.1) Not applicable
5, 1989 Shareholder Rights Plan and
declaration of a dividend of one
Right for each share of common
stock of Conservative to the
shareholders of record as of the
close of business on June 5, 1989.
4.2 Statement Establishing $1.52 Series (4.2) Not applicable
A Cumulative Convertible Preferred
Stock
9 Voting trust agreement None Not applicable
10.1 Employment Agreement dated January (10.1) Not applicable
12, 1989 between Registrant and
Robert P. DeLay
10.2 Employee Stock Compensation Program (10.2) Not applicable
10.4 Executive Deferred Compensation Plan (10.4) Not applicable
10.5 1992 Stock Plan for Nonemployee (10.5) Not applicable
Directors
10.7 Employment Agreement dated April (10.7) Not applicable
13, 1994 between Registrant and
Craig S. Allen.
10.8 Employment Agreement dated April (10.8) Not applicable
13, 1994 between Registrant and
William M. Balak.
10.9 Employment Agreement dated April (10.9) Not applicable
13, 1994 between Registrant and
Gene F. Uher.
10.10 First Amendment to Employment (10.10) 65
Agreement dated May 23, 1991
between Registrant and Robert P.
DeLay (filed herewith).
10.11 Second Amendment to Employment (10.11) 67
Agreement dated October 8, 1992
between Registrant and Robert P.
DeLay (filed herewith).
10.12 Third Amendment to Employment (10.12) 69
Agreement dated October 7,
1994between Registrant and Robert
P. DeLay (filed herewith)
10.13 First Amendment to Employment (10.13) 71
Agreement dated October 7, 1994
between Registrant and Craig S.
Allen (filed herewith).
10.14 First Amendment to Employment (10.14) 73
Agreement dated October 7, 1994
between Registrant and William M.
Balak (filed herewith).
10.15 First Amendment to Employment (10.15) 75
Agreement dated October 7, 1994
between Registrant and Gene F. Uher
(filed herewith).
10.16 Management Bonus Plan - Fiscal Year (10.16) 77
Ended December 31, 1994 (filed
herewith)
11 Statement re: Computation of Per None Not applicable
Share Earnings
12 Statement re: Computation of Ratios Not required Not applicable
13 Annual Report to Stockholder None See Item 8 contained
herein
</TABLE>
61
<PAGE>
<TABLE>
<S> <C> <C> <C>
16 Letter re: Change in Certifying Accountant None Not applicable
18 Letter re: Change in Accounting Principles None Not applicable
21 Subsidiaries of Registrant None Not applicable
22 Published report regarding matter submitted to vote None Not applicable
of security holders
23 Consent of Independent Auditors (filed herewith) (23) 78
24 Power of Attorney None Not applicable
28 Information from reports furnished to state None Not applicable
insurance regulatory authorities
99 Additional exhibits None Not applicable
</TABLE>
Footnote references:
(2) Incorporated by reference to Appendix 1 to Registrant's
Registration Statement No. 33-31150.
(3.1) Incorporated by reference to Exhibit 3.1 to Registrant's
Registration Statement No. 33-31150.
(3.2) Incorporated by reference to Exhibit 3.2 to Registrant's
Form 10-K for the fiscal year ended December 31, 1993.
(4.1) Incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement No. 33-31150.
(4.2) Incorporated by reference to Exhibit 4.2 to Registrant's
Form 10-K for the fiscal year ended December 31, 1993.
(10.1) Incorporated by reference to Exhibit 10.1 to Registrant's
Registration Statement No. 33-31150.
(10.2) Incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement No. 33-31150.
(10.4) Incorporated by reference to Exhibit 10.4 to Registrant's
Registration Statement No. 33-63016.
(10.5) Incorporated by reference to Exhibit 10.5 to Registrant's
Registration Statement No. 33-63016.
(10.7) Incorporated by reference to Exhibit 10.7 to Registrant's
Form 10-Q for the quarter ended June 30, 1994.
(10.8) Incorporated by reference to Exhibit 10.8 to Registrant's
Form 10-Q for the quarter ended June 30, 1994.
(10.9) Incorporated by reference to Exhibit 10.9 to Registrant's
Form 10-Q for the quarter ended June 30, 1994.
62
<PAGE>
(b) Reports on Form 8-K:
Conservative Savings Corporation did not file any reports on Form 8-K
during the three months ended December 31, 1994.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT PAGE
- ------- -------- ----
NUMBER
- ------
<S> <C> <C>
10.10 First Amendment to Employment Agreement dated May 23, 1991 between Registrant 65
and Robert P. DeLay
10.11 Second Amendment to Employment Agreement dated October 8, 1992 between 67
Registrant and Robert P. DeLay
10.12 Third Amendment to Employment Agreement dated October 7, 1994 between 69
Registrant
and Robert P. DeLay
10.13 First Amendment to Employment Agreement dated October 7, 1994 between 71
Registrant
and Craig S. Allen.
10.14 First Amendment to Employment Agreement dated October 7, 1994 between 73
Registrant
and William M. Balak.
10.15 First Amendment to Employment Agreement dated October 7, 1994 between 75
Registrant
and Gene F. Uher.
10.16 Management Bonus Plan - Fiscal Year Ended December 31, 1994 77
23 Consent of Independent Auditors 78
</TABLE>
63
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
CONSERVATIVE SAVINGS CORPORATION
Date: March 27, 1995 By: /s/ROBERT P. DELAY
--------------------------------- ---------------------------------
Robert P. DeLay
President 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.
By: /s/CRAIG S. ALLEN By: /s/GARY W. KLEIN
--------------------------------- --------------------------------
Craig S. Allen Gary W. Klein
Senior Vice President, Chief Vice President, Controller
Financial Officer and Secretary
Date: March 27, 1995 Date: March 27, 1995
--------------------------------- --------------------------------
By: /s/ROBERT P. DELAY By: /s/PHILIP S. KEMP
--------------------------------- --------------------------------
Robert P. DeLay Philip S. Kemp
Director Director
Date: March 27, 1995 Date: March 27, 1995
--------------------------------- --------------------------------
By: /s/DAVID L. FRIEDLAND By: /s/MATTHEW A. KURS
--------------------------------- --------------------------------
David L. Friedland Matthew A. Kurs
Director Director
Date: March 27, 1995 Date: March 27, 1995
--------------------------------- --------------------------------
By: /s/GEORGE F. GILMORE By: /s/MARGARET A. LEHNING
--------------------------------- --------------------------------
George F. Gilmore Margaret A. Lehning
Director Director
Date: March 27, 1995 Date: March 27, 1995
--------------------------------- --------------------------------
64
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
of the SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 1995
---------------
Commission file number 0-18831
--------------
CONSERVATIVE SAVINGS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0730495
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11207 West Dodge Road, Omaha, NE 68154
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
402-334-8475
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
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
---------- ----------
At August 7, 1995, 1,846,005 shares of common stock of the
Registrant were outstanding.
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
Index to Form 10-Q
June 30, 1995
PAGE
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
Statement of Financial Condition -
June 30, 1995 and December 31, 1994 2
Statements of Income -
Three Months Ended June 30, 1995 and 1994 3
Statements of Income -
Six Months Ended June 30, 1995 and 1994 4
Statement of Cash Flows -
Six Months Ended June 30, 1995 and 1994 5 - 6
Notes to Interim Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 7-25
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. CHANGE IN SECURITIES 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 26-27
ITEM 5. OTHER INFORMATION 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 27
Page 1
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Cash.........................................................................................$ 2,462,861 $ 3,933,792
Federal funds sold........................................................................... 3,000,000 1,700,000
----------- -----------
Total cash and cash equivalents......................................................... 5,462,861 5,633,792
Investments available for sale............................................................... 21,972,035 22,033,756
Investment securities held-to-maturity (estimated market value $15,359,531
and $17,793,281, respectively).......................................................... 15,470,621 18,463,124
Mortgage-backed securities available for sale................................................ 14,700,497 25,274,779
Mortgage-backed securities held-to-maturity (estimated market
value $140,114,230 and $131,450,374, respectively)........................................ 139,898,090 139,747,321
Loans held for sale, at amortized cost (estimated market value
$1,201,231 and $541,399, respectively).................................................... 1,173,899 525,229
Real estate loans receivable - net........................................................... 132,542,222 126,710,650
Consumer loans receivable - net.............................................................. 28,684,616 27,955,508
Federal Home Loan Bank stock - cost.......................................................... 8,025,000 7,850,000
Real estate owned - net...................................................................... 147,197 954,894
Office premises and equipment - net.......................................................... 5,380,021 6,104,386
Accrued interest receivable - net............................................................ 2,551,455 2,618,216
Deferred taxes............................................................................... 2,309,645 3,231,044
Other assets................................................................................. 5,057,123 5,351,418
----------- -----------
Total assets............................................................................$383,375,282 $392,454,117
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Deposits..................................................................................$198,060,284 $207,113,531
Federal Home Loan Bank borrowings......................................................... 145,600,000 149,500,000
Advances by borrowers for taxes and insurance............................................. 1,587,098 1,284,939
Accrued interest payable.................................................................. 2,077,712 165,551
Other liabilities......................................................................... 1,177,409 1,925,701
Income taxes payable...................................................................... 99,614 55,263
----------- -----------
Total liabilities................................................................... 348,602,117 360,044,985
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 460,000
issued and outstanding................................................................. 4,600 4,600
Common stock, $0.01 par value, 10,000,000 shares authorized, 1,846,005 and
1,833,074, respectively, issued and outstanding........................................ 18,460 18,331
Additional paid-in capital................................................................ 21,174,134 21,041,998
Retained income........................................................................... 17,653,697 17,210,523
Net unrealized loss on securities, net of $2,100,647
and $3,022,043 tax benefit, respectively............................................... (4,077,726) (5,866,320)
----------- -----------
Total stockholders' equity........................................................... 34,773,165 32,409,132
----------- -----------
Total liabilities and stockholders' equity........................................$383,375,282 $392,454,117
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 2
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For three months ended,
June 30,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Interest and dividend income
Interest and fees on loans........................................................... $ 3,604,721 $ 3,548,107
Interest on mortgage-backed securities............................................... 2,637,977 2,607,480
Interest and dividends on investment securities...................................... 738,772 688,180
Dividends on Federal Home Loan Bank stock............................................ 118,977 105,894
Interest on other investments........................................................ 29,106 87,574
----------- -----------
Total interest and dividend income................................................. 7,129,553 7,037,235
----------- -----------
Interest expense
Interest on deposits................................................................. 2,499,711 2,341,296
Interest on Federal Home Loan Bank borrowings........................................ 2,372,056 1,499,165
----------- -----------
Total interest expense............................................................. 4,871,767 3,840,461
----------- -----------
Net interest income before provision for loan loss................................... 2,257,786 3,196,774
Provision for loan loss........................................................... - 87,440
----------- -----------
Net interest income after provision for loan loss.................................... 2,257,786 3,109,334
----------- -----------
Noninterest income:
Gain on sale of loans................................................................ 55,439 161,451
Gain (loss) on sale of investments................................................... 33,221 1,021
Gain on sale of fixed assets......................................................... 282,622 -
Gain on sale of deposits............................................................. 102,739 -
(Loss) on sale of real estate owned.................................................. (26,751) -
(Loss) on sale of repossessed assets................................................. (2,152) (5,601)
Income from Loan servicing fee-net................................................... 311 15,979
Other................................................................................ 252,402 253,462
----------- -----------
Total noninterest income........................................................... 697,831 426,312
----------- -----------
Noninterest expense
Employee compensation and benefits................................................... 993,212 1,104,630
Advertising and promotions........................................................... 49,178 89,598
Occupancy and equipment.............................................................. 350,384 407,090
SAIF premiums and special assessments................................................ 121,433 131,460
Provisions for loss on real estate owned............................................. 10,000 6,792
Operation of real estate owned....................................................... 80,245 1,710
Professional service................................................................. 68,567 50,323
Other general and administrative..................................................... 552,204 578,132
----------- -----------
Total noninterest expenses......................................................... 2,225,223 2,369,735
----------- -----------
Income before taxes .................................................................. 730,394 1,165,911
Income tax expense................................................................... 162,156 269,343
----------- -----------
Net income ........................................................................... $ 568,238 $ 896,568
=========== ===========
Net income applicable to common shareholders........................................... $ 393,438 $ 721,768
=========== ===========
Per share amounts:
Earnings per common and common equivalent share...................................... $ 0.211 $ 0.389
=========== ===========
Earnings per common share - assuming full dilution................................... $ 0.196 $ 0.310
=========== ===========
Weighted average common and common equivalent shares outstanding..................... 1,866,431 1,855,442
=========== ===========
Weighted average common and common equivalent shares outstanding,
assuming full dilution............................................................. 2,906,029 2,895,041
=========== ===========
Cash dividends per common share........................................................ $ 0.03 $ 0.03
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For six months ended,
June 30,
--------------------------
1995 1994
---------- -----------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans..................................................................$ 7,109,757 $ 7,407,287
Interest on mortgage-backed securities...................................................... 5,331,357 4,670,184
Interest and dividends on investment securities............................................. 1,479,702 1,421,963
Dividends on Federal Home Loan Bank stock................................................... 235,130 252,853
Interest on other investments............................................................... 46,215 171,535
---------- ----------
Total interest income.................................................................... 14,202,161 13,923,822
---------- ----------
Interest expense:
Interest on deposits........................................................................ 4,780,724 4,720,105
Interest on Federal Home Loan Bank borrowings............................................... 4,663,202 2,567,211
---------- ----------
Total interest expense................................................................... 9,443,926 7,287,316
---------- ----------
Net interest income before provision for loan loss.......................................... 4,758,235 6,636,506
Provision for loan loss.................................................................. - 88,746
---------- ----------
Net interest income after provision for loan loss........................................... 4,758,235 6,547,760
---------- ----------
Noninterest income:
Gain on sale of loans....................................................................... 88,670 423,856
Gain on sale of investments................................................................. (87,727) 19,651
Gain (loss) on sale of fixed assets......................................................... 282,795 6,275
Gain on sale of deposits.................................................................... 102,739 -
(Loss) on sale of repossessed assets........................................................ (2,152) (5,851)
Gain (loss) on sale of real estate owned.................................................... (26,751) -
Loan servicing fee - net.................................................................... 891 23,165
Other....................................................................................... 520,715 498,867
---------- ----------
Total noninterest income................................................................. 879,180 965,963
---------- ----------
Noninterest expense:
Employee compensation and benefits.......................................................... 1,986,664 2,251,623
Advertising and promotions.................................................................. 115,772 293,279
Occupancy and equipment..................................................................... 751,668 831,527
SAIF premiums and special assessments....................................................... 242,866 262,920
Provision for loss on real estate owned..................................................... 10,000 6,792
Operation of real estate owned............................................................... 173,422 1,738.
Professional services....................................................................... 115,806 93,169
Other general and administrative............................................................ 1,112,466 1,238,197
---------- ----------
Total noninterest expenses............................................................... 4,508,664 4,979,245
---------- ----------
Income before taxes........................................................................... 1,128,751 2,534,478
Income tax expense.......................................................................... 225,281 633,677
---------- ----------
Net income....................................................................................$ 903,470 $ 1,900,801
========== ==========
Net income applicable to common shareholders..................................................$ 553,870 1,551,201
========== ==========
Per share amounts:
Earnings per common and common equivalent share.............................................$ 0.297 0.835
========== ==========
Earnings per common share - assuming full dilution..........................................$ 0.297 0.656
========== ==========
Weighted average common and common equivalent shares outstanding............................ 1,864,830 1,856,696
========== ==========
Weighted average common and common equivalent shares outstanding,
assuming full dilution................................................................... 1,864,830 2,896,293
========== ==========
Cash dividends per common share.............................................................$ 0.06 0.06
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For six months ended,
June 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................................... $ 903,470 $ 1,900,801
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Amortization of:
Investment security premiums and accretion of discounts...................................... 13,891 33,992
Mortgage-backed security premiums and accretion of discounts................................. 23,302 83,344
Deferred loan origination fees............................................................... (68,983) (135,798)
Discounts on loans purchased................................................................. (270,768) (462,318)
Cost of purchased mortgage servicing rights.................................................. 2,847 73,555
Core deposit intangible...................................................................... 238,619 229,039
(Gain) loss on sale of:
Investment and mortgage-backed securities.................................................... 87,727 (19,651)
Loans........................................................................................ (88,670) (423,856)
Real estate owned............................................................................ 26,751 -
Repossessed assets........................................................................... 2,152 5,851
Office premises and equipment................................................................ (282,795) (6,275)
Provision for:
Loan loss.................................................................................... - 88,746
Real estate owned............................................................................ 10,000 6,792
Depreciation................................................................................... 360,859 344,504
Origination of loans held-for-sale............................................................. (8,463,665) (26,702,999)
Proceeds from sale of:
Loans........................................................................................ 7,903,665 26,278,210
Decrease (increase) in:
Accrued interest receivable.................................................................. 66,761 (30,937)
Other assets................................................................................. 31,381 118,184
Increase (decrease) in:
Accrued interest payable..................................................................... 1,912,161 1,975,150
Other liabilities............................................................................ (748,485) 539,575
Current income taxes payable................................................................. 44,351 (130,589)
----------- -----------
Net cash provided (used) in operating activities............................................... $ 1,704,571 $ 3,765,320
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For six months ended,
June 30,
---------------------------------
Cash flows from investing activities: 1995 1994
--------------- ---------------
<S> <C> <C>
Proceeds from sale of:
Investment securities available for sale............................... $ 3,472,988 $ 3,951,851
Investment securities held-to-maturity................................. 5,017,813 -
Mortgage-backed securities available for sale.......................... 11,019,409 8,629,513
Real estate owned...................................................... 75,436 -
Repossessed assets..................................................... 19,296 40,252
Office premises and equipment.......................................... 945,459 6,275
Proceeds from:
Maturity of investment securities available for sale................... - 1,935,000
Repayment of mortgage-backed securities available for sale............. 1,052,600 12,578,201
Purchase of:
Investment securities available for sale............................... (4,500,000) (320,045)
Mortgage-backed securities available for sale.......................... - (41,486,235)
Federal Home Loan Bank stock........................................... (175,000) (400,000)
Office premises and equipment.......................................... (299,158) (847,229)
Decrease (increase) in:
Loans receivable....................................................... (5,456,626) 9,343,312
Real estate owned...................................................... (68,792) -
--------------- ---------------
Net cash provided (used) in investing activities........................... 11,103,425 (6,569,105)
--------------- ---------------
Cash flows from financing activities:
Net increase (decrease) in:
Deposits............................................................... (9,053,247) (9,487,493)
Advances by borrowers for taxes and insurance.......................... 302,159 7,819
Principal and interest received on loans serviced for others........... 192 86,684
Federal Home Loan Bank borrowings...................................... (3,900,000) 16,000,000
Proceeds from issuance of common stock..................................... 132,265 62,093
Dividends paid............................................................. (460,296) (459,231)
--------------- ---------------
Net cash provided (used) in financing activities........................... (12,978,927) 6,209,872
--------------- ---------------
Net decrease in cash and cash equivalents.................................... (170,931) 3,406,087
Cash and cash equivalents at beginning of period......................... 5,633,792 7,631,085
--------------- ---------------
Cash and cash equivalents at end of period................................... $ 5,462,861 $ 11,037,172
=============== ===============
Supplemental Disclosures:
Cash paid for:
Interest on deposits and Federal Home Loan Bank borrowings............... $ 3,106,460 $ 3,249,024
Income taxes............................................................. 174,296 762,709
Noncash activities:
Loans securitized........................................................ - 6,577,533
Unrealized net gain (loss) on available for sale securities.............. 2,561,022 (4,803,549)
Transfer of:
Real estate owned to loans............................................. 765,000 -
Loans to real estate owned............................................. 698 -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
-------
The accompanying, unaudited, interim financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have
been included. The results of operations for the three months ended
June 30, 1995, are not necessarily indicative of the results that may
be expected for future periods. For further information, refer to the
audited financial statements and footnotes hereto included in
Conservative's annual report on Form 10-K for the year ended December
31, 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
For the Three Months Ended June 30, 1995 and 1994
Overview. Net income decreased $328,000 for the three months ended June 30,
1995 to $568,000 from $896,000 for the three months ended June 30, 1994. Net
interest income before loan loss provision decreased $939,000, noninterest
income increased $272,000 and noninterest expense decreased $145,000.
Interest Income. Interest income increased $92,000, or 1.31%, for the three
months ended June 30, 1995 to $7.1 million from $7.0 million for the three
months ended June 30, 1994. Of this increase, $248,000 resulted from an
increase of 7.45% from 7.09% in the average yield on interest-earning assets,
and was offset by $156,000 resulting from a decrease of $14.1 million in the
average balance of interest-earning assets.
Interest Expense. Interest expense increased $1.0 million, or 26.85%, for the
three months ended June 30, 1995 to $4.8 million from $3.8 million for the
three months ended June 30, 1994. Of this increase, $13,000 resulted from a
$15.6 million decrease in the average balance of interest-bearing liabilities,
and $926,000 from an increase to 5.49% from 4.15% in the average cost of
interest-bearing liabilities.
Net Interest Income. Net interest income decreased $939,000, or 29.37%, for
the three months ended June 30, 1995 to $2.3 million from $3.2 million for the
three months ended June 30, 1994. The net interest margin decreased to 2.36%
for the three months ended June 30, 1995 from 3.22% for the three months ended
June 30, 1994. The impact of the 350 basis point plus increase in the U.S.
credit markets has negatively impacted the interest-bearing liabilities of
Conservative to a much greater extent than the increase in interest-earning
asset base. Conservative's interest-earning assets continue to reprice on a
lagging basis, while the FHLB advance liabilities reprice on a current basis.
Noninterest Income. Noninterest income increased $272,000 for the three
months ended June 30, 1995 to $698,000 from $426,000 for the three months
ended June 30, 1994. Gain on sale of loans decreased $106,000 to $55,000 for
the three months ended June 30, 1995 from $161,000 for the three months ended
June 30, 1994. This decrease resulted from a 38.72% decrease in Real Estate
Mortgage Loan closings and because Conservative retained more loans originated
in its portfolio rather than selling them on a servicing-released basis. This
trend will continue during 1995 unless the U.S. credit market rates decrease
to a level which dramatically increases real estate loan originations.
Page 7
<PAGE>
A gain on sale of fixed assets of $282,622 was recognized during the three
months ended June 30, 1995. On June 15, 1995, Conservative sold a vacant tract
of lot immediately South of its Corporate headquarters. Accordingly, the gain
was recognized during the second quarter of 1995.
On May 19, 1995, Conservative sold its Millard branch location (in Omaha,
Nebraska) to a national bank located in Omaha, Nebraska. The branch's assets
were retained by Conservative and approximately $4.0 million of deposit and
accrued interest liabilities were transferred as of the May 19, 1995 closing
date.
A gain on sale of deposits, net, was recorded in the amount of $103,000 for
the three months ended June 30, 1995.
Noninterest Expense. Noninterest expense decreased $145,000, or 6.10%, to
$2.2 million for the three months ended June 30, 1995 from $2.4 million for
the three months ended June 30, 1994. Conservative sold the 217-unit multi-
family REO asset and incurred a loss on the sale of approximately $27,000.
In addition, expenses to operate this REO asset, prior to sale, were $80,000.
An addition to the provision for REO of $10,000 was recorded and was
applicable to the three remaining REO assets in inventory as of June 30, 1995.
For the Six Months Ended June 30, 1995 and 1994
Overview. Net income decreased $997,000 for the six months ended June 30,
1995 to $903,000 from $1.9 million for the six months ended June 30, 1994.
Net interest income before loan loss provision decreased $1.9 million,
noninterest income decreased $87,000 and noninterest expense decreased
$471,000.
Interest Income. Interest income increased $278,000, or 2%, for the six
months ended June 30, 1995 to $14.2 million from $13.9 million for the six
months ended June 30, 1994. Of this increase, $395,000 resulted from an
increase of 7.43% from 7.17% in the average yield on interest-earning assets,
and was offset by $117,000 resulting from a decrease of $5.8 million in the
average balance of interest-earning assets.
Interest Expense. Interest expense increased $2.2 million, or 29.6%, for the
six months ended June 30, 1995 to $9.4 million from $7.2 million for the six
months ended June 30, 1994. Of this increase, $1.8 million resulted from an
increase to 5.32% from 4.03% in the average cost of interest-bearing
liabilities, which was offset $117,000 resulting from a $6.7 million decrease
in the average balance of interest-bearing liabilities.
Net Interest Income. Net interest income decreased $1.9 million, or 28.3%,
for the six months ended June 30, 1995 to $4.8 million from $6.6 million for
the six months ended June 30, 1994. The net interest margin decreased to
2.49% for the six months ended June 30, 1995 from 3.42% for the six months
ended June 30, 1994. The impact of the 350 basis point plus increase in the
U.S. credit markets has negatively impacted the interest-bearing liabilities
of Conservative to a much greater extent than the increase in interest-earning
asset base. Conservative's interest-earning assets continue to reprice on a
lagging basis, while the FHLB advance liabilities reprice on a current basis.
Noninterest Income. Noninterest income decreased $87,000 for the six months
ended June 30, 1995 to $879,000 from $966,000 for the six months ended June
30, 1994. Gain on sale of loans decreased $335,000 to $89,000 for the six
months ended June 30, 1995 from $424,000 for the six months ended June 30,
1994. This decrease resulted from a 36.01% decrease in Real Estate Mortgage
Loan closings and because Conservative retained more loans originated in its
portfolio rather than selling them on a servicing-released basis. This trend
will continue during 1995 unless the U.S. credit market rates decrease to a
level which dramatically increases real estate loan originations.
Loss on sale of investment securities was $88,000 for the six months ended
June 30, 1995. Sale of municipal bond investments during the three months
ended March 31, 1995 in the amount of $121,000 was recognized to satisfy OTS
regulatory requirements. Sales for these reasons will not recur during
Page 8
<PAGE>
1995; however, if investment securities are sold to provide necessary
liquidity, control interest rate risk or to provide funding for loan
originations, gains or losses may be recognized.
A gain on sale of fixed assets of $282,622 was recognized during the three
months ended June 30, 1995. On June 15, 1995, Conservative sold a vacant tract
of lot immediately South of its Corporate headquarters. Accordingly, the gain
was recognized during the second quarter of 1995.
On May 19, 1995, Conservative sold its Millard branch location (in Omaha,
Nebraska) to a national bank located in Omaha, Nebraska. The branch's assets
were retained by Conservative and approximately $4.0 million of deposit and
accrued interest liabilities were transferred as of the May 19, 1995 closing
date.
A gain on sale of deposits, net, was recorded in the amount of $103,000 for
the three months ended June 30, 1995.
Noninterest Expense. Noninterest expense decreased $471,000, or 9.45%, to
$4.5 million for the six months ended June 30, 1995 from $5.0 million for the
six months ended June 30, 1994. Conservative sold the 217-unit multi-family
REO asset and incurred a loss on the sale of approximately $27,000. In
addition, expenses to operate this REO asset, prior to sale, were $173,000.
An addition to the provision for REO of $10,000 was recorded and was
applicable to the three remaining REO assets in inventory as of June 30, 1995.
LIQUIDITY AND SOURCES OF FUNDS
------------------------------
Conservative's primary sources of funds are customer deposits and advances
from the FHLB of Topeka. These funds, together with loan repayments, loan
sales and retained earnings, are used to make loans, to acquire investment
securities and other assets and to fund continuing operations. Management
anticipates that Conservative will continue to rely primarily upon customer
deposits, short- and long-term advances from the FHLB of Topeka or others
lenders, loan repayments, loan sales and retained earnings to provide
liquidity and will use funds so provided primarily to make loans and to
purchase investment securities.
Current OTS regulations require savings institutions to maintain an average
daily balance of liquid assets greater than or equal to 5% of the average
daily balance of net withdrawable accounts and borrowings payable on demand in
one year or less during the preceding calendar month, of which, short-term
liquid assets must consist of not less than 1%. At June 30, 1995,
Conservative's liquidity ratio was 7.41% compared to 6.11% at December 31,
1994. Conservative's liquidity ratio may vary from time to time, depending on
economic conditions, savings flows and loan funding needs.
On a quarterly basis, the Bank performs formal asset classification procedures
consistent with OTS regulations and procedures. As a part of this review, a
schedule of nonperforming assets are reviewed and are considered when
establishing the level of provisions for loan losses to be established. The
Bank's "Schedule of Nonperforming Assets" at June 30, 1995 and December 31,
1994 is as follows:
Page 9
<PAGE>
CONSERVATIVE SAVINGS CORPORATION
SCHEDULE OF NONPERFORMING ASSETS
<TABLE>
<CAPTION>
Jun 30, 1995 Dec 31, 1994
-------------------------
Non-accruing loans/1/: (Amount in thousands)
<S> <C> <C>
Real estate loans:
One-to-four family $ 175 $ 17
Multi-family 0 116
Commercial 0 0
Land 0 0
Consumer loans 156 142
--------- ---------
Total non-accruing loans $ 331 $ 275
========= =========
Accruing loans delinquent more than 90 days:
Real estate loans:
One-to-four family $ 0 $ 0
Multi-family 0 0
Commercial 0 0
Land 0 0
Consumer loans 0 0
--------- ---------
Total accruing loans delinquent more
than 90 days $ 0 $ 0
========= =========
Other loans of concern:
Real estate loans:
One-to-four family $ 0 $ 0
Multi-family 786 911
Commercial 0 0
Land 0 0
Consumer loans 227 401
--------- ---------
Total other loans of concern $ 1,013 $ 1,312
========= =========
Total non-accruing loans $ 331 $ 275
Real estate owned, net 157 1,039
--------- ---------
Total non-performing assets $ 488 $ 1,314
========= =========
Total assets $ 383,375 $ 392,454
Total gross loans 168,155 165,623
Allowance for loan loss 774 803
Ratios:
Total non-performing assets to total loans 0.29% 0.79%
Total non-accruing loans to total assets 0.09% 0.07%
Total other loans of concern to total assets 0.26% 0.33%
Total nonperforming loans to total assets 0.13% 0.33%
Ratio of allowance for estimated losses on
loans to total non-performing loans 233.84% 292.00%
</TABLE>
- -----------------------
/1/ Interest that would have accrued on non-accruing loans and percentage
earned on non-accruing loans is not material.
Page 10
<PAGE>
REGULATION
----------
Introduction
Conservative, as a savings and loan holding company, and the Bank, as a
federally-chartered savings bank with deposits insured by the FDIC, are
subject to extensive laws and regulations. These laws and regulations impose
restrictions on activities, minimum capital requirements, lending, deposit
taking and branching, among other things, and impose securities disclosure
obligations.
Recent Regulatory Developments
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") was signed into law. The following is not intended to be a
complete description of FIRREA, but is intended to describe certain of the
most significant provisions applicable to Conservative. A number of
significant changes have resulted from this legislation and from new
regulations issued pursuant to FIRREA. Under FIRREA, the Bank's chartering
authority, the Federal Home Loan Bank Board (the "FHLBB"), was abolished and
its thrift chartering and certain regulatory functions passed to the newly
created OTS, a bureau within the Treasury Department. FIRREA also created a
new independent agency known as the Federal Housing Finance Board (the
"FHFB"), which is the governing authority for the FHLB System. Under FIRREA,
the Federal Savings and Loan Insurance Corporation (the "FSLIC") was also
abolished and its role as the insurer of thrift deposits passed to the FDIC
through its Savings Association Insurance Fund (the "SAIF").
Among other things, FIRREA also (i) for the first time, permitted bank
holding companies to acquire healthy savings associations, (ii) permitted
commercial banks that meet certain housing-related asset requirements to
secure advances and other financial services from their local Federal Home
Loan Banks, (iii) requires higher minimum capital levels for savings
associations and (iv) greatly enhances the regulators' enforcement powers by
removing procedural barriers, sharply increasing the civil and criminal
penalties for violating statutes and regulations and providing increased
appropriations to the Justice Department to finance prosecution of crimes
against depository institutions.
In late 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted into law. FDICIA (i) requires federal
regulators under certain circumstances to impose a conservatorship or
receivership on an institution falling below a level of tangible capital set
by the regulators (which level must be a minimum of 2%), (ii) provides for the
assessment of deposit insurance premiums based on assessed risk in the
institution's asset portfolios, (iii) imposes charges for FDIC examinations,
(iv) imposes liability on holding companies, such as Conservative, for
regulatory capital deficiencies in their insured subsidiaries under certain
circumstances and (v) requires holding companies to guarantee that
undercapitalized subsidiaries will comply with capital plans, among other
significant changes.
FDICIA amended the grounds for the appointment of a conservator or
receiver for an insured depository institution to include, among other things:
(i) consent by the board of directors of the institution, (ii) cessation of
the institution's status as an insured depository institution, (iii) the
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized when required to do so, fails to timely submit an
acceptable capital plan or materially fails to implement an acceptable capital
plan or (iv) the institution is critically undercapitalized or otherwise has
substantially insufficient capital. FDICIA provides that an institutions'
directors shall not be liable to its stockholders or creditors for acquiescing
in or consenting in good faith to the appointment of the FDIC or the RTC as
receiver or conservator or to a supervisory acquisition of the institution.
FDICIA further provides the OTS with broad powers to take "prompt
corrective action" to resolve problems of insured depository institutions. The
extent of these powers depends upon whether the institutions
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<PAGE>
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." On September 29, 1992, the OTS adopted final regulations
implementing the "prompt corrective action" provisions of FDICIA. These
regulations became effective December 19, 1992. The "prompt corrective action"
regulations do not require specific prompt corrective actions for "well
capitalized" or "adequately capitalized" institutions. Institutions with lower
capital levels are, however, subject to increased scrutiny and must submit a
written capital restoration plan.
If an institution is significantly undercapitalized or is
undercapitalized and fails to timely submit an acceptable capital restoration
plan to the OTS or fails in any material respect to implement a plan accepted
by the OTS, the OTS is authorized under certain circumstances to take the
following corrective actions: placing limits on asset growth and restrictions
on activities; requiring the institution to issue additional stock (including
voting stock) or requiring the institution to be acquired; pay on deposits;
ordering a new election of the institution board of directors; requiring that
certain senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of
principal or interest on subordinated debt; prohibiting the holding company
from making capital distributions without prior regulatory approval; and,
ultimately, appointing a receiver (or, with the concurrence of the FDIC, a
conservator) for the institution. The appropriate federal banking agency is
required to appoint a receiver (or, with the concurrence of the FDIC, a
conservator) within 90 days after an institution becomes critically
undercapitalized unless certain specific findings are made by such agency and
the FDIC.
Under FDICIA, if an insured depository institution is undercapitalized,
the parent holding company is required to guarantee that the institution will
comply with any capital restoration plan submitted to and approved by the OTS
in an amount equal to the lesser of (i) 5% of the institution's total assets
at the time the institution became undercapitalized or (ii) the amount which
is necessary (or would have been necessary) to bring the institution into
compliance with all applicable capital standards as of the time the
institution failed to comply with the capital restoration plan.
FDICIA requires the federal bank regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems, (ii) loan documentation, (iii) credit underwriting,
(iv) interest rate risk exposure, (v) asset growth and (vi) compensation, fees
and benefits. The compensation standards would prohibit employment contracts,
compensation or benefit arrangements, stock option plans, fee arrangements or
other compensatory arrangements that would provide excessive compensation,
fees or benefits or could lead to material financial loss. In addition, the
federal banking regulatory agencies are required to prescribe by regulation
standards specifying (i) maximum classified assets to capital ratios, (ii)
minimum earnings sufficient to absorb losses without impairing capital and
(iii) to the extent feasible, a minimum ratio of market value to book value
for publicly traded shares of depository institutions and depository
institution holding companies. The federal banking agencies jointly issued
proposed rules concerning these standards, but final rules have not been
issued.
FDICIA amended the Federal Deposit Insurance Act to prohibit insured
depository institutions that are not well-capitalized from accepting brokered
deposits unless a waiver has been obtained from the FDIC. Deposit brokers will
be required to register with the FDIC. FDICIA directs the FDIC to establish a
permanent risk-based assessment system for deposit insurance by January 1,
1994 and authorizes the FDIC to privately reinsure up to 10% of its risk of
loss with respect to an institution and base its assessment on the cost of
such reinsurance. On January 1, 1994, the FDIC implemented a new permanent
system of risk-related insurance premiums. See "Regulation - Insurance of
Accounts."
Pursuant to FDICIA, the federal bank regulatory agencies, including the
OTS, have adopted uniform regulations, effective as of March 19, 1993, for
real estate mortgage and construction loans. FDICIA also
Page 12
<PAGE>
requires federal bank regulatory agencies to review biannually risk-based
capital standards to ensure that they adequately address interest rate risk,
concentration of credit risk and risks from non-traditional activities.
FDICIA seeks to encourage enforcement of existing consumer protection
laws and enacts new consumer-oriented provisions including a requirement of
notice to regulators and customers for any proposed branch closing and
provisions intended to encourage the offering of "lifeline" banking accounts
and lending in distressed communities. FDICIA also requires depository
institutions to make additional disclosures to depositors with respect to the
rate of interest and the terms of their deposit accounts.
The full effect that FIRREA and FDICIA will have is not known at this
time and cannot be predicted with certainty. However, these laws may have a
significant effect on the competitive balance between commercial banks and
thrift institutions and present significant opportunities for some
institutions while imposing additional capital, compliance and operating
burdens and enforcement risks for others.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") amended the Bank Holding
Company Act of 1956 (the "BHCA") to create certain interstate banking and
branching opportunities. The IBBEA generally applies only to traditional
savings banks and commercial banks. It does not alter the existing interstate
branching authority of federally chartered institutions regulated by the OTS,
such as the Bank. Under the IBBEA a bank holding company may acquire a bank
located in any state, provided that the acquisition does not result in the
bank holding company controlling more than 10% of the deposits in the United
States, or 30% of deposits in the state in which the bank to be acquired is
located (unless the state waives the 30% deposit limitation). The IBBEA
permits individual states to restrict the ability of an out-of-state bank
holding company or bank to acquire an in-state bank that has been in existence
for less than five years and to establish a state concentration limit of less
than 30% if such reduced limit does not discriminate against out-of-state bank
holding companies or banks.
Effective June 1, 1997, the IBBEA authorizes an "adequately capitalized"
bank, with the approval of the appropriate federal banking agency, to merge
with another adequately capitalized bank in any state that has not opted out
of interstate branching. Such a bank may operate the target's offices as
branches if certain conditions are satisfied. The same national and state
deposit concentration limits and applicable state minimum-existence
restrictions which apply to interstate acquisitions (as discussed above) also
apply to interstate mergers. The applicant also must comply with any
nondiscriminatory host state filing and notice requirements and demonstrate a
record of compliance with applicable federal and state community reinvestment
laws. A state may opt out of interstate branching by enacting a new law
between September 29, 1994 and June 1, 1997, expressly prohibiting interstate
merger transactions.
Under the IBBEA, the resulting bank in an interstate merger may establish
or acquire additional branches at any location in a state where any of the
banks involved in the merger could have established or acquired a branch. A
bank also may acquire one or more branches of an out-of-state bank without
acquiring the target out-of-state bank if the law of the target's home state
permits such a transaction. In addition, the IBBEA permits a bank to
establish a de novo branch in another state if the host state statutorily
permits de novo interstate branching.
Effective as of September 29, 1995, the IBBEA also permits a bank
subsidiary of a bank holding company to act as agent for other depository
institutions owned by the same holding company for purposes of receiving
deposits, renewing time deposits, closing of servicing loans and receiving
loan payments. Under the IBBEA, a savings association may perform similar
agency services for affiliated banks to the extent that the savings
association was affiliated with a bank on July 1, 1994, and satisfies certain
additional requirements.
Page 13
<PAGE>
The interstate banking, branching and affiliate banking opportunities
created by the IBBEA may further increase competition within the Bank's
existing market area.
Regulatory Capital Requirements
FIRREA mandated significant new regulatory capital requirements for
thrift institutions. Under minimum regulatory capital regulations issued
pursuant to FIRREA by the OTS, thrift institutions are required to have
"tangible capital" equal to no less than 1.5% of adjusted total assets and
"core capital" equal to no less than 3% of adjusted total assets. In addition,
thrift institutions are required to maintain "risk-based capital" equal to 8%
of risk-weighted assets.
Under OTS regulations, adjusted total assets are a thrift institution's
total assets as determined under generally accepted accounting principles
(GAAP) increased, among other things, by investments in any subsidiary subject
to consolidation under the capital rules. Adjusted total assets are reduced by
the amount of assets that have been deducted from capital, the portion of the
thrift 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.
Tangible Capital. Tangible capital consists of common stockholders'
equity, including retained earnings, noncumulative perpetual preferred stock
and related earnings and minority interests in equity accounts of fully
consolidated subsidiaries. In calculating tangible capital, certain items must
be deducted, including goodwill and other intangible assets, nonqualifying
purchased mortgage servicing rights and investments in subsidiaries engaged
principally in activities not permissible for national banks (except for a
declining amount of grandfathered investments described below).
With respect to purchased mortgage servicing rights, the amount that
qualifies to be included in tangible capital is the lowest of (i) 90% of fair
market value if determinable, (ii) 90% of original cost or (iii) the current
amortized book value, provided that the amount included does not exceed 50% of
the core capital or 100% of tangible capital, except for amounts recorded
prior to February 9, 1990.
With respect to investments (both debt and equity) in subsidiaries
engaged before April 12, 1989 in an activity not then impermissible for a
national bank, a thrift institution must first deduct such investments from
assets and, thus, tangible capital by the amount by which such investments
exceed the amount of such investments held by the thrift institution as of
April 12, 1989. The thrift institution must then deduct from assets and, thus,
tangible capital a percentage of the thrift institution's investment in and
loans to such subsidiaries at April 12, 1989 or as of the date of calculation,
whichever is less. Such percentage declines over a transition period as
follows: July 1, 1992 to June 30, 1993 - 60%; July 1, 1993 to June 30, 1994 -
40%; thereafter - 0%. Additional investments in such subsidiaries after April
12, 1989 are fully deducted from tangible capital. To the extent the
investment in these subsidiaries is not deducted from tangible capital during
the phase-in period, the assets of the subsidiaries must be consolidated with
those of the thrift institution. The percentage may be further reduced by the
FDIC during such five-year transition period with respect to a particular
thrift institution on safety and soundness grounds.
Core Capital. "Core capital" is defined, essentially, as tangible
capital plus supervisory goodwill subject to limits discussed below, FSLIC
capital contributions and other qualifying intangible assets, meeting a three-
part test: separability, marketability and market valuation.
The amount of supervisory goodwill and FSLIC capital contributions that
may be included in core capital as a percent of total assets is as follows:
January 1, 1993 to December 31, 1993 - 0.75%; January 1, 1994 to December 31,
1994 - 0.375%; thereafter - 0%.
Page 14
<PAGE>
Risk-Based Capital. FIRREA and OTS capital regulations also impose a
risk-based capital requirement which is a percentage of capital to risk-
adjusted assets. A risk weight is assigned to both the on-balance sheet assets
and off-balance sheet commitments of a thrift institution. Representative risk
weights include: 0% for assets that are backed by the full faith and credit of
the United States; 20% for FHLB system stock, agency securities not backed by
the full faith and credit of the United States and certain high-quality
mortgage-related securities; 50% for qualifying mortgage loans and certain
non-high-quality mortgage-related securities; and 100% for consumer,
commercial and other loans. Residential construction loans are generally
assigned a risk weight of 100%; however, pursuant to amendments to the OTS'
risk-based capital regulation, certain loans to finance the construction of
pre-sold, one-to-four family residences qualify for the 50% risk-weight
category.
A thrift institution may use "supplementary capital" to satisfy the risk-
based capital requirement in an amount up to 100% of its core capital.
Supplementary capital includes certain permanent capital instruments such as
cumulative perpetual preferred stock and certain maturing capital instruments
issued pursuant to OTS regulations. Thrift institutions issuing maturing
capital instruments after November 7, 1989 may choose to include such
instruments in supplementary capital pursuant to one of two options: (i) at
the beginning of each of the last five years of the life of the instrument,
the amount included as supplementary capital is reduced by 20% of the original
amount of the instrument or (ii) only the aggregate amount of instruments
maturing in any one year during the seven years prior to an instrument's
maturity that does not exceed 20% of a thrift institution's capital will
qualify as supplementary capital. Once a thrift institution has selected an
option, it may not switch to the other option until all instruments issued
pursuant to such option are no longer outstanding. Subject to a five-year
phase-out period ending June 30, 1994, thrift institutions also are required
to deduct from risk-based capital (i) those investments that would be
considered equity investments under GAAP, (ii) that portion of land loans and
nonresidential construction loans that have a loan-to-value ratio in excess of
80% and (iii) the amount of their investment in certain real estate assets
acquired in satisfaction of debts previously contracted if the investment is
to be held for a period longer than five years (or such longer period as is
approved by the OTS). The allowance for estimated losses on loans and other
valuation allowances established in accordance with OTS regulations are
included in supplementary capital in an amount not to exceed 1.25% of risk-
weighted assets.
Effective January 1, 1994, the OTS issued a final rule which adds an
interest rate risk (IRR) component to the risk-based capital requirement.
Under these rules, savings institutions with a greater than "normal" level of
IRR exposure will be subject to a deduction from total capital for purposes of
calculating the risk-based capital requirement. Interest rate exposure will be
measured as the decline in net portfolio value due to a 200 basis point
increase or decrease in market interest rates. The IRR component to be
deducted from total capital is equal to one-half the difference between an
institution's measured exposure and the "normal" level of exposure which is
defined as 2% of the estimated economic value of its assets.
The final rule established a two quarter "lag" between the reporting date
of the data used to calculate the IRR component and the effective date of each
quarter's IRR component. Under the final rule, the OTS director may waive or
defer an institution's IRR component, but not decrease it unless it is as the
result of an appeal.
In October 1994, the OTS delayed implementation of the IRR capital
deduction to allow for an appeals process to be developed. Accordingly, the
OTS has delayed the introduction of the IRR capital deduction to June 30,
1995. The June 1995 deduction will be based on the lesser of the September
1994, December 1994 and March 1995 IRR components.
The OTS has the authority to impose higher capital requirements for
individual thrift institutions, such as the Bank, based on an assessment of
the risk a thrift institution presents to the deposit insurance fund or
Page 15
<PAGE>
other factors. The OTS also has the authority to raise the capital
requirements over the minimum levels set forth in FIRREA.
The following table sets forth the Bank's tangible, core and risk-based
capital levels, capital requirements and excess at June 30, 1995, December 31,
1994 and December 31, 1993.
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994 December 31, 1993
------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent
----- ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital................... $35,008 9.09% $34,201 8.67% $31,076 7.72%
Tangible capital requirement....... 5,780 1.50 5,915 1.50 6,040 1.50
------- ------- ------- ------- ------- -------
Excess.......................... $29,228 7.59% $28,286 7.17% $25,036 6.22%
======= ======= ======= ======= ======= =======
Core capital....................... $35,008 9.09% $34,201 8.67% $31,076 7.72%
Core capital requirement........... 11,560 3.00 11,831 3.00 12,080 3.00
------- ------- ------- ------- ------- -------
Excess.......................... $23,448 6.09% $22,370 5.67% $18,996 4.72%
======= ======= ======= ======= ======= =======
Risk-based capital................. $35,781 22.61% $35,004 21.95% $32,206 20.18%
Risk-based capital requirement..... 12,658 8.00 12,757 8.00 12,766 8.00
------- ------- ------- ------- ------- -------
Excess.......................... $23,123 14.61% $22,247 13.95% $19,440 12.18%
======= ======= ======= ======= ======= =======
</TABLE>
Certain interpretive issues are presented by the new capital rules. In
many instances, these issues have not been resolved by the OTS or other
regulatory authorities. Although the Bank believes its resolution of such
issues, together with the assumptions it has used in its regulatory capital
calculations, are appropriate and reasonable, the Bank's calculations of
capital may require adjustment in the event the OTS or other regulatory
authorities adopt differing interpretations or use different assumptions.
In the event the Bank fails to comply with any of its existing or future
minimum regulatory capital requirements, it (i) would be required to file and
implement a capital plan with the appropriate regulatory agencies, (ii) would
be subjected to restrictions on growth and the payment of dividends, (iii)
could have restrictions imposed on its ability to establish new branches,
invest in service corporations and make equity investments, or (iv) could be
precluded from issuing securities as a means of raising additional capital,
among other negative effects. Such failure could also permit the OTS to
require that the Bank subject itself to a restrictive business plan or
supervisory agreement that could impose limits on internal growth and
acquisitions, the payment of dividends or other activities. Such restrictions
could impair Conservative's ability to pay dividends on the Common Stock or
the Convertible Preferred Stock or to pursue its acquisition and internal
growth strategies. Such failure also could permit the FDIC to initiate action
resulting in the termination of deposit insurance. The material failure of a
thrift institution to comply with any plan, regulation, written agreement,
order or directive issued may be treated as an unsafe or unsound practice
which could result in the imposition of certain penalties or sanctions
including, but not limited to, the assessment of civil monetary penalties, the
issuance of a cease and desist order, or the appointment of a conservator or
receiver.
The Bank's ability to attain compliance with future increases in the
risk-based capital requirement or the core capital requirements (as the latter
is effectively increased by the phase-out of goodwill) may be adversely
affected by unanticipated losses or lower levels of earnings, by new or
increased regulatory capital requirements, an increase in its level of higher
risk assets or by other factors. In addition, there is virtually no
Page 16
<PAGE>
limit on the authority of the OTS or the FDIC to take any appropriate action
with respect to conditions or activities it considers unsafe and unsound,
including failure to comply with minimum regulatory capital requirements.
Restrictions on Distributions
Dividends or other capital distributions from the Bank to Conservative
will be necessary in order for Conservative to pay dividends on the Common
Stock and the Convertible Preferred Stock. The Bank's ability to make any such
distributions in the future will depend on its earnings and its ability to
meet minimum regulatory capital requirements in effect during future periods.
See "Regulation - Regulatory Capital Requirements."
Capital distributions by thrift institutions such as the Bank, including
dividends, stock repurchases, redemption of securities and cash-out mergers,
are subject to restrictions tied to the thrift institution's capital levels
after giving effect to such distributions.
Under an OTS regulation, thrift institutions identified as "Tier 1"
thrift institutions (see definitions below) generally are authorized to make
capital distributions during a calendar year up to the higher of (i) 100% of
their net income to date during the calendar year plus the amount that would
reduce by one-half their surplus capital ratio at the beginning of the
calendar year or (ii) 75% of their net income over the most recent four-
quarter period. "Surplus capital ratio" refers to the percentage by which a
thrift institution's capital-to-assets ratio exceeds the ratio of its fully
phased-in capital requirement to its assets.
Thrift institutions identified as "Tier 2" thrift institutions generally
are authorized to make capital distributions in accordance with the following
schedule: (i) if the thrift institution's current capital satisfies the risk-
based capital standard that would be applicable to it as of January 1, 1993
computed on the basis of its current portfolio, it may make capital
distributions of up to 75% of its net income over the most recent four-quarter
period and (ii) if a thrift institution's current capital satisfies the risk-
based capital standard applicable to it on January 1, 1991 computed on the
basis of its current portfolio, it may make capital distributions of up to 50%
of its net income over the most recent four-quarter period. For purposes of
computing the foregoing amounts, a thrift institution must deduct the amount
of capital distributions it has previously made during the most recent four-
quarter period.
Thrift institutions identified as "Tier 3" thrift institutions would not
be permitted to make capital distributions unless they receive prior written
OTS approval or unless such a distribution is made in accordance with an
approved capital plan.
"Tier 1" thrift institutions are those that would have capital,
immediately prior to and on a pro forma basis after giving effect to a
proposed capital distribution, equal to or greater than the amount of their
regulatory capital requirements. "Tier 2" thrift institutions are those that
would have capital, immediately prior to and on a pro forma basis after giving
effect to a proposed capital distribution, equal to or in excess of their
minimum regulatory capital requirements. "Tier 3" thrift institutions are
those that would have capital, immediately prior to or on a pro forma basis
after giving effect to a proposed capital distribution, less than their
minimum regulatory capital requirements. The new capital distribution rule
would also reflect any individual minimum capital requirement and requirements
tied to general minimum capital requirements would need to be adjusted
accordingly. Since the Bank does not currently have an individual minimum
capital requirement and exceeds the fully phased-in regulatory capital
requirements, the Bank is a "Tier 1" thrift institution. At June 30, 1995, the
Bank could pay dividends to Conservative of approximately $8.8 million.
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<PAGE>
Liquidity and Reserve Requirements
FIRREA amended the Home Owners Loan Act ("HOLA") to require that the
Director of the OTS adopt regulations providing for a minimum liquidity
requirement for thrift institutions. The minimum liquidity requirement must be
in range of 4% to 10% of a thrift institution's withdrawable accounts and
borrowings payable on demand or with maturities of one year or less. Current
OTS regulations, which may be modified by the Director of the OTS in
accordance with FIRREA, provided that each thrift institution must maintain an
average daily balance for each calendar month of liquid assets (cash, certain
time deposits, certain bankers' acceptances, specified corporate obligations,
and specified U.S. government, state or federal agency obligations) equal to
at least 5% of the sum of its average daily balance of net withdrawable
deposit accounts (the amount of all withdrawable accounts less the unpaid
balance of all loans secured by such accounts) plus borrowings payable in one
year or less. These regulations also provide that each thrift institution must
maintain an average daily balance for each calendar month of short-term liquid
assets (generally those having maturities of six months or less or twelve
months or less, depending on the type of asset) equal to at least 1% of its
average daily balance of net withdrawable deposit accounts plus short-term
debt.
The OTS has announced it has taken under consideration the adoption of
proposed rule-making to amend its liquidity regulation. The rule, if adopted,
would reduce the liquidity requirement from 5% to the statutory minimum of 4%,
change the daily calculation to a quarterly calculation and remove the 1%
short-term liquidity requirement. The OTS has not yet released its proposed
rule. The Bank's liquidity ratio currently is in excess of the existing
requirements. For a discussion of Conservative's compliance with the foregoing
requirements, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Sources of Funds."
The Bank also is subject to Federal Reserve Board reserve requirements
imposed under Regulation D by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). These requirements, which are subject to
change from time to time, call for minimum levels of reserves based on amounts
held in transaction accounts. At June 30, 1995 the Bank's liquidity ratio was
7.41%, which exceeded the current 5% regulatory requirement.
Insurance of Accounts
Under FIRREA, the Bank's deposits are insured by the FDIC up to $100,000
per insured depositor. FIRREA provides that the Bank will be assessed annual
deposit insurance premiums at rates equal to the following percentages of
total insured deposits: from January 1, 1994 through December 31, 1997 -
0.18%; and on and after January 1, 1998 - 0.15%. In addition, FIRREA provides
that after December 31, 1994, the Board of Directors of the FDIC may, in order
to meet designated reserve ratios, increase deposit insurance rates not
exceeding 0.325%, provided the increase in any one year may not exceed 0.075%.
On October 1, 1993, the FDIC adopted a permanent system of risk-related
insurance premiums that went into effect on January 1, 1994. Under this new
system, the SAIF premium rates are assigned to each thrift institution based
on its capital group and risk. Each thrift institution fits into one of three
capital groups, based on its capital ratio: group "1" (well capitalized),
group "2" (adequately capitalized) and group "3" (undercapitalized). Within
each capital group, thrift institutions are further divided into three
subgroups based on their risk to the insurance fund: (i) subgroup "A" which
consists of finally sound institutions with only a few minor weaknesses; (ii)
subgroup "B" which 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 SAIF or the Bank Insurance Fund (the "BIF"),
also administered by the FDIC; and (iii) subgroup "C" which consists of
institutions that pose a substantial probability of loss to the SAIF or BIF
unless correction action is taken. Under the current system adopted by the
FDIC the actual assessment rate for thrift institutions ranges from 0.23% to
0.31%.
Page 18
<PAGE>
The assessment rate for well-capitalized, subgroup "A" institutions is
0.23%. Adequately capitalized, subgroup "A" institutions and well capitalized,
subgroup "B" institutions pay an assessment rate of 0.26%. Undercapitalized,
subgroup "A" institutions, adequately capitalized, subgroup "B" institutions
and well-capitalized, subgroup "C" institutions pay an assessment rate of
0.29%. The assessment rate for undercapitalized, subgroup "B" institutions and
adequately capitalized, subgroup "C" institutions is 0.30% and the assessment
rate for undercapitalized, subgroup "C" institutions is 0.31%.
On October 5, 1994, the FDIC issued an advance notice of proposed rule-
making seeking comment on whether the deposit insurance assessment base should
be redefined in light of the recent transition to a risk-based deposit
insurance system. The FDIC stated that, while it did not intend any
redefinition of the assessment base to have a significant impact on the total
amount of assessments industry-wide, there is a potential for significant
change in the assessments paid on an institution-by-institution basis.
Depending on the type of activities in which a particular institution, such as
the Bank, is engaged, and the type of products and services it offers, a
change in the assessment base could have a significant effect on the amount of
the assessments such an institution pays. The deadline for submitting written
comments on the advanced notice of proposed rule-making expired on February 2,
1995, and the FDIC has not yet issued a proposed rule.
On February 16, 1995, the FDIC also issued a proposed rule to retain the
existing assessment rate schedule applicable to SAIF member institutions. The
effect of this proposal would be that the SAIF assessment rate to be paid by
SAIF members would continue to range from $0.23 per $100 of domestic deposits
to $0.31 per $100 of domestic deposits, depending on risk classification. On
the same date, the FDIC also announced it is proposing to establish a new
assessment rate schedule of 4 to 31 basis points for members of the BIF. At
present, BIF members are assessed the same rates for FDIC insurance as SAIF
members - 23 basis points for the best risk classification to 31 basis points
for the riskiest classification. The comment period for both of these
proposed rules expired on April 17, 1995.
Since August 9, 1994, SAIF members may convert to the status of members
of the BIF or merge with or transfer assets to a BIF member. Each depository
institution participating in a SAIF-to-BIF conversion is required to pay an
exit fee to the SAIF and an entrance fee to the BIF, subject to certain
exceptions.
Qualified Thrift Lender
All thrift institutions, including the Bank, are required to meet the
Qualified Thrift Lender (QTL) test to avoid certain restrictions on their
operations. The QTL test requires 65% of a thrift institution's portfolio
assets (total assets less intangibles, properties used to conduct the thrift
institution's business, and liquid assets not exceeding 20% of total assets)
to be maintained in qualified thrift investments on a monthly average basis in
nine of every twelve months. Assets that will qualify without limitation for
inclusion as part of the 65% requirement are loans related to domestic
residential housing and manufactured housing, home equity loans, mortgage-
backed securities (where the mortgages are related to residential housing or
manufactured housing), stock of any FHLB, and direct or indirect obligations
of the FSLIC or the FDIC.
In addition, the following assets may be included in meeting the QTL
test, subject to an overall limit of 20% of the thrift institution's asset
portfolio: 50% of residential mortgage loans originated and sold within 90
days of origination; 100% of investments in service corporations that meet
certain housing-related standards; 200% of loans related to the acquisition,
development and construction of one-to-four family housing meeting certain
low-income standards, 200% of certain loans in areas where credit needs of low
and moderate-income residents are not being adequately met; 100% of certain
loans for the purchase, construction, improvement or upkeep of churches,
schools, nursing homes and hospitals; 100% of consumer and educational loans
(limited to 10% of total portfolio assets); and 100% of stock issued by the
FHLMC and the FNMA. At June 30, 1995, the Bank's QTL ratio was 88.63%, which
exceeds the 65% regulatory requirement.
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<PAGE>
A thrift institution failing the QTL test is subject to a number of
restrictions, including (i) a requirement that the thrift institution not make
any new investment or engage in any new activity unless such investment or
activity would be permissible for a national bank and is also permissible for
a thrift institution, (ii) a requirement that the thrift institution not
establish any new branch office at any location at which a national bank
located in the thrift institution's home state may not establish a branch,
(iii) ineligibility for new FHLB advances and (iv) any restrictions on the
payment of dividends to which a national bank would not be subject.
Where a thrift institution still does not meet QTL requirements three
years from the date on which it should have and failed to do so, the thrift
institution will be required to divest any investment or discontinue any
activity that is impermissible for a national bank and will be required to
repay any outstanding FHLB advances. Any savings and loan holding company
owning a thrift institution that fails to meet the QTL test will, within one
year after the date on which the thrift institution should have become or
ceases to be a QTL, be deemed to be a bank holding company subject to all the
provisions of the Bank Holding Company Act of 1956 and other statutes
applicable to bank holding companies, which would impose a number of
additional activity, capital and other restrictions on any such savings and
loan holding company.
Another consequence of a thrift institution failing to maintain
sufficient qualifying real property loans is that such thrift institution
would no longer receive the benefit of certain favorable provisions regarding
deductions from taxable income for annual additions to its bad debt reserve.
Thrift institutions, such as the Bank, as subject to provisions of the
Internal Revenue Code of 1986, as amended (the "Code") in the same general
manner as other corporations. However, thrift institutions such as the Bank
which meet certain conditions prescribed by the Code may benefit from
provisions regarding 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 loan experience (the "Experience
Method") or a percentage of taxable income determined without regard to such
deduction (the "Percentage of Taxable Income Method"). The Bank files its
income tax returns on a calendar year basis. The Bank computed its bad debt
reserve deduction utilizing the Experience Method for calendar years 1990,
1991, 1993 and 1994 and the Percentage of Taxable Income Method for calendar
year 1992.
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%. The Percentage Bad Debt Deduction may be claimed as long as not
less than 60% of the total dollar amount of the assets of a thrift
institutions falls within certain designated categories. In the event the
percentage of assets in the designated categories falls below 60%, the thrift
institution could be required to recapture, generally over a period of up to
four years, its existing bad debt reserve, although net operating loss carry
forwards available to the thrift institution could be used to offset such
recapture. At December 31, 1994, the Bank's assets falling within such
categories exceeded the 60% test.
The bad debt deduction under the Percentage of Taxable Income Method is
limited to the lesser of (i) 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% of such loans outstanding at such time or (ii) the
amount, which when added to the addition to the bad debt reserve for losses on
nonqualifying real property loans, equals the amount by which 12% 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 real estate loans.
Page 20
<PAGE>
Loans to Affiliates
The affiliate restrictions contained in Sections 23A and 23B of the
Federal Reserve Act ("Sections 23A and 23B") apply to all federally insured
thrift institutions and any "affiliate." Section 23A of the Federal Reserve
Act generally defines an "affiliate" of a thrift institution as any company
that controls the thrift institution or that is under common control with the
thrift institution. For the purposes of this definition, "control" is defined
to include the power to vote 25% or more of any class of voting securities or
to control in any manner the election of the majority of a board of directors.
Generally, Section 23A and 23B (i) limit the extent to which a thrift
institution or its subsidiaries may engage in certain covered transactions
with an affiliate to an amount equal to 10% of such thrift institution's
capital stock and surplus, (ii) contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital
sock and surplus and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the thrift 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 other similar types of transactions.
In addition, applicable regulations provide that an SAIF-insured thrift
institution may not buy securities from an affiliate, except for shares of
stock of a subsidiary, and may not make any loan to an affiliate unless the
affiliate is engaged only in activities permissible for bank holding
companies. Only the Federal Reserve Board may grant exemptions from the
restrictions of Section 23A and 23B. The FDIC, however, may impose more
stringent restrictions on thrift institutions for reasons of safety and
soundness. FIRREA permits the OTS to adopt additional restrictions upon
affiliate transactions.
Further FIRREA has extended to thrift institutions the restrictions
contained in Section 22(h) of the Federal Reserve Act ("Section 22(h)") on
loans to executive officers, directors and principal stockholders. Under
Section 22(h), loans to an executive officer and to a greater than 10%
stockholder ("principal stockholder") of a thrift institution, and certain
affiliated entities of either, may not exceed, together with all other
outstanding loans to such person and affiliated entities the thrift
institution's loan to one borrower limit as established by FIRREA (generally
equal to 15% of the institution's unimpaired capital and surplus and an
additional 10% of such capital and surplus for loans fully secured by certain
readily marketable collateral). Section 22(h) as amended by the FDICIA, limits
an association's extension of credit to any executive officer, director or
principal stockholder, or to any affiliates of such persons, to an amount
that, when aggregated with the amount of all outstanding extensions of credit
by that thrift institution to its executive officers, directors, principal
stockholders, and affiliates of the foregoing, would not exceed the
association's unimpaired capital and surplus. Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and principal stockholders of a thrift
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the disinterested directors of the thrift
institution, or unless a loan to an executive officer, made after September
23, 1994, is secured by a first lien on the officer's residence. The Federal
Reserve Board has prescribed the loan amount as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of
capital and unimpaired surplus. Prior Bank Board approval is also required for
any extension of credit to executive officers, directors, principal
shareholders, or any related interests of such persons, if such extensions of
credit, when aggregated with all other extensions of credit to such persons,
exceeds $500,000. Further, the Federal Reserve Board pursuant to 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 and not involve more than the normal risk of
collectability. The OTS amended its regulations governing loans to officers
and directors to provide that such transactions will be governed by Regulation
O of the Federal Reserve Board.
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<PAGE>
Loans to One Borrower
Under FIRREA, loans to one borrower which are not fully secured, are
limited to 15% of a thrift institution's unimpaired capital and unimpaired
surplus, plus an additional 10% for loans fully secured by readily marketable
collateral. In addition, thrift institutions that meet their capital
requirements are permitted under FIRREA, to make loans to develop domestic
residential housing units, not to exceed the lesser of $30 million or 30% of
the thrift institution's unimpaired capital and unimpaired surplus, subject to
certain conditions and other limitations. In determining the maximum loans to
one borrower permitted for thrift institutions, the OTS applies a definition
of unimpaired capital and unimpaired surplus that is generally the same as the
definition employed by the OCC. At June 30, 1995, the Bank's limit on loans to
one borrower was $5.3 million. At June 30, 1995, the Bank was in compliance
with applicable limits on loans to one borrower. Management does not expect
these limitations to have a material effect on the Bank's lending activities.
Community Reinvestment
Under the Community Reinvestment Act (the "CRA"), as implemented by OTS
regulations, a thrift institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs to
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for thrift
institutions nor does it limit a thrift institution's discretion to develop
the types of products and services that it believes are best suited to its
particular community, consistent with the CRA. The Bank employs a full-time
CRA officer to monitor the Bank's compliance with OTS regulations. The CRA
requires the OTS, in connection with its examination of a thrift institution,
to assess the thrift institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by such thrift institution. FIRREA amended the CRA to require,
effective July 1, 1990, public disclosure of a thrift institutions' CRA rating
and to require that the OTS provide a written evaluation of a thrift
institution's CRA performance utilizing a four-tiered description rating
system in lieu of the existing five-tiered numerical rating system. The Bank's
most recent CRA rating, determined by the OTS in June 1994 was "Outstanding",
the highest rating.
On July 15, 1993, President Clinton announced a CRA reform initiative
which directed the federal banking agencies to develop CRA assessment
standards that are based on measurable and objective performance. The
President's initiative also calls for the agencies to develop standards that
make CRA examinations more consistent, ensure the public is provided with
better information on CRA evaluations, and seeks more effective agency
sanctions against financial institutions with consistently poor CRA
performance. The federal banking agencies released proposed rules pursuant to
the President's CRA reform initiative in December 1993, with the comment
period expiring March 24, 1994. Final rules have not been issued.
Limitations on Investments
As a federally chartered thrift institution, the Bank is generally
prohibited from investing directly in equity securities and real estate (other
than that used for offices and related facilities or acquired through, or in
lieu of, foreclosure or on which a contract purchaser has defaulted). In
addition the Bank's authority to invest directly in service corporations is
limited to a maximum of 2% of the Bank's assets, plus an additional 1% of
assets if the amount over 2% is used for specified community or inner-city
development purposes. If its risk-based capital is in compliance with the
then-applicable minimum requirements, the Bank also is permitted to make
additional loans not to exceed 50% of its risk-based capital to service
corporations of which the Bank owns more than 10% of the stock at June 30,
1995.
Page 22
<PAGE>
Other Regulatory Considerations
The Bank is subject to a wide array of other state and federal laws and
regulations, including, without limitation, usury laws, the Equal Credit
Opportunity Act, Electronic Funds Transfer requirements, the Truth-in-Lending
Act, the Truth-in-Savings Act and the Real Estate Settlement Procedures Act.
The Bank also is subject to laws and regulations that may impose liability on
lenders and owners for cleanup expenses and other costs stemming from
hazardous waste located on property securing real estate loans made by lenders
or on real estate that is owned by lenders following a foreclosure or
otherwise. Some court decisions also have expanded the circumstances under
which lenders have been held liable for hazardous wastes on such properties.
Although the Bank's lending procedures include measures designed to limit its
liability for hazardous waste clean up of other related liability, there can
be no assurance that the Bank will not become subject to such liability in the
future.
Regulation of Holding Companies
Conservative is subject to regulation as a savings and loan holding
company. It is required to register with the OTS and is subject to OTS
regulations, examinations and reporting requirements relating to savings and
loan holding companies. As a subsidiary of a savings and loan holding company,
the Bank is subject to certain restrictions in its dealings with Conservative
and with other companies affiliated with Conservative.
HOLA prohibits a savings and loan holding company, directly or
indirectly, from (i) acquiring control of another thrift institution (or a
holding company for such a thrift institution) without the prior approval of
the OTS, (ii) acquiring 5% or more of the voting shares of another thrift
institution (or a holding company for such a thrift institution) that is not a
subsidiary or (iii) acquiring control of a thrift institution not insured by
the FDIC. Under HOLA, the OTS is prohibited from approving an acquisition that
would result in the formation of a multiple savings and loan holding company
controlling thrift institutions in more than one state unless (i) such
company, or a thrift institution that is a subsidiary of such company, is
authorized to acquire a thrift institution, or to operate a home or branch
office, in an additional state pursuant to an emergency acquisition, (ii) such
company controls an insured thrift institution subsidiary that operated a home
or branch office in the additional state on March 5, 1987 or (iii) state law
in the state of the thrift institution to be acquired specifically authorizes
such an acquisition. Under FIRREA, thrift institutions may also be subject to
the Change in Bank Control Act if the foregoing provisions of HOLA do not
apply.
HOLA authorizes the OTS or the FDIC to identify holding company
activities that present excessive risk to insured thrift institutions, and to
restrict, among other things, dividends to the holding company and other
affiliate transactions. If the Bank were to lose its status as a QTL,
Conservative would thereafter be treated as a multiple savings and loan
holding company, and possibly also as a bank holding company, resulting in
additional restrictions on its activities and other possible negative effects.
See "Regulation - Qualified Thrift Lender."
Restrictions on Change in Control
Federal laws and regulations contain a number of provisions which affect
the acquisition of thrift institutions such as the Bank and savings and loan
holding companies such as Conservative. The Change in Bank Control Act
provides that no person, acting directly or indirectly or through or in
concert with one or more persons, may acquire control of a thrift institution
or a savings and loan holding company unless the OTS has been given 60 days'
prior written notice and the OTS does not issue a notice disapproving the
proposed acquisition. In addition, certain provisions of HOLA provide that no
person may acquire direct or indirect control of a thrift institution without
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to restrictions, examinations and
regulation by the OTS. See "Regulation - Regulation of Holding Companies."
Page 23
<PAGE>
Pursuant to applicable regulations, control of a thrift institution or a
savings and loan holding company is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of its
voting stock or the ability to control the election of a majority of its
directors. Moreover, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of its voting
stock, or more than 25% of any class of its stock (whether voting or not)
where certain enumerated "control factors" are also present in the
acquisition. Control factors would include the acquiror's status as one of the
two largest holders of voting stock or when and whether the acquiror's
nominees or representatives would have more than one seat on the thrift
institution's board of directors.
As indicated above, if a person's ownership of the stock of a thrift
institution or savings and loan holding company is below the threshold levels
for control, such person may nevertheless be deemed to be "acting in concert"
with one or more other persons that own stock in the thrift institution, in
which case all of the stock ownership of each person acting in concert will be
aggregated and attributed to each member of the group, thereby putting each
one over the control threshold. Under certain circumstances, acquirors will be
presumed to be acting in concert with other persons; however, such presumption
may be rebutted by the acquiror. Applicable circumstances include (i) a
company will be presumed to be acting in concert with a controlling
stockholder or management official under certain circumstances, (ii) a company
controlling or controlled by another company and companies under common
control will be presumed to be acting in concern and (iii) persons will be
presumed to be acting in concert where they constitute a group under Section
13 and 14 of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act").
The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the thrift institution or savings and
loan holding company or (iii) the competence, experience or integrity of the
acquiring person indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
The OTS's change in control regulations define "voting stock" to include
voting common stock such as the Common Stock and to include securities (such
as the Convertible Preferred Stock) that are convertible into voting stock. As
a result, a holder of Convertible Preferred Stock will be deemed to own the
number of shares of Common Stock issuable upon conversion thereof. Thus,
prospective purchasers that may become beneficial owners of 10% or more of
Conservative's Common Stock and/or Convertible Preferred Stock should consult
with their counsel regarding the application of the statutes and regulations
outlined above to their purchases of Conservative's Common Stock and
Convertible Preferred Stock.
Acquisitions and Interstate Operations
The OTS regulations permit federal thrift institutions to branch in any
state or states of the United States and its territories subject to the
following limitations: (i) the federal thrift institution must qualify as a
"domestic building and loan association" under (S)7701(a)(19) of the Code or
satisfy the asset composition test thereunder and the total assets
attributable to all branches of the thrift institution in the state must
qualify such branches, taken as a whole, for treatment as a domestic building
and loan association; (ii) such branch may not result in formation of a
prohibited multi-state, multiple savings and loan holding company and violate
certain statutory restrictions on branching by thrift institutions
subsidiaries of bank holding companies. However, these limitations do not
apply if, among other things, interstate branching is otherwise permitted by
applicable state law. Notwithstanding the above, under the OTS regulations,
federal thrift institutions generally may not establish new branches unless
the thrift institution meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the thrift institution's record of
compliance with the CRA in connection with any branch application.
Page 24
<PAGE>
HOLA and related regulations also allow a federal thrift institution to
acquire a failing thrift institution in a state other than the state in which
such federal thrift institution has its home office. Such federal thrift
institution also may receive branching rights in up to three additional states
or branching rights in the failing thrift institution's region if such thrift
institution's home state is included in a regional compact of states
specifically authorizing interstate branching. As a result of the acquisition
of its Harlan branch, the Bank acquired branching rights in Iowa.
The formation of multi-state, multiple savings and loan holding companies
is permitted under certain circumstances that could permit Conservative to
acquire and operate as separate subsidiaries thrift institutions in certain
states. This could have the effect of allowing Conservative to operate thrift
institutions in states into which the Bank could not otherwise branch. The
acquisition of a healthy FDIC-insured thrift institution by Conservative would
cause Conservative to be treated as a multiple savings and loan holding
company, subject to certain restrictions on its activities. The acquisition of
a bank would cause Conservative to be treated as a bank holding company
subject to the Bank Holding Company Act of 1956, as amended, and regulations
of the Federal Reserve Board that would impose restrictions on its activities
and obligate it to meet additional minimum regulatory capital requirements,
among other effects.
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
FHFB. The FHLB provide a central credit facility primarily for member
institutions. As a member of the FHLB of Topeka, the Bank must acquire and
hold shares of capital stock in the FHLB of Topeka in an amount at least equal
to the greater of 1% of the aggregate unpaid principal of the Bank's
residential mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year, or 5% of its then outstanding borrowings from
the FHLB of Topeka. The Bank was in compliance with this requirement at June
30, 1995 with investment in FHLB of Topeka stock of $8.0 million.
Monetary Policy
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rates paid by the Bank to obtain
its deposits and other borrowings, and the interest rates received by the Bank
on loans extended to its customers and on securities held in the Bank's
portfolio, comprises the major portion of the Bank's earnings. These rates are
highly sensitive to many factors that are beyond the control of the Bank, and
accordingly, its earnings and growth will be subject to the influence of
economic conditions generally, both domestic and foreign, including inflation,
recession and unemployment, and also to the monetary policies of the Federal
Reserve Board. The Federal Reserve Board implements national monetary policies
designed to curb inflation, combat recession and promote growth through, among
other means, its open-market dealings in U.S. government securities, by
adjusting the required level of reserves for financial institutions subject to
reserve requirements and through adjustments to the discount rate applicable
to borrowings by banks that are members of the Federal Reserve System. The
nature and timing of any future changes in such policies and their impact on
Conservative cannot be predicted.
State Taxation
Nebraska has a Financial Institution Tax which subjects average deposits
of an institution to a .04% tax. This tax is limited to 3.25% of an
institution's net income before income taxes and extraordinary items.
Page 25
<PAGE>
PART II OTHER INFORMATION
------- -----------------
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On May 11, 1995, Conservative held its Annual Meeting of
Shareholders for the following purposes:
1. To elect Robert P. DeLay and Philip S. Kemp as directors to
serve until the Annual Meeting of Shareholders at which their
term expires, and until their successors shall have been
elected and qualified. Nominated at the Meeting, upon receipt
and due and proper notice, for one of the two director seats
available for vote at this Meeting was Joel H. Weins. The
results of the vote was as follows:
<TABLE>
<CAPTION>
FOR WITHHELD NOT VOTED
----------------------------------
<S> <C> <C> <C>
Robert P. DeLay 1,502,819 20,952 14,500
Philip S. Kemp 1,531,619 20,952 100
Joel H. Weins 184,700
</TABLE>
Mr. DeLay and Mr. Kemp were elected as directors.
2. To consider and vote upon the proposal of three shareholders
to amend Conservative's Bylaws as follows:
WHEREAS, the liquidity of any stock is important to
shareholders; and
WHEREAS, institutional investors, and money managers in
general, place a great deal of emphasis on stock ownership by
the "insiders" (i.e., the officers and directors); and
WHEREAS, because of the limited liquidity of the stock of
Conservative Savings Corporation, and the resultant wide
"spread" in the "bid" and "ask" price of the stock -- despite
superior financial results and operational efficiencies of the
firm (the stock selling at a discount to book value, for
example) -- and, in an attempt to alleviate this situation;
bit it
RESOLVED, that Article III, Section 4 of the Bylaws of
Conservative Savings Corporation be amended by adding the
following sentence:
Each director, within two years of being elected, shall be
required to own beneficially at least 4,000 shares of
common stock of the corporation (exclusive of options but
inclusive of shares of convertible preferred stock on an
"as if converted" basis).
RESOLVED, that each officer of Conservative Savings
Corporation be encouraged as an objective (but not mandatorily
required ) to own beneficially within five years of becoming
an officer, shares of common stock of Conservative having a
cost to such officer or a fair market value equal to at least
20% of the
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<PAGE>
amount of such officer's total annual compensation as of the
end of such five-year period.
The shareholder proposal was defeated in the following vote:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTED
--------------------------------------------------------------
<S> <C> <C> <C>
531,599 528,663 42,196 528,063
</TABLE>
Item 5. OTHER INFORMATION
a. FHLMC Master Commitment. On May 3, 1995, Conservative entered
into a Master Commitment Agreement with the Federal Home Loan
Mortgage Corporation (FHLMC) to deliver $20 million of whole
loans, on a "non recourse basis" prior to the May 31, 1996
expiration of the Master Commitment. The FHLMC Commitment will
be satisfied upon delivery of $10 million of whole loans. At
June 30, 1995, $0 had been delivered to FHLMC.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Conservative Savings Corporation filed one Form 8-K on April 6, 1995,
during the three months ended June 30, 1995 describing the sale of its Millard
branch location in Omaha, Nebraska.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSERVATIVE SAVINGS CORPORATION
Date: August 8, 1995 By:/s/ Robert P. DeLay
----------------------- ---------------------------------
Robert P. DeLay
President and Chief Executive
Officer/Director
Date: August 8, 1995 By:/s/ Craig S. Allen
----------------------- ---------------------------------
Craig S. Allen
Senior Vice President/Chief Financial
Officer and Corporate
Secretary/Treasurer
Date: August 8, 1995 By:/s/ Gary W. Klein
----------------------- ---------------------------------
Gary W. Klein
Vice President/Controller
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