<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1995, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _______________
COMMISSION FILE NUMBER: 1-11515
COMMERCIAL FEDERAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0658852
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 22, 1995, was
$364,353,954.
As of September 22, 1995, there were issued and outstanding 12,912,416 shares
of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1995. (Parts I, II and IV)
2. Portions of the Proxy Statement relating to the 1995 Annual Meeting of
Stockholders. (Part III)
1
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PART I
ITEM 1. BUSINESS
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GENERAL
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Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. The Corporation incurs
interest expense on $40.25 million of subordinated debt and pays operating
expenses primarily for shareholder and stock related expenditures such as the
annual report, proxy, corporate filing fees and assessments and certain costs
directly attributable to the holding company. The Bank presently pays dividends
to the Corporation on a semi-annual basis primarily to cover the amount of the
interest payable to the subordinated debt noteholders.
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is a consumer-oriented
financial institution that emphasizes traditional savings and loan operations,
including single-family residential real estate lending, retail deposit
activities and mortgage banking. All loan origination activities are conducted
through the Bank's branch office network, through the loan offices of Commercial
Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage banking
subsidiary, and through a nationwide correspondent network numbering
approximately 400. The Corporation also provides insurance and securities
brokerage and other retail financial services.
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage financing, consumer
loans and other types of loans, which, in turn, are affected by the interest
rates at which such financings may be offered, the availability of funds, and
other factors, such as the supply of housing for mortgage loans.
2
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At June 30, 1995, the Corporation had assets of $6.0 billion and stockholders'
equity of $309.5 million, and through the Bank operated 30 branch offices in
Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 16 branch
offices in Oklahoma, and five branches in Kansas. The increase in branches over
fiscal year 1994 was the result of two acquisitions during fiscal year 1995. On
July 15, 1994, the Corporation acquired Home Federal Savings and Loan ("Home
Federal") of Ada, Oklahoma (two branches and total assets of $100.2 million at
acquisition). On April 3, 1995, the Corporation acquired Provident Federal
Savings Bank ("Provident") of Lincoln, Nebraska (five branches and total assets
of $96.5 million at acquisition). As of June 30, 1995, the Bank was the largest
depository institution headquartered in Nebraska, and, based upon total assets
at June 30, 1995, the Corporation was the 18th largest publicly-held thrift
institution holding company in the United States. In addition, CFMC serviced a
loan portfolio totaling $7.8 billion at June 30, 1995, with $4.6 billion in
loans serviced for third parties and $3.2 billion in loans serviced for the
Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" in the Corporation's 1995 Annual Report to
Stockholders (the "Annual Report") which is incorporated herein by reference.
The Corporation will seek to continue its growth through expansion of the
Corporation's operations in its market areas, consisting of Nebraska, Colorado,
Oklahoma and Kansas, and may seek to enter markets in other adjoining states.
The Corporation will also seek to expand its operations both through competition
for market share within its market areas and through mergers with and
acquisitions of other selected financial institutions. Management of the
Corporation believes that its emphasis on operating acquired entities as
consumer-oriented financial institutions is attractive to potential acquisition
candidates and is advantageous in competing with larger banks for acquisitions
of selected financial institutions.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
RECENT DEVELOPMENTS
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Regulatory Issues.
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Deposit Insurance Premiums. The Bank's savings deposits are insured by the
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SAIF, which is administered by FDIC. The assessment rate currently ranges from
0.23% of deposits for well-capitalized institutions to 0.31% of deposits for
undercapitalized institutions. The FDIC also administers the Bank Insurance
Fund ("BIF"), which has the same designated reserve ratios as the SAIF. The
FDIC amended the BIF risk-based assessment schedule effective September 30,
1995, which lowered the deposit insurance assessment rate for most commercial
banks and other depository institutions with deposits insured by the BIF to a
range of from 0.31% of insured deposits for undercapitalized BIF-insured
institutions to 0.04% of deposits for well-capitalized institutions, which
constitute over 90% of BIF-insured institutions. The amendment creates a
substantial disparity in the deposit insurance premiums paid by BIF and SAIF
members and could place SAIF-insured savings institutions at a significant
competitive disadvantage to BIF-insured institutions.
Among the proposals being considered by the FDIC and Congress to eliminate this
premium disparity is a similar reduction in premium rates charged to SAIF-
insured institutions. Such a reduction would be accompanied by a one-time
assessment of SAIF-insured institutions up to .90% of insured deposits to
increase the SAIF reserve level to 1.25% of SAIF-insured deposits, which is the
same level attained by the BIF prior to the reduction of BIF premium rates.
Under this proposal, the BIF and SAIF would be merged into one fund as soon as
practicable after they both reach their designated reserve ratios, but no later
than January 1, 1998. It is unknown whether this particular proposal or any
other proposal will be implemented or that premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action. If
a special assessment as described above were to be required, it would result, on
a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of
approximately $20.4 million (assuming such charge would be tax deductible).
Such assessment would have the effect of, on a pro forma basis as of June 30,
1995, reducing the Bank's tangible capital to $283.1 million, or 4.80% of
adjusted total assets, core capital to $304.5 million, or 5.14% of adjusted
total assets, and risk-based capital to $335.3 million, or 12.68% of risk-
weighted assets. If such a special assessment were required and the
3
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SAIF as a result was fully recapitalized, it could have the effect of reducing
the Bank's annual deposit insurance premiums to the SAIF, thereby increasing net
income in future periods.
Change in Charter Proposal. An additional proposal under consideration by
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Congress would require savings associations to convert their charters to that of
commercial banks in connection with a merger of the BIF and the SAIF. Under
current tax laws, a savings association converting to a commercial bank charter
must recapture into taxable income the amount of its tax bad debt reserve that
would not have been allowed if the savings association had operated as a
commercial bank. The tax associated with the recapture of all or part of its
tax bad debt reserve would immediately reduce the capital of the savings
association even though such tax would actually be paid out over the succeeding
years. Management of the Corporation cannot predict if this proposal or the
foregoing proposal would be adopted in their current form.
Acquisitions Subsequent to Fiscal Year.
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On September 22, 1995, the stockholders of Railroad Financial Corporation
("Railroad") approved a merger with the Corporation with the closing expected in
October 1995. Railroad is headquartered in Wichita, Kansas and operates 18
branches and 71 agency offices throughout the state of Kansas. This acquisition
was approved by the OTS on September 13, 1995. Under the terms of the
Reorganization and Merger Agreement (the "Agreement"), dated April 18, 1995, the
Corporation will exchange a pro-rata amount of its common stock for all of the
outstanding common stock of Railroad. Based on the Corporation's closing stock
price on September 22, 1995, of $35.75, each share of Railroad common stock
would be exchanged for .6389 shares of the Corporation's common stock, resulting
in the exchange of approximately 1,361,222 shares of the Corporation's common
stock with an aggregate value approximating $48.7 million. Cash will be paid in
lieu of fractional shares. At June 30, 1995, Railroad had assets of $615.3
million, deposits of $421.7 million and stockholders' equity of $28.1 million.
It is anticipated that this acquisition will be accounted for as a pooling of
interests.
Also, on August 15, 1995, the Corporation entered into a Reorganization and
Merger Agreement (the "Merger Agreement") by and among the Corporation, the
Bank, Conservative Savings Corporation ("Conservative") and Conservative Savings
Bank, FSB. Under the terms of the Merger Agreement, the Corporation will
acquire all 1,846,005 outstanding shares of Conservative's common stock and all
460,000 outstanding shares of preferred stock. As defined in the Merger
Agreement, Conservative's common and preferred stock will be exchanged for cash
and a pro-rata amount of the Corporation's common stock. Based on the
Corporation's closing stock price on September 22, 1995, of $35.75, the
transaction has a per share value of $15.37 for the common stock and $34.73 for
the preferred stock with an aggregate value of approximately $44.3 million for
all outstanding common and preferred stock of Conservative.
The Corporation also announced that it has entered into a stock option agreement
with Conservative under which the Corporation has been granted an option to
purchase 19.9% of Conservative's outstanding shares of common stock under
certain circumstances provided in the agreement in the event the transaction is
terminated.
At June 30, 1995, Conservative had assets of $383.4 million, deposits of $198.1
million and stockholders' equity of $34.8 million. Conservative operates nine
branches with seven located in Nebraska (five in Omaha, Nebraska and two in
Columbus, Nebraska), one in Overland Park, Kansas and one in Harlan, Iowa. This
proposed acquisition, which is subject to regulatory approvals and the approval
of Conservative's shareholders, is expected to be completed by March 31, 1996,
but no later than June 30, 1996, unless extended by mutual agreement of both
parties. This acquisition will be accounted for as a purchase with core value
of deposits resulting from this transaction amortized on an accelerated basis
over a period not to exceed 10 years and goodwill, if any, amortized on a
straight-line basis over a period not to exceed 20 years.
4
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Acquisitions During Fiscal Year 1995.
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On April 3, 1995, the Corporation consummated the acquisition of Provident by
purchasing all 140,000 outstanding shares of Provident's common stock at $53.75
per share for approximately $7.5 million in cash. Provident operated a
traditional thrift operation with five branches located in the Lincoln, Nebraska
metropolitan area. At April 3, 1995, Provident had assets totaling $96.5
million, deposits totaling $58.1 million and stockholders' equity approximating
$4.6 million. This acquisition has been accounted for as a purchase. Core
value of deposits totaling $2.6 million resulting from this transaction is being
amortized using an accelerated method over 10 years and goodwill totaling
$713,000 is being amortized on a straight-line basis over 20 years.
On July 15, 1994, the Corporation consummated the acquisition of Home Federal by
purchasing all 236,212 outstanding shares of Home Federal's common stock at
$38.17 per share for approximately $9.0 million in cash. Home Federal operated
two branches in Ada, Oklahoma. At July 15, 1994, Home Federal had assets
totaling $100.2 million, deposits totaling $87.3 million and stockholders'
equity totaling $8.7 million. This acquisition has been accounted for as a
purchase. Core value of deposits totaling $1.3 million resulting from this
transaction is being amortized on an accelerated basis over 10 years.
In fiscal year 1995 the Corporation also acquired four branches and the related
equipment of the former Franklin Federal Savings Association of Kansas
("Franklin Federal") at a cost of $876,000. Previously, on June 10, 1994, the
Corporation had acquired $255.7 million of insured deposits of Franklin Federal
from the Resolution Trust Corporation ("RTC") at a cost of $7.7 million. This
acquisition has been accounted for as a purchase. Core value of deposits
totaling approximately $8.0 million and goodwill totaling $451,000 were recorded
from this transaction. Core value of deposits resulting from these acquisitions
is amortized on an accelerated basis over 10 years and goodwill is amortized on
a straight-line basis over 20 years.
Acceleration of Goodwill Amortization.
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A significant event affecting the results of operations for fiscal year 1995 was
the accelerated amortization of goodwill totaling $21.4 million. This
accelerated amortization of goodwill resulted from the fact that, effective June
30, 1994, the Corporation changed its method of valuation of intangible assets
incorporating a fair value concept using a lower of cost or market methodology.
This accounting change was considered to be a change in accounting principle
inseparable from a change in estimate. An appraisal performed by an independent
third party of the existing intangible assets relating to acquisitions during
1986 through 1988 of five troubled savings institutions located in Colorado,
Kansas and Oklahoma resulted in a fair value estimate of $41.0 million, and
therefore, recognition of an impairment of recorded intangible assets of $52.7
million at June 30, 1994. The effect of this accounting change was a pre-tax
charge to results of operations for fiscal year 1994 totaling $52.7 million,
with an income tax benefit of $8.8 million, resulting in a loss of $43.9
million. The appraisal of $41.0 million was classified as core value of
deposits totaling $19.6 million and goodwill totaling $21.4 million. Effective
July 1, 1994, the remaining $19.6 million of identifiable intangible assets
classified as core value of deposits is being amortized on a straight-line basis
over the remaining respective lives, of which all were original 10 year terms,
with the primary amount to be fully amortized as of April 30, 1997. The $21.4
million of goodwill was completely amortized to expense over the first six
months of fiscal year 1995, and for reporting purposes separately disclosed in
the Consolidated Statement of Operations. Excluding the accelerated
amortization of goodwill of $21.4 million, fiscal year 1995 earnings per share
would have been $3.75 per share compared to the $2.11 per share reported, and
return on average assets and return on average stockholders' equity would have
been .85% and 17.04%, respectively, compared to reported results of .48% and
9.60%, respectively.
The valuation did not decrease the book value of the intangible assets resulting
from the Corporation's acquisitions in fiscal year 1994. An independent
valuation was also performed at June 30, 1995, of the Corporation's total
unamortized balance of goodwill and core value of deposits resulting in no
impairment.
5
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Regulatory Capital Compliance.
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At June 30, 1995, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands)
Amount Ratio
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<S> <C> <C>
Tangible capital $303,479 5.12% (1)
Tangible capital requirement 88,849 1.50
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Excess $214,630 3.62%
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Core capital (Tier 1 capital) $324,909 5.47% (2)
Core capital requirement 178,341 3.00
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Excess $146,568 2.47%
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Risk-based capital (Total capital) $355,733 13.45% (3)
Risk-based capital requirement 211,525 8.00
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Excess $144,208 5.45%
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</TABLE>
(1) Based on adjusted total assets totaling $5,923,283.
(2) Based on adjusted total assets totaling $5,944,713.
(3) Based on risk-weighted assets totaling $2,644,066.
In April 1991, the OTS proposed to amend its core capital requirement to
establish a minimum 3.0% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
institutions, the minimum core capital ratio would be 3.0% plus at least an
additional 1.00% to 2.00%, as determined on a case-by-case basis by the OTS
after assessing both the quality of risk management systems and the level of
overall risk in each individual savings institution. The Bank does not
anticipate that it will be materially affected by this regulation if adopted in
its current form.
Effective July 1, 1994, the OTS amended its risk-based capital standards that
included an interest rate risk component. The amendment requires thrifts with
interest rate risk in excess of certain levels to maintain additional capital.
Based on the Bank's interest rate risk profile and the level of interest rates
at June 30, 1995, as well as the Bank's level of risk-based capital at the same
date, management does not believe that this change will have a material adverse
effect on the Bank's level of required risk-based capital.
6
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The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized; and authorized banking regulatory agencies to take prompt
corrective action with respect to institutions in the three undercapitalized
categories. These corrective actions become increasingly more stringent as the
institution's regulatory capital declines. At June 30, 1995, the Bank exceeded
the minimum requirements for the well-capitalized category as shown in the
following table.
<TABLE>
<CAPTION>
(Dollars in Thousands) Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
------------ --------------- ---------------
<S> <C> <C> <C>
Actual capital $324,909 $324,909 $355,733
Percentage of adjusted assets 5.47% 12.29% 13.45%
Minimum requirements to be
classified well-capitalized 5.00% 6.00% 10.00%
</TABLE>
See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
Supervisory Goodwill Lawsuit.
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On September 13, 1994, the Bank commenced litigation against the United States
in the United States Court of Federal Claims seeking to recover monetary relief
for the government's refusal to honor certain contracts between the Bank and the
Federal Savings and Loan Insurance Corporation. The suit alleges that such
governmental action constitutes breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome, and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing and the dollar amount of damages which
may be awarded to the Bank if it finally prevails in this litigation.
Effects of New Accounting Pronouncements.
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During fiscal year 1995, the Corporation adopted the provisions of four
accounting pronouncements: "Accounting by Creditors for Impairment of a Loan,"
which was subsequently amended by "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," "Accounting for Certain Investments
in Debt and Equity Securities" and "Disclosures on Derivative Financial
Instruments and Fair Value of Financial Instruments." See Note 1 of Notes to
the Consolidated Financial Statements for a discussion of the implementation of
the provisions of these new accounting pronouncements, none of which had a
material effect on the Corporation's financial position or results of
operations. See Note 26 of Notes to the Consolidated Financial Statements for a
discussion of newly issued accounting pronouncements as yet not implemented by
the Corporation.
Other Information.
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Additional information concerning the general development of the business of the
Corporation during fiscal year 1995 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
7
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LENDING ACTIVITIES
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General. The Corporation concentrates its lending activities primarily on the
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origination of first mortgage loans for the purpose of financing or refinancing
single-family residential properties, consumer loans and home improvement loans.
As a result of a renewed emphasis on consumer-oriented operations, including
single-family residential lending and mortgage-banking activities, the
origination of residential loans during fiscal years 1994 and 1993 increased
significantly over previous fiscal years. However, during fiscal year 1995, due
to a relatively higher interest rate environment, such loan origination activity
declined significantly compared to fiscal year 1994. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. In the past, the
Corporation relied solely on its mortgage banking subsidiary to originate real
estate loans through the offices of such mortgage banking subsidiary and
therefore did not develop an origination capability in the branch offices of the
Bank. Beginning in fiscal year 1992, in an attempt to increase the volume of
single-family residential loan originations and take advantage of its extensive
branch network in Nebraska and in greater metropolitan Denver, Colorado, and,
beginning in fiscal year 1994 in Oklahoma, the Corporation reorganized the
lending operations in the Bank branch office system. The Corporation's mortgage
banking subsidiary has continued and will continue to originate real estate
loans through the Bank's various loan offices located in Nebraska, Colorado,
Oklahoma and Kansas and through its nationwide correspondent network.
At June 30, 1995, the Corporation's total loan and mortgage-backed securities
portfolio was $5.3 billion, representing over 89.0% of its $6.0 billion of total
assets at that date. Mortgage-backed securities totaled $1.3 billion at June
30, 1995, representing 25.0% of the Corporation's total loan and mortgage-
backed securities portfolio at such date. Over 95.0% of the Corporation's total
gross loan and mortgage-backed securities portfolio has historically been and
continues to be secured by real estate. Commercial real estate and land loans
(collectively referred to as "income property loans") totaled $180.7 million or
3.3% of the total loan and mortgage-backed securities portfolio at June 30,
1995, compared to $195.9 million or 4.0% of such total portfolio at June 30,
1994. These loans are secured by various types of commercial properties
including office buildings, shopping centers, warehouses and other income
producing properties. At June 30, 1995, multi-family residential loans
consisting of loans secured by various types of properties, including townhomes,
condominiums and apartment projects with more than four dwelling units, totaled
$33.7 million, or .6% of the total loan portfolio, compared to $43.4 million or
.9% at June 30, 1994. The Bank presently does not originate a significant
amount of multi-family residential loans, and expects to originate such loans
primarily for purposes of resolving certain nonperforming assets.
The Corporation's primary emphasis in recent years has been on the origination
of loans secured by existing single-family residences. Fixed-rate single-family
residential loans are originated using underwriting guidelines, appraisals and
documentation which are acceptable to the Federal Home Loan Mortgage Corporation
("FHLMC"), Government National Mortgage Corporation ("GNMA") and the Federal
National Mortgage Corporation ("FNMA") to facilitate the sale of such loans to
such agencies in the secondary market. The Corporation also originates fixed-
rate single-family residential loans using internal lending policies in
accordance with what management believes are prudent underwriting standards but
which may not strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate
single-family residential loans are originated or purchased for the
Corporation's loan portfolio if such loans have characteristics which are
consistent with the Corporation's asset and liability goals and long-term
interest rate yield requirements. Adjustable-rate single-family residential
loans are originated primarily for retention in the Corporation's loan portfolio
to match more closely the repricing of the Corporation's interest-bearing
liabilities as a result of changes in interest rates.
In recent years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. The Corporation
has begun, however, beginning fiscal year 1994, to initiate commercial and
multi-family real estate lending, on a limited basis, with such loans secured by
properties located within the Corporation's primary market areas. Such loans,
which are subject to prudent credit review and other underwriting standards and
procedures, are not expected to constitute a significant portion of the
Corporation's lending business in the future.
8
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In addition to real estate loans, the Corporation originates consumer, home
improvement, savings account and commercial business loans (collectively,
"consumer loans") through the Bank's branch network and direct mail
solicitation. However, the Corporation presently does not originate commercial
business loans, except for loans to resolve nonperforming assets.
Regulatory guidelines generally subject savings institutions to the same loans
to one borrower limitations that are applicable to national banks. At June 30,
1995, all loans to one borrower were within the Bank's limitation of $53.7
million. See "Regulation -- Limitations on Loans to One Borrower."
9
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Composition of Loan Portfolio. The following table sets forth the composition
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of the Corporation's loan and mortgage-backed securities portfolios (including
loans and mortgage-backed securities held for sale) as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------
1995 1994 1993 1992
----------------- --------------------- --------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------- --------- ------- --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOAN PORTFOLIO
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Conventional real estate
mortgage loans:
Loans on existing
properties -
Single-family residential $3,256,172 60.6% $2,814,748 57.0% $2,520,264 58.5% $2,359,988 59.7%
Multi-family residential 33,338 .6 43,379 .9 60,935 1.4 75,233 1.9
Land 7,257 .1 9,080 .2 9,322 .2 10,356 .3
Commercial real estate 167,800 3.1 185,213 3.8 237,656 5.5 256,303 6.5
---------- --- ---------- ---- ---------- ----- --------- ----
Total 3,464,567 64.4 3,052,420 61.9 2,828,177 65.6 2,701,880 68.4
Construction loans -
Single-family residential 10,544 .2 363 -- 492 -- 4,842 .1
Multi-family residential 380 -- -- -- -- -- -- --
Land 1,600 -- 1,640 -- -- -- 1,581 --
Commercial real estate 3,995 .1 -- -- -- -- 4,810 .1
---------- --- ---------- ---- ---------- ----- --------- ----
Total 16,519 .3 2,003 -- 492 -- 11,233 .2
FHA and VA loans 336,639 6.3 393,149 8.0 454,536 10.6 353,312 9.0
Mortgage-backed securities 1,321,018 24.6 1,293,807 26.2 887,741 20.6 762,452 19.3
---------- --- ---------- ---- ---------- ----- --------- ----
Total real estate
loans 5,138,743 95.6 4,741,379 96.1 4,170,946 96.8 3,828,877 96.9
Consumer and other loans -
Home improvement and
other
consumer loans 224,589 4.2 183,859 3.7 124,602 2.9 110,139 2.8
Savings account loans 9,087 .2 8,312 .2 7,753 .2 8,574 .2
Other loans -- -- 1,322 -- 3,696 .1 3,845 .1
---------- --- ---------- ---- ---------- ----- --------- ----
Total consumer and
other loans 233,676 4.4 193,493 3.9 136,051 3.2 122,558 3.1
---------- --- ---------- ---- ---------- ----- --------- ----
Total loans $5,372,419 100.0% $4,934,872 100.0% $4,306,997 100.0% $3,951,435 100.0%
========== ===== ========== ===== ========== ===== ========= =====
<CAPTION>
June 30,
---------------------
1991
----------------------
Amount Percent
------- --------
(Dollars in Thousands)
<S> <C> <C>
LOAN PORTFOLIO
- - ---------------------------
Conventional real estate
mortgage loans:
Loans on existing
properties -
Single-family residential $2,033,037 54.0%
Multi-family residential 73,684 2.0
Land 9,695 .3
Commercial real estate 295,975 7.9
---------- -----
Total 2,412,391 64.2
Construction loans -
Single-family residential 15,957 .4
Multi-family residential -- --
Land 2,480 .1
Commercial real estate 8,774 .2
---------- -----
Total 27,211 .7
FHA and VA loans 205,318 5.4
Mortgage-backed securities 979,601 26.0
---------- -----
Total real estate
loans 3,624,521 96.3
Consumer and other loans -
Home improvement and
other
consumer loans 116,947 3.2
Savings account loans 8,715 .2
Other loans 12,170 .3
---------- -----
Total consumer and
other loans 137,832 3.7
---------- -----
Total loans $3,762,353 100.0%
========== =====
</TABLE>
(Continued on next page)
10
<PAGE>
Composition of Loan Portfolio (continued):
- - ------------------------------------------
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------
1995 1994 1993 1992
-------------------- --------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ -------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance forward of total
loans $5,372,419 100.0% $4,934,872 100.0% $4,306,997 100.0% $3,951,435 100.0%
===== ===== ===== =====
Less:
Unamortized discounts,
net
of premiums 8,164 12,713 (4,941) (17,290)
Deferred loan fees, net (2,495) (1,505) (6,826) (8,033)
Loans in process (6,263) (2,922) (1,194) (1,121)
Allowance for loan losses (46,567) (42,926) (45,106) (48,964)
Allowance for losses on
mortgage-
backed securities (1) (1,837) (1,860) (1,890) (2,007)
---------- ---------- ------- -------
Loan portfolio $5,323,421 $4,898,372 $4,247,040 $3,874,020
========== ========== ========== ==========
<CAPTION>
June 30,
-----------------
1991
------ -------
Amount Percent
------ -------
<S> <C> <C>
Balance forward of total
loans $3,762,353 100.0%
=====
Less:
Unamortized discounts,
net
of premiums (37,436)
Deferred loan fees, net (6,573)
Loans in process (3,670)
Allowance for loan losses (53,142)
Allowance for losses on
mortgage-
backed securities (1) --
----------
Loan portfolio $3,661,532
==========
</TABLE>
(1) During fiscal year 1992, certain adjustable-rate single-family residential
loans acquired through the bulk purchased loan restructuring process during
fiscal years 1992 and 1991 were securitized through a privately issued
mortgage pool placement. Accordingly, the estimated allowance amount has
been provided for the potential credit risk associated with this private
placement.
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes to the Consolidated Financial Statements
in the Annual Report.
11
<PAGE>
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (including loans held for sale and before any
reduction for unamortized discounts (net of premiums), undisbursed loan
proceeds, deferred loan fees and allowance for loan losses) as of the dates
indicated:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- - ---------------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Dollars in Thousands)
----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 835,050 21.9% $ 767,937 22.3% $ 654,788 19.9% $ 403,062 13.1% $ 357,582 13.5%
Colorado 728,333 19.1 731,016 21.2 767,123 23.4 647,327 21.1 671,408 25.4
Texas 208,814 5.5 171,755 5.0 177,486 5.4 176,755 5.8 156,296 5.9
Georgia 202,331 5.3 210,299 6.1 241,286 7.3 303,321 9.9 21,380 .8
Oklahoma 186,755 4.9 133,285 3.9 88,786 2.7 74,198 2.4 35,660 1.3
Missouri 172,855 4.5 156,622 4.5 195,911 6.0 247,796 8.1 532,913 20.2
New Jersey 119,223 3.1 110,267 3.2 38,027 1.2 42,685 1.4 -- -.-
Virginia 111,081 2.9 81,290 2.3 67,821 2.1 47,849 1.6 8,895 .3
Maryland 100,762 2.6 76,333 2.2 69,735 2.1 77,767 2.5 3,524 .1
Florida 99,991 2.6 92,531 2.7 96,760 2.9 95,249 3.1 61,766 2.3
Connecticut 79,482 2.1 80,948 2.3 85,204 2.6 92,321 3.0 11,912 .5
Kansas 78,790 2.1 77,709 2.3 82,521 2.5 93,490 3.0 120,283 4.6
Illinois 76,041 2.0 54,371 1.6 65,312 2.0 88,991 2.9 112,069 4.2
Iowa 70,474 1.9 65,273 1.9 65,418 2.0 35,560 1.2 25,681 1.0
California 64,487 1.7 70,052 2.0 82,765 2.5 112,315 3.7 109,758 4.2
Arizona 63,288 1.7 60,895 1.8 77,248 2.4 84,366 2.8 79,259 3.0
Pennsylvania 53,234 1.4 43,223 1.3 30,372 .9 38,716 1.3 5,269 .2
Washington 48,189 1.3 40,558 1.2 37,294 1.1 29,057 1.0 15,460 .6
Ohio 47,421 1.2 36,894 1.1 14,082 .4 9,090 .3 11,140 .4
Michigan 45,784 1.2 46,119 1.3 10,233 .3 11,315 .3 11,044 .4
Massachusetts 43,734 1.1 16,506 .5 5,007 .1 4,816 .2 4,318 .2
New York 39,409 1.0 27,700 .8 13,014 .4 16,725 .5 17,658 .7
Alabama 38,147 1.0 38,604 1.1 43,126 1.3 53,700 1.8 73,149 2.8
Minnesota 32,780 .9 23,233 .7 30,683 .9 16,695 .5 16,258 .6
South Carolina 25,402 .7 27,163 .8 13,792 .4 15,451 .5 5,129 .2
Indiana 25,048 .7 13,645 .4 7,548 .2 6,082 .2 3,362 .1
North Carolina 23,260 .6 19,683 .6 20,404 .6 22,277 .7 3,674 .1
Tennessee 22,709 .6 20,434 .6 24,256 .7 31,831 1.0 28,974 1.1
Other States 174,851 4.4 153,227 4.3 177,203 5.7 187,618 6.1 141,099 5.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$3,817,725 100.0% $3,447,572 100.0% $3,283,205 100.0% $3,066,425 100.0% $2,644,920 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
12
<PAGE>
The following table presents the composition of the Corporation's total
real estate portfolio (including loans held for sale and before any
reduction for unamortized discounts (net of premiums), undisbursed loan
proceeds, deferred loan fees and allowance for loan losses) by state and
property type at June 30, 1995:
<TABLE>
<CAPTION>
Residential Multi- Land Commercial % of
State 1-4 Units Family Loans Loans FHA/VA Total Total
- - ------------------------ ------------ -------- ------- ----------- --------- ----------- ------
(Dollars in Thousands)
------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 745,716 $ 7,905 $ 181 $ 30,947 $ 50,301 $ 835,050 21.9%
Colorado 591,469 13,421 8,675 89,065 25,703 728,333 19.1
Texas 170,161 9,730 -- 4,260 24,663 208,814 5.5
Georgia 186,613 -- -- 3,232 12,486 202,331 5.3
Oklahoma 159,232 945 1 5,808 20,769 186,755 4.9
Missouri 150,180 546 -- -- 22,129 172,855 4.5
New Jersey 117,851 -- -- -- 1,372 119,223 3.1
Virginia 93,885 -- -- -- 17,196 111,081 2.9
Maryland 90,447 -- -- -- 10,315 100,762 2.6
Florida 67,252 -- -- 16,746 15,993 99,991 2.6
Connecticut 79,368 -- -- -- 114 79,482 2.1
Kansas 59,637 -- -- 1,498 17,655 78,790 2.1
Illinois 61,637 -- -- -- 14,404 76,041 2.0
Iowa 55,343 1,151 -- 1,049 12,931 70,474 1.9
California 52,773 20 -- 6,717 4,977 64,487 1.7
Arizona 50,996 -- -- -- 12,292 63,288 1.7
Pennsylvania 51,560 -- -- -- 1,674 53,234 1.4
Washington 40,686 -- -- -- 7,503 48,189 1.3
Ohio 40,381 -- -- -- 7,040 47,421 1.2
Michigan 44,018 -- -- -- 1,766 45,784 1.2
Massachusetts 43,456 -- -- -- 278 43,734 1.1
New York 37,963 -- -- 726 720 39,409 1.0
Alabama 28,144 -- -- 2,516 7,487 38,147 1.0
Minnesota 27,098 -- -- -- 5,682 32,780 .9
South Carolina 21,811 -- -- -- 3,591 25,402 .7
Indiana 20,137 -- -- -- 4,911 25,048 .7
North Carolina 17,732 -- -- -- 5,528 23,260 .6
Tennessee 16,636 -- -- -- 6,073 22,709 .6
Other States 144,534 -- -- 9,231 21,086 174,851 4.4
---------- ------- ------ -------- -------- ---------- -----
Total $3,266,716 $33,718 $8,857 $171,795 $336,639 $3,817,725 100.0%
========== ======= ====== ======== ======== ========== =====
% of Total 85.6% .9% .2% 4.5% 8.8% 100.0%
========== ======= ====== ======== ======== ==========
</TABLE>
13
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
- - ---------------------------------
information at June 30, 1995, regarding the dollar amount of all loans and
mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of potential prepayments. Demand loans (loans having no stated
schedule of repayments and no stated maturity) and overdrafts are reported as
due in one year or less. Since prepayments significantly shorten the average
life of mortgage loans and mortgage-backed securities, management believes that
the following table will bear little resemblance to what will be the actual
repayments of the loan and mortgage-backed securities portfolios. Loan balances
have not been reduced for (i) unamortized discounts (net of premiums),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
<TABLE>
<CAPTION>
Due During the Year Ended June 30,
---------------------------------
1997- After
1996 2000 2000 Total
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Principal Repayments (In Thousands)
- - --------------------
REAL ESTATE LOANS:
Single-family residential (1)
Fixed-rate $ 66,572 $ 347,632 $1,651,109 $2,065,313
Adjustable-rate 24,172 117,960 1,385,366 1,527,498
Multi-family residential, land
and commercial real estate
Fixed-rate 12,180 51,372 23,050 86,602
Adjustable-rate 23,756 98,024 13 121,793
-------- ---------- ---------- ----------
126,680 614,988 3,059,538 3,801,206
-------- ---------- ---------- ----------
Construction, adjustable-rate 1,097 5,486 9,936 16,519
-------- ---------- ---------- ----------
MORTGAGE-BACKED SECURITIES:
Fixed-rate 33,751 140,959 307,182 481,892
Adjustable-rate 13,383 62,686 763,057 839,126
-------- ---------- ---------- ----------
47,134 203,645 1,070,239 1,321,018
-------- ---------- ---------- ----------
CONSUMER AND OTHER LOANS:
Fixed-rate 44,253 161,265 -- 205,518
Adjustable-rate 12,592 15,566 -- 28,158
-------- ---------- ---------- ----------
56,845 176,831 -- 233,676
-------- ---------- ---------- ----------
PRINCIPAL REPAYMENTS $231,756 $1,000,950 $4,139,713 $5,372,419
======== ========== ========== ==========
</TABLE>
(1) Includes conventional mortgage loans, FHA and VA loans.
14
<PAGE>
Scheduled contractual principal repayments do not reflect the actual maturities
of such assets. The average maturity of loans is substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Corporation the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Annual Report.
The following table sets forth the amount of all loans and mortgage-backed
securities due after June 30, 1996, which have fixed interest rates and those
which have adjustable interest rates. Such loans and mortgage-backed securities
have not been reduced for (i) unamortized discounts (net of premiums),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
<TABLE>
<CAPTION>
Adjustable
Fixed-Rate Rate Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $1,998,741 $1,503,326 $3,502,067
Multi-family residential,
land and commercial 74,422 98,037 172,459
Construction loans -- 15,422 15,422
Mortgage-backed securities 448,141 825,743 1,273,884
Consumer and other loans 161,265 15,566 176,831
---------- ---------- ----------
Principal repayments due
after June 30, 1996 $2,682,569 $2,458,094 $5,140,663
========== ========== ==========
</TABLE>
LOAN ORIGINATIONS
- - -----------------
Residential Loans. The Corporation, through the Bank's branches and CFMC's
- - ------------------
nationwide correspondent network, originates and purchases both fixed-rate and
adjustable-rate mortgage loans secured by single-family units. Such residential
mortgage loans are either (i) FHA/VA loans which qualify for sale in the form of
securities guaranteed by GNMA, (ii) conventional mortgage loans which comply
with the requirements for sale to, or conversion into securities issued by, FNMA
or FHLMC ("conventional conforming loans") or (iii) mortgage loans which exceed
the maximum loan amount allowed by FNMA or FHLMC, but which otherwise generally
comply with FNMA and FHLMC loan requirements ("conventional nonconforming
loans"). The Corporation originates substantially all conventional conforming
loans or conventional nonconforming loans (collectively, "conventional loans")
with loan-to-value ratios at or below 80.0% unless the borrower obtains private
mortgage insurance, at the borrower's own expense, for the Corporation's benefit
covering that portion of the loan in excess of 80.0% of the appraised value.
Occasional exceptions to the 80.0% loan-to-value ratio for conventional loans
are made for loans to facilitate the resolution of nonperforming assets.
15
<PAGE>
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans generally are also
originated with terms of 15 and 30 years. However, certain adjustable-rate
loans contain provisions which permit the borrower, at the borrower's option, to
convert at certain periodic intervals over the life of the loan to a long-term
fixed-rate loan. The adjustable-rate loans currently have interest rates which
are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Board Cost of Funds Index. The amount of any such
interest rate increase is limited to one or two percentage points annually and
four to six percentage points over the life of the loan. Certain adjustable-
rate loans are also offered which have interest rates fixed over annual periods
ranging from two through seven years, and also ten year loans, with such loans
repricing annually after the fixed interest-rate term. In order to encourage
public acceptance of adjustable-rate loans, such loans are currently offered at
initial rates below the fully indexed rate, which is a common practice in the
Corporation's market area.
In prior years, the Corporation provided interim construction financing for
single-family dwellings. Currently, the Corporation is not actively pursuing
construction loans, but will provide interim construction financing that will be
tied to permanent real estate mortgage loans. Management expects construction
lending to increase over fiscal year 1995, although not significantly. During
fiscal years 1995 and 1994, the Corporation originated $10.9 million and
$470,000, respectively, of residential construction loans. There were no
construction loans originated in fiscal year 1993.
Commercial Real Estate and Land Loans. The Corporation originated commercial
- - --------------------------------------
real estate loans totaling $7.3 million, $12.8 million and $14.8 million,
respectively, during fiscal years 1995, 1994 and 1993. Substantially all
commercial real estate loan originations for fiscal years 1993 and 1994
consisted of loans made to borrowers on purchases of commercial real estate
property previously foreclosed.
Commercial real estate lending may entail significant additional risks compared
with residential real estate lending. These additional risks are due to larger
loan balances which are more sensitive to economic conditions, business cycle
downturns and construction related risks. See "Asset Quality" herein.
The payment of principal and interest due on the Corporation's commercial real
estate loans is substantially dependent upon the performance of the projects
securing such loans. As an example, to the extent that the occupancy and rental
rates are not high enough to generate the income necessary to make such
payments, the Corporation could experience an increased rate of delinquency and
could be required either to declare such loans in default and foreclose upon
such properties or to make concessions on the terms of the repayment of such
loans.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $1.423
billion at June 30, 1995. This restriction has not and is not expected to
materially affect the Corporation's business.
Consumer Loans. Federal regulations permit federal savings institutions to make
- - ---------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. During fiscal years 1995, 1994 and 1993, the Corporation
originated $158.3 million, $156.3 million and $109.1 million, respectively, of
consumer loans. Consumer loans originated by the Corporation are primarily
second mortgage loans, loans to depositors on the security of their savings
accounts and loans secured by automobiles. The Corporation increased its
secured consumer lending activities beginning fiscal year 1994 to meet its
customers' financial needs and will continue to emphasize such lending
activities in the future.
16
<PAGE>
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Corporation, and a borrower may be
able to assert against such assignee claims and defenses which it has against
the seller of the underlying collateral.
Commercial Business Loans. Federal savings institutions are authorized to make
- - --------------------------
secured or unsecured commercial, corporate, business or agricultural loans up to
10.0% of total regulatory assets. The Corporation had no commercial business
and corporate loans at June 30, 1995. Currently, the Corporation does not
originate any new commercial business loans.
Bulk Loan Purchases. Between January 1991 and June 30, 1992, as part of its
- - --------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the RTC, comprised of 46,500 loans primarily
collateralized by single-family residential properties with principal balances
aggregating $2.5 billion. These purchased loans had a weighted average yield of
8.71%. At June 30, 1995, 1994 and 1993, the aggregate principal balance of
these bulk purchased loans associated with such restructuring was $701.9
million, $868.0 million and $1.3 billion, respectively.
To supervise and coordinate the residential loan purchase program, the
management of the Corporation established a loan purchase committee responsible
for identifying the loan packages to review, directing the loan review process,
preparing the bid or rejecting the package, facilitating the purchase and
transfer of loan servicing and coordinating the put back process as necessary.
Management established specific guidelines to define the types of loans
management would consider for purchase, and established internal standards for
underwriting and documentation for loan purchases. Management implemented
procedures to analyze the credit and servicing risks of a loan package and the
expected return of the loan package. Based upon both a review and analysis of
the information provided by the seller with respect to each loan package and
management's own due diligence review of a certain percentage (usually 5.0% to
10.0%) of the loans within a loan package, management established specific
estimated allowance amounts which were allocated from the discount amounts on
the loan packages. At June 30, 1995, 1994 and 1993, $15.3 million, $17.3
million and $22.3 million, respectively, of the discount amount relating to
these purchased loans was allocated to an estimated allowance amount for
potential credit risk associated with such bulk purchased loans. These
allowances are available to absorb losses associated with the respective
purchased loan packages, and are not available to absorb losses from other
loans.
The loan purchase agreements generally provided for a 30-to-90 day period after
purchase and delivery of the loan in which to identify and put back loans which
did not conform to legal documentation presented by the seller. In addition,
the loan purchase agreements contained representations and warranties concerning
the loans in the package generally warranting, at a minimum, as of the date of
sale of the loans, the accuracy of information previously disclosed by seller,
and the validity, enforceability, and first lien status of the loans and the
delinquency or current payment status of the loans. The Corporation's right to
enforce remedies for breach of representations or warranties was generally not
limited in duration except as measured from the time that a breach is
discovered. Substantially all of the obligations of sellers in RTC loan sales
are guaranteed by the RTC in its corporate capacity. At June 30, 1995, 1994 and
1993, $17.8 million, $17.5 million and $18.1, respectively, of these purchased
loans were past due 90 days or more.
To the extent opportunities to make similar bulk purchases of loans become
available, the Corporation will consider making such purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1995, 1994 and 1993, the
Corporation purchased $461.3 million, $545.8 million and $186.8 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
17
<PAGE>
Loan Sales. In addition to originating loans for the Bank's portfolio, the
- - -----------
Corporation, through its mortgage banking subsidiary, participates in secondary
mortgage market activities by selling whole and securitized loans to
institutional investors or other financial institutions with the Corporation
generally retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole loans
to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC
which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1995, 1994 and 1993, the Corporation sold an aggregate of
$405.7 million, $691.9 million and $407.4 million, respectively, in mortgage
loans resulting in net losses of $596,000, $392,000 and $352,000, respectively,
in such fiscal years. Of the amount of mortgage loans sold during fiscal year
1995, $404.9 million were sold in the secondary market, of which 92.5% were
converted into GNMA securities, 7.4% were sold directly to FNMA or FHLMC for
cash or were exchanged for securities issued by FNMA or FHLMC, and the remaining
were sold to other institutional investors. At June 30, 1995, the carrying
value of loans held for sale totaled $36.4 million.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on an annual basis. However, in connection with a 1987 acquisition
of a financial institution, the Bank assumed agreements providing for recourse
in the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1995, the remaining balance
of such loans sold with recourse totaled $49.7 million.
18
<PAGE>
Set forth below is a table showing the Corporation's loan and mortgage-backed
securities activity for the fiscal years indicated:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
LOANS ORIGINATED:
Real estate loans -
Residential loans (1) $ 182,804 $ 548,291 $ 630,493
Construction loans 10,862 470 --
Commercial real estate and land loans 7,257 12,818 14,843
Consumer loans 158,330 156,333 109,113
---------- ---------- ----------
Loans originated $ 359,253 $ 717,912 $ 754,449
========== ========== ==========
LOANS PURCHASED:
Conventional mortgage loans -
Residential loans 603,635 $1,069,584 $ 777,559
Bulk loan purchases 461,299 545,823 186,790
Mortgage-backed securities 11,504 205,222 121,584
---------- ---------- ----------
Loans purchased $1,076,438 $1,820,629 $1,085,933
========== ========== ==========
LOANS SECURITIZED:
Conventional mortgage loans securitized
into mortgage-backed securities $ 137,936 $ 468,564 $ 222,457
========== ========== ==========
ACQUISITIONS:
Residential real estate $ 101,067 $ 771 $ --
Consumer loans 11,995 19,027 --
Mortgage-backed securities 42,648 -- --
---------- ---------- ----------
Loans from acquisitions $ 155,710 $ 19,798 $ --
========== ========== ==========
LOANS SOLD:
Conventional mortgage loans $ 405,687 $ 691,935 $ 407,421
Mortgage-backed securities 34,756 12,672 --
---------- ---------- ----------
Loans sold $ 440,443 $ 704,607 $ 407,421
========== ========== ==========
</TABLE>
(1) Includes single-family and multi-family residential loans and FHA and VA
loans. In addition, includes loans refinanced of $31,308, $329,438 and
$453,224 for fiscal years 1995, 1994 and 1993, respectively.
19
<PAGE>
Loan Servicing. The Corporation, through its mortgage banking subsidiary,
- - ---------------
services substantially all of the mortgage loans that it originates and
purchases (whether retained for its own portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1995, the Bank's
mortgage banking subsidiary was servicing approximately 85,100 loans and
participations for others with principal balances aggregating $4.6 billion,
compared to 77,500 loans with principal balances totaling $4.0 billion at June
30, 1994. At June 30, 1995, adjustable-rate mortgage loans represented 30.4% of
the aggregate dollar amount of loans in the servicing portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General," -- "Loan Servicing Fees" and -- "Note 23 - Segment
Information" in the Annual Report for information pertaining to revenue from
servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .50% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .42% for fiscal
year 1995 compared to .43% for fiscal year 1994. The Corporation's servicing
portfolio is subject to reduction primarily by reason of normal amortization and
prepayment of outstanding mortgage loans. In general, the value of the
Corporation's loan servicing portfolio may also be adversely affected as
mortgage interest rates decline and loan prepayments increase. It is expected
that income generated from the Corporation's loan servicing portfolio also will
decline in such an environment. This negative effect on the Corporation's
income may be offset somewhat by a rise in origination and servicing fee income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates. The weighted average mortgage loan note
rate of the Corporation's servicing portfolio at June 30, 1995, was 7.76%
compared to 7.55% at June 30, 1994.
At June 30, 1995, 95.0% of the Corporation's mortgage servicing portfolio for
other institutions was covered by servicing agreements pursuant to the mortgage-
backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1995, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $900,000.
In May 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking
enterprise capitalize the cost of rights to service loans for others that were
acquired through either purchase or origination. The total cost of loans being
sold should be allocated to the mortgage servicing rights and the loans based on
their relative fair values. The mortgage servicing rights should be amortized
in proportion to, and over the period of, estimated net servicing income and
should be evaluated for impairment based on their fair value. The Corporation
currently sells certain of its loan originations with servicing retained. SFAS
No. 122 is effective for fiscal years beginning after December 15, 1995, or
effective as of July 1, 1996, for the Corporation. The effect of SFAS No. 122
is dependent, among other items, upon the volume and type of loans originated,
the general levels of market interest rates and the rate of estimated loan
prepayments. Management of the Corporation is currently reviewing the
provisions of this statement to determine its implementation date and has not as
of this date determined the effect of such implementation.
20
<PAGE>
Interest Rates and Loan Fees. Interest rates charged by the Corporation on its
- - -----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. Nebraska and Oklahoma law
do not provide an interest rate limitation on loans secured by real estate,
however, such states do impose various limitations on the interest rate which
may be charged on installment and personal loans made to non-corporate
borrowers. Generally, interest rates on these loans are limited to 19.0% per
annum by Nebraska law and 21.0% by Oklahoma law, although loans in excess of
$25,000 and $45,000 in Nebraska and Oklahoma, respectively, are not subject to
any interest rate limitation. Colorado statutory usury limitations prohibit the
Corporation from contracting for payment by the debtor of any loan finance
charge in excess of a 45.0% annual percentage rate when the loan is secured by a
first lien against real estate or is for a business or commercial purpose.
Colorado usury limitations also restrict the Corporation for all other loans,
excluding business or commercial purpose loans, from contracting for payment by
the debtor of any loan finance charge in excess of a 21.0% annual percentage
rate. Kansas law limits the interest rate on fixed-rate non-business loans
secured by real estate to an index based on FHLMC securities, while interest
rates imposed on variable rate mortgages are generally not limited. Kansas law
imposes various interest rate limitations on consumer loans of $25,000 or less
which are generally limited to 18.0% per annum.
In addition to interest earned on loans, the Corporation receives loan
origination fees for originating certain loans. These fees are a percentage of
the principal amount of the mortgage loan and are charged to the borrower.
Loan Commitments. At June 30, 1995, the Corporation had issued commitments of
- - -----------------
$84.0 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are expected to settle within four months
following June 30, 1995. These outstanding loan commitments to extend credit do
not necessarily represent future cash requirements since many of the commitments
may expire without being drawn. The Corporation anticipates that normal
amortization and prepayments of loan and mortgage-backed security principal will
be sufficient to fund these loan commitments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" in the Annual Report.
Collection Procedures. If a borrower fails to make required payments on a loan,
- - ----------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
21
<PAGE>
ASSET QUALITY
- - -------------
Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a
- - ---------------------
nonaccruing status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on a nonaccruing status when
either principal or interest is 90 days or more past due. Interest accrued and
unpaid at the time a loan is placed on nonaccruing status is charged against
interest income. Subsequent payments are applied to the outstanding principal
balance until such time as the loan is removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. Such property is stated at the lower of cost or fair value, minus
estimated costs to sell. Valuation allowances for estimated losses on real
estate are subsequently provided when the carrying value exceeds the fair value
minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when a
delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of ownership
would still be retained by the borrower. The evaluation of borrowers and
collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring. In
these circumstances, the Corporation would strive to ensure that the borrower's
continued participation in and management of the collateral does not put the
Corporation at further risk of loss. In situations in which the borrower is not
performing under the restructured terms, foreclosure proceedings are commenced
when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Corporation would not otherwise consider.
The Corporation's nonperforming assets totaling $58.4 million decreased by $5.6
million, or 8.8%, at June 30, 1995, compared to June 30, 1994, primarily as a
result of net decreases of $3.0 million in troubled debt restructurings, $1.7
million in nonperforming loans and $894,000 in real estate.
22
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccruing basis: (1)
Real estate -
Residential $28,002 $25,516 $28,990 $ 32,002 $ 13,028
Commercial 773 5,228 1,377 11,937 13,299
Consumer 442 192 120 70 112
------- ------- ------- -------- --------
Total 29,217 30,936 30,487 44,009 26,439
------- ------- ------- -------- --------
Accruing loans which are
contractually past
due 90 days or more - -- -- -- -- --
------- ------- ------- -------- --------
Total nonperforming loans 29,217 30,936 30,487 44,009 26,439
------- ------- ------- -------- --------
Real estate: (2)
Commercial 8,795 9,808 16,721 45,799 75,395
Residential 3,383 3,264 5,169 6,625 17,770
------- ------- ------- -------- --------
Total 12,178 13,072 21,890 52,424 93,165
------- ------- ------- -------- --------
Troubled debt restructurings: (3)
Commercial 15,708 18,445 38,828 39,283 64,328
Residential 1,294 1,580 2,164 3,233 3,764
------- ------- ------- -------- --------
Total 17,002 20,025 40,992 42,516 68,092
------- ------- ------- -------- --------
Nonperforming assets $58,397 $64,033 $93,369 $138,949 $187,696
======= ======= ======= ======== ========
Nonperforming loans to total loans (4) .72% .85% .89% 1.38% .95%
Nonperforming assets to total assets .98% 1.16% 1.92% 2.99% 3.70%
- - ----------------------------------------- ------- ------- ------- -------- --------
Allowance for loan losses:
Other loans $31,287 $25,605 $22,835 $ 19,233 $ 20,866
Bulk purchased loans (5) 15,280 17,321 22,271 29,731 32,276
------- ------- ------- -------- --------
Total $46,567 $42,926 $45,106 $ 48,964 $ 53,142
======= ======= ======= ======== ========
Allowance for bulk purchased loan
losses to bulk purchased loans (5) 2.18% 2.00% 1.69% 1.89% 2.68%
Allowance for loan losses
(other loans) to total loans
(less bulk purchased loans) .93% .92% 1.09% 1.19% 1.32%
Allowance for loan losses
to total loans (4) 1.15% 1.18% 1.32% 1.54% 1.91%
Allowance for loan losses
to total nonperforming assets 79.74% 67.04% 48.31% 35.24% 28.31%
Allowance for loan losses (other loans)
to total nonperforming loans (less
nonperforming bulk purchased
loans) (6) 275.03% 189.86% 184.88% 73.04% 85.48%
</TABLE>
(Continued on next page)
23
<PAGE>
(1) During fiscal years 1995, 1994 and 1993, the Corporation did not record any
interest income on these nonaccruing loans. Had these loans been current in
accordance with their original terms and outstanding throughout this fiscal
year or since origination, the Corporation would have recorded gross
interest income on these loans of $1.9 million, $2.0 million and $2.0
million, respectively.
(2) Real estate as a component of nonperforming assets does not include
performing real estate held for investment, which totaled $4.2 million and
$2.9 million, respectively, at June 30, 1995 and 1994. At June 30, 1993,
there was no performing real estate held for investment.
(3) During fiscal years 1995, 1994 and 1993, the Bank recognized interest income
on these loans classified as troubled debt restructurings aggregating $1.5
million, $1.8 million and $3.9 million, respectively, whereas under their
original terms the Bank would have recognized interest income of $1.6
million, $1.9 million and $4.6 million, respectively. At June 30, 1995, the
Bank had no material commitments to lend additional funds to borrowers whose
loans were subject to troubled debt restructuring.
(4) Based on the total balance of loans receivable (before any reduction for
unamortized discounts (net of premiums), undisbursed loan proceeds, deferred
loan fees and allowance for loan losses) at the respective dates.
(5) Between January 1991 and June 30, 1992, the Bank purchased $2.5 billion of
primarily single-family residential whole loans (bulk purchased loans) at
varying amounts of discounts that totaled $54.6 million in the aggregate
through June 30, 1992. At June 30, 1995, 1994 and 1993, $15.3 million,
$17.3 million and $22.3 million, respectively, of allowance for loan losses
for bulk purchased loans, which had been allocated from the amount of net
discounts associated with the Bank's purchase of these loans is included in
the total allowance for loan losses to provide for the credit risk
associated with these bulk purchased loans, which had balances of $701.9
million, $868.0 million and $1.3 billion, respectively, at June 30, 1995,
1994 and 1993. These allowances are available only to absorb losses
associated with the respective bulk purchased loans, and are not available
to absorb losses from other loans.
(6) Nonperforming bulk purchased loans approximating $17.8 million, $17.5
million and $18.1 million, respectively, at June 30, 1995, 1994 and 1993,
and the allowance for loan losses associated with the total bulk purchased
loans, have been excluded from this calculation since these allowances are
not available to absorb the losses associated with other loans in the
portfolio.
For a discussion of the major components of the $5.6 million decrease in
nonperforming assets during the fiscal year ended June 30, 1995, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan Losses and Real Estate Operations" in the
Annual Report.
24
<PAGE>
The geographic concentration of nonperforming loans at June 30 was as follows:
<TABLE>
<CAPTION>
State 1995 1994 1993 1992 1991
- - ----- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Texas $ 3,561 $ 4,317 $ 3,222 $ 3,189 $ 1,764
Georgia 2,559 2,355 3,273 2,870 53
Colorado 2,191 4,163 2,260 10,078 13,311
Nebraska 2,037 1,551 2,237 3,607 2,700
Missouri 1,864 1,689 2,334 2,991 359
California 1,842 2,986 2,309 4,377 511
New Jersey 1,680 1,361 793 551 571
Florida 1,553 1,148 1,268 2,355 --
Illinois 1,234 1,457 1,976 1,835 218
Oklahoma 1,019 472 609 1,189 289
New York 855 407 366 189 --
Washington 745 841 465 376 --
Maryland 743 613 -- 105 --
Pennsylvania 715 823 967 388 13
Connecticut 643 37 385 594 --
Arizona 539 569 2,061 2,894 314
North Carolina 455 237 220 178 --
Virginia 446 790 552 332 --
Indiana 411 145 113 9 --
Kansas 389 761 1,156 1,422 3,820
Other states 3,736 4,214 3,921 4,480 2,516
------- ------- ------- ------- -------
Nonperforming loans $29,217 $30,936 $30,487 $44,009 $26,439
======= ======= ======= ======= =======
</TABLE>
Nonperforming loans at June 30, 1995, consisted of 780 loans with an average
balance of $37,458. Nonperforming loans totaling $29.2 million at June 30,
1995, consisted of $773,000 (3 loans) collateralized by commercial real estate,
$28.0 million (661 loans) collateralized by residential real estate and $442,000
(116 loans) of consumer loans.
The geographic concentration of nonperforming real estate at June 30 was
follows:
<TABLE>
<CAPTION>
State 1995 1994 1993 1992 1991
- - ----- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Colorado $ 6,823 $ 4,027 $ 8,871 $17,390 $38,780
Nebraska 5,770 6,868 8,241 8,727 11,230
Texas 999 801 1,337 12,970 22,071
Georgia 391 1,348 1,016 561 --
Oklahoma 326 351 362 555 1,435
Pennsylvania 280 90 -- -- --
New Jersey 262 219 -- -- --
Missouri 197 115 551 535 612
Florida 129 248 653 4,083 3,222
Iowa 119 -- 23 -- 49
Tennessee 109 64 -- 1,979 6,767
California 81 1,457 1,946 2,638 3,930
Kansas -- -- 1,135 1,258 3,125
Other states 624 1,484 774 3,674 7,146
Unallocated reserves (3,932) (4,000) (3,019) (1,946) (5,202)
------- ------- ------- ------- -------
Nonperforming real estate $12,178 $13,072 $21,890 $52,424 $93,165
======= ======= ======= ======= =======
</TABLE>
At June 30, 1995, total commercial real estate was $8.8 million (23 properties)
or 72.2% of the $12.2 million in total nonperforming real estate (consisting of
97 properties), and the remaining $3.4 million (74 properties) consisted of
residential real estate. The Bank's commercial real estate at June 30, 1995, is
located primarily in Colorado and Nebraska.
25
<PAGE>
Classification of Assets. Savings institutions are required to review their
- - -------------------------
assets on a regular basis and, as warranted, classify them as "substandard,"
"doubtful," or "loss." Adequate general valuation allowances are required to be
established for assets classified as substandard or doubtful. If an asset is
classified as a loss, the institution must either establish a specific valuation
allowance equal to the amount classified as loss or charge off such amount. An
asset which does not currently warrant classification as substandard but which
possesses credit deficiencies or potential weaknesses deserving close attention
is required to be designated as "special mention." In addition, a savings
institution is required to set aside adequate valuation allowances to the extent
that any affiliate possesses assets which pose a risk to the savings
institution. The OTS has the authority to approve, disapprove or modify any
asset classification or any amount established as an allowance pursuant to such
classification. On the basis of managemental review of the Corporation's
portfolio at June 30, 1995, the Corporation had $25.5 million in assets
classified as special mention, $47.2 million in assets classified as
substandard, no assets classified as doubtful and $307,000 in assets classified
as loss. As required, specific valuation allowances have been established in an
amount equal to 100.0% of all assets classified as loss. Substantially all
nonperforming assets at June 30, 1995, are classified as either substandard or
loss pursuant to applicable asset classification standards. Of the
Corporation's loans which were not classified at June 30, 1995, there were no
loans where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrowers to comply
with present loan repayment terms.
Loan and Real Estate Review Policy. Management of the Corporation has the
- - -----------------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan and real estate portfolios.
Management is also responsible for the determination of all specific and
general provisions for loan and real estate losses, taking into consideration a
number of factors, including changes in the composition of the Corporation's
loan portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
affect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
real estate portfolios, and regular review of specific problem loans and real
estate. See "Nonperforming Assets."
Management also has the responsibility of ensuring timely charge-offs of loan
and real estate balances, as appropriate, when general and economic conditions
warrant a change in the value of these loans and real estate. To ensure that
credit risk is properly and timely monitored, this responsibility has been
delegated to a credit review group which consists of key personnel of the
Corporation knowledgeable in the specific areas of loan and real estate
valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and the likelihood of liquidation of
real estate and other assets and their book value, (ii) to identify problem
assets at the earliest possible time, (iii) to assure an adequate level of
allowances for possible losses to cover identified and anticipated credit risks,
(iv) to monitor the Corporation's compliance with established policies and
procedures, and (v) to provide the Corporation's management with information
obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loan or real estate value weakness. Accordingly, these types of
loans and real estate are assigned a credit risk rating ranging from one
(excellent) to six (loss). Loans and real estate with minimal credit risk (not
adversely classified or with a credit risk rating of one to four) generally have
general reserves established on the basis of the Corporation's historical loss
experience. Loans and real estate adversely classified (classified substandard,
loss or with a credit risk rating of five or six) generally have greater levels
of general reserves similarly established on the basis of the Corporation's
historical loss experience, as well as specific reserves established as
applicable to recognize permanent declines in the value of loans or real estate.
26
<PAGE>
It is management's responsibility to maintain a reasonable allowance for loan
losses applicable to all categories of loans through periodic charges to
operations. The Corporation employs a systematic methodology to determine the
amount of general loan losses, in addition to specific valuation allowances, to
be recorded as a percentage of the respective loan balances as follows:
<TABLE>
<CAPTION>
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
<S> <C>
RESIDENTIAL REAL ESTATE LOANS:
Current .25%
90 days delinquent (or classified substandard) 7.50
COMMERCIAL REAL ESTATE LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
CONSTRUCTION LOANS:
Current 1.00
90 days delinquent 12.50
CONSUMER LOANS:
Current .50
Classified substandard and 90 days delinquent 20.00
120 days delinquent 100.00
</TABLE>
As appropriate, management of the Corporation attempts to ensure that the
Corporation's reserves are in general compliance with previously established
regulatory examination guidelines.
Allowance for Losses on Loans. The allowance for loan losses is based upon
- - ------------------------------
management's continuous evaluation of the collectibility of outstanding loans,
which takes into consideration such factors as changes in the composition of the
loan portfolio and economic conditions that may affect the borrower's ability to
pay, regular examinations by the Corporation's credit review group of specific
problem loans and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Provision for Loan
Losses and Real Estate Operations" in the Annual Report.
The Corporation's policy is to charge-off loans or portions thereof against the
allowance for loan losses in the period in which loans or portions thereof are
determined to be uncollectible. A majority of the Corporation's loans are
collateralized by residential or commercial real estate. Therefore, the
collectibility of such loans is susceptible to changes in prevailing real estate
market conditions and other factors which can cause the fair value of the
collateral to decline below the loan balance. When the Corporation records
charge-offs on these loans, it also begins the foreclosure process of taking
possession of the real estate which served as collateral for such loans.
Recoveries of loan charge-offs generally occur only when the loan deficiencies
are completely cured. Upon foreclosure and conversion of the loan into real
estate owned, the Corporation may realize a credit to real estate operations
through the disposition of such real estate when the sale proceeds exceed the
value of the real estate.
Although management believes that the Corporation's allowance for loan losses is
adequate to reflect the risk inherent in its portfolios, there can be no
assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans on a regular
basis as an integral part of their examination process. Such agencies may
require additions to the allowance based on their judgments of information
available to them at the time of their examination.
27
<PAGE>
The following table sets forth the activity in the Bank's allowance for loan
losses for the fiscal years ended June 30 as indicated:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for losses on
loans at beginning of year $42,926 $45,106 $48,964 $ 53,142 $ 24,099
------- ------- ------- -------- --------
Loans charged-off:
Single-family residential (903) (774) (1,097) (1,542) (4,109)
Multi-family residential
and commercial real estate (842) (2,083) (1,264) (6,098) (6,394)
Consumer (1,758) (1,073) (1,033) (2,134) (2,908)
------- ------- ------- -------- --------
Loans charged-off (3,503) (3,930) (3,394) (9,774) (13,411)
------- ------- ------- -------- --------
Recoveries:
Single-family residential 64 71 -- -- --
Multi-family residential
and commercial real estate 815 164 857 -- 6
Consumer 455 432 404 760 1,035
------- ------- ------- -------- --------
Recoveries 1,334 667 1,261 760 1,041
------- ------- ------- -------- --------
Net loans charged-off (2,169) (3,263) (2,133) (9,014) (12,370)
Provision charged to operations 6,033 6,033 5,735 7,381 9,137
------- ------- ------- -------- --------
Estimated allowance added
for bulk purchased loans (1) 1,818 39 173 17,268 32,347
Change in estimate of allowance
for bulk purchased loans (1)(2) (1,705) (4,357) (5,334) (18,728) (49)
Charge off to allowance
for bulk purchased loans(1) (336) (632) (2,299) (1,085) (22)
------- ------- ------- -------- --------
Allowance for losses on loans
at end of year $46,567 $42,926 $45,106 $ 48,964 $ 53,142
======= ======= ======= ======== ========
Ratio of net loans charged-off
to average loans outstanding
during the year .07% .11% .13% .33% .61%
</TABLE>
(1) Between January 1991 and June 30, 1992, the Bank purchased $2.5 billion of
primarily single-family residential whole loans (bulk purchased loans) at
varying amounts of discounts that totaled $54.6 million in the aggregate
through June 30, 1992. At June 30, 1995, 1994 and 1993, $15.3 million,
$17.3 million and $22.3 million, respectively, of allowance for loan losses
for bulk purchased loans, which had been allocated from the amount of net
discounts associated with the Bank's purchase of these loans, was included
in the total allowance for loan losses. Such bulk purchased loans had
balances of $701.9 million, $868.0 million and $1.3 billion, respectively,
at June 30, 1995, 1994 and 1993. These allowances are available only to
absorb losses associated with the respective bulk purchased loans, and are
not available to absorb losses from other loans.
(2) Consists of changes in estimates of allowance amounts for bulk purchased
loans resulting from the securitization of these bulk purchased loans into
mortgage-backed securities or from loan principal payoffs such that these
allowance amounts either will be amortized into income as a yield
adjustment over the respective remaining lives of the related mortgage-
backed securities or accreted directly to interest income on payoffs of
purchased loans.
28
<PAGE>
INVESTMENT ACTIVITIES
- - ---------------------
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) equal to the monthly average of not less than a
specified percentage (currently 5.0%) of its net withdrawable savings deposits
plus short-term borrowings. The Corporation is also required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of net withdrawable savings accounts and
borrowings payable in one year or less.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1995,
the Bank had total average liquid assets of $356.8 million, which consisted of
$21.6 million in cash, $2.4 million in federal funds and $332.8 million in
agency-backed securities. The Corporation's liquidity and short-term liquidity
ratios were 8.52% and 1.69%, respectively, at June 30, 1995. See "Regulation --
Liquidity Requirements." The Corporation's management objective is to maintain
liquidity at a level sufficient to assure adequate funds, taking into account
anticipated cash flows and available sources of credit, to allow future
flexibility to meet withdrawal requests, to fund loan commitments and to make
other investments. Such liquid funds are managed in an effort to produce the
highest yield consistent with maintaining safety of principal and within
regulations governing the thrift industry. In recent years, because of the
uncertain nature of interest rates, the Corporation has deemed it prudent to
purchase short-term securities. Due to the maturities on such funds, the yields
tend to respond quickly to changes in the level of interest rates in the money
market.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury and other
Government agency obligations $294,187 $280,550 $246,990
Obligations of states and
political subdivisions -- -- 806
Other securities 50 50 50
-------- -------- --------
Total investment
securities held to maturity 294,237 280,600 247,846
Cash on deposit 3,100 500 1,300
-------- -------- --------
Total Investments $297,337 $281,100 $249,146
======== ======== ========
</TABLE>
29
<PAGE>
The following table sets forth the scheduled maturities, carrying values, market
values and weighted average yields for the Corporation's investment securities
held to maturity at June 30, 1995:
<TABLE>
<CAPTION>
One Year Over One Within Over Five Within More Than
or Less Five Years Ten Years Ten Years
------------------ ------------------ ----------------- ------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------ --------- ------- --------- ------ --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held
to maturity:
U.S. Treasury and other
Government agency
obligations $44,953 7.86% $228,244 5.97% $20,990 6.16% --$ --%
Other securities -- -- 50 5.75 -- -- -- --
--------- ------- -------- ----- --------- ----- --------- ---
Investment securities
held to maturity $44,953 7.86% $228,294 5.96% $20,990 6.16% --$ --%
========= ======= ======== ===== ========= ===== ========= ===
<CAPTION>
Total
----------------------------
Amortized Market Average
Cost Value Yield
------- -------- -------
<S> <C> <C> <C>
Investment securities held
to maturity:
U.S. Treasury and other
Government agency
obligations $294,187 $291,601 6.27%
Other securities 50 50 5.75
--------- -------- ----
Investment securities
held to maturity $294,237 $291,651 6.27%
========= ======== ====
</TABLE>
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report.
30
<PAGE>
SOURCES OF FUNDS
- - ----------------
General. Deposits have historically been the major source of the Corporation's
- - --------
funds for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, prepayment and
maturity of investment securities, and other borrowings. Also, during fiscal
year 1993, net proceeds totaling approximately $75.8 million from common stock
and subordinated debt offerings were another significant source of funds.
The Corporation has considered, and anticipates that it will in the future
continue to consider, possible mergers with and acquisitions of other selected
financial institutions. During fiscal year 1995 the Corporation consummated the
acquisitions of Home Federal and Provident, and entered into a merger agreement
with Railroad. In addition, on August 15, 1995, the Bank entered into a merger
agreement with Conservative. See Notes 2 and 27 to the Consolidated Financial
Statements for additional information on these completed and pending
acquisitions. Such completed and proposed acquisitions present the Corporation
with the opportunity to further expand its retail network over last fiscal year
in the Oklahoma, Iowa, Kansas and Nebraska markets; and to increase its earnings
potential by increasing its mortgage and consumer loan volumes funded by
deposits which generally bear lower rates of interest than alternative sources
of funds. The cash proceeds from the fiscal year 1994 deposit acquisitions
allowed the Corporation to repay advances from the FHLB and to originate and
purchase primarily single-family residential loans.
Deposits. The Corporation's deposit strategy is to emphasize retail branch
- - ---------
deposits by offering a variety of rates and deposit programs to satisfy customer
needs. As such, during fiscal year 1995, NOW accounts increased $19.4 million,
from $254.4 million at June 30, 1994, to $273.8 million at June 30, 1995. In
addition, during fiscal year 1995 passbook accounts increased $69.9 million,
from $468.3 million at June 30, 1994 to $538.2 million at June 30, 1995. Rates
on deposits are priced based on investment opportunities as the Bank attempts to
control the flow of funds in its deposit accounts according to its business
objectives and the cost of alternative sources of funds.
Fixed-term, fixed-rate retail certificates are the primary sources of deposits
for the Bank and at June 30, 1995, represented 72.7% of the Bank's total
deposits compared to 71.9% and 74.2%, respectively, at June 30, 1994 and 1993.
The Bank offers certificate accounts with terms ranging from one month to 120
months.
Total deposits increased $235.6 million during fiscal year 1995 from $3.356
billion at June 30, 1994, to $3.591 billion at June 30, 1995. This increase is
primarily from the acquisitions of Provident and Home Federal with deposits of
$58.1 million and $87.3 million, respectively. The additional amount of the
increase is attributable to (i) this larger franchise base from such
acquisitions the last two fiscal years which has broadened the Corporation's
retail deposit base and (ii) to an increase in Colorado and Oklahoma deposits
due to increased marketing efforts and product promotion.
31
<PAGE>
The following table sets forth the balances and percentages of the various types
of deposits offered by the Corporation at the dates indicated and the change in
the dollar amount of deposits between such dates:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1994 June 30, 1993
------------------------------------ ---------------------------------- ------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
-------- -------- --------- ------ --------- ---------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 538,207 15.0% $ 69,899 $ 468,308 13.9% $255,507 $ 212,801 8.9%
NOW accounts 273,809 7.6 19,367 254,442 7.6 18,107 236,335 9.9
Market rate savings 169,892 4.7 (50,358) 220,250 6.6 51,845 168,405 7.0
Certificates of deposit 2,609,267 72.7 196,670 2,412,597 71.9 638,705 1,773,892 74.2
---------- ----- -------- ---------- ----- -------- ---------- -----
Total Deposits $3,591,175 100.0% $235,578 $3,355,597 100.0% $964,164 $2,391,433 100.0%
========== ===== ======== ========== ===== ======== ========== =====
</TABLE>
32
<PAGE>
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1995 1994 1993
---------- ---------- ----------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 532,032 4.41% $ 290,293 2.93% $ 195,677 2.78%
NOW accounts 262,882 .93 280,406 .96 260,651 .99
Market rate savings 197,365 3.31 185,073 2.76 181,985 2.97
Certificates of deposit 2,473,211 5.37 2,167,273 5.19 1,748,304 6.13
---------- ---- ---------- ---- ---------- ----
Average deposit accounts $3,465,490 4.77% $2,923,045 4.40% $2,386,617 5.06%
========== ==== ========== ==== ========== ====
</TABLE>
The following table sets forth the Corporation's certificates of deposit (fixed
maturities) classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Rate
- - ---------------
Less than 3.00% $ 11,846 $ 15,876 $ 11,146
3.00% - 3.99% 66,337 577,067 273,034
4.00% - 4.99% 442,559 788,261 753,844
5.00% - 5.99% 865,932 708,786 440,711
6.00% - 6.99% 906,923 195,676 155,992
7.00% - 7.99% 276,934 79,846 96,893
8.00% - 8.99% 32,415 35,830 22,589
9.00% and over 6,321 11,255 19,683
---------- ---------- ----------
Certificates of deposit $2,609,267 $2,412,597 $1,773,892
========== ========== ==========
</TABLE>
The following table presents, the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity as of the dates
indicated.
<TABLE>
<CAPTION>
Maturity Period June 30,
- - --------------- -------------------------
1995 1994 1993
---- ----- ----
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 62,771 $ 34,887 $ 35,921
Over three through six months 36,742 23,070 27,662
Over six through twelve months 35,079 44,339 39,244
Over twelve months 63,027 64,391 33,465
-------- -------- --------
Total $197,619 $166,687 $136,292
======== ======== ========
</TABLE>
For further information regarding the Corporation's deposits, see Note 12 to the
Notes to Consolidated Financial Statements in the Annual Report.
33
<PAGE>
Borrowings. The Corporation has also relied upon other borrowings, primarily
- - -----------
advances from the FHLB of Topeka, as additional sources of funds. Advances from
the FHLB of Topeka are typically secured by the Corporation's stock in the FHLB,
a portion of first mortgage real estate loans and mortgage-backed securities.
The maximum amount of FHLB advances which the FHLB will advance for purposes
other than meeting deposit withdrawals fluctuates from time to time in
accordance with federal regulatory policies. The Corporation is required to
maintain an investment in FHLB stock in an amount equal to the greater of 1.0%
of the aggregate unpaid loan principal of the Corporation's loans secured by
home mortgage loans, home purchase contracts and similar obligations, or 5.0% of
advances from the FHLB to the Corporation. The Corporation is also required to
pledge such stock as collateral for FHLB advances. In addition to this
collateral requirement, the Corporation is required to pledge additional
collateral which may be unencumbered whole residential first mortgages with an
aggregate unpaid principal amount equal to 158.0% of the Corporation's total
outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of
the market value of U.S. government or U.S. government agency guaranteed
securities, including mortgage-backed securities, as collateral for the
outstanding FHLB advances. Pursuant to this requirement, as of June 30, 1995,
the Corporation had pledged a portion of its real estate loans and its FHLB
stock of $97.1 million.
At June 30, 1995, the Corporation had advances totaling approximately $1.7
billion from the FHLB of Topeka at interest rates ranging from 4.61% to 10.75%
and at a weighted average rate of 5.87%. At June 30, 1994, such advances from
the FHLB totaled $1.5 billion at interest rates ranging from 4.27% to 12.00% and
at a weighted average rate of 5.51%.
The Corporation also borrows funds under repurchase agreements. However, as
shown in the table below, the Corporation has reduced its reliance on these
borrowings. Under a repurchase agreement, the Corporation sells securities
(generally, government agency securities and GNMA, FNMA, FHLMC and AA rated
privately issued mortgage-backed securities) and agrees to buy such securities
back at a specified price at a subsequent date. Repurchase agreements are
generally made for terms ranging from one day to four years, are subject to
renewal, and are deemed to be borrowings collateralized by the securities sold.
At June 30, 1995, the Corporation's repurchase agreements aggregated $195.8
million at an average rate of 7.04%. The Corporation's repurchase agreements
were collateralized by $234.2 million of mortgage-backed securities at June 30,
1995. At June 30, 1995, these repurchase agreements had maturities ranging from
January 1996 to June 1997 with a weighted average maturity of 491 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
1995 1994 1993
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Balance at end of year $195,755 $157,432 $154,862
Maximum month-end balance $195,755 $157,432 $419,076
Average balance $101,924 $155,897 $255,101
Weighted average interest rate
during the year 7.61% 6.15% 6.90%
Weighted average interest rate
at end of year 7.04% 6.08% 6.05%
</TABLE>
For further information regarding the Corporation's FHLB advances and securities
sold under agreements to repurchase, see Notes 13 and 14 to the Notes to the
Consolidated Financial Statements in the Annual Report.
34
<PAGE>
Customer Services. The Corporation aggressively markets its various checking
- - ------------------
account products and telephone bill paying system. It is the Corporation's
objective to utilize these services and its technology, rather than paying above
market interest rates on deposits, to attract and service customers to which it
can cross sell its numerous services on a cost-effective, profitable basis.
Accordingly, management continues to update data processing equipment in the
Corporation's branch operations in order to provide a cost-effective and
efficient delivery of services to its customers. At June 30, 1995, there were
86 strategically located proprietary automatic teller machines ("ATMs") in use.
These ATMs are also linked with a series of regional, national and international
ATM services, including CASHBOX, CIRRUS, NETS, and MINIBANK. As a result of the
Corporation's participation in these ATM services, electronic banking machines
are currently available worldwide for the convenience of the Corporation's
customers.
Subsidiaries
- - ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1995, the Bank was authorized to invest up to
$178.3 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1995, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $45.9
million and unsecured loans including conforming loans to those entities totaled
$1,000.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has one subsidiary, Commercial Federal Service Corporation,
engaged in activities not permissible for national banks. Investments in such
subsidiary must be deducted from capital at 40.0% of such investment until July
1, 1996, when the deduction will be 100.0%. See "Regulation -- Regulatory
Capital Requirements." At June 30, 1995, $1.7 million of the $4.3 million total
investment in such subsidiary was deducted from capital for this purpose.
Capital deductions are not required for investment in subsidiaries engaged in
non-national bank activities as agent for customers rather than as principal,
subsidiaries engaged solely in mortgage banking activities, and certain other
exempted subsidiaries. The capital deductions under applicable regulations have
the effect of reducing the Bank's capital during the phase-out period.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
The Bank has fourteen wholly-owned subsidiaries, three of which own and operate
certain real estate properties of the Bank. As such, these subsidiaries are
considered engaged in permissible activities and do not require deductions from
capital as discussed above. During fiscal year 1994, CFMC was approved by the
OTS to be classified as an "operating subsidiary." As such, CFMC ceased to be
subject to the regulatory investment in service corporation limitations as of
June 30, 1994. The remaining wholly-owned subsidiaries, exclusive of CFMC, are
classified as service corporations. The principal active subsidiaries of the
Bank are described below.
Commercial Federal Mortgage Corporation ("CFMC"). CFMC is a full-service
- - -------------------------------------------------
mortgage banking company. The Bank's real estate lending, secondary marketing,
mortgage servicing and foreclosure activities are conducted primarily through
CFMC. At June 30, 1995, CFMC serviced 55,800 loans for the Bank and 85,100
loans for others. See "Loan Originations -- Loan Servicing."
35
<PAGE>
Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers to customers
- - ------------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 26 of the Bank's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities.
Commercial Federal Insurance Corporation ("CIC"). CIC was formed in November
- - -------------------------------------------------
1983 and serves as a full-service independent insurance agency, offering a full
line of homeowners, commercial, health, auto and life insurance products.
Additionally, a wholly-owned subsidiary of CIC provides reinsurance on credit
life and disability policies written by an unaffiliated carrier for consumer
loan borrowers of the Bank.
Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to
- - ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC must be excluded from regulatory capital in
increasing amounts over a phase-out period ending on July 1, 1996. See
"Regulation -- Regulatory Capital Requirements."
EMPLOYEES
- - ---------
At June 30, 1995, the Corporation and its wholly-owned subsidiaries had 1,144
full-time equivalent employees. The Corporation provides its employees with a
comprehensive benefit program, including basic and major medical insurance,
dental plan, life insurance, accident insurance, short and long-term disability
coverage and sick leave. The Corporation also offers loans with below market
rates to its employees who qualify based on term of employment (except that no
preferential rates or terms are offered to executive officers) and offers a
deferred compensation plan (401(k) plan) for employees. The Corporation
considers its employee relations to be good.
EXECUTIVE OFFICERS
- - ------------------
For certain information concerning the Registrant's directors and executive
officers, refer to Part III -- Item 10. "Directors and Executive Officers of the
Registrant" of this report.
COMPETITION
- - -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate loans. Its most direct competition for savings
deposits has come historically from thrift institutions and from commercial
banks located in its primary market areas. The Corporation's primary market
area for savings deposits includes Nebraska, Colorado, Kansas, Oklahoma and
western Iowa and, for loan originations, includes Nebraska, Colorado, Kansas and
Oklahoma. Management believes that the Corporation's extensive branch network
has enabled the Corporation to compete effectively for deposits and loans
against commercial banks and other financial institutions. The Corporation has
been able to attract savings deposits primarily by offering depositors a wide
variety of deposit accounts, competitive rates of interest, convenient branch
locations and a full range of financial services.
The Corporation's competition for real estate loans comes principally from other
thrift institutions, mortgage banking companies, commercial banks, insurance
companies and other institutional lenders. The Corporation competes for loans
principally through the efficiency and quality of the services it provides to
borrowers and the interest rates and loan fees it charges.
36
<PAGE>
REGULATION
----------
GENERAL
- - -------
As a federal savings bank, the Bank is subject to extensive regulation by the
OTS. The lending and deposit taking activities and other investments of the Bank
must comply with various regulatory requirements. The OTS periodically examines
the Bank for compliance with various regulatory requirements and the FDIC also
has the authority to conduct special examinations of the Bank because its
deposits are insured by the SAIF. The Bank must file reports with the OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Corporation is subject
to the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS
- - -------------------------------
At June 30, 1995, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1995:
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital $303,479 5.12%
Tangible Capital Requirement 88,849 1.50
-------- -----
Excess $214,630 3.62%
======== =====
Core Capital (Tier 1 Capital) $324,909 5.47%
Core Capital Requirement (2) 178,341 3.00
-------- -----
Excess $146,568 2.47%
======== =====
Risk-Based (Total Capital) $355,733 13.45%
Risk-Based Capital Requirement (3) 211,525 8.00
-------- -----
Excess $144,208 5.45%
======== =====
</TABLE>
(1) Based on adjusted total assets for purposes of the tangible and core
capital requirements, and risk-weighted assets for purpose of the risk-
based capital requirement.
(2) The core capital requirement applicable to the Bank may increase if the OTS
amends its capital regulations, as it has proposed, in response to the more
stringent leverage ratio adopted by the Office of the Comptroller of the
Currency for national banks.
(3) Represents the total capital required at June 30, 1995. As discussed in
further detail in this section, the OTS has adopted an interest rate risk
component amendment to the risk-based capital requirement. Management of
the Bank believes that such an amendment, based on the Bank's interest-rate
risk profile and the level of interest rates at June 30, 1995, as well as
the Bank's level of risk-based capital, will not have a material adverse
effect on the Bank's compliance with its risk-based capital requirements.
37
<PAGE>
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "-- Prompt Corrective Regulatory
Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights and purchased credit card relationships.
Purchased mortgage servicing rights and purchased credit card relationships may
be deducted from tangible capital, if not meeting certain criteria, at the lower
of 90.0% of fair market value, 90.0% of original cost, or 100.0% of current
amortized book value.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets and, through December 31, 1994, also included a
portion of a savings association's qualifying supervisory goodwill. Effective
December 31, 1994, no newly added intangible assets other than those includable
in tangible capital are permitted to be included in core capital. The Bank's
core capital of $324.9 million at June 30, 1995, includes no qualifying
supervisory goodwill and $21.4 million of restricted amounts of certain
intangible assets (core value of deposits).
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempted from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not
applied to federal savings associations existing as of August 9, 1989, that were
either chartered as a state savings bank or state cooperative bank prior to
October 1, 1982, or that acquired their principal assets from such an
association. The required deduction for this purpose is 60.0% as of July 1,
1993, and 100.0% as of July 1, 1994. However, this phase-in provision was
amended to allow institutions to request, at their option, a delayed phase-in
schedule for subsidiary investments until July 1, 1996. The Bank requested
regulatory approval of such a delayed phase-in and on December 18, 1992, such
request was approved by the OTS. Pursuant to such approval, the Bank's
deduction was 40.0% until July 1, 1995, and will remain at 60.0% until July 1,
1996, when the deduction will be 100.0%.
Accordingly, at June 30, 1995, the Bank had $4.3 million of debt and equity
invested in service corporations engaged in activities not permissible for
national banks, 40.0% ($1.7 million) of which was deducted from capital in
accordance with the OTS approved delayed phase-in schedule previously discussed.
See "Business -- Subsidiaries."
Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
38
<PAGE>
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loss allowances. Allowances for
loan and lease losses includable in capital are includable only up to 1.25% of
risk-weighted assets. In addition, equity investments and those portions of
nonresidential construction and land loans, and loans with loan-to-value ratios
in excess of 80.0% must be deducted from total capital under the same phase-out
period as is applied to investments in subsidiaries engaged in activities not
permissible for national banks. The Bank's investments subject to this
deduction totaled $729,000 at June 30, 1995, which was deducted from capital in
accordance with applicable regulations.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each on-balance-sheet asset and the credit-equivalent
amount of each off-balance-sheet item after being multiplied by an assigned risk
weight. Under the OTS risk-weighting system, cash and securities backed by the
full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80.0% and average annual occupancy rates over 80.0%, and certain
qualifying loans for the construction of one- to four-family residences pre-sold
to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non-
qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100.0%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100.0% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
Effective July 1, 1994, the OTS amended its risk-based capital standards to
include an interest rate risk component, which requires savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk is measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a "greater than normal"
interest rate risk is required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets. The interest rate risk
component is to be computed quarterly and the resulting capital requirement has
an effective time lag of two quarters (e.g., the July 1, 1995, calculation would
use December 31, 1994, data). Based on the Bank's interest rate risk profile
and the level of interest rates at June 30, 1995, as well as the Bank's level of
risk-based capital at June 30, 1995, management believes that the Bank does not
have a greater than normal level of interest rate risk as measured under the OTS
rule and will not be required to increase its capital as a result of the rule.
In April 1991, the OTS proposed to amend its core capital requirement to
establish a minimum 3.0% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
institutions, the minimum core capital ratio would be 3.0% plus at least an
additional 1.0% to 2.0%, determined on a case-by-case basis by the OTS after
assessing both the quality of risk management systems and the level of overall
risk in each individual savings institution. The Bank does not anticipate that
it will be materially affected by this regulation if adopted in its current
form. In addition to the proposed rule, the OTS has adopted a prompt corrective
action rule under which a savings institution that has a core capital ratio of
less than 4.0% would be deemed to be "undercapitalized" and may be subject to
certain sanctions. See "Prompt Corrective Regulatory Action."
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In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of
the OTS may treat the failure of any savings institution to maintain capital at
or above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
- - -----------------------------
The Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Topeka, the Bank is required to acquire and hold shares of capital stock
in the FHLB of Topeka in an amount at least equal to the greater of 1.0% of the
Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
5.0% of its then outstanding advances (borrowings) from the FHLB of Topeka. The
Bank was in compliance with this requirement at June 30, 1995, with an
investment in FHLB of Topeka stock totaling $97.1 million compared to a required
amount of $83.0 million. During fiscal years 1995, 1994 and 1993, the Bank
received income from its investment in FHLB stock totaling $5.4 million, $6.2
million and $7.1 million, respectively.
The FHLB of Topeka serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Topeka. Under applicable
law, long-term advances may only be made for the purpose of providing funds for
residential housing lending. At June 30, 1995, the Bank had advances of $1.7
billion from the FHLB of Topeka.
LIQUIDITY REQUIREMENTS
- - ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquidity assets (defined as cash, deposits maintained pursuant
Federal Reserve Board requirements, time and savings deposits in certain
institutions, U.S. Treasury and other government agency obligations, obligations
of states and political subdivisions thereof, shares in mutual funds with
certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. This liquidity requirement, which is currently
5.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0% depending upon economic conditions and the savings flows of
savings associations. Regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet liquidity requirements. The average liquidity and
short-term liquidity ratios of the Bank as of June 30, 1995, were 8.52% and
1.69%, respectively.
QUALIFIED THRIFT LENDER TEST
- - ----------------------------
The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a
qualified thrift lender ("QTL") test. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
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To meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65.0% of "portfolio assets." Under OTS regulations, portfolio assets
are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20.0% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50.0% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20.0% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200.0% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the savings institution must maintain a weekly average
percentage of Qualified Thrift Investments to portfolio assets equal to 65.0% on
a monthly average basis in nine out of 12 months. A savings institution that
fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.
At June 30, 1995 approximately 95.8% the Bank's portfolio assets were invested
in Qualified Thrift Investments, which was in excess of the percentage required
to qualify the Bank under the QTL test.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- - -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75.0% of its net income for the previous four quarters; or (b) up to 100.0% of
its net income to date during the calendar year plus an amount that would reduce
by one-half the amount by which its ratio of total capital to assets exceeded
its fully phased-in risk-based capital ratio requirement at the beginning of the
calendar year. A savings institution with total capital in excess of current
minimum capital ratio requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Association") is permitted, after notice, to make
capital distributions without OTS approval of up to 75.0% of its net income for
the previous four quarters, less dividends already paid for such period. A
savings institution that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital distributions
without the prior approval of the OTS. A Tier 1 Association that has been
notified by the OTS that its is in need of more than normal supervision will be
treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Despite the above authority, the OTS may prohibit any savings
institution from making a capital distribution that would otherwise be permitted
by the regulation, if the OTS were to determine that the distribution
constituted an unsafe or unsound practice. Furthermore, under the OTS's prompt
corrective action regulations, which took effect on December 19, 1992, the Bank
would be prohibited from making any capital distributions if, after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. See "-- Prompt Corrective Regulatory Action."
ENFORCEMENT
- - -----------
Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on a
savings institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1.0 million per day.
Criminal penalties for most financial institution crimes include fines of up to
$1.0 million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to take enforcement action against an institution that
fails to comply with its regulatory requirements, particularly with respect to
the capital requirements. Possible enforcement actions range from the
imposition of a capital plan and capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act, the
FDIC has the authority to recommend to the Director of OTS enforcement action to
be taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under certain
circumstances.
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DEPOSIT INSURANCE
- - -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment rate is not less than 0.23% for the
period from January 1, 1991, through December 31, 1993. The minimum rate may be
decreased to not less than 0.18% for the period January 1, 1994, through
December 31, 1997. After December 31, 1997, the SAIF assessment rate will be a
rate established by the FDIC but not less than 0.15%.
The FDIC has adopted a risk-based deposit insurance assessment system under
which the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period. Well capitalized institutions are
institutions satisfying the following capital ratio standards: (i) total risk-
based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of
6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately
capitalized institutions are institutions that do not meet the standards for
well capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rate ranges from 0.23% of deposits for well capitalized institutions
in Subgroup A to 0.31% of deposits for undercapitalized institutions in Subgroup
C. The Bank's deposit insurance premium has been .23% of deposits since July 1,
1994, compared to the .26% premium rate it was assessed all of fiscal year 1994.
On August 8, 1995, the FDIC approved a significant reduction in the deposit
insurance premiums charged to those financial institutions that are members of
the Bank Insurance Fund ("BIF"). As a result of such action, most BIF-insured
financial institutions will pay an annual deposit insurance assessment of 0.04%
of insured deposits. No similar reduction was approved for institutions, such
as the Bank, that are members of the SAIF. This amendment creates a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
could place SAIF-insured savings institutions at a significant competitive
disadvantage to BIF-insured institutions.
Among the proposals being considered by the FDIC and Congress to eliminate this
premium disparity is a similar reduction in premium rates charged to SAIF-
insured institutions. Such a reduction would be accompanied by a one-time
assessment of SAIF-insured institutions up to .90% of insured deposits to
increase the SAIF reserve level to 1.25% of SAIF-insured deposits, which is the
same level attained by the BIF prior to the reduction of BIF premium rates.
Under this proposal, the BIF and SAIF would be merged into one fund as soon as
practicable after they both reach their designated reserve ratios, but no later
than January 1, 1998. It is unknown whether this particular proposal or any
other proposal will be implemented or that premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action. If
a special assessment as described above were to be required, it would result, on
a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of
approximately $20.4 million (assuming such charge would be tax deductible).
Such assessment would have the effect of reducing the Bank's tangible capital to
$283.1 million, or 4.80% of adjusted total assets, core capital to $304.5
million, or 5.14% of adjusted total assets, and risk-based capital to $335.3
million, or 12.68% of risk-weighted assets. If such a special assessment were
required and the SAIF as a result was fully recapitalized, it could have the
effect of reducing the Bank's annual deposit insurance premiums to the SAIF,
thereby increasing net income in future periods.
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The FDIC is authorized to raise insurance premiums for SAIF-member institutions
in certain circumstances. If the FDIC determines to increase the assessment
rate for all SAIF-member institutions, institutions in all risk categories could
be affected. While an increase in premiums for the Bank could have an adverse
effect on the Bank's earnings, a decrease in premiums could have a positive
impact on the earnings of the Bank.
SAIF members are generally prohibited from converting to the status of members
of the BIF, also administered by the FDIC, or merging with or transferring
assets to a BIF member prior to the date on which the SAIF meets the required
ratio of reserves to insured deposits (1.25%). The FDIC, however, may approve
such a transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF and an entrance fee to BIF. A savings institution is not prohibited
from adopting a commercial bank or savings bank charter prior to the expiration
of the moratorium on SAIF - BIF conversions provided that the resulting bank
remains a SAIF member.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2.0% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4.0% of total assets for all but the most highly rated state
non-member banks.
TRANSACTIONS WITH RELATED PARTIES
- - ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections 23A and 23B (i)
limit the extent to which the savings institution or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10.0% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution.
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Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10.0% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
CLASSIFICATION OF ASSETS
- - ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets,
Doubtful Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. That portion of an asset classified loss is
considered uncollectible and of such little value that its continuance as an
asset, without establishment of a specific valuation allowance or charge-off, is
not warranted. This classification does not necessarily mean that an asset has
absolutely no recovery or salvage value; but rather, it is not practical or
desirable to defer writing off a basically worthless asset (or portion thereof)
even though partial recovery may be effected in the future.
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With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for off-
balance sheet items, such as letters of credit, when loss becomes probable and
estimable.
In August 1993, the OTS issued revised guidance for the classification of assets
and a new policy on the classification of collateral-dependent loans (where
proceeds from repayment can be expected to come only from the operation and sale
of the collateral). With limited exceptions, effective September 30, 1993, for
troubled collateral-dependent loans where it is probable that the lender will be
unable to collect all amounts due, an institution must classify as "loss" any
excess of the recorded investment in the loan over its "value", and classify the
remainder as "substandard". The "value" of a loan is either all present value
of the expected future cash flows, the loan's observable market price or the
fair value of the collateral. The Bank does not anticipate any adverse impact
from the implementation of the revised guidance for classification of assets or
collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all credit
losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit losses
forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
Additionally, an adequate level of ALLL should reflect an additional
margin for imprecision inherent in most estimates of expected credit
losses.
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of the following amounts:
(a) 50 percent of the portfolio that is classified doubtful,
(b) 15 percent of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable, supported by the
weight of reliable evidence and that all relevant factors have been
appropriately considered. The Bank has reviewed the Policy Statement and does
not believe that it will adversely effect the level of the Bank's allowances for
loan losses.
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PROMPT CORRECTIVE REGULATORY ACTION
- - -----------------------------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must
include a guarantee by the institution's holding company that the institution
will comply with the plan until it has been adequately capitalized on average
for four consecutive quarters, under which the holding company would be liable
up to the lesser of 5.0% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order
or written directive to meet or maintain a specific capital level is deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 MACRO rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 MACRO
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of core capital to total
assets of less than 2.0%. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any MACRO rating
category. The Bank is classified as "well capitalized" under the OTS
regulations.
46
<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS
- - ----------------------------------
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
- - --------------------------------
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect on August 9,
1995. The guidelines require savings associations to maintain internal controls
and information systems and internal audit systems that are appropriate for the
size, nature and scope of the association's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings associations should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings association is not in compliance with the safety and soundness
guidelines, it may require the association to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
association to regulatory sanctions. Management believes that the Bank already
meets substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
FEDERAL RESERVE SYSTEM
- - ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$51.9 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1995, the Bank met its reserve requirements.
LIMITATIONS ON LOANS TO ONE BORROWER
- - ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000 (ii) the savings
association is in compliance with its fully phased-in capital standards, (iii)
the loans comply with applicable loan-to-value requirements, and (iv) the
aggregate amount of loans made under this authority does not exceed 150.0% of
unimpaired capital and surplus. At June 30, 1995, the Bank's loan to one
borrower limitation was $89.5 million and all loans to one borrower were within
such limitation.
47
<PAGE>
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- - -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $1.4 billion. At June 30,
1995 the Bank's nonresidential real property loans totaled $180.7 million.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
- - -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA.
As such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- - -----------------------
The Board of Directors of the Corporation presently intends to operate the
Corporation as a unitary savings and loan holding company. There are generally
no restrictions on the activities of a unitary savings and loan holding company.
However, if the Director of the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Director of the OTS may
impose such restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates; and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See "Qualified Thrift Lender Test."
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
48
<PAGE>
RESTRICTIONS ON ACQUISITIONS
- - ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an under-
capitalized savings institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
49
<PAGE>
TAXATION
- - --------
The Corporation and its subsidiaries, including the Bank, currently file a
consolidated federal income tax return based on a fiscal year ending June 30.
Consolidated taxable income is determined on an accrual basis. Consolidated
returns have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the taxable
year in which the distributions occur. However, under certain circumstances,
dividends and other distributions by a thrift institution can result in the
recapture into taxable income of previously deducted provisions to the bad debt
reserve.
Savings institutions such as the Bank are subject to the provisions of the
Internal Revenue Code (the "Code") in the same general manner as other
corporations. However, institutions such as the Bank which meet certain
definitional tests and other conditions prescribed by the Code may benefit from
certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. For purposes of the bad debt
reserve deduction, loans are separated into "qualifying real property loans,"
which generally are loans secured by interests in improved real property, and
"nonqualifying real property loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). The Bank
computed its bad debt deduction utilizing the percentage of taxable income
method in 1995 and the experience method in fiscal years 1988 to 1994.
Under the percentage of taxable income method, the bad debt reserve deduction
for qualifying real property loans is computed as a percentage of taxable
income, with certain adjustments. The allowable deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is currently
8.0%. The percentage bad debt deduction may be claimed as long as not less than
60.0% of the total dollar amount of the assets of an institution falls within
certain designated categories. In the event the percentage of assets in the
designated categories falls below 60.0%, the institution could be required to
recapture, generally over a period of up to four years, its existing bad debt
reserve, although net operating loss carryforwards available to the thrift could
be used to offset such recapture. As of June 30, 1995, the Bank's assets
falling within such categories exceeded 60.0%. It is anticipated that the Bank
will continue to meet the 60.0% of assets test in the foreseeable future.
The bad debt deduction under the percentage of taxable income method is limited
to the amount which (i) does not exceed the amount necessary to increase the
balance at the close of the taxable year of the reserves for losses on
qualifying real property loans to 6.0% of such loans outstanding at such time,
and (ii) the amount when added to the addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12.0% of total
deposits or withdrawable accounts of depositors at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. It is not
expected that either limitation will restrict the Bank from making the maximum
addition to its bad debt reserve. The percentage bad debt deduction is reduced
by the deduction for losses on nonqualifying loans.
To the extent earnings appropriated to a thrift institution's bad debt reserves
for qualifying real property loans and deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience
method ("Excess"), and to the extent of the institution's supplemental reserves
for losses on loans, such Excess and the supplemental reserve may not, without
adverse tax consequences, be utilized for payment of dividends or certain other
distributions to a shareholder (including distributions in redemption,
dissolution, or liquidation) or for any other purpose (except to absorb bad debt
losses). The Code provides different sequences of accounts to which a
distribution is attributed, depending upon whether the distribution is or is not
a redemption, dissolution or liquidation distribution. To the extent a
distribution by the Bank is deemed paid out of the Excess or the supplemental
reserves under these rules, the Excess or supplemental reserve would be reduced
and the Bank's gross income for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the Excess
or supplemental reserve. As of June 30, 1995, the Bank had $5.3 million of
Excess and supplemental reserves. However, at June 30, 1995, the Bank has an
estimated $80.6 million in its earnings and profit account, which account would
be utilized prior to reaching the Excess or the supplemental reserves in the
case of a distribution that is not part of a redemption, dissolution or
liquidation.
50
<PAGE>
The Corporation's federal income tax returns were last audited in 1985.
Management is unaware of any significant income tax deficiencies outstanding.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation and will be assessed at a rate of $.47 per $1,000 of
average deposits. The franchise tax is limited to 3.81% of the Bank's income
before tax (including subsidiaries) as reported on the regular books and
records. At June 30, 1995, the Bank paid its tax based on the average level of
deposits.
Savings institutions are taxed like other corporations in certain other states.
Colorado imposes an income tax of 5.0% of net income apportioned to Colorado.
Oklahoma imposes a 6.0% privilege tax, essentially equivalent to an income tax
on income apportioned to Oklahoma. Kansas also has a privilege tax on income
from Kansas sources. A corporation's "net income" for Colorado and Oklahoma
income tax purposes is equal to the corporation's federal taxable income
increased and decreased by certain items including the federal net operating
loss deduction and the interest income on obligations issued by the U.S.
Government.
For further information regarding federal income taxes payable by the
Corporation, see Note 17 of the Notes to the Consolidated Financial Statements.
Item 2. Properties
- - ------------------
At June 30, 1995, the Bank conducted business through 30 offices in Nebraska, 20
offices in Colorado, five offices in Kansas and sixteen offices in Oklahoma.
One additional branch located in Oklahoma was subsequently added on July 17,
1995. See Item 1. Business - "Recent Developments--Acquisitions Subsequent to
Fiscal Year End" for additional branches to be added pursuant to pending and
proposed acquisitions.
At June 30, 1995, the Bank owned the buildings for 54 of its branch offices and
leased the remaining 17 offices under leases expiring (not assuming exercise of
renewal options) between November 1995 and August 2031. The Bank has 86
"Cashbox" ATMs located throughout Nebraska, Colorado, Kansas and Oklahoma. At
June 30, 1995, the total net book value of land, office properties and equipment
owned by the Corporation was $62.7 million. Management believes that the Bank's
premises are suitable for its present and anticipated needs.
Item 3. Legal Proceedings
- - --------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position.
See Item 1. Business -- "Recent Developments -- Supervisory Goodwill Lawsuit"
for other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1995.
51
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-------------------
The information contained under "Regulation -- Restrictions on Capital
Distributions" in Part I of this Report and the sections "Stock Prices" and
"Dividends" appearing on page 35 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- - --------------------------------
The presentation of selected financial data for the years ended June 30, 1991
through 1995 is included in the "Selected Consolidated Financial Data" section
appearing on pages 14 and 15 of the Annual Report and is incorporated herein by
reference.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-----------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1995 compared
to fiscal year 1994 and fiscal year 1994 compared to fiscal year 1993 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 16 through 35 of the Annual
Report and are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- - ------- -------------------------------------------
The "Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report" set forth on pages 36 through 76
of the Annual Report are incorporated herein by reference.
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None.
52
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- - -------- --------------------------------------------------
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1995 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference. For information regarding certain beneficial ownership
reports filed by management and 10.0% or more owners of the Corporation's common
stock, reference is made to "Beneficial Ownership Reports" in the Proxy
Statement, which is incorporated herein by reference.
53
<PAGE>
The executive officers of the Corporation and the Bank are as follows:
<TABLE>
<CAPTION>
Age at
Name June 30, 1995 Current Position(s)
------------- -------------------
<S> <C> <C>
William A. Fitzgerald 57 Chairman of the Board and Chief Executive
Officer of the Corporation and the Bank
James A. Laphen 47 President, Chief Operating Officer and
Chief Financial Officer of the Corporation
and the Bank
Gary L. Matter 50 Senior Vice President, Controller and
Secretary of the Corporation and of the Bank
Joy J. Narzisi 39 Treasurer of the Corporation and Senior
Vice President, Treasurer and Assistant
Secretary of the Bank
Margaret E. Ash 42 Senior Vice President and Assistant
Secretary of the Bank
Jon W. Stephenson 47 Senior Vice President of the Bank
Terry A. Taggart 40 Senior Vice President of the Bank
Gary D. White 50 Senior Vice President of the Bank
Ronald A. Aalseth 39 First Vice President of the Bank
Michael C. Bruggeman 47 First Vice President of the Bank
David E. Gunter, Jr. 57 First Vice President of the Bank
John L. Laughlin 54 First Vice President of the Bank
Roger L. Lewis 45 First Vice President and Assistant Secretary of the Bank
Kevin C. Parks 40 First Vice President of the Bank
Thomas N. Perkins 43 First Vice President of the Bank
Dennis R. Zimmerman 44 First Vice President of the Bank
</TABLE>
54
<PAGE>
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the
- - ---------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Nebraska League
of Savings Institutions and the board of America's Community Bankers. Mr.
Fitzgerald joined Commercial Federal's Board of Directors in 1973.
James A. Laphen is President, Chief Operating Officer and Chief Financial
- - ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania, and prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
Gary L. Matter, a Senior Vice President, Controller, and Secretary of the
- - --------------
Corporation and the Bank, joined the Bank in December 1990 as First Vice
President and Controller. Mr. Matter, a certified public accountant, was the
Treasurer of Anchor Glass Container Corporation from June 1983 to November 1990.
Joy J. Narzisi, Treasurer of the Corporation and Senior Vice President,
- - --------------
Assistant Secretary and Treasurer of the Bank, joined the Bank in September
1980. Ms. Narzisi was named Senior Vice President and Assistant Secretary of the
Bank in July 1995 after first being appointed Treasurer of the Corporation in
November 1994, Treasurer of the Bank in 1991 and First Vice President in June of
1989. Prior to 1989, Ms. Narzisi was Investment Portfolio Manager since July
1987. Since joining the Bank, she has held other various Treasury related
management positions.
Margaret E. Ash, was named Senior Vice President and Assistant Secretary of the
- - ---------------
Bank in July 1995. Ms. Ash joined Commercial Federal in 1973 and has held
numerous management positions within the Bank for 19 years. Most recently she
was First Vice President of Retail Operations since July 1993, First Vice
President of the Colorado Retail Division since 1989 and Vice President/Regional
Manager of Colorado Retail prior to that time.
Jon W. Stephenson, a Senior Vice President of the Bank since July 1995, joined
- - -----------------
the Bank as First Vice President in July 1994, with responsibility for Oklahoma
and Kansas retail operations. Mr. Stephenson, a certified public accountant,
was President and Chief Executive Officer of Home Federal Savings and Loan
Association of Ada, Oklahoma prior to joining Commercial Federal.
Terry A. Taggart, was named Senior Vice President of Corporate Retail Banking in
- - ----------------
August 1993. Mr. Taggart has held various positions of responsibility within
the Bank, including First Vice President/Retail Operations in May 1989 and Vice
President/Regional Sales Manager in March 1988. Mr. Taggart joined the Bank in
January 1986 as an advanced manager trainee.
Gary D. White, was named Senior Vice President of the Bank and State Director in
- - -------------
July 1995. Previous positions held include Director of Residential Mortgage
Lending in May 1994 and First Vice President and Director of Human Resources in
March 1984. Mr. White joined the Bank in 1976 as an Investment Account
Executive and has held the positions of Branch Manager and Employment Manager.
Prior to 1976, Mr. White was Vice President of College Relations at the College
of Saint Mary.
Ronald A. Aalseth, a First Vice President of the Bank since November 1994,
- - -----------------
joined the Bank in December 1984 and serves as President of Commercial Federal
Insurance Corporation; ComFed Insurance Services Company, Limited; and
Commercial Federal Investment Services, Inc. He has served in this capacity
since June 1987.
55
<PAGE>
Michael C. Bruggeman is First Vice President and Director of Human Resources.
- - --------------------
He joined the Bank in August 1994. Prior to 1994, Mr. Bruggeman was Vice
President of Human Resources and Public Affairs for Ransomes America Corporation
and Cushman Inc., where he also served as a Board of Director member and
Corporate Secretary.
David E. Gunter, Jr., has been with the Bank since 1982. Mr. Gunter became
- - --------------------
First Vice President of the Bank in December 1992 with responsibility for
commercial real estate lending and income recovery. Mr. Gunter is also the
President of Commercial Federal Service Corporation.
John L. Laughlin, has been First Vice President of Consumer Lending since March
- - ----------------
1984. Mr. Laughlin joined the Bank in August 1980 as Director of Consumer Loans
and has 35 years of experience in the consumer loan industry. Prior to 1980, he
was Vice President of Omaha National Bank.
Roger L. Lewis, a First Vice President and Assistant Secretary of the Bank,
- - --------------
joined the Bank in 1986 as Vice President and Director of Public Relations until
he became First Vice President and Director of Marketing in March 1988. Prior
to joining Commercial Federal, Mr. Lewis was Vice President and Communications
Director for Omaha National Bank.
Kevin C. Parks was named First Vice President of the Bank responsible for
- - --------------
Internal Audit, Legal Oversight/Compliance and Security in November 1993. Mr.
Parks, a certified public accountant, certified internal auditor, and chartered
bank auditor, was previously self employed as a practicing accountant since
1989. Prior to 1989, Mr. Parks was Manager of Internal Audit for Security
Pacific Bank - Arizona since 1985.
Thomas N. Perkins is First Vice President and Acquisitions Manager. Mr. Perkins
- - -----------------
joined the Bank in 1976 and has held various management positions in the Bank's
Retail division prior to assuming the Acquisitions position in August 1993.
Dennis R. Zimmerman became First Vice President in October 1991 and Director of
- - -------------------
Information Systems as of July 1993. Mr. Zimmerman joined the Bank in 1987 and
has held the positions of Information Systems Audit Manager, Internal Audit
Manager and Director of Internal Audit/Legal Oversight. Prior to 1987, Mr.
Zimmerman was the Director of Financial Systems for a subsidiary of Enron
Corporation.
56
<PAGE>
Item 11. Executive Compensation
- - --------------------------------
The information under the section captioned "Proposal I -- Election of Directors
- - -- Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- - ------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders " and "Proposal I --
Election of Directors" in the Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- - --------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports on Form 8-K
- - --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements (incorporated herein by reference from
the indicated section of the Annual Report):
Consolidated Statement of Financial Condition at June 30, 1995 and 1994.
Consolidated Statement of Stockholders' Equity for the Years Ended June
30, 1995, 1994 and 1993.
Consolidated Statement of Operations for the Years Ended June 30, 1995,
1994 and 1993.
Consolidated Statement of Cash Flows for the Years Ended June 30, 1995,
1994 and 1993.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is not
applicable, not required or is included in the financial statements or
related notes thereto.
(3) Exhibits:
2.1 Reorganization and Merger Agreement by and between Commercial
Federal Corporation and Commercial Federal Bank, a Federal Savings
Bank and Railroad Financial Corporation and Railroad Savings Bank,
fsb, dated April 18, 1995 (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
2.2 Reorganization and Merger Agreement by and among Commercial Federal
Corporation and Commercial Federal Bank, a Federal Savings Bank and
Conservative Savings Corporation and Conservative Savings Bank,
FSB, dated August 15, 1995 (incorporated by reference to the
Registrant's Form 8-K Current Report Dated August 16, 1995)
2.3 Stock Option Agreement dated August 16, 1995, between Commercial
Federal Corporation and Conservative Savings Corporation
(incorporated by reference to the Registrant's Form 8-K Current
Report Dated August 16, 1995)
3.1 Articles of Incorporation of Registrant (incorporated by reference
to the Registrant's Form S-4 Registration Statement No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Form S-4 Registration Statement No.
33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated by
reference to the Registrant's Form S-1 Registration Statement No.
33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company (incorporated
by reference to the Registrant's Form 8-K Current Report Dated
January 9, 1989)
58
<PAGE>
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William A.
Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated
by reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreements entered
into with Senior Vice Presidents and First Vice Presidents
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1,
1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994 - File No.
0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for
the Fiscal Year Ended June 30, 1995 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
(b) Reports on Form 8-K:
The registrant filed a Current Report on Form 8-K dated April 25, 1995
reporting the Corporation entering into, on April 18, 1995, a
Reorganization and Merger Agreement (the Agreement) by and among the
registrant, the Bank, Railroad Financial Corporation (Railroad) and
Railroad Savings Bank, F.S.B. Under the terms of the Agreement, the
Corporation will exchange a pro-rata amount of its common stock for all
of the outstanding common stock of Railroad. On September 22, 1995 the
stockholders of Railroad approved a merger with the Corporation with the
closing expected in October 1995. Railroad is headquartered in Wichita,
Kansas and operates 18 branches and 71 agency offices throughout the
state of Kansas. At June 30, 1995 Railroad had assets of $615.3
million, deposits of $421.7 million and stockholders' equity of $28.1
million.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) No financial statement schedules are filed, and as such are excluded
from the Annual Report as provided by Exchange Act Rule 14A-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1995 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 27, 1995 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
Date: September 27, 1995 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Date: September 27, 1995 By: /s/ James A. Laphen
-------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
Date: September 27, 1995 By: /s/ Gary L. Matter
------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
DIRECTORS:
Date: September 27, 1995 By: /s/ Robert F. Krohn
-------------------
Robert F. Krohn
Director
Date: September 27, 1995 By: /s/ Talton K. Anderson
----------------------
Talton K. Anderson
Director
60
<PAGE>
Date: September 27, 1995 By: /s/ Charles M. Lillis
---------------------
Charles M. Lillis
Director
Date: September 27, 1995 By: /s/ Carl G. Mammel
------------------
Carl G. Mammel
Director
Date: September 27, 1995 By: /s/ Sharon G. Marvin
--------------------
Sharon G. Marvin
Director
Date: September 27, 1995 By: /s/ Robert S. Milligan
----------------------
Robert S. Milligan
Director
Date: September 27, 1995 By: /s/ James P. O'Donnell
----------------------
James P. O'Donnell
Director
Date: September 27, 1995 By: /s/ Michael T. O'Neil
---------------------
Michael T. O'Neil
Director
61
<PAGE>
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- - ------ -------------------- --------
2.1 Reorganization and Merger Agreement by and between
Commercial Federal Corporation and Commercial Federal Bank,
a Federal Savings Bank and Railroad Financial Corporation
and Railroad Savings Bank, fsb, dated April 18, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
2.2 Reorganization and Merger Agreement by and among Commercial
Federal Corporation and Commercial Federal Bank, a Federal
Savings Bank and Conservative Savings Corporation and
Conservative Savings Bank, FSB, dated August 15, 1995
(incorporated by reference to the Registrant's Form
8-K Current Report Dated August 16, 1995)
2.3 Stock Option Agreement dated August 16, 1995, between
Commercial Federal Corporation and Conservative Savings
Corporation (incorporated by reference to the Registrant's
Form 8-K Current Report Dated August 16, 1995)
3.1 Articles of Incorporation of Registrant (incorporated by
reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K
Current Report Dated January 9, 1989)
10.1 Employment Agreement with William A. Fitzgerald dated
June 8, 1995 (incorporated by reference to the Registrant's
Form S-4 Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreements
entered into with Senior Vice Presidents and First Vice
Presidents (incorporated by reference to the Registrant's
Form S-4 Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective
July 1, 1994 (incorporated by reference to the Registrant's
Form 10-K Annual Report for the Fiscal Year Ended June 30,
1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated Effective August 1,
1992 (incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders
for the Fiscal Year Ended June 30, 1995 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule
<PAGE>
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Computation of Income per Common and Common Equivalent Shares:
- - --------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1995 1994 1993
------------------- ------------- -----------
<S> <C> <C> <C>
Income (loss) before cumulative effects of changes
in accounting principles $27,534,779 $(5,644,577) $30,778,702
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- 6,139,271 --
Postretirement benefits, net of income tax benefit -- (336,176) --
----------- ----------- -----------
Total cumulative effects of changes in
accounting principles -- 5,803,095 --
----------- ----------- -----------
Net income $27,534,779 $ 158,518 $30,778,702
=========== =========== ===========
PRIMARY:
- - --------
Weighted average common shares outstanding 12,830,975 12,689,297 11,510,136
Add shares applicable to stock options and
warrants using average market price 193,019 231,403 1,137,227
----------- ----------- -----------
Total average common and common equivalent
shares outstanding 13,023,994 12,920,700 12,647,363
=========== =========== ===========
Income (loss) before cumulative effects of changes
in accounting principles $ 2.11 $ (.44) $ 2.43
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- .48 --
Postretirement benefits, net of income tax benefit -- (.03) --
----------- ----------- -----------
Total cumulative effects of changes
in accounting principles -- .45 --
----------- ----------- -----------
Net income per common and common equivalent share $ 2.11 $ .01 $ 2.43
=========== =========== ===========
FULLY DILUTED (1):
- - ------------------
Weighted average common shares outstanding 12,830,975 12,689,297 11,510,136
Add shares applicable to stock options and
warrants using the period-end market price
if higher than average market price and
other dilutive factors 194,634 232,669 1,171,415
----------- ----------- -----------
Total average common and common equivalent
shares outstanding assuming full dilution 13,025,609 12,921,966 12,681,551
=========== =========== ===========
Income (loss) before cumulative effects of changes
in accounting principles $ 2.11 $ (.44) $ 2.43
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- .48 --
Postretirement benefits, net of income tax benefit -- (.03) --
----------- ----------- -----------
Total cumulative effects of changes
in accounting principles -- .45 --
----------- ----------- -----------
Net income per common share assuming full dilution $ 2.11 $ .01 $ 2.43
=========== =========== ===========
</TABLE>
This calculation is submitted in accordance with Regulation S-K under Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3.0%.
<PAGE>
EXHIBIT 13
Shareholder and Company Objectives Are Being Met and Exceeded
Commercial Federal began the 1995 fiscal year with the dual objectives of
further increasing our core profitability and continuing to enhance the long-
term value of our shareholders' investment in the Company. We are pleased to
report that by all measures we exceeded our goals.
As you read this annual report to shareholders, you will note that in
achieving these goals, Commercial Federal generated record income from its core
banking business. In addition, the Company has undertaken several new
initiatives that bode well for our future growth and clearly demonstrate
Commercial Federal's commitment to maximize shareholder value.
Fiscal 1995 was a very successful year for Commercial Federal. The Company
once again demonstrated that it will not be content to rest on the laurels of
past accomplishments. Your Company remains focused on the goals of further
increasing core profitability quarter-to-quarter and year-to-year and on taking
proactive steps to maximize the value of your investment in the Company's stock.
The Board of Directors and management of Commercial Federal invite you to read
this fiscal 1995 report to shareholders to learn more about the Company's
successes, its continuing momentum and our commitment to providing shareholders
with above average returns.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Financial Highlights...................................... 1
Letter to Shareholders.................................... 2
Board of Directors........................................ 10
Corporate Profile......................................... 12
Financial Information..................................... 13
Investor Information...................................... 77
Executive Officers and Senior Management.................. 78
Branch Locations.......................................... 79
</TABLE>
<PAGE>
- - --------------------------------------------------------------------------------
Financial Information
<TABLE>
<S> <C>
Selected Consolidated Financial Data....................................... 14
Management's Discussion and Analysis....................................... 16
Consolidated Statement of Financial Condition.............................. 36
Consolidated Statement of Stockholders' Equity............................. 37
Consolidated Statement of Operations....................................... 38
Consolidated Statement of Cash Flows....................................... 40
Notes to Consolidated Financial Statements................................. 42
Management's Report on Internal Controls................................... 75
Independent Auditors' Report............................................... 76
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- - -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1995 1994 1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------------------------
<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
========== ========== ========== ========== ==========
- - -----------------------------------------------------------------------------------------------------------------------------
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>
14
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data (continued)
- - -------------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1995 1994 1993 1992 1991
- - -------------------------------------------------------------------------------------------------------------------------------
<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 (4)........................ 1,331,783 1,305,434 892,361 764,547 975,025
Loans receivable, net (5)............................. 3,991,638 3,592,938 3,354,679 3,109,473 2,686,507
Goodwill and core value of deposits................... 33,712 67,185 87,782 98,290 109,642
Deposits.............................................. 3,591,175 3,355,597 2,391,433 2,300,641 2,249,245
Advances from Federal Home Loan Bank.................. 1,656,602 1,524,516 1,853,779 1,455,062 1,325,087
Securities sold under agreements to repurchase........ 195,755 157,432 154,862 445,479 1,101,583
Other borrowings...................................... 55,403 59,740 70,066 53,514 89,300
Stockholders' equity.................................. 309,501 279,451 278,011 236,933 165,630
Book value per common share........................... 23.97 21.86 21.95 22.02 22.98
Tangible book value per common share (6).............. 21.36 16.60 15.02 12.89 7.77
Regulatory capital ratios of the Bank:
Tangible capital................................... 5.12% 4.54% 4.46% 2.85% 1.15%
Core capital (Tier 1 capital)...................... 5.47% 5.45% 5.88% 4.67% 3.18%
Risk-based capital (Total capital)................. 13.45% 13.13% 12.75% 8.92% 6.62%
- - -------------------------------------------------------------------------------------------------------------------------------
</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.
(4) Includes mortgage-backed securities available for sale totaling $10.3
million, $12.2 million, $15.6 million, $20.8 million and $500.9 million,
respectively, at June 30, 1995, 1994, 1993, 1992 and 1991.
(5) Includes loans held for sale totaling $36.4 million, $74.3 million, $98.2
million, $39.5 million and $112.7 million, respectively, at June 30, 1995,
1994, 1993, 1992 and 1991.
(6) Calculated by dividing stockholders' equity, reduced by the amount of
goodwill and core value of deposits, by the number of shares of common stock
outstanding at the respective dates.
- - --------------------------------------------------------------------------------
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- - --------------------------------------------------------------------------------
GENERAL
Commercial Federal Corporation (the Corporation) is a unitary non-
diversified savings and loan holding company whose primary asset is Commercial
Federal Bank, a Federal Savings Bank (the Bank). The Bank is a consumer-oriented
financial institution that emphasizes traditional savings and loan operations,
including single-family residential real estate lending, retail deposit
activities and mortgage banking. At June 30, 1995, the Bank operated 30 branch
offices in Nebraska, 20 branch offices in greater metropolitan Denver, Colorado,
16 branch offices in Oklahoma and five branches in Kansas. The Bank also
conducts loan origination activities through its 71 branch office network, loan
offices of its wholly-owned mortgage banking subsidiary and a nationwide
correspondent network consisting of approximately 400 loan originators. The Bank
also provides insurance and securities brokerage and other retail financial
services.
Net income for fiscal year 1995 was $27.5 million, or $2.11 per share,
which compares to net income of $158,000 and $30.8 million, respectively, for
fiscal years 1994 and 1993, or $.01 per share and $2.43 per share, respectively.
Fiscal year 1994 net income included a charge to operations from the write-off
of intangible assets totaling $52.7 million, with an income tax benefit of $8.8
million resulting in a loss of $43.9 million, and an increase to earnings from
the cumulative effects of changes in accounting principles for income taxes and
postretirement benefits totaling a net $5.8 million, or $.45 per share.
A significant event affecting the results of operations for fiscal year
1995 was the accelerated amortization of goodwill totaling $21.4 million. This
accelerated amortization of goodwill resulted from the adoption by the
Corporation of an accounting change incorporating a fair value concept on the
valuation of its intangible assets during fiscal year 1994. As such, an
independent appraisal was performed resulting in the Corporation's intangible
assets valued at $41.0 million and classified as core value of deposits for
$19.6 million and goodwill for $21.4 million at June 30, 1994. Such valuation
resulted in the aforementioned charge to operations of $52.7 million from the
write-off of intangible assets in excess of $41.0 million. In addition to the
adoption of the change in method of valuation of intangible assets, it was also
determined that effective July 1, 1994, the $21.4 million of goodwill would be
amortized over the first six months of fiscal year 1995 and the remaining $19.6
million of core value of deposits would be amortized over the next 34 months.
The valuation did not decrease the book value of the intangible assets resulting
from the Corporation's acquisitions in fiscal year 1994. An independent
valuation was also performed at June 30, 1995, of the Corporation's total
unamortized balance of goodwill and core value of deposits resulting in no
impairment. Excluding the accelerated amortization of goodwill of $21.4 million,
fiscal year 1995 earnings per share would have been $3.75 per share compared to
the $2.11 per share reported, and return on average assets and return on average
stockholders' equity would have been .85% and 17.04%, respectively, compared to
reported results of .48% and 9.60%, respectively.
The Corporation's emphasis on single-family residential lending and the
promotion of retail financial services, along with the Corporation's continued
growth through acquisitions, continues to have positive effects on the
Corporation's core operations. Core earnings for fiscal year 1995 increased 5.9%
and 30.6%, respectively, over fiscal years 1994 and 1993. Core earnings, defined
as operating income before income taxes excluding (i) gains on sales of
mortgage-backed securities and loan servicing rights and (ii) amortization
expense and valuation adjustment of intangible assets, totaled $79.8 million
during fiscal year 1995 compared to $75.4 million and $61.1 million,
respectively, during fiscal years 1994 and 1993. This increase in core earnings
resulted from increases in net interest income, increases in loan servicing and
retail fee income and reductions in nonperforming assets.
Net interest income increased 6.9% or $8.6 million to $134.1 million during
fiscal year 1995 compared to $125.5 million during fiscal year 1994. Net
interest income for fiscal year 1994 increased $9.2 million compared to $116.3
million during fiscal year 1993. Loan servicing fees increased 10.3%, to $22.5
million during fiscal year 1995 compared to $20.4 million during fiscal year
1994, which increased 19.7%, from $17.1 million during fiscal year 1993. In
addition, retail fees and charges increased to $9.0 million during fiscal year
1995 compared to $8.0 million and $7.2 million, respectively, during fiscal
years 1994 and 1993. Nonperforming assets declined from $93.4 million and $64.0
million, respectively, at June 30, 1993 and 1994, to $58.4 million at June 30,
1995, representing reductions of 37.5% and 8.8%, respectively. These substantial
improvements are reflected in the Corporation's results of operations as total
provision for loan losses and real estate operations declined to $6.7 million
during fiscal year 1995 compared to $8.4 million and $11.0 million during fiscal
years 1994 and 1993, respectively.
16
<PAGE>
- - --------------------------------------------------------------------------------
The efficiency ratio is defined as general and administrative expenses
divided by the sum of (i) net interest income before provision for loan losses,
(ii) loan servicing fees, (iii) retail fees and charges and (iv) other operating
income. Such ratio has remained favorable even though operating expenses have
increased, primarily from acquisitions in fiscal years 1994 and 1995, to $85.9
million during fiscal year 1995 compared to $76.5 million and $72.7 million
during fiscal years 1994 and 1993, respectively. The Corporation's efficiency
ratio for fiscal year 1995 was 49.6% compared to 47.6% and 50.0% for fiscal
years 1994 and 1993, respectively. The increase in the efficiency ratio for
fiscal year 1995 compared to fiscal year 1994 is due to loan production costs
expensed, instead of being deferred, as current year loan production has
declined compared to fiscal year 1994 and due to increases in general and
administrative expenses primarily from the acquisitions during the last two
fiscal years. During fiscal year 1995, the Corporation acquired Home Federal
Savings and Loan (Home Federal) in Ada, Oklahoma and Provident Federal Savings
Bank of Lincoln, Nebraska (Provident). See "Acquisitions During Fiscal Year
1995" for additional information.
The Corporation will seek to continue its growth through expansion of the
Corporation's operations in its market areas, consisting of Nebraska, Colorado,
Oklahoma and Kansas, and may seek to enter markets in other adjoining states.
The Corporation will also seek to expand its operations both through competition
for market share within its market areas and through mergers with and
acquisitions of other selected financial institutions. Management of the
Corporation believes that its emphasis on operating acquired entities as
consumer-oriented financial institutions is attractive to potential acquisition
candidates and is advantageous in competing with larger banks for acquisitions
of selected financial institutions.
ACQUISITIONS DURING FISCAL YEAR 1995
On April 3, 1995, the Corporation consummated the acquisition of Provident
by purchasing all 140,000 outstanding shares of Provident's common stock at
$53.75 per share for approximately $7.5 million in cash. Provident operated a
traditional thrift operation with five branches located in the Lincoln, Nebraska
metropolitan area. At April 3, 1995, Provident had assets totaling $96.5
million, deposits totaling $58.1 million and stockholders' equity approximating
$4.6 million. This acquisition has been accounted for as a purchase. Core value
of deposits totaling $2.6 million resulting from this transaction is being
amortized using an accelerated method over 10 years and goodwill totaling
$713,000 is being amortized on a straight-line basis over 20 years.
On July 15, 1994, the Corporation consummated the acquisition of Home
Federal by purchasing all 236,212 outstanding shares of Home Federal's common
stock at $38.17 per share for approximately $9.0 million in cash. Home Federal
operated two branches in Ada, Oklahoma. At July 15, 1994, Home Federal had
assets totaling $100.2 million, deposits totaling $87.3 million and
stockholders' equity totaling $8.7 million. This acquisition has been accounted
for as a purchase. Core value of deposits totaling $1.3 million resulting from
this transaction is being amortized on an accelerated basis over 10 years.
ACQUISITIONS SUBSEQUENT TO FISCAL YEAR END
On September 22, 1995, the stockholders of Railroad Financial Corporation
(Railroad) approved a merger with the Corporation with the closing expected in
October 1995. Railroad is headquartered in Wichita, Kansas and operates 18
branches and 71 agency offices throughout the state of Kansas. Under the terms
of the Reorganization and Merger Agreement (the Agreement), dated April 18,
1995, the Corporation will exchange a pro-rata amount of its common stock for
all of the outstanding common stock of Railroad. Based on the Corporation's
closing stock price on September 22, 1995, of $35.75, each share of Railroad
common stock would be exchanged for .6389 shares of the Corporation's common
stock, resulting in the exchange of approximately 1,361,222 shares of the
Corporation's common stock with an aggregate value approximating $48.7 million.
Cash will be paid in lieu of fractional shares. At June 30, 1995, Railroad had
assets of $615.3 million, deposits of $421.7 million and stockholders' equity of
$28.1 million. It is anticipated that this acquisition will be accounted for as
a pooling of interests.
Also, on August 15, 1995, the Corporation entered into a Reorganization and
Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Conservative Savings Corporation (Conservative) and Conservative Savings Bank,
FSB. Under the terms of the Merger Agreement, the Corporation will acquire all
1,846,005 outstanding shares of Conservative's common stock and all 460,000
outstanding shares of preferred stock. As defined in the Merger Agreement,
Conservative's common and preferred stock will be exchanged for cash and a pro-
rata amount of the Corporation's common stock. Based on the Corporation's
closing stock price on September 22, 1995, of $35.75, the transaction has a per
17
<PAGE>
- - --------------------------------------------------------------------------------
share value of $15.37 for the common stock and $34.73 for the preferred stock
with an aggregate value of approximately $44.3 million for all outstanding
common and preferred stock.
At June 30, 1995, Conservative had assets of $383.4 million, deposits of
$198.1 million and stockholders' equity of $34.8 million. Conservative operates
nine branches with seven located in Nebraska (five in Omaha, Nebraska and two in
Columbus, Nebraska), one in Overland Park, Kansas and one in Harlan, Iowa. This
proposed acquisition, which is subject to regulatory approvals and the approval
of Conservative's shareholders, is expected to be completed by March 31, 1996,
but no later than June 30, 1996, unless extended by mutual agreement of both
parties. This acquisition will be accounted for as a purchase with core value of
deposits resulting from this transaction amortized on an accelerated basis over
a period not to exceed 10 years and goodwill, if any, amortized on a straight-
line basis over a period not to exceed 20 years.
REGULATORY CAPITAL
At June 30, 1995, the Bank exceeded all minimum regulatory capital
requirements. The following table sets forth information relating to the Bank's
regulatory capital compliance at June 30, 1995.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio
- - --------------------------------------------------------------------------------
<S> <C> <C>
Tangible capital................................... $303,479 5.12% (1)
Tangible capital requirement....................... 88,849 1.50
- - --------------------------------------------------------------------------------
Excess.......................................... $214,630 3.62%
- - --------------------------------------------------------------------------------
Core capital (Tier 1 capital)...................... $324,909 5.47% (2)
Core capital requirement........................... 178,341 3.00
- - --------------------------------------------------------------------------------
Excess.......................................... $146,568 2.47%
- - --------------------------------------------------------------------------------
Risk-based capital (Total capital)................. $355,733 13.45% (3)
Risk-based capital requirement..................... 211,525 8.00
- - --------------------------------------------------------------------------------
Excess.......................................... $144,208 5.45%
- - --------------------------------------------------------------------------------
</TABLE>
(1) Based on adjusted total assets totaling $5,923,283,000.
(2) Based on adjusted total assets totaling $5,944,713,000.
(3) Based on risk-weighted assets totaling $2,644,066,000.
- - --------------------------------------------------------------------------------
Effective July 1, 1994, the Office of Thrift Supervision (OTS) amended its
risk-based capital standards that included an interest rate risk component. The
amendment requires thrifts with interest rate risk in excess of certain levels
to maintain additional capital. Based on the Bank's interest rate risk profile
and the level of interest rates at June 30, 1995, as well as the Bank's level of
risk-based capital at the same date, management does not believe that these
changes will have a material adverse effect on the Bank's level of required
risk-based capital.
18
<PAGE>
- - --------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991
established five regulatory capital categories and authorized banking regulatory
agencies to take prompt corrective action with respect to institutions in the
three undercapitalized categories. These corrective actions become increasingly
more stringent as the institution's regulatory capital declines. At June 30,
1995, the Bank exceeded the minimum requirements for the well-capitalized
category, which is the highest regulatory capital category, as shown in the
following table.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
(Dollars in Thousands) Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual capital........................ $324,909 $324,909 $355,733
Percentage of adjusted assets......... 5.47% 12.29% 13.45%
Minimum requirements to be
classified well-capitalized........ 5.00% 6.00% 10.00%
- - ----------------------------------------------------------------------------------------------
</TABLE>
REGULATORY ISSUES
The Bank's savings deposits are insured by the Savings Association
Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance
Corporation (FDIC). The assessment rate currently ranges from 0.23% of deposits
for well-capitalized institutions to 0.31% of deposits for undercapitalized
institutions. The FDIC also administers the Bank Insurance Fund (BIF), which has
the same designated reserve ratios as the SAIF. The FDIC amended the BIF risk-
based assessment schedule effective September 30, 1995, which lowered the
deposit insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions. The amendment creates a substantial disparity in the
deposit insurance premiums paid by BIF and SAIF members and could place SAIF-
insured savings institutions at a significant competitive disadvantage to BIF-
insured institutions.
Among the proposals being considered by the FDIC and Congress to eliminate
this premium disparity is a similar reduction in premium rates charged to SAIF-
insured institutions. Such a reduction would be accompanied by a one-time
assessment of SAIF-insured institutions up to .90% of insured deposits to
increase the SAIF reserve level to 1.25% of SAIF-insured deposits, which is the
same level attained by the BIF prior to the reduction of BIF premium rates.
Under this proposal, the BIF and SAIF would be merged into one fund as soon as
practicable after they both reach their designated reserve ratios, but no later
than January 1, 1998. It is unknown whether this particular proposal or any
other proposal will be implemented or that premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action. If
a special assessment as described above were to be required, it would result, on
a pro forma basis as of June 30, 1995, in a one-time charge to the Bank of
approximately $20.4 million (assuming such charge would be tax deductible). Such
assessment would have the effect of reducing the Bank's tangible capital to
$283.1 million, or 4.80% of adjusted total assets, core capital to $304.5
million, or 5.14% of adjusted total assets, and risk-based capital to $335.3
million, or 12.68% of risk-weighted assets. If such a special assessment were
required and the SAIF as a result was fully recapitalized, it could have the
effect of reducing the Bank's annual deposit insurance premiums to the SAIF,
thereby increasing net income in future periods.
An additional proposal under consideration by Congress would require
savings associations to convert their charters to that of commercial banks in
connection with a merger of the BIF and the SAIF. Under current tax laws, a
savings association converting to a commercial bank charter must recapture into
taxable income the amount of its tax bad debt reserve that would not have been
allowed if the savings association had operated as a commercial bank. The tax
associated with the recapture of all or part of its tax bad debt reserve would
immediately reduce the capital of the savings association even though such tax
would actually be paid out over the succeeding years. Management of the
Corporation cannot predict if any of the foregoing proposals would be adopted in
their current form.
19
<PAGE>
- - --------------------------------------------------------------------------------
ASSET/LIABILITY MANAGEMENT
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference (i.e., a mismatch) between
the amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. Consequently, when
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-bearing
liabilities. This mismatch in the maturity and interest rate sensitivity of
assets and liabilities is commonly referred to as the "gap." A gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
during a specified period exceeds the amount of interest rate sensitive
liabilities maturing or repricing during such period, and is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
during a specified period exceeds the amount of interest rate assets maturing or
repricing during such period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, and during a
period of declining interest rates, a negative gap would result in an increase
in net interest income while a positive gap would adversely affect net interest
income.
The Corporation has historically invested in interest-earning assets that
have a longer duration than its interest-bearing liabilities. The shorter
duration of the interest-sensitive liabilities indicates that the Corporation is
exposed to interest rate risk. In a rising rate environment, in addition to
reducing the market value of long-term interest-earning assets, liabilities will
reprice faster than assets, therefore decreasing net interest income.
To mitigate this risk, the Bank has utilized certain financial instruments
to hedge the interest rate exposure on certain interest-sensitive liabilities.
However, it has been the general policy of the Bank to move toward a natural,
rather than a synthetic, management of its interest rate risk. The Bank has
allowed these financial instruments to expire upon maturity while extending the
maturities and locking in fixed interest rates on certain borrowings, primarily
advances from the Federal Home Loan Bank (FHLB). Such strategy has helped to
reduce the Bank's one-year cumulative gap mismatch. In addition, the Bank's
continued concentration of adjustable-rate assets as a percentage of total
assets benefits the one-year cumulative gap as such adjustable-rate assets
reprice and are more responsive to the sensitivity of more frequently repricing
interest-bearing liabilities.
In connection with its asset/liability management program, the Bank has
interest rate swap agreements with other counterparties under terms that provide
an exchange of interest payments on the outstanding notional amount of the swap.
Such agreements have been used to artificially lengthen the maturity of various
interest-bearing liabilities. In accordance with these arrangements, the Bank
pays fixed rates and receives variable rates of interest according to a
specified index. The Bank has reduced its level of such swap agreements to a
notional principal amount of $78.5 million at June 30, 1995, from balances of
$109.5 million and $194.5 million, respectively, at June 30, 1994 and 1993. For
fiscal years 1995, 1994 and 1993, the Bank recorded $4.3 million, $8.5 million
and $12.2 million, respectively, in net interest expense from its interest rate
swap agreements. During fiscal year 1996, $68.5 million of these swap agreements
mature.
The following table represents management's projected maturity and
repricing of the Bank's interest-earning assets and interest-bearing liabilities
on an unconsolidated basis at June 30, 1995. The amounts of interest-earning
assets, interest-bearing liabilities and interest rate risk management
instruments presented which mature or reprice within a particular period were
determined in accordance with the contractual terms of such assets, liabilities
and interest rate swap agreements, except (i) adjustable-rate loans are
included in the period in which they are first scheduled to adjust and not in
the period in which they mature and are also adjusted for prepayment rates
ranging from 12.2% to 28.1% for single-family residential loans and mortgage-
backed securities, (ii) prepayment rates ranging from 8.5% to 20.0%, based on
the contractual interest rate, were utilized for fixed-rate, single-family
residential loans and mortgage-backed securities, (iii) prepayment rates ranging
from 1.8% to 8.5%, based on the contractual interest rate, were utilized for
fixed-rate commercial real estate and multi-family loans and a prepayment rate
of 30.0% was utilized for consumer loans, (iv) passbook deposits and negotiable
order of withdrawal ("NOW") accounts totaling $490.5 million, all of which have
fixed-rates, are assumed to mature according to the decay rates as defined by
20
<PAGE>
- - --------------------------------------------------------------------------------
regulatory guidelines, which at June 30, 1995, ranged from 14.0% to 37.0%, (v)
market bonus savings and commercial money market accounts totaling $115.1
million are assumed to reprice or mature according to the decay rates as defined
by regulatory guidelines, which at June 30, 1995, ranged from 31.0% to 79.0%,
and (vi) money market rate deposits totaling $439.6 million are deemed to
reprice or mature within the one-year category, even though a certain portion of
these deposits is not likely to be interest rate sensitive. Management believes
that these assumptions approximate actual experience and considers such
assumptions reasonable; however, the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities could vary
substantially if different assumptions were used or actual experience differs
from the assumptions used, such as actual prepayment experience varying from
estimates, early deposit withdrawals, and caps on adjustable-rate loans and
mortgage-backed securities.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------
Within 91 Days Over 1 3 Years
(Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate single-family
mortgage loans (1) (2)............ $ 140,323 $ 313,580 $ 735,805 $1,329,341 $2,519,049
Other loans (2) (3).................. 940,357 1,355,099 338,518 153,535 2,787,509
Investments (4)...................... 130,511 14,651 138,178 111,107 394,447
- - ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets.............. 1,211,191 1,683,330 1,212,501 1,593,983 5,701,005
- - ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits..................... 517,958 163,406 166,447 197,411 1,045,222
Other time deposits.................. 565,487 1,087,870 808,372 138,334 2,600,063
Borrowings (5)....................... 313,933 416,840 1,106,221 29,825 1,866,819
Impact of interest rate
swap agreements................... (45,000) 35,000 10,000 -- --
- - ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities......... 1,352,378 1,703,116 2,091,040 365,570 5,512,104
- - ------------------------------------------------------------------------------------------------------------------------
Gap position............................ (141,187) (19,786) (878,539) 1,228,413 188,901
- - ------------------------------------------------------------------------------------------------------------------------
Cumulative gap.......................... $ (141,187) $ (160,973) $(1,039,512) $ 188,901 $ 188,901
- - ------------------------------------------------------------------------------------------------------------------------
Gap as a percentage of the
Bank's total assets ................. (2.38)% (.34)% (14.82)% 20.73% 3.19%
Cumulative gap as a percentage
of the Bank's total assets........... (2.38)% (2.72)% (17.54)% 3.19% 3.19%
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional single-family mortgage loans and mortgage-backed
securities.
(2) Such amounts are, as applicable, before deductions for unamortized discounts
and premiums, loans in process, deferred loan fees and allowance for loan
losses.
(3) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed or
adjustable interest rates.
(4) Included in the "Within 90 Days" column is short-term cash investments of
$3.1 million and Federal Home Loan Bank stock of $97.1 million.
(5) Includes advances from the FHLB, securities sold under agreements to
repurchase and other borrowings.
- - --------------------------------------------------------------------------------
The Bank's one-year cumulative gap is a negative $161.0 million, or 2.72%
of the Bank's total assets of $5.925 billion at June 30, 1995, contrasted to a
negative $141.8 million, or 2.58% of total assets at June 30, 1994. The interest
rate risk policy of the Bank authorizes a liability sensitive one-year
cumulative gap not to exceed 10.0%.
21
<PAGE>
- - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for fiscal year 1995 was $27.5 million, or $2.11 per share.
These results compare to net income for fiscal year 1994 of $158,000, or $.01
per share, which includes the cumulative effects of changes in accounting
principles for income taxes and postretirement benefits of $5.8 million, or $.45
per share, and to net income in fiscal year 1993 of $30.8 million, or $2.43 per
share.
The increase in net income for fiscal year 1995 compared to fiscal year
1994 is primarily due to the following: an improvement of $52.7 million in the
intangible assets valuation adjustment, an increase of $8.6 million in net
interest income, a decline of $3.9 million in amortization of goodwill and core
value of deposits, an increase of $2.1 million in loan servicing fees, an
improvement of $1.7 million in real estate operations, an increase of $1.0
million in retail fees and charges and a net increase of $500,000 in other
miscellaneous income. These increases to net income were partially offset by
accelerated amortization of goodwill of $21.4 million, an increase of $9.4
million in total general and administrative expenses, an increase of $6.5
million in the provision for income taxes and a net decrease of $5.8 million
from the cumulative effects of changes in accounting principles.
The decrease in net income for fiscal year 1994 compared to fiscal year
1993 is primarily due to the following: the intangible assets valuation
adjustment totaling $52.7 million, an increase of $3.7 million in total general
and administrative expenses, an increase of $3.6 million in amortization of
goodwill and core value of deposits and an increase of approximately $300,000 in
the provision for loan losses. These decreases to net income were offset by an
increase of $9.2 million in net interest income, a net increase of $5.8 million
from the cumulative effects of changes in accounting principles, a decrease of
$5.6 million in the provision for income taxes, an increase of $3.4 million in
loan servicing fees, a decrease of $2.9 million in the costs and expenses
involved in real estate operations, a net increase of approximately $2.0 million
in other miscellaneous income and an increase of approximately $800,000 in
retail fees and charges.
NET INTEREST INCOME AND INTEREST RATE SPREAD
Net interest income was $134.1 million for fiscal year 1995 compared to
$125.5 million for fiscal year 1994, an increase of $8.6 million, or 6.9%; and
compared to $116.3 million for fiscal year 1993. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.16%, 2.30% and 2.55%,
respectively, at June 30, 1995, 1994 and 1993, a decrease of 14 basis points
comparing the interest rate spread at June 30, 1995, to the interest rate spread
at June 30, 1994, and a decrease of 25 basis points comparing the spreads at
June 30, 1994, to June 30, 1993. In addition, during the fiscal years 1995, 1994
and 1993, interest rate spreads were 2.23%, 2.39% and 2.53%, respectively,
representing a decrease of 16 basis points comparing the interest rate spread
during fiscal year 1995 to fiscal year 1994 and a decrease of 14 basis points
comparing the spread during fiscal year 1994 to 1993. The net yield on interest-
earning assets during fiscal years 1995, 1994 and 1993 was 2.42%, 2.55% and
2.61%, respectively, representing a decrease of 13 basis points comparing fiscal
year 1995 to 1994 and a decrease of six basis points comparing fiscal year 1994
to 1993.
The current interest rate environment has put pressure on the Corporation's
interest rate spreads and yields and the resulting net interest income. The
future trend in interest rate spreads and net interest income will be dependent
upon such factors as the composition and size of the Corporation's interest-
earning assets and interest-bearing liabilities, the interest rate risk exposure
of the Corporation, and the maturity and repricing activity of interest-
sensitive assets and liabilities, as influenced by changes in the differential
between short and long-term interest rates. Net interest income increased
during fiscal year 1995 compared to fiscal year 1994, even though the interest
rate spread and the net yield on interest-earning assets decreased 16 and 13
basis points, respectively, due to average interest-earning assets increasing
$624.2 million to $5.553 billion for fiscal year 1995 compared to $4.929 billion
for fiscal year 1994.
22
<PAGE>
- - --------------------------------------------------------------------------------
This increase in average interest-earning assets is primarily due to the
acquisitions during fiscal years 1995 and 1994 and to internal growth.
Although the net yield on interest-earning assets decreased six basis
points during fiscal year 1994 compared to fiscal year 1993, average interest-
earning assets increased $477.9 million to $4.929 billion for the fiscal year
ended June 30, 1994, compared to $4.451 billion for the fiscal year ended June
30, 1993, which accounted for the increase in net interest income for fiscal
year 1994 compared to fiscal year 1993.
The following table presents certain information concerning yields earned
on interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the fiscal years presented.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------------------
For the Year
Ended June 30, At June 30,
------------------------------ ----------------------------
1995 1994 1993 1995 1994 1993
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans.......................................... 8.05% 8.03% 8.96% 8.23% 7.80% 8.59%
Mortgage-backed securities..................... 6.01 5.65 6.24 6.36 5.74 6.05
Investments.................................... 6.17 6.49 7.76 6.20 6.00 7.00
- - -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets..................... 7.42 7.41 8.37 7.66 7.16 7.98
- - -------------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits............................... 3.27 2.16 2.10 3.11 2.76 2.05
Other time deposits............................ 5.37 5.19 6.13 5.94 5.05 5.66
Advances from FHLB............................. 5.71 5.79 6.62 5.87 5.51 6.11
Securities sold under agreements
to repurchase............................... 7.61 6.15 6.91 7.04 6.08 6.05
Other borrowings............................... 11.17 10.68 10.26 10.79 10.78 10.46
- - -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities................... 5.19 5.02 5.84 5.50 4.86 5.43
- - -------------------------------------------------------------------------------------------------------------------------
Interest rate spread.............................. 2.23% 2.39% 2.53% 2.16% 2.30% 2.55%
- - -------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets.............. 2.42% 2.55% 2.61% 2.37% 2.46% 2.70%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
- - --------------------------------------------------------------------------------
The following table presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the periods indicated. The table below includes
nonaccruing loans averaging $28.5 million, $29.5 million and $36.4 million,
respectively, for fiscal years 1995, 1994 and 1993 as interest-earning assets at
a yield of zero percent.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
-----------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................... $3,800,432 $306,033 8.05% $3,518,910 $282,607 8.03% $3,290,436 $294,732 8.96%
Mortgage-backed
securities............ 1,360,267 81,691 6.01 1,028,859 58,136 5.65 792,606 49,496 6.24
Investments.............. 392,493 24,205 6.17 381,272 24,731 6.49 368,063 28,550 7.76
- - --------------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets................ 5,553,192 411,929 7.42 4,929,041 365,474 7.41 4,451,105 372,778 8.37
- - --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits......... 992,279 32,427 3.27 755,772 16,308 2.16 638,313 13,431 2.10
Other time deposits...... 2,473,211 132,697 5.37 2,167,273 112,383 5.19 1,748,304 107,258 6.13
Advances from
FHLB.................. 1,724,733 98,499 5.71 1,635,904 94,716 5.79 1,695,075 112,187 6.62
Securities sold under
agreements to
repurchase............ 101,924 7,758 7.61 155,897 9,592 6.15 255,101 17,632 6.91
Other borrowings......... 57,526 6,425 11.17 65,067 6,951 10.68 58,116 5,960 10.26
- - --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities........... 5,349,673 277,806 5.19 4,779,913 239,950 5.02 4,394,909 256,468 5.84
- - --------------------------------------------------------------------------------------------------------------------------------
Net earnings balance........ $ 203,519 $ 149,128 $ 56,196
Net interest income......... $134,123 $125,524 $116,310
Interest rate spread........ 2.23% 2.39% 2.53%
- - --------------------------------------------------------------------------------------------------------------------------------
Net yield on interest -
earning assets........... 2.42% 2.55% 2.61%
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1995, the Corporation experienced higher costs on
interest-bearing liabilities and a lower interest rate spread and yield compared
to fiscal year 1994 primarily due to increases in the interest rates offered on
certain types of deposit products. The Corporation, and most of its competitors
in its deposit markets, raised interest rates on deposits during fiscal year
1995 in order to maintain savings deposits as an attractive investment vehicle
for consumers. The reduced interest rate spread and yield also reflects the fact
that the Bank's incremental growth of interest-earning assets during fiscal year
1995 yielded comparatively lower spread. The net earnings balance (the
difference between average interest-bearing liabilities and average interest-
earning assets) improved by $54.4 million for fiscal year 1995 compared to 1994
primarily from internal growth.
In fiscal year 1994 interest rate spreads compressed as adjustable-rate
interest-earning assets repriced, high-coupon loans were refinanced, and cash
proceeds from non-earning asset dispositions and loan pay-offs were reinvested
in assets yielding a lower rate of interest than previously. Although interest
rate spreads and yields declined comparing fiscal
24
<PAGE>
- - --------------------------------------------------------------------------------
year 1994 to fiscal year 1993 due to this reinvestment in lower yielding
interest-earning assets, an increase in the difference between average interest-
bearing liabilities and average interest-earning assets improved by $92.9
million. During fiscal year 1994, approximately $90.0 million of investment
securities were called resulting in the recognition of approximately $271,000 in
unamortized discounts, net of premiums, recorded to interest income compared to
approximately $1.0 million recorded during fiscal year 1993 from approximately
$157.1 million of investment securities called. Residential mortgage loan
prepayments totaling approximately $272.3 million during fiscal year 1994 from
the bulk purchased loans acquired in fiscal years 1992 and 1991 resulted in the
recognition of $4.4 million of the net discount associated with such loans. Such
recognition in fiscal year 1994 compares to $5.9 million recognized in fiscal
year 1993. The interest rate spread during fiscal year 1994 was also negatively
affected as the Corporation received cash of $533.4 million in October 1993 from
the acquisition of the Heartland Federal Savings and Loan (Heartland) deposits
but initially invested the cash in short-term interest-earning assets at yields
lower than first mortgage real estate loans and paid down advances from the
FHLB.
The following table presents the dollar amount of changes in interest
income and expense for each major component of interest-earning assets and
interest-bearing liabilities, respectively, and the amount of change in each
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate), and (ii) changes in rate (change in rate multiplied by prior year
volume). The net change attributable to change in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate. This table demonstrates the effect of the
increased volume of interest-earning assets and interest-bearing liabilities,
the increasing interest rates and the decline in interest spreads previously
discussed.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------------------------
Year Ended June 30, Year Ended June 30,
1995 Compared to 1994 1994 Compared to 1993
----------------------------------- ----------------------------------
(In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to
- - ---------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans............................... $22,668 $ 758 $23,426 $19,615 $(31,740) $(12,125)
Mortgage-backed securities.......... 19,711 3,844 23,555 13,690 (5,050) 8,640
Investments......................... 715 (1,241) (526) 995 (4,814) (3,819)
- - ---------------------------------------------------------------------------------------------------------------------
Interest income.................. 43,094 3,361 46,455 34,300 (41,604) (7,304)
- - ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits.................... 6,096 10,023 16,119 2,527 350 2,877
Other time deposits................. 16,306 4,008 20,314 23,286 (18,161) 5,125
Advances from FHLB.................. 5,087 (1,304) 3,783 (3,809) (13,662) (17,471)
Securities sold under agreements
to repurchase.................... (3,788) 1,954 (1,834) (6,269) (1,771) (8,040)
Other borrowings.................... (832) 306 (526) 735 256 991
- - ---------------------------------------------------------------------------------------------------------------------
Interest expense................. 22,869 14,987 37,856 16,470 (32,988) (16,518)
- - ---------------------------------------------------------------------------------------------------------------------
Effect on net interest income.......... $20,225 $(11,626) $ 8,599 $17,830 $ (8,616) $ 9,214
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The decreases in interest rates between fiscal years 1995, 1994 and 1993
account for the decreases in interest rate spreads. The improvements due to
changes in volume in part reflects the increases in the difference between
average interest-bearing liabilities and average interest-earning assets of
$54.4 million and $92.9 million, respectively, between fiscal years 1995, 1994
and 1993. The percentage of average interest-earning assets to average interest-
bearing liabilities was 103.8% during fiscal year 1995, compared to 103.1%
during fiscal year 1994 and to 101.3% during fiscal year 1993. The improvements
in fiscal years 1995 and 1994 are primarily due to internal growth and, in
addition for fiscal year 1994, the continued reduction of nonperforming assets.
25
<PAGE>
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NON-INTEREST INCOME AND EXPENSE
PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS
The Corporation recorded loan loss provisions of $6.0 million, $6.0 million
and $5.7 million in fiscal years 1995, 1994 and 1993, respectively. The loan
loss provisions remained stable even though the net loan portfolio increased
approximately $398.7 million at June 30, 1995, compared to June 30, 1994,
indicating the improved credit quality of the loan portfolio and the low level
of nonperforming loans over the respective periods of time. At June 30, 1995,
the Corporation's conventional, FHA and VA loans, including loans held for sale,
totaling approximately $3.6 billion, are secured by single-family residential
properties located primarily in Nebraska (22%), Colorado (18%), Texas (6%),
Georgia, Missouri and Oklahoma (5% each), and the remaining 39% in 44 other
states. The commercial real estate loan portfolio at June 30, 1995, totaling
$167.8 million is secured by properties located in Colorado (52%), Nebraska
(18%), Florida (10%) and the remaining 20% in 12 other states. The allowance for
loan losses is based upon management's continuous evaluation of the
collectibility of outstanding loans, which takes into consideration such factors
as changes in the composition of the loan portfolio and economic conditions that
may affect the borrower's ability to pay, regular examinations by the
Corporation's credit review group of specific problem loans and of the overall
portfolio quality and real estate market conditions in the Corporation's lending
areas.
The Corporation recorded net losses on real estate operations of $662,000,
$2.3 million and $5.2 million in fiscal years 1995, 1994 and 1993, respectively.
These charges to operations reflect provisions for real estate losses, net real
estate operations, and gains and losses on dispositions of real estate. Real
estate loss provisions charged to operations totaled $399,000, $1.6 million and
$1.2 million, respectively, for fiscal years 1995, 1994 and 1993. The
improvements in real estate operations of $1.7 million over fiscal year 1994 and
$4.6 million over fiscal year 1993 are primarily due to the realization of gains
on sales of certain commercial properties, lower operating expenses and lower
loss provisions. Management believes that such improvements in real estate
operations are indicative of the improvements made in the reduction of the
Corporation's real estate portfolio and to the improvement in the real estate
markets in general.
Although the Corporation believes that present levels of allowances for
loan losses are adequate to reflect the risks inherent in its portfolios, there
can be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of allowances for losses on loans on a regular
basis as an integral part of their examination process. Such agencies may
require additions to the allowances based on their judgments of information
available to them at the time of their examinations.
26
<PAGE>
- - --------------------------------------------------------------------------------
Nonperforming assets are monitored closely on a regular basis by the
Corporation's internal credit review and asset workout groups. Nonperforming
assets decreased by $5.6 million, or 8.8%, at June 30, 1995, compared to June
30, 1994, primarily as a result of net decreases of $3.0 million in troubled
debt restructurings, $1.7 million in nonperforming loans and $894,000 in real
estate. Nonperforming assets at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------
(Dollars in Thousands) 1995 1994 1993
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans (1)
Residential real estate........................ $28,002 $25,516 $28,990
Commercial real estate......................... 773 5,228 1,377
Consumer....................................... 442 192 120
- - ----------------------------------------------------------------------------------------------
Total....................................... 29,217 30,936 30,487
- - ----------------------------------------------------------------------------------------------
Real estate (2)
Commercial..................................... 8,795 9,808 16,721
Residential.................................... 3,383 3,264 5,169
- - ----------------------------------------------------------------------------------------------
Total....................................... 12,178 13,072 21,890
- - ----------------------------------------------------------------------------------------------
Troubled debt restructurings (3)
Commercial..................................... 15,708 18,445 38,828
Residential.................................... 1,294 1,580 2,164
- - ----------------------------------------------------------------------------------------------
Total....................................... 17,002 20,025 40,992
- - ----------------------------------------------------------------------------------------------
Total nonperforming assets........................ $58,397 $64,033 $93,369
- - ----------------------------------------------------------------------------------------------
Nonperforming loans to total loans................ .72% .85% .89%
Nonperforming assets to total assets.............. .98% 1.16% 1.92%
- - ----------------------------------------------------------------------------------------------
Allowance for loan losses:
Other loans (4)................................ $31,287 $25,605 $22,835
Bulk purchased loans (5)....................... 15,280 17,321 22,271
- - ----------------------------------------------------------------------------------------------
Total....................................... $46,567 $42,926 $45,106
- - ----------------------------------------------------------------------------------------------
Allowance for loan losses to total loans.......... 1.15% 1.18% 1.32%
Allowance for loan losses to total
nonperforming assets........................... 79.74% 67.04% 48.31%
- - ----------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more past
due) and accruing loans that are contractually past due 90 days or more. At
June 30, 1995, 1994 or 1993, there were no accruing loans contractually past
due 90 days or more.
(2) Real estate consists of commercial and residential property acquired through
foreclosure or repossession (real estate owned and real estate in judgment)
and real estate from certain subsidiary operations, and does not include
performing real estate held for investment totaling $4.2 million and $2.9
million, respectively, at June 30, 1995 and 1994. At June 30, 1993, there
was no performing real estate held for investment.
(3) A troubled debt restructuring is a loan on which the Bank, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the
face amount of the debt, or an extension of the maturity date of the loan,
that the Bank would not otherwise consider.
(4) Includes $78,000 and $206,000, respectively, at June 30, 1995 and 1994, in
general allowance for losses established primarily to cover risks associated
with borrowers' delinquencies and defaults on loans held for sale. At June
30, 1993, there was no allowance for losses on loans held for sale.
(5) Represents the allowance for loan losses for single-family residential whole
loans purchased between January 1991 and June 30, 1992 (bulk purchased
loans), which had been allocated from the amount of net discounts associated
with the Bank's purchase of these loans to provide for the credit risk
associated with such bulk purchased loans. These bulk purchased loans had
principal balances of $701.9 million, $868.0 million and $1.3 billion,
respectively, at June 30, 1995, 1994 and 1993. These allowances are
available only to absorb losses associated with respective bulk purchased
loans, and are not available to absorb losses from other loans.
27
<PAGE>
- - --------------------------------------------------------------------------------
The ratio of nonperforming loans to total loans was .72% at June 30, 1995,
based on loan balances of $4.0 billion, compared to .85% and .89%, respectively,
at June 30, 1994 and 1993, which were based on loan balances of $3.6 billion and
$3.4 billion. Management believes that these ratios reflect the quality of the
Bank's loan portfolio, which consists primarily of loans secured by single-
family residential properties. The ratio of nonperforming assets to total assets
of .98% at June 30, 1995, which management believes is favorable compared to
industry standards, is one of several indicators of the continued improvement
made in reducing nonperforming assets as reflected in the higher ratios at June
30, 1994 and 1993, of 1.16% and 1.92%, respectively. The total allowance for
loan losses increased to $46.6 million at June 30, 1995, an improvement of $3.6
million and $1.5 million, respectively, compared to June 30, 1994 and 1993.
However, the percentage of allowance for loan losses to total loans at June 30,
1995, was 1.15%, compared to the ratios of 1.18% and 1.32%, respectively, at
June 30, 1994 and 1993, a decrease of three and 17 basis points due to net
increases of $398.7 million and $637.0 million, respectively, in total loans
over the same fiscal years. The total allowance for loan losses to total
nonperforming assets of 79.74% at June 30, 1995, also indicates improved
coverage for potential losses as compared to the ratios of 67.04% and 48.31%,
respectively, at June 30, 1994 and 1993. The asset quality ratios have improved
due to net decreases in nonperforming loans and nonperforming assets, primarily
from the sale of properties and loan principal payments, combined with increases
in both total loans and total assets over the respective fiscal years.
Nonperforming loans at June 30, 1995, decreased $1.7 million compared to
June 30, 1994, primarily due to a net decrease in delinquent commercial real
estate loans totaling $4.5 million partially offset by a net increase in
delinquent residential real estate loans totaling $2.5 million. Nonperforming
loans at June 30, 1994, increased by $449,000 compared to June 30, 1993, with
such an increase primarily attributable to a net increase in nonperforming
commercial real estate loans totaling $3.9 million (primarily three loans)
offset by a net decrease in nonperforming residential real estate loans totaling
$3.5 million.
The net decrease of $894,000 in real estate at June 30, 1995, compared to
June 30, 1994, is substantially attributable to the sale of real estate
properties. At June 30, 1995, real estate, before allowance for losses, totaling
$6.8 million and $5.8 million, respectively, was located in Colorado and
Nebraska. The net decrease of $8.8 million in real estate at June 30, 1994,
compared to June 30, 1993, is attributable to the decrease of $7.9 million
primarily due to the sale of certain commercial real estate properties during
fiscal year 1994, a net decrease of $1.9 million in residential real estate and
a $1.0 million net increase primarily in the allowance for losses. Offsetting
these decreases was an increase in commercial real estate resulting from the
addition of four properties approximating $1.9 million. At June 30, 1994, real
estate, before allowance for losses, totaling $6.9 million and $4.0 million,
respectively, was located in Nebraska and Colorado.
Troubled debt restructurings decreased $3.0 million at June 30, 1995,
compared to June 30, 1994, primarily attributable to net decreases of $2.7
million in commercial real estate loans and $300,000 in residential real estate
loans. The net decrease in commercial real estate loans is due to a
reclassification of such loans totaling $5.1 million to loans receivable and
loan principal repayments totaling $800,000, partially offset by additions of
$3.2 million. The net decrease of $300,000 in residential real estate loans is
due to loan principal repayments. The net decrease in troubled debt
restructurings of $21.0 million at June 30, 1994, compared to June 30, 1993, is
attributable to net decreases of $20.4 million in commercial real estate loans
and $584,000 in residential real estate loans. The net decrease in commercial
real estate loans is primarily due to the reclassification of 11 such loans
totaling $13.1 million to loans receivable, loan principal repayments totaling
$5.9 million, and transfers to nonperforming loans totaling $2.4 million. The
net change in residential real estate loans is attributable to loan principal
repayments.
LOAN SERVICING FEES
Loan servicing fees, which also includes miscellaneous loan fees for late
payments and prepayment charges, and assumption and modification fees, totaled
$22.5 million, $20.4 million and $17.1 million for fiscal years 1995, 1994 and
1993, respectively. This current year increase over previous fiscal years is
primarily due to increases in the size of the Corporation's loan servicing
portfolio. Fees from loans serviced for others totaled $18.7 million, $16.3
million and $13.9 million for fiscal years 1995, 1994 and 1993, respectively.
The mortgage loan servicing portfolio totaled $4.6 billion, $4.0 billion and
$3.7 billion at June 30, 1995, 1994 and 1993, respectively.
The value of the Corporation's loan servicing portfolio increases as
mortgage interest rates rise and loan prepayments decrease. It is expected that
income
28
<PAGE>
- - --------------------------------------------------------------------------------
generated from the Corporation's loan servicing portfolio will increase in such
an environment. However, this positive effect on the Corporation's income is
offset, in part, by a decrease in additional servicing fee income attributable
to new loan originations, which historically decrease in periods of higher, or
increasing, mortgage interest rates, and by an increase in expenses from loan
production costs since a portion of such costs cannot be deferred due to lower
loan originations. Conversely, the value of the Bank's loan servicing portfolio
will decrease as mortgage interest rates decline.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights." SFAS No. 122 requires that a mortgage banking enterprise
capitalize the cost of rights to service loans for others that were acquired
through either purchase or origination. The total cost of loans being sold
should be allocated to the mortgage servicing rights and the loans based on
their relative fair values. The mortgage servicing rights should be amortized in
proportion to, and over the period of, estimated net servicing income and should
be evaluated for impairment based on their fair value. The Corporation currently
sells certain of its loan originations with servicing retained. SFAS No. 122 is
effective for fiscal years beginning after December 15, 1995, or effective as of
July 1, 1996, for the Corporation. The effect of SFAS No. 122 is dependent,
among other items, upon the volume and type of loans originated, the general
levels of market interest rates and the rate of estimated loan prepayments.
Management of the Corporation is currently rewiewing the provisions of this
Statement to determine its implementation date and has not as of this date
determined the effect of such implementation.
RETAIL FEES AND CHARGES
Retail fees and charges totaled $9.0 million, $8.0 million and $7.2 million
for fiscal years 1995, 1994 and 1993, respectively. The primary source of this
fee income is customer charges for retail financial services such as checking
account fees and service charges, charges for insufficient checks or uncollected
funds, stop payment fees, overdraft protection fees and transaction fees for
personal checking and automatic teller machine services. The net increase of
$979,000 from fiscal year 1995 compared to fiscal year 1994 primarily results
from the Corporation's expanding retail customer deposit base from the
acquisitions in 1995 and 1994. Such acquisitions account for over $1.4 million
of the total retail fees and charges for fiscal year 1995 compared to $768,000
for fiscal year 1994, an increase of approximately $675,000. The increase of
$793,000 from fiscal year 1993 to fiscal year 1994 is primarily due to
additional fees and charges generated due to a larger customer base that
resulted primarily from the acquisition of Heartland deposits during fiscal year
1994.
LOSS ON SALES OF LOANS
During fiscal years 1995, 1994 and 1993, the Corporation sold to third
parties, through its mortgage banking operations, loans totaling $405.7 million,
$691.9 million and $407.4 million, respectively, resulting in net pre-tax losses
of $596,000, $392,000 and $352,000, respectively. The lower sales activity
comparing fiscal year 1995 to 1994 primarily is a result of lower loan
originations due to the relatively higher interest rate environment.
OTHER OPERATING INCOME
Other operating income totaled $7.3 million, $6.6 million and $4.6 million
for fiscal years 1995, 1994 and 1993, respectively. The major components of
other operating income are brokerage and insurance commissions. Brokerage
commission income totaled $2.6 million, $2.8 million and $2.7 million,
respectively, for fiscal years 1995, 1994 and 1993. Investment alternatives more
attractive to consumers such as certificates of deposit with higher interest
rates have contributed to lower revenues for brokerage commissions. Insurance
commission income totaled $2.4 million, $2.1 million and $2.2 million,
respectively, for fiscal years 1995, 1994 and 1993. Management of the Bank will
continue to emphasize insurance and securities brokerage services; however, such
commissions are affected to a significant degree by the current interest rate
environment in relation to rates on other competing products. Fiscal year 1995
results also include credit life and disability commission income totaling $1.2
million compared to $629,000 and $319,000 in fiscal years 1994 and 1993,
respectively.
Fiscal year 1994 results include a pre-tax gain of $385,000 on the sale of
an equity ownership interest in a minority subsidiary and gains totaling
$180,000 on the sales of fixed assets. Other various miscellaneous income
increased by approximately $600,000 during fiscal year 1994 compared to fiscal
year 1993. Losses from leasing operations improved by $355,000 during fiscal
year 1994 from the $400,000 loss in fiscal year 1993. Such
29
<PAGE>
- - --------------------------------------------------------------------------------
improvement is the result of reversing certain reserves established for
estimated losses on leasing operations which ceased during fiscal year 1993.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $85.9 million, $76.5 million
and $72.7 million for fiscal years 1995, 1994 and 1993, respectively. The
increase of $9.4 million in general and administrative expenses in fiscal year
1995 compared to fiscal year 1994 was due to increases in compensation and
benefits of $7.1 million, occupancy and equipment of $1.3 million, regulatory
insurance and assessments of $1.1 million, amortization of purchased mortgage
servicing rights of $745,000 and advertising of $671,000, partially offset by a
decrease of $1.5 million in other operating expenses. Increases in general and
administrative expenses directly resulting from the acquisitions in fiscal years
1995 and 1994 totaled $4.4 million comparing fiscal year 1995 ($7.5 million) to
fiscal year 1994 ($3.1 million). Such increases in general and administrative
expenses result from increased personnel wages and benefits, costs of operating
additional branches and higher regulatory insurance costs from the deposits
acquired.
Other increases in general and administrative expenses in fiscal year 1995
compared to fiscal year 1994 are attributable to loan production costs,
primarily compensation and benefits, which were deferred in fiscal year 1994
when loan production volume was significantly higher than in fiscal year 1995.
Such increase in loan production costs expensed in fiscal year 1995 over 1994
totaled $3.7 million. Deferred compensation related to restricted stock totaled
$1.2 million and $395,000, respectively, in fiscal years 1995 and 1994, an
increase of $778,000 due to additional awards granted. Additionally,
amortization of purchased mortgage servicing rights increased $745,000 in fiscal
year 1995 over 1994 primarily from the increase of $10.4 million in servicing
rights acquired through purchases and an acquisition.
The Bank paid FDIC premiums which totaled $8.6 million and $7.5 million for
fiscal years 1995 and 1994, respectively. The higher levels of such costs
recorded during fiscal year 1995 is primarily attributable to a $542.4 million,
or 18.6%, increase in the average balance of deposits during fiscal year 1995
compared to 1994. Effective September 30, 1995, the FDIC amended the BIF risk-
based assessment schedule which will lower the deposit insurance assessment rate
for most commercial banks and other depository institutions with deposits
insured by the BIF to a range of from 0.31% of insured deposits for
undercapitalized BIF-insured institutions to 0.04% of deposits for well-
capitalized institutions. The amendment creates a substantial disparity in the
deposit insurance premiums paid by BIF and SAIF members and could place SAIF-
insured savings institutions at a significant competitive disadvantage to BIF-
insured institutions. Among the proposals being considered by the FDIC and
Congress to eliminate this premium disparity is a similar reduction in premium
rates charged to SAIF-insured institutions. Such a reduction would be
accompanied by a one-time assessment of SAIF-insured institutions up to .90% of
insured deposits to increase the SAIF reserve level to 1.25% of SAIF-insured
deposits, which is the same level attained by the BIF prior to the reduction of
BIF premium rates. It is unknown whether this particular proposal or any other
proposal will be implemented or that premiums for either BIF or SAIF members
will be adjusted in the future by the FDIC or by legislative action. If a
special assessment as described above were to be required, it would result, on a
pro forma basis as of June 30, 1995, in a one-time charge to the Bank of
approximately $20.4 million (assuming such charge would be tax deductible). If
such a special assessment were required and the SAIF as a result was fully
recapitalized, it could have the effect of reducing the Bank's deposit insurance
premiums to the SAIF, thereby increasing net income in future periods.
The $3.8 million increase in general and administrative expenses in fiscal
year 1994 compared to fiscal year 1993 is primarily attributable to the 1994
acquisitions which resulted in additional expenses of $3.1 million incurred
during fiscal year 1994 with Heartland accounting for $3.0 million of such
increase. The addition of 16 branches and retail personnel as well as the
insured deposits acquired was the primary reason for increases to all categories
of general and administrative expenses comparing fiscal year 1994 results to
fiscal year 1993. Deferred compensation related to the fiscal year 1993 award of
restricted stock from certain management incentive plans totaling $395,000 was
amortized to compensation expense during fiscal year 1994. Additionally,
amortization of purchased mortgage servicing rights increased $1.8 million
during fiscal year 1994 over the previous fiscal year as a result of the
purchase of $7.3 million in servicing rights. Offsetting these increases to
fiscal year 1994 general and administrative expenses over fiscal year 1993 was a
$1.0 million decrease in expenses relating to the Corporation's loan servicing
portfolio and a decrease of $492,000 in data processing charges.
30
<PAGE>
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GOODWILL AND CORE VALUE OF DEPOSITS
Goodwill and core value of deposits resulted from acquisitions over the
years of various savings institutions and several other non-financial companies.
Effective June 30, 1994, the Corporation changed its method of valuation of
intangible assets incorporating a fair value concept using a lower of cost or
market methodology. An appraisal performed by an independent third party of the
existing intangible assets relating to acquisitions during 1986 through 1988 of
five troubled savings institutions located in Colorado, Kansas and Oklahoma
resulted in a fair value estimate of $41.0 million. Such fair value estimate
resulted in the Corporation recognizing an impairment of recorded intangible
assets at June 30, 1994, of $52.7 million, with an income tax benefit of $8.8
million, resulting in a net loss of $43.9 million. This appraisal of $41.0
million as of June 30, 1994, was classified by management as core value of
deposits totaling $19.6 million and goodwill totaling $21.4 million. The $21.4
million of goodwill was completely amortized to expense over the first six
months of fiscal year 1995, and for reporting purposes separately disclosed in
the Consolidated Statement of Operations.
Total amortization expense for goodwill and core value of deposits for
fiscal years 1995, 1994 and 1993 was $10.2 million, $14.1 million and $10.5
million, respectively. Amortization of goodwill and core value of deposits for
fiscal year 1995 was lower than fiscal year 1994 primarily due to a $6.2 million
decrease in goodwill amortization comparing the respective fiscal years since
the amortization of goodwill was accelerated, completely amortized to expense
over the first six months of fiscal year 1995 and separately reported. In
addition, the amortization expense on core value of deposits from acquisitions
before fiscal year 1994 decreased in the last six months of fiscal year 1995 due
to an adjustment totaling $6.8 million that was recorded effective January 1,
1995, as a result of the Corporation's recognition of pre-acquisition tax
credits and net operating losses. See "Provision for Income Taxes" for
additional information. Accordingly, amortization expense on the core value of
deposits from acquisitions before fiscal year 1994 totaled $5.4 million for
fiscal year 1995. The remaining balance of core value of deposits from these
acquisitions before fiscal year 1994 totaled $7.4 million at June 30, 1995, and
will be amortized on a straight-line basis over the remaining 22 months. Such
decreases in amortization expense comparing fiscal year 1995 to 1994 were
partially offset by the net increase of $2.4 million in amortization of core
value of deposits and goodwill resulting from the acquisitions in fiscal years
1994 and 1995.
The increase of $3.6 million in amortization expense in fiscal year 1994
compared to fiscal year 1993 was primarily due to (i) additional amortization
expense of $2.5 million from the core value of deposits added from the fiscal
year 1994 acquisitions and (ii) amortization expense of $1.8 million from the
adoption of Statement of Financial Accounting Standards No. 109 which increased
core deposit intangibles from prior business combinations by $15.6 million.
PROVISION FOR INCOME TAXES
For fiscal years 1995, 1994 and 1993 the provision for income taxes was
$20.7 million, $14.2 million and $19.8 million, respectively. The effective tax
rates for fiscal years 1995, 1994 and 1993 were 43.0%, 165.7% and 39.2%,
respectively. The provision for income taxes for fiscal year 1995 was reduced by
$2.3 million due to the recognition of pre-acquisition tax credits and net
operating losses that the Corporation was entitled to from a thrift acquired in
1987 and two leasing companies acquired in 1984 and 1986. These tax credits and
net operating losses were created prior to the acquisition of such companies and
were not previously considered available to the Corporation. The recognition of
such pre-acquisition tax credits and net operating losses also resulted in a
reduction of core value of deposits totaling $6.8 million as of January 1, 1995.
See "Goodwill and Core Value of Deposits" for additional information. For the
three fiscal years ended June 30, 1995, the effective tax rates vary from the
applicable statutory rates primarily due to the nondeductibility of amortization
of goodwill and core value of deposits in relation to the level of taxable
income for the respective fiscal years. In addition, the effective tax rate
varied from the statutory rate of 35.0% for fiscal years 1995 and 1994 due to
the recognition of the pre-acquisition tax credits and net operating losses of
$2.3 million in fiscal year 1995 and, in fiscal year 1994, to the intangible
assets valuation adjustment of $52.7 million.
The effective tax rate for fiscal year 1994 includes a change in the
federal tax law enacted in August 1993 that increased the federal corporate
marginal tax rate from 34.0% to 35.0%. The effect of this tax rate change on the
net deferred income tax liability resulted in the recording of additional income
tax expense of $1.2 million in the first quarter of fiscal year 1994.
31
<PAGE>
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CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
Included in fiscal year 1994 results of operations is the adoption of the
provisions of two accounting statements resulting in the Corporation recording a
net $5.8 million in net income, or $.45 per share, from the cumulative effects
of these changes in accounting principles.
The adoption of the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," resulted in recording $6.1
million in net income, or $.48 per share, while the adoption of the provisions
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," resulted in recording a charge
to income of $519,000 (net of a tax benefit of $183,000), or $.03 loss per share
after tax.
RATIOS
The table below sets forth certain performance ratios of the Corporation
for the periods indicated.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
- - ------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets: net income divided by average total assets (1) (2)............. .48% --% .65%
Return on average equity: net income divided by average equity (1) (2)................... 9.60 .05 11.97
Equity-to-assets ratio: average stockholders' equity to average total assets (1)......... 4.97 5.75 5.44
General and administrative expenses divided by average assets (1)........................ 1.49 1.47 1.54
- - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on daily average balances during fiscal years 1995 and 1994 and on
average monthly balances during fiscal year 1993.
(2) Return on average assets and return on average stockholders' equity for
fiscal year 1995 is .85% and 17.04%, respectively, excluding the accelerated
amortization of goodwill totaling $21,357,000. Return on average assets and
return on average stockholders' equity for fiscal year 1994 is .73% and
12.77% respectively, excluding the after-tax effect of the intangible assets
valuation adjustment and the cumulative effects of changes in accounting
principles totaling $43.9 million and $5.8 million, respectively.
- - --------------------------------------------------------------------------------
The increase in the operating ratio for general and administrative expenses
for fiscal year 1995 compared to fiscal year 1994 is attributable to an increase
of $9.4 million in such expenses offset significantly by an increase of
approximately $550.0 million in the average total assets from fiscal year 1994.
The decrease in the operating ratio for general and administrative expenses for
fiscal year 1994 compared to fiscal year 1993 is due to a substantial increase
in the Corporation's average total assets over the same time span (primarily
from the Heartland acquisition) partially offset by an increase of $3.7 million
in general and administrative expenses which was also primarily attributable to
the Heartland acquisition.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
During fiscal year 1995, the Corporation adopted the provisions of four
accounting pronouncements: "Accounting by Creditors for Impairment of a Loan,"
which was subsequently amended by "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," "Accounting for Certain Investments
in Debt and Equity Securities" and "Disclosures on Derivative Financial
Instruments and Fair Value of Financial Instruments." See Note 1 to the
Consolidated Financial Statements for a discussion of the implementation of the
provisions of these new accounting pronouncements, none of which had a material
effect on the Corporation's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's principal asset is its investment in the capital stock of
the Bank, and because it does not generate any significant revenues independent
of the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is
32
<PAGE>
- - --------------------------------------------------------------------------------
permitted to pay dividends during a calendar year in an amount equal to the
greater of (i) 75.0% of its net income for the recent four quarters, or (ii)
100.0% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its ratio of total capital to
assets exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. At June 30, 1995, the Bank qualified as a Tier 1
Association, and would be permitted to pay an aggregate amount approximating
$81.3 million in dividends under these regulations. Should the Bank's regulatory
capital fall below certain levels, applicable law would require approval by the
OTS of such proposed dividends and, in some cases, would prohibit the payment of
dividends.
At June 30, 1995, the cash of Commercial Federal Corporation (the parent
company) totaled $10.5 million of which $3.5 million is required to be retained
under the terms of the Indenture governing the subordinated notes due December
1999. Due to the parent company's limited independent operations, management
believes that the cash balance at June 30, 1995, is currently sufficient to meet
operational needs. However, the parent company's ability to make future interest
and principal payments on the subordinated notes is dependent upon its receipt
of dividends from the Bank. Accordingly, during fiscal years 1995 and 1994, the
parent company received dividends and cash proceeds totaling $4.4 million and
$5.5 million, respectively, all of which were from the Bank except for $460,000
received from another wholly-owned subsidiary on its sale proceeds of an equity
ownership interest during fiscal year 1994. These dividends from the Bank were
made primarily to cover the semi-annual interest payments on the parent
company's subordinated debt. The parent company also receives cash from the
exercise of stock options and the sale of stock under its employee benefit plans
which totaled $1.3 million and $887,000, respectively, during fiscal years 1995
and 1994. In June 1994, the parent company contributed $5.0 million to the
capital of the Bank to strengthen further the Bank's regulatory capital ratios
so that the Bank would be better positioned to pursue its strategy of growth
through expansion of existing operations and through mergers and acquisitions of
other financial institutions.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB of Topeka and (iv) cash generated from operations. As reflected in
the Consolidated Statement of Cash Flows, net cash flows provided by operating
activities for fiscal years 1995 and 1994 totaled $54.9 million and $72.2
million, respectively, while net cash flows used by operating activities totaled
$271.8 million for fiscal year 1993. Amounts fluctuate from period to period
primarily as a result of mortgage banking activity relating to the purchase and
origination of loans for resale and the subsequent sale of such loans. The
origination of loans for resale totaling $46.0 million for fiscal year 1995 is
considerably lower than the $164.0 million and $127.1 million, respectively, for
fiscal years 1994 and 1993 primarily due to the lower volume of loan refinancing
activity attributable to the increase in interest rates over the past two fiscal
years.
Net cash flows used by investing activities totaled $269.9 million for
fiscal year 1995 and net cash flows provided by investing activities totaled
$111.7 million and $12.9 million, respectively, for fiscal years 1994 and 1993.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans and mortgage-backed securities. During fiscal year 1995 the
Corporation acquired the assets and liabilities of Home Federal and Provident
for which it paid cash totaling $16.5 million. In addition, the large amount of
cash flows provided by investing activities during fiscal year 1994 is primarily
from the acquisition of deposits of two institutions for which the Corporation
received cash totaling $784.5 million. The acquisition of Railroad will have no
material effect on liquidity since such transaction will be consummated as an
exchange of common stock between companies. The proposed acquisition of
Conservative, however, will result in cash paid totaling approximately $18.3
million for Conservative's common and preferred stock.
Net cash flows provided by financing activities totaled $223.1 million and
$253.7 million, respectively, for fiscal years 1995 and 1993 and net cash used
by financing activities totaled $196.2 million for fiscal year 1994.
33
<PAGE>
- - --------------------------------------------------------------------------------
Advances from the FHLB and retail deposits have been the primary sources to
balance the Bank's funding needs during each of the fiscal years presented. In
addition, during fiscal year 1995 the Corporation utilized securities sold under
agreements to repurchase primarily for liquidity and asset liability management
purposes. Decreases in securities sold under agreements to repurchase
experienced for fiscal year 1993 were, at that time, in accordance with the
Corporation's intent to reduce its reliance on these borrowings. The net
increase of $91.4 million in deposits for fiscal year 1995 was lower compared to
the net increase of $140.5 million for fiscal year 1994 primarily due to the
change in the interest rate environment which has increased competition for
retail deposits. Deposits increased during fiscal year 1994 over fiscal year
1993 due to increased market expansion. In addition, during fiscal year 1993,
$78.7 million in net proceeds were received from the Corporation's sale of
4,025,000 shares of common stock, the issuance of $40.25 million of subordinated
debt and the exercise of warrants for 1,250,000 shares of the Corporation's
common stock.
The Corporation has considered and will continue to consider possible
mergers with and acquisitions of other selected financial institutions. During
fiscal year 1995 the Corporation consummated the acquisitions of Home Federal
and Provident, and entered into a merger agreement with Railroad. In addition,
on August 15, 1995, the Corporation entered into a merger agreement with
Conservative. See Notes 2 and 27 to the Consolidated Financial Statements for
additional information on these completed and pending acquisitions. Such
completed and proposed acquisitions present the Corporation with the opportunity
to further expand its retail network over last fiscal year in the Oklahoma,
Iowa, Kansas and Nebraska markets; and to increase its earnings potential by
increasing its mortgage and consumer loan volumes funded by deposits which
generally bear lower rates of interest than alternative sources of funds. The
cash proceeds from the fiscal year 1994 deposit acquisitions allowed the
Corporation to prepay advances from the FHLB and to originate and purchase
primarily single-family residential loans.
The Corporation will seek to continue its growth through expansion of the
Corporation's operations in its market areas and may seek to enter markets in
other adjoining states. The Corporation will also seek to expand its operations
both through competition for market share within its market areas and through
mergers with and acquisitions of other selected financial institutions.
Management of the Corporation believes that its emphasis on operating acquired
entities as consumer-oriented financial institutions is attractive to potential
acquisition candidates and is advantageous in competing with larger banks for
acquisitions of selected financial institutions.
At June 30, 1995, the Corporation had issued commitments of $103.8 million
to fund and purchase loans and to purchase investment and mortgage-backed
securities as follows: $31.4 million of single-family adjustable-rate mortgage
loans, $31.0 million of single-family fixed-rate mortgage loans, $5.1 million of
commercial real estate loans, $15.0 million of investment securities, $4.8
million of adjustable-rate mortgage-backed securities and $16.5 million of
consumer loan lines of credit. In addition, at June 30, 1995, outstanding
commitments from mortgage banking operations to purchase mortgage loan servicing
rights totaled $521,000. These outstanding loan commitments to extend credit in
order to originate loans or fund consumer loan lines of credit do not
necessarily represent future cash requirements since many of the commitments may
expire without being drawn. The Corporation expects to fund these commitments,
as necessary, from the sources of funds previously described.
The maintenance of an appropriate level of liquid resources to meet not
only regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Corporation is required by
federal regulation to maintain a minimum average daily balance of cash and
certain qualifying liquid investments equal to 5.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's average liquidity ratio increased to 8.52% at June 30, 1995, from
7.64% at June 30, 1994, resulting primarily from an increase of $50.3 million
over last fiscal year in the level of total liquid assets. Liquidity levels will
vary depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The
Corporation does not foresee any difficulty in meeting its liquidity
requirements.
34
<PAGE>
- - --------------------------------------------------------------------------------
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial
information have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant effect on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
STOCK PRICES
The Corporation's common stock is currently traded on the New York Stock
Exchange under the symbol "CFB." Prior to August 2, 1995, the Corporation's
common stock was traded on the Nasdaq Stock Market and quoted on the Nasdaq
National Market under the symbol "CFCN." The following table sets forth the high
and low closing sales prices for the common stock of the Corporation for the
periods indicated on the Nasdaq Stock Market.
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
1995 1994
- - ---------------------------------------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock prices:
High................. $31 1/4 $24 7/8 $24 13/16 $27 7/8 $25 3/4 $21 5/8 $26 3/4 $27 3/4
Low.................. 24 5/8 20 3/8 18 7/8 23 3/4 17 7/8 17 7/8 19 1/4 24 1/8
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1995, there were 12,909,849 shares of common stock issued
and outstanding which were held by more than 1,800 shareholders of record, and
288,653 shares subject to outstanding options. The shareholders of record number
does not reflect the persons or entities who hold their stock in nominee or
"street" name.
DIVIDENDS
The Corporation has not paid a cash dividend on its common stock through
June 30, 1995. The payment of dividends on the common stock would be subject to
determination and declaration by the Board of Directors of the Corporation and
the availability of funds. At the present time, the only significant independent
sources of funds available for the payment of dividends by the Corporation are
dividends paid by the Bank and the Corporation's unrestricted cash which totaled
$7.0 million at June 30, 1995. Future payment of dividends by the Corporation
will depend on the Corporation's consolidated earnings, financial condition,
liquidity, capital and other factors, including economic conditions and any
regulatory restrictions.
35
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) June 30,
ASSETS 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash (including short-term investments of $3,100 and $500).................................. $ 29,330 $ 21,208
Mortgage-backed securities available for sale, at fair value................................ 10,322 12,171
Loans held for sale......................................................................... 36,382 74,321
Investment securities held to maturity (fair value of $291,651 and $273,601)................ 294,237 280,600
Mortgage-backed securities held to maturity (fair value of $1,312,958 and $1,240,299)....... 1,321,461 1,293,263
Loans receivable, net of allowances of $46,489 and $42,720.................................. 3,955,256 3,518,617
Federal Home Loan Bank stock................................................................ 97,110 90,913
Interest receivable, net of reserves of $197 and $406....................................... 38,761 34,621
Real estate................................................................................. 16,385 16,011
Premises and equipment...................................................................... 62,716 54,534
Prepaid expenses and other assets........................................................... 58,636 57,896
Goodwill and core value of deposits,
net of accumulated amortization of $135,683 and $104,115................................. 33,712 67,185
- - -----------------------------------------------------------------------------------------------------------------------------
Total Assets.......................................................................... $5,954,308 $5,521,340
- - -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits................................................................................. $3,591,175 $3,355,597
Advances from Federal Home Loan Bank..................................................... 1,656,602 1,524,516
Securities sold under agreements to repurchase........................................... 195,755 157,432
Other borrowings......................................................................... 55,403 59,740
Interest payable......................................................................... 22,703 26,076
Other liabilities........................................................................ 123,169 118,528
- - -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities..................................................................... 5,644,807 5,241,889
- - -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies............................................................... -- --
- - -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued........................................................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
12,909,849 and 12,783,684 shares issued and outstanding............................... 129 128
Additional paid-in capital............................................................... 139,728 137,293
Unrealized holding gain on securities available for sale, net............................ 79 --
Retained earnings, substantially restricted.............................................. 169,565 142,030
- - -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity............................................................ 309,501 279,451
- - -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity............................................ $5,954,308 $5,521,340
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Stockholders' Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Net
Unrealized Unrealized
Holding Gain Retained Depreciation
Additional on Securities Earnings on Marketable Common
Common Paid-in Available (Substantially Equity Stock
Stock Capital for Sale, Net Restricted) Securities Subscribed Total
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992.................... $ 73 $ 94,019 $-- $111,094 $(390) $ 32,137 $236,933
Issuance of 3,500,000
shares of common
stock subscribed.................... 35 32,102 -- -- -- (32,137) --
Issuance of 525,000 shares
of common stock under
over-allotment option............... 5 4,816 -- -- -- -- 4,821
Issuance of 132,233 shares
under certain compensation
and employee plans.................. 1 1,001 -- -- -- -- 1,002
Issuance of 1,250,000 shares
on exercise of warrants............. 12 2,834 -- -- -- -- 2,846
Restricted stock and deferred
compensation plans, net............. 1 1,240 -- -- -- -- 1,241
Net change in value of
marketable equity securities........ -- -- -- -- 390 -- 390
Net income............................. -- -- -- 30,778 -- -- 30,778
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993.................... 127 136,012 -- 141,872 -- -- 278,011
Issuance of 59,244 shares
under certain compensation
and employee plans.................. 1 886 -- -- -- -- 887
Restricted stock and deferred
compensation plans, net............. -- 395 -- -- -- -- 395
Net income............................. -- -- -- 158 -- -- 158
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994.................... 128 137,293 -- 142,030 -- -- 279,451
Issuance of 102,733 shares
under certain compensation
and employee plans.................. 1 1,262 -- -- -- -- 1,263
Restricted stock and deferred
compensation plans, net............. -- 1,173 -- -- -- -- 1,173
Unrealized holding gain on
securities available
for sale, net....................... -- -- 79 -- -- -- 79
Net income............................. -- -- -- 27,535 -- -- 27,535
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995.................... $129 $139,728 $79 $169,565 $ -- $ -- $309,501
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Operations
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans receivable........................................................... $306,033 $282,607 $294,732
Mortgage-backed securities................................................. 81,691 58,136 49,496
Investment securities...................................................... 24,205 24,731 28,550
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest income................................................... 411,929 365,474 372,778
Interest Expense:
Deposits................................................................... 165,124 128,691 120,689
Advances from Federal Home Loan Bank....................................... 98,499 94,716 112,187
Securities sold under agreements to repurchase............................. 7,758 9,592 17,632
Other borrowings........................................................... 6,425 6,951 5,960
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest expense.................................................. 277,806 239,950 256,468
Net Interest Income........................................................... 134,123 125,524 116,310
Provision for Loan Losses..................................................... (6,033) (6,033) (5,735)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses........................... 128,090 119,491 110,575
Other Income (Loss):
Loan servicing fees........................................................ 22,535 20,426 17,070
Retail fees and charges.................................................... 8,971 7,992 7,199
Real estate operations..................................................... (662) (2,324) (5,232)
Loss on sales of loans..................................................... (596) (392) (352)
Other operating income..................................................... 7,349 6,638 4,592
- - -----------------------------------------------------------------------------------------------------------------------------
Total other income...................................................... 37,597 32,340 23,277
Other Expense:
General and administrative expenses-
Compensation and benefits............................................... 34,421 27,341 26,001
Occupancy and equipment................................................. 18,593 17,254 16,763
Regulatory insurance and assessments.................................... 8,572 7,463 6,356
Advertising............................................................. 4,174 3,504 2,743
Amortization of purchased mortgage loan servicing rights................ 8,293 7,548 5,768
Other operating expenses................................................ 11,799 13,348 15,094
- - -----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expenses............................ 85,852 76,458 72,725
Amortization of goodwill and core value of deposits........................ 10,211 14,084 10,508
Accelerated amortization of goodwill....................................... 21,357 -- --
Intangible assets valuation adjustment..................................... -- 52,703 --
- - -----------------------------------------------------------------------------------------------------------------------------
Total other expense.................................................. 117,420 143,245 83,233
Income Before Income Taxes and Cumulative Effects of
Changes in Accounting Principles........................................... 48,267 8,586 50,619
Provision for Income Taxes.................................................... 20,732 14,231 19,841
- - -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effects of Changes in Accounting Principles... 27,535 (5,645) 30,778
Cumulative Effects of Changes in Accounting Principles:
Change in method of accounting for income taxes............................ -- 6,139 --
Postretirement benefits, net of income tax benefit of $183................. -- (336) --
- - -----------------------------------------------------------------------------------------------------------------------------
Total cumulative effects of changes in accounting principles......... -- 5,803 --
- - -----------------------------------------------------------------------------------------------------------------------------
Net Income.................................................................... $ 27,535 $ 158 $ 30,778
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Operations (continued)
- - ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share:
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before cumulative effects
of changes in accounting principles................................ $2.11 $(.44) $2.43
Cumulative effects of changes in accounting principles................ -- .45 --
- - -----------------------------------------------------------------------------------------------------------------------------
Net income............................................................ $2.11 $ .01 $2.43
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 27,535 $ 158 $ 30,778
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Accelerated amortization of goodwill.................................... 21,357 -- --
Amortization of goodwill and core value of deposits..................... 10,211 14,084 10,508
Intangible assets valuation adjustment.................................. -- 52,703 --
Cumulative effects of changes in accounting principles.................. -- (5,620) --
Provisions for loss on loans and real estate............................ 6,432 7,647 6,901
Depreciation and amortization........................................... 4,970 4,265 4,143
Accretion of deferred discounts and fees................................ (3,009) (10,846) (10,532)
Amortization of purchased mortgage loan servicing rights................ 8,293 7,548 5,768
Amortization of deferred compensation on
restricted stock and premiums........................................ 1,340 948 1,740
Deferred tax provision.................................................. 13,630 5,100 11,590
(Gain) loss on sale of real estate, net................................. (899) (1,781) 3,751
Loss on sales of loans, net............................................. 596 392 352
Proceeds from the sale of loans......................................... 405,091 691,543 407,069
Origination of loans for resale......................................... (45,974) (163,960) (127,074)
Purchase of loans for resale............................................ (378,496) (503,296) (595,142)
(Increase) decrease in interest receivable.............................. (2,739) (887) 4,866
Decrease in interest payable............................................ (3,677) (11,854) (10,074)
(Decrease) increase in other liabilities................................ (7,563) 3,632 (27,326)
Other items, net........................................................ (2,167) (17,533) 10,842
--------- ----------- ---------
Total adjustments.................................................... 27,396 72,085 (302,618)
--------- ----------- ---------
Net cash provided (used) by operating activities.................. 54,931 72,243 (271,840)
- - -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments of loans and mortgage-backed securities.................. 719,471 1,196,830 1,049,822
Purchases of loans............................................................ (686,438) (1,112,111) (369,207)
Origination of loans.......................................................... (312,696) (541,134) (612,408)
Proceeds from sale of mortgage-backed securities available for sale........... 34,756 12,672 --
Purchases of investment securities............................................ (25,000) (149,637) (109,101)
Maturities and repayments of investment securities............................ 23,426 117,185 169,060
Purchases of mortgage-backed securities....................................... (11,504) (205,222) (121,584)
Proceeds from sale of investment securities available for sale................ 14,797 -- --
Acquisitions, net of cash (paid) received..................................... (11,906) 785,540 --
Purchases of premises and equipment, net...................................... (10,542) (3,659) (2,178)
Purchases of mortgage loan servicing rights................................... (9,386) (7,270) (20,873)
Proceeds from sale of real estate............................................. 9,017 18,016 25,373
Purchases of Federal Home Loan Bank stock..................................... (2,600) (8,078) (8,414)
Payments to acquire real estate............................................... (1,310) (1,461) --
Proceeds from sale of Federal Home Loan Bank stock............................ -- 10,000 3,000
Other items, net.............................................................. -- -- 9,444
--------- ----------- ---------
Net cash (used) provided by investing activities.................. (269,915) 111,671 12,934
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation and Subsidiaries Consolidated Statement of Cash Flows (continued)
- - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits............................................................. $ 91,380 $ 140,528 $ 90,792
Proceeds from Federal Home Loan Bank advances.................................... 512,720 799,350 1,154,032
Repayment of Federal Home Loan Bank advances..................................... (415,878) (1,128,966) (756,602)
Proceeds from securities sold under agreements to repurchase..................... 195,755 2,570 143,864
Repayment of securities sold under agreements to repurchase...................... (157,432) -- (434,481)
Proceeds from issuance of other borrowings....................................... -- -- 38,841
Repayment of other borrowings.................................................... (4,702) (10,579) (23,193)
Issuance of common stock......................................................... 1,263 887 40,806
Other items, net................................................................. -- -- (346)
--------- ----------- ----------
Net cash provided (used) by financing activities........................ 223,106 (196,210) 253,713
- - ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position......................................... 8,122 (12,296) (5,193)
Balance, beginning of year....................................................... 21,208 33,504 38,697
--------- ----------- ----------
Balance, end of year............................................................. $ 29,330 $ 21,208 $ 33,504
- - ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense.............................................................. $ 281,152 $ 243,583 $ 265,322
Income taxes, net............................................................. 2,983 10,731 3,937
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities................................ 137,936 468,564 222,457
Loans transferred to real estate.............................................. 7,853 7,550 16,620
Loans to facilitate the sale of real estate................................... 583 12,818 14,967
Reduction in core value of deposits on recognition of
pre-acquisition tax credits and net operating losses....................... (6,810) -- --
Increase to assets and liabilities from prior business combinations........... -- 15,195 --
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
41
<PAGE>
Commercial Federal Corporation and Subsidiaries Notes to Consolidated Financial
Statements
- - --------------------------------------------------------------------------------
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
Note 1. Summary of Significant
Accounting Policies:
BASIS OF CONSOLIDATION - The consolidated financial statements are prepared on
an accrual basis and include the accounts of Commercial Federal Corporation (the
Corporation) and its wholly-owned subsidiary, Commercial Federal Bank, a Federal
Savings Bank (the Bank), and all majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain amounts for
years prior to fiscal year 1995 have been reclassified for comparative purposes.
CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and
cash equivalents include cash, restricted cash and federal funds sold.
Generally, federal funds are purchased and sold for a one-day period.
CHANGE IN METHOD OF ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES - As of July 1, 1994, the Corporation implemented the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
Those investments are classified in three categories and accounted for as
follows: (i) debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as "held-to-maturity securities" and
reported at amortized cost; (ii) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as "trading securities" and reported at fair value, with unrealized gains and
losses included in earnings; and (iii) debt and equity securities not classified
as either held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity.
In accordance with SFAS No. 115, prior period financial statements have not
been restated to reflect the change in accounting method. Accordingly, as
permitted by SFAS No. 115, the Corporation classified its investment and
mortgage-backed securities as of July 1, 1994, to held to maturity securities
and available for sale securities as applicable. The Corporation did not hold
any trading securities at June 30, 1995. Realized gains or losses on securities
available for sale are based on the specific identification method and are
included in results of operations on the trade date.
INVESTMENT SECURITIES HELD TO MATURITY - Premiums and discounts are amortized
over the contractual lives of the related securities on the level yield method.
Unrealized losses on investment securities held to maturity, if any, reflecting
a decline in the fair value of such securities to be other than temporary, would
be charged against income.
MORTGAGE-BACKED SECURITIES HELD TO MATURITY - Mortgage-backed securities are
designated as held to maturity because the Corporation has the positive intent
and ability to hold the securities to maturity. Mortgage-backed securities
represent participating interests in pools of single-family residential first
mortgage loans. Collateralized mortgage obligations are debt securities that are
secured by mortgage loans or other mortgage-backed securities. A portion of the
mortgage-backed securities portfolio also consists of pools of mortgage loans
originated by the Corporation and exchanged for mortgage-backed securities
("securitized loans"). These mortgage-backed securities are carried at the
Corporation's net investment in the underlying pool of mortgage loans at the
time of the exchange. Mortgage-backed securities held to maturity are recorded
at cost adjusted for amortization of premium and accretion of discount. Such
discounts and premiums are accreted and amortized into interest income using the
level yield method over the remaining contractual life of the securities,
adjusted for actual prepayments.
LOANS - Loans receivable are recorded at the contractual amounts owed by
borrowers less unamortized discounts, net of premiums, undisbursed funds on
loans in process, deferred loan fees and allowance for loan losses. Interest on
loans is accrued to income as earned, except that interest is not accrued on
first mortgage loans contractually delinquent three months or more. Any related
discounts or premiums on loans purchased are amortized into interest income
using the level yield method over the contractual lives of the loans, adjusted
for actual prepayments. Loan origination fees, commitment fees and direct loan
origination costs are deferred and recognized over the estimated average life of
the loan as a yield adjustment.
42
<PAGE>
- - --------------------------------------------------------------------------------
Loans held for sale are carried at the lower of aggregate cost or market value
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation adjustments,
if necessary, to reflect the lower of aggregate cost or market value, are
recorded to operations.
LOAN SERVICING - The Corporation's mortgage banking subsidiary services real
estate loans for investors which are not included in the accompanying
consolidated financial statements. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, holding advance
payments by borrowers for taxes and insurance, making inspections as required of
the mortgage premises, collecting amounts due from delinquent mortgagors,
supervising foreclosures in the event of unremedied defaults and generally
administering the loans for the investors to whom they have been sold. The
amount of loans being serviced for others at June 30, 1995, 1994 and 1993, was
$4,605,900,000, $4,042,300,000 and $3,647,400,000, respectively. The servicing
portfolio is subject to reduction by reason of normal amortization and
prepayment or liquidation of outstanding mortgage loans. Fees earned for
servicing loans are reported as income when the related mortgage loan payments
are collected. Loan servicing costs are charged to expense as incurred. The
mortgage servicing portfolio is covered by servicing agreements pursuant to the
mortgage-backed securities programs of the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through Federal Housing
Authority (FHA) insurance or Veteran's Administration (VA) guarantees or FNMA or
FHLMC reimbursement provisions in connection with loan foreclosures. The amount
of funds advanced by the Corporation pursuant to servicing agreements is not
material.
REAL ESTATE - Real estate includes real estate acquired through foreclosure,
real estate in judgment and real estate held for investment, which includes
equity in unconsolidated joint ventures and investment in real estate
partnerships.
Real estate acquired through foreclosure and in judgment are stated at the
lower of cost or fair value minus estimated costs to sell. Valuation allowances
for estimated losses on real estate are provided when the carrying value exceeds
the fair value minus estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities incurred to date. Joint
venture and partnership investments are carried on the equity method of
accounting and, where applicable, are stated at net realizable value. The
Corporation's ability to recover the carrying value of real estate held for
investment (including capitalized interest) is based upon future sales of land
or projects. The ability to affect such sales is subject to market conditions
and other factors which may be beyond the Corporation's control.
PROVISIONS FOR LOSSES - As of July 1, 1994, the Corporation implemented the
provisions of Statement of Financial Accounting Standards No. 114 (SFAS No.
114), "Accounting by Creditors for Impairment of a Loan," which has been amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -Income
Recognition and Disclosures." SFAS No. 114 addresses the accounting by creditors
for impairment of loans and applies to all loans, except large groups of smaller
balance homogeneous loans (such as residential real estate and consumer loans)
that are collectively evaluated for impairment, loans that are measured at fair
value or the lower of cost or fair value, leases and debt securities. SFAS No.
114 requires that impaired loans within its scope be measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable market price of
the loan or the fair value of the underlying collateral. The adoption of the
provisions of these statements had no material effect on the Corporation's
financial position or results of operations.
In addition to providing valuation allowances on specific assets where an
impairment has been identified, the Corporation establishes general valuation
allowances
43
<PAGE>
- - --------------------------------------------------------------------------------
for losses based upon the overall portfolio composition and prior loss
experience. Provisions for loan losses are recognized in current operations and
are added to the balance of allowances for losses. Recoveries are credited to
the allowance.
Provisions for losses include charges to reduce the recorded balances of
real estate to their estimated net realizable value or fair value, as
applicable. Provisions for losses are incurred when the carrying value of real
estate acquired through foreclosure and in judgment exceeds its fair value minus
estimated costs to sell, and when the net realizable value for real estate held
for investment is lower than the cost of such real estate. Specific losses on
real estate are provided when any permanent decline in value occurs. These
specific losses are based on independent third party appraisals, sales contract
values, and individual assets and their related cash flow forecasts. Therefore,
the value used to determine the provision for losses is subject to the
reasonableness of these estimates.
ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation periodically
purchases single-family residential seasoned whole loan packages (bulk purchased
loans) at net discounts. Portions of such discounts are allocated to allowance
for losses (credit allowances) relating to the credit risk associated with each
mortgage loan package purchased. These credit allowances are available to absorb
possible losses on these bulk purchased loans only and are credited to interest
income as actual prepayments of individual loans occur. Collectibility is
evaluated throughout the life of the acquired loans and if the estimate of total
probable collections is increased or decreased, the amount of the allowance on
bulk purchased loans (and the corresponding discount to be amortized) is
adjusted accordingly. The adjusted discount is amortized over the remaining life
of the mortgage loans, adjusted for actual prepayments.
PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building
improvements, leasehold improvements and furniture, fixtures and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings and three to 15
years for furniture, fixtures and equipment. Leasehold improvements are
generally amortized on the straight-line method over the terms of the respective
leases. Maintenance and repairs are charged to expense as incurred.
INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS - Effective June 30, 1994,
the Corporation changed its method of valuation of intangible assets
incorporating a fair value concept using a lower of cost or market methodology.
This accounting change was considered to be a change in accounting principle
inseparable from a change in estimate. Independent valuations are performed
annually. Core value of deposits resulting from acquisitions in fiscal years
1994 and 1995 is amortized on an accelerated basis over a period not to exceed
10 years and goodwill is amortized on a straight-line basis over a period not to
exceed 20 years.
PURCHASED MORTGAGE LOAN SERVICING RIGHTS - Purchased mortgage loan servicing
rights represent the cost of acquiring the right to service mortgage loans. Such
costs are capitalized and amortized in proportion to, and over the period of,
estimated net loan servicing income. Subsequent to acquisition, servicing rights
are valued at the lower of amortized cost or the present value of estimated
future net servicing revenue, discounted at a rate implicit at the date of
acquisition. Purchased mortgage loan servicing rights are periodically evaluated
in relation to the present value of estimated future net servicing revenues and
such carrying values are adjusted for indicated impairments based on
management's best estimate of remaining cash flows. Such estimates may vary from
actual cash flows due to prepayments of the underlying mortgage loans and
increases in servicing costs.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Corporation enters into
sales of securities under agreements to repurchase with primary dealers only,
which provide for the repurchase of the same security. Securities sold under
agreements to purchase identical securities are collateralized by assets which
are held in safekeeping in the name of the Corporation by the dealers who
arranged the transaction. Securities sold under agreements to repurchase are
treated as financings and the obligations to repurchase such securities are
reflected as a liability. The securities underlying the agreements remain in the
asset accounts of the Corporation.
HEDGING - The Bank has historically invested in interest-earning assets that
have a longer duration than its interest-bearing liabilities. The shorter
duration of the interest-sensitive liabilities indicates that the Bank is
exposed to interest rate risk. In a rising rate environment, liabilities will
reprice faster than assets, thereby reducing the market value of long-term
interest-earning assets and net interest income.
44
<PAGE>
- - --------------------------------------------------------------------------------
To mitigate this risk, interest rate swaps, interest rate caps and put
options on Eurodollar future contracts have historically been utilized to hedge
the interest rate exposure on certain interest-sensitive liabilities. It has
been the general direction of the Bank to move toward a natural, rather than a
synthetic, management of its interest rate risk. Therefore, the Bank has allowed
such hedging instruments to expire upon maturity while extending the maturities
and locking in fixed interest rates on certain borrowings, primarily advances
from the Federal Home Loan Bank, which has helped to reduce the Bank's one-year
cumulative gap mismatch. The Bank reports interest rate swaps using settlement
accounting whereby the net amount on interest rate swaps is recognized as an
adjustment to interest expense.
Effective June 30, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 119 (SFAS No. 119), "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments," which requires
disclosures about amounts, nature and terms of derivative financial instruments
(such as futures; forward, swap and option contracts; and other financial
instruments with similar characteristics). Because this statement requires only
disclosures about derivative financial instruments and does not require
adjustments to any such instruments, the provisions of SFAS No. 119 do not
affect the Corporation's financial position or results of operations.
INCOME TAXES - The Corporation files consolidated federal income tax returns.
The Corporation and its subsidiaries have entered into a tax-sharing agreement
that provides for the allocation and payment of federal and state income taxes.
The provision for income taxes of each corporation is computed on a separate
company basis, subject to certain adjustments.
Effective July 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." This
statement supersedes both Accounting Principles Board Opinion No. 11 (APB
Opinion No. 11) and the guidance of APB Opinion No. 23 on the tax treatment of
savings and loan bad debt reserves. SFAS No. 109 calculates income taxes on the
liability method, under which the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various assets and liabilities of the Corporation and gives current
recognition to changes in tax rates and laws. The effect of applying the
provisions of SFAS No. 109 was a one-time adjustment that increased net income
for fiscal year 1994 by $6,139,000 ($.48 per share) recorded as a cumulative
effect of a change in accounting principle resulting from increasing the net
deferred tax liability by $9,056,000 offset by additional deferred taxes
totaling $15,195,000 recorded to adjust the assets and liabilities for prior
business combinations from net-of-tax to pre-tax amounts. The principal
temporary difference creating this increase to net income is the Bank's reserve
for losses on loans and real estate. In addition, valuation allowances were
established against certain deferred tax assets recorded for state income tax
purposes.
EARNINGS PER SHARE - Earnings per common share are calculated on the basis of
the weighted average common shares outstanding and those outstanding options and
warrants that are dilutive.
Note 2. Acquisitions:
PROVIDENT FEDERAL SAVINGS BANK - On April 3, 1995, the Corporation consummated
the acquisition of Provident Federal Savings Bank of Lincoln, Nebraska
(Provident) by purchasing all 140,000 outstanding shares of Provident's common
stock at $53.75 per share for $7,525,000 in cash. Provident operated a
traditional thrift operation with five branches located in the Lincoln
metropolitan area. At April 3, 1995, Provident had assets totaling approximately
$96,500,000, deposits totaling approximately $58,100,000 and stockholders'
equity approximating $4,600,000. This acquisition has been accounted for as a
purchase. Core value of deposits totaling $2,591,000 and goodwill totaling
$713,000 were recorded from this transaction.
HOME FEDERAL SAVINGS AND LOAN - On July 15, 1994, the Corporation consummated
the acquisition of Home Federal Savings and Loan (Home Federal) by purchasing
all 236,212 outstanding shares of Home Federal's common stock at $38.17 per
share for approximately $9,016,000 in cash. Home Federal operated two branches
in Ada, Oklahoma. At July 15, 1994, Home Federal had assets totaling
$100,200,000, deposits totaling $87,300,000 and stockholders' equity totaling
$8,700,000. This acquisition has been accounted for as a purchase. Core value of
deposits totaling $1,331,000 was recorded.
45
<PAGE>
- - --------------------------------------------------------------------------------
FRANKLIN FEDERAL SAVINGS ASSOCIATION - On June 10, 1994, the Corporation
acquired $255,735,000 of insured deposits of the former Franklin Federal Savings
Association of Kansas (Franklin Federal) from the Resolution Trust Corporation
at a cost of $7,674,000. In fiscal year 1995 the Corporation also acquired four
branches and the related equipment of Franklin Federal at a cost of $876,000.
This acquisition has been accounted for as a purchase. Core value of deposits
totaling $8,049,000 and goodwill totaling $451,000 were recorded from this
transaction.
Core value of deposits resulting from these acquisitions is amortized on an
accelerated basis over 10 years and goodwill is amortized on a straight-line
basis over 20 years.
Note 3. Investment Securities Held to Maturity:
Investment securities held to maturity are summarized as follows:
<TABLE>
- - -----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and other Government agency obligations...... $294,187 $1,078 $(3,664) $291,601
Other securities........................................... 50 -- -- 50
- - -----------------------------------------------------------------------------------------------------------------------------
$294,237 $1,078 $(3,664) $291,651
- - -----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate............................. 6.27%
- - -----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1994 Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other Government agency obligations...... $280,550 $2,178 $(9,177) $273,551
Other securities........................................... 50 -- -- 50
- - -----------------------------------------------------------------------------------------------------------------------------
$280,600 $2,178 $(9,177) $273,601
- - -----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate............................. 6.16%
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995 and 1994, investment securities totaling $659,000 and
$4,999,000, respectively, were pledged to secure public funds.
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 1995, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
- - --------------------------------------------------------------------------------
1995
----------------------
Amortized Fair
Cost Value
- - --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less................................ $ 44,953 $ 44,976
Due after one year through five years.................. 228,294 226,156
Due after five years through ten years................. 20,990 20,519
Due after ten years.................................... -- --
- - --------------------------------------------------------------------------------
$294,237 $291,651
- - --------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
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During the fiscal years ended June 30, 1995 and 1994, there were no sales
of investment securities held to maturity. During fiscal year 1995 the
Corporation acquired investment securities totaling approximately $14,797,000 as
part of the acquisition of Home Federal and Provident. These securities were
sold shortly after acquisition at their fair market values resulting in no gain
or loss. Proceeds from the sales of marketable equity securities totaled
$4,705,000 for the fiscal year ended June 30, 1993, with gross (and net)
realized losses totaling $295,000 which is included in other operating income.
Note 4. Mortgage-Backed Securities Available For Sale:
Mortgage-backed securities available for sale at fair value are summarized as
follows:
<TABLE>
- - ---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.......... $ 9,829 $119 $ -- $ 9,948
Federal National Mortgage Association........... 370 4 -- 374
- - ---------------------------------------------------------------------------------------------------------
$10,199 $123 $ -- $10,322
- - ---------------------------------------------------------------------------------------------------------
Weighted average interest rate.................. 6.26%
- - ---------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1994 Cost Gains Losses Value
- - ---------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation.......... $11,930 $ 5 $181 $11,754
Federal National Mortgage Association........... 419 1 3 417
- - ---------------------------------------------------------------------------------------------------------
$12,349 $ 6 $184 $12,171
- - ---------------------------------------------------------------------------------------------------------
Weighted average interest rate.................. 5.81%
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1995, the Corporation recorded an unrealized gain on
securities available for sale as an increase to stockholders' equity totaling
$123,000, net of a deferred income tax benefit of approximately $44,000.
Proceeds from the sale of mortgage-backed securities available for sale
totaled $34,756,000 and $12,672,000, respectively, for the fiscal years ended
June 30, 1995 and 1994, resulting in no gain or loss. During fiscal year 1995
the Corporation acquired mortgage-backed securities as part of the acquisition
of Home Federal and Provident which were sold shortly after acquisition at their
fair market values resulting in no gain or loss. Sales during fiscal year 1994
were through the Corporation's mortgage banking operations resulting from
originated residential loans that were subsequently securitized. There were no
mortgage-backed securities sold during the fiscal year ended June 30, 1993.
At June 30, 1995, no mortgage-backed securities available for sale were
pledged as collateral, and at June 30, 1994, mortgage-backed securities totaling
$10,482,000 were pledged to secure public funds and securities sold under
agreements to repurchase.
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<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
Note 5. Mortgage-Backed Securities Held to Maturity:
Mortgage-backed securities held to maturity are summarized as follows:
- - -----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.................... $ 187,492 $1,448 $ (2,436) $ 186,504
Government National Mortgage Association.................. 778,855 2,045 (10,971) 769,929
Federal National Mortgage Association..................... 269,246 3,715 (2,633) 270,328
Collateralized Mortgage Obligations....................... 54,354 29 (1,299) 53,084
Privately Issued Mortgage Pool Securities................. 31,514 1,781 (182) 33,113
- - ------------------------------------------------------------------------------------------------------------------------------
$1,321,461 $9,018 $(17,521) $1,312,958
- - ------------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate............................ 6.36%
- - ------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1994 Cost Gains Losses Value
- - ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation.................... $ 214,848 $1,920 $ (6,197) $ 210,571
Government National Mortgage Association.................. 678,927 2 (40,106) 638,823
Federal National Mortgage Association..................... 299,449 2,245 (9,330) 292,364
Collateralized Mortgage Obligations....................... 59,491 -- (2,991) 56,500
Privately Issued Mortgage Pool Securities................. 40,548 1,786 (293) 42,041
- - -----------------------------------------------------------------------------------------------------------------------------
$1,293,263 $5,953 $(58,917) $1,240,299
- - -----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate............................ 5.74%
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities held to maturity at June 30 are classified by type of
interest payment and contractual maturity term as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------------
1995 1994
--------------------------------------- -----------------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate.............................. $ 778,173 $ 772,182 6.08% $ 714,562 $ 686,421 5.07%
Fixed-rate, 5-year term...................... 15,913 15,665 5.98 17,374 16,639 5.61
Fixed-rate, 7-year term...................... 50,362 49,538 6.29 54,868 51,815 5.97
Fixed-rate, 15-year term..................... 308,335 305,954 6.76 315,236 299,056 6.65
Fixed-rate, 30-year term..................... 114,324 116,535 7.48 131,732 129,868 7.34
- - -----------------------------------------------------------------------------------------------------------------------------
1,267,107 1,259,874 6.38 1,233,772 1,183,799 5.76
Collateralized mortgage obligations.......... 54,354 53,084 5.94 59,491 56,500 5.21
- - -----------------------------------------------------------------------------------------------------------------------------
$1,321,461 $1,312,958 6.36% $1,293,263 $1,240,299 5.74%
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
- - --------------------------------------------------------------------------------
At June 30, 1995 and 1994, the Corporation pledged mortgage-backed
securities totaling $317,701,000 and $216,928,000, respectively, as collateral
for collateralized mortgage obligations, securities sold under agreements to
repurchase, Federal Home Loan Bank advances, interest rate swap agreements and
other borrowings.
Note 6. Loans Held For Sale:
Loans held for sale from mortgage banking operations at June 30, 1995 and
1994, totaled $36,382,000 and $74,321,000, respectively, with weighted average
rates of 8.06% and 7.43%, respectively. Loans held for sale are secured by
single-family residential properties consisting of fixed and adjustable rate
mortgage loans totaling $36,195,000 and $187,000, respectively, at June 30,
1995, and $45,700,000 and $28,621,000, respectively, at June 30, 1994.
Proceeds from the sales of loans totaled $405,091,000, $691,543,000 and
$407,069,000, respectively, for the fiscal years ended June 30, 1995, 1994 and
1993. For the fiscal years ended June 30, 1995, 1994 and 1993, gross realized
gains on the sales of loans totaled $1,307,000, $3,018,000 and $742,000,
respectively, and gross realized losses totaled $1,903,000, $3,410,000 and
$1,094,000, respectively.
Note 7. Loans Receivable:
Loans receivable at June 30 are summarized as follows:
<TABLE>
- - -------------------------------------------------------------------------------------------
1995 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
Conventional mortgage loans.............................. $3,282,607 $2,850,356
FHA and VA loans......................................... 314,613 335,686
Commercial real estate loans............................. 167,800 186,535
Consumer and other loans................................. 233,676 192,171
Construction loans....................................... 16,484 2,003
- - ------------------------------------------------------------------------------------------
4,015,180 3,566,751
Less:
Unamortized discounts, net of premiums................ 4,677 987
Loans-in-process...................................... 6,263 2,922
Deferred loan fees, net............................... 2,495 1,505
Allowance for loan losses............................. 46,489 42,720
- - ------------------------------------------------------------------------------------------
$3,955,256 $3,518,617
- - ------------------------------------------------------------------------------------------
Weighted average interest rate........................... 8.23% 7.81%
- - ------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995, conventional, FHA and VA loans, including loans held
for sale, totaling $3,645,930,000 are secured by single-family residential
properties located as follows: 22% in Nebraska, 18% in Colorado, 6% in Texas, 5%
each in Georgia, Missouri and Oklahoma, and the remaining 39% in 44 other
states. At June 30, 1994, conventional, FHA and VA loans, including loans held
for sale, totaling $3,262,359,000 are secured by single-family residential
properties located as follows: 23% in Nebraska, 19% in Colorado, 6% in Georgia,
5% each in Missouri and Texas, and the remaining 42% in 45 other states. The
commercial real estate portfolio at June 30, 1995, is secured by properties
located as follows: 52% in Colorado, 18% in Nebraska, 10% in Florida and the
remaining 20% in 12 other states. The commercial real estate portfolio at June
30, 1994, is secured by properties located as follows: 59% in Colorado, 12% in
Nebraska, 11% in Florida and the remaining 18% in 13 other states.
Nonperforming loans at June 30, 1995 and 1994, aggregated $29,217,000 and
$30,936,000, respectively. Of the nonperforming loans at June 30, 1995,
approximately 12% are secured by properties located in Texas, 9% in
49
<PAGE>
- - --------------------------------------------------------------------------------
Georgia, 8% in Colorado, 7% in Nebraska, 6% each in California, Missouri and New
Jersey, 5% in Florida, 4% in Illinois and the remaining 37% located in 31 other
states. Of the nonperforming loans at June 30, 1994, approximately 14% are
secured by properties located in Colorado and Texas, 10% in California, 8% in
Georgia, 5% each in Missouri, Nebraska, and Illinois and the remaining 39%
located in 32 other states.
Also included in loans receivable at June 30, 1995 and 1994, are loans with
carrying values of $17,002,000 and $20,025,000, respectively, the terms of which
have been modified in troubled debt restructurings. During the fiscal years
ended June 30, 1995 and 1994, the Corporation recognized interest income on
these loans aggregating $1,492,000 and $1,788,000, respectively, whereas under
their original terms the Corporation would have recognized interest income of
$1,556,000 and $1,890,000, respectively. At June 30, 1995, the Corporation had
no material commitments to lend additional funds to borrowers whose loans were
subject to troubled debt restructuring.
At June 30, 1995 and 1994, the Corporation had pledged substantially all
single-family residential loans as collateral for Federal Home Loan Bank
advances, securities sold under agreements to repurchase and other borrowings.
Note 8. Real Estate:
Real estate at June 30 is summarized as follows:
<TABLE>
- - -------------------------------------------------------------------------------------------------
1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned and in judgment, net of allowance
for losses of $4,508 and $4,567................................. $ 6,859 $ 6,273
Real estate held for investment, which includes
equity in unconsolidated joint ventures and
investments in real estate partnerships, net of
allowance for losses of $1,391 and $1,416....................... 9,526 9,738
- - -------------------------------------------------------------------------------------------------
$16,385 $16,011
- - -------------------------------------------------------------------------------------------------
</TABLE>
Commercial and residential real estate comprise approximately 79% and 21%,
respectively, of the total amount of real estate at June 30, 1995, and
approximately 80% and 20%, respectively, of the total amount of real estate at
June 30, 1994. Real estate located by states at June 30, 1995, is as follows:
49% in Nebraska, 34% in Colorado, 5% in Texas, and the remaining 12% in 17 other
states. Real estate located by states at June 30, 1994, is as follows: 49% in
Nebraska, 20% in Colorado, 7% each in California and Georgia and the remaining
17% in 14 other states.
50
<PAGE>
- - --------------------------------------------------------------------------------
Note 9. Allowance for Losses on Loans and Real Estate:
<TABLE>
<CAPTION>
An analysis of the allowance for losses on loans and real estate is summarized as follows:
- - ----------------------------------------------------------------------------------------------------------------------
Loans Real Estate Total
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1992................................................... $ 48,964 $ 4,045 $ 53,009
- - --------------------------------------------------------------------------------------------------------------------------
Provision charged to operations.......................................... 5,735 1,166 6,901
Charges.................................................................. (3,394) (873) (4,267)
Recoveries............................................................... 1,261 832 2,093
Estimated allowance for purchased loans.................................. 173 -- 173
Change in estimate of allowance for purchased loans...................... (5,334) -- (5,334)
Charge-offs to allowance for purchased loans............................. (2,299) -- (2,299)
- - --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993................................................... 45,106 5,170 50,276
- - ---------------------------------------------------------------------------------------------------------------------------
Provision charged to operations.......................................... 6,033 1,614 7,647
Charges.................................................................. (3,930) (1,138) (5,068)
Recoveries............................................................... 667 337 1,004
Estimated allowance for purchased loans.................................. 39 -- 39
Change in estimate of allowance for purchased loans...................... (4,357) -- (4,357)
Charge-offs to allowance for purchased loans............................. (632) -- (632)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 (1)............................................... 42,926 5,983 48,909
- - ---------------------------------------------------------------------------------------------------------------------------
Provision charged to operations.......................................... 6,033 399 6,432
Charges.................................................................. (3,503) (635) (4,138)
Recoveries............................................................... 1,334 152 1,486
Allowances from acquisitions............................................. 1,818 -- 1,818
Change in estimate of allowance for purchased loans...................... (1,705) -- (1,705)
Charge-offs to allowance for purchased loans............................. (336) -- (336)
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (1)............................................... $46,567 $5,899 $52,466
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At June 30, 1995 and 1994, includes $78,000 and $206,000, respectively, in
general allowance for losses established primarily to cover risks associated
with borrowers' delinquencies and defaults on loans held for sale. At June
30, 1993, there was no allowance for losses on loans held for sale.
Bulk loan purchases acquired at a discount are allocated an estimated
allowance for purchased loans that will be available for potential losses in the
future on a particular loan package with any excess over the allowance recorded
as a discount. At June 30, 1995, 1994 and 1993, $15,280,000, $17,321,000 and
$22,271,000, respectively, has been allocated from these discount amounts to
provide for the credit risk associated with such purchased loans. This estimated
allowance for purchased loans is available only to absorb losses associated with
the respective purchased loan packages, and is not available to absorb losses
from other loans.
51
<PAGE>
- - --------------------------------------------------------------------------------
Note 10. Premises And Equipment:
Premises and equipment at June 30 are summarized as follows:
<TABLE>
- - --------------------------------------------------------------------------------------------
1995 1994
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Land.......................................................... $ 9,671 $ 9,265
Buildings and improvements.................................... 51,733 47,203
Leasehold improvements........................................ 2,034 2,128
Furniture, fixtures and equipment............................. 51,718 43,829
- - --------------------------------------------------------------------------------------------
115,156 102,425
Less accumulated depreciation and amortization................ 52,440 47,891
- - --------------------------------------------------------------------------------------------
$ 62,716 $ 54,534
- - --------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $4,970,000, $4,265,000 and $4,143,000
for the fiscal years ended June 30, 1995, 1994 and 1993, respectively.
The Bank has operating lease commitments on certain premises and equipment.
Rent expense totaled $1,998,000, $1,906,000 and $1,643,000 for the fiscal years
ended June 30, 1995, 1994 and 1993, respectively. Annual minimum operating lease
commitments as of June 30, 1995, are as follows: 1996 - $1,433,000; 1997 -
$1,054,000; 1998 - $942,000; 1999 - $833,000; 2000 - $652,000; 2001 and
thereafter - $5,243,000.
52
<PAGE>
- - --------------------------------------------------------------------------------
Note 11. Goodwill and Core Value of Deposits:
An analysis of goodwill and core value of deposits is summarized as follows:
<TABLE>
- - --------------------------------------------------------------------------------------------------------------
Core Value
Goodwill of Deposits Total
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1992........................................ $ 64,508 $ 33,782 $ 98,290
Amortization expense.......................................... (6,806) (3,702) (10,508)
- - --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993........................................ 57,502 30,080 87,782
- - --------------------------------------------------------------------------------------------------------------
Additions from acquisitions................................... -- 28,674 28,674
Adoption of SFAS No. 109 for prior business combinations...... -- 15,692 15,692
Valuation adjustment.......................................... (29,267) (20,763) (50,030)
Amortization expense.......................................... (6,229) (7,855) (14,084)
Sale of an investment in a subsidiary......................... (849) -- (849)
- - --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994........................................ 21,357 45,828 67,185
- - --------------------------------------------------------------------------------------------------------------
Additions from acquisitions, net.............................. 1,164 3,741 4,905
Accelerated amortization expense.............................. (21,357) -- (21,357)
Write-off due to recognition of pre-acquisition
tax credits and net operating losses....................... -- (6,810) (6,810)
Amortization expense.......................................... (32) (10,179) (10,211)
- - --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995........................................ $ 1,132 $ 32,580 $ 33,712
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
An appraisal performed in fiscal year 1994 by an independent third party of
the existing intangible assets relating to acquisitions during 1986 through 1988
of five troubled savings institutions located in Colorado, Kansas and Oklahoma
resulted in a fair value estimate of $41,000,000, and therefore, recognition of
an impairment of recorded intangible assets of $52,703,000 at June 30, 1994. The
appraisal of $41,000,000 was classified as core value of deposits totaling
$19,643,000 and goodwill totaling $21,357,000. The effect of this accounting
change was a charge to fiscal year 1994 results of operations totaling
$52,703,000, with an income tax benefit of $8,765,000, resulting in a loss of
$43,938,000. Effective July 1, 1994, the remaining $19,643,000 of identifiable
intangible assets classified as core value of deposits is being amortized on a
straight-line basis over the remaining respective lives, of which all were
original 10 year terms, with the primary amount to be fully amortized as of
April 30, 1997. Goodwill of $21,357,000 has been amortized over the first six
months of fiscal year 1995. No adjustment was made to the intangible assets
resulting from the Corporation's acquisitions during fiscal year 1994.
53
<PAGE>
- - --------------------------------------------------------------------------------
Note 12. Deposits:
Deposits at June 30 are summarized as follows:
<TABLE>
- - -------------------------------------------------------------------------------------------------------------------------
1995 1994
------------------------- ----------------------
Description and interest rates Amount % Amount %
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (average of 4.41% and 2.93%)................. $ 538,207 15.0% $ 468,308 13.9%
NOW accounts (average of .93% and .96%)........................ 273,809 7.6 254,442 7.6
Market rate savings (average of 3.31% and 2.76%)............... 169,892 4.7 220,250 6.6
- - --------------------------------------------------------------------------------------------------------------------------
Total savings (no stated maturities)........................... 981,908 27.3 943,000 28.1
- - --------------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00%............................................ 11,846 .3 15,876 .5
3.00% - 3.99%............................................ 66,337 1.9 577,067 17.2
4.00% - 4.99%............................................ 442,559 12.3 788,261 23.5
5.00% - 5.99%............................................ 865,932 24.1 708,786 21.1
6.00% - 6.99%............................................ 906,923 25.3 195,676 5.8
7.00% - 7.99%............................................ 276,934 7.7 79,846 2.4
8.00% - 8.99%............................................ 32,415 .9 35,830 1.1
9.00% and over........................................... 6,321 .2 11,255 .3
- - --------------------------------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 5.37% and 5.19%)................................. 2,609,267 72.7 2,412,597 71.9
- - --------------------------------------------------------------------------------------------------------------------------
$3,591,175 100.0% $3,355,597 100.0%
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Interest expense on deposit accounts for the years ended June 30 is summarized as follows:
- - --------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts.............................................. $ 23,448 $ 8,509 $ 5,445
NOW accounts................................................... 2,440 2,698 2,569
Market rate savings............................................ 6,539 5,101 5,417
Certificates of deposit........................................ 132,697 112,383 107,258
- - --------------------------------------------------------------------------------------------------------------------------
$165,124 $128,691 $120,689
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
<TABLE>
- - -------------------------------------------------------------------------------------------------------------------------
At June 30, 1995, scheduled maturities of certificates of deposit are as follows:
- - -------------------------------------------------------------------------------------------------------------------------
Year Ending June 30,
--------------------------------------------------------------------------------------------
Rate 1996 1997 1998 1999 2000 Thereafter Total
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.00%........ $ 9,061 $ 426 $ 95 $ 18 $ 11 $2,235 $ 11,846
3.00% - 3.99%....... 61,612 4,014 684 27 -- -- 66,337
4.00% - 4.99%....... 401,169 33,037 6,237 1,743 68 305 442,559
5.00% - 5.99%....... 588,538 133,784 56,064 80,593 3,944 3,009 865,932
6.00% - 6.99%....... 550,243 243,396 82,478 22,621 6,606 1,579 906,923
7.00% - 7.99%....... 26,891 162,085 71,598 11,728 4,002 630 276,934
8.00% - 8.99%....... 18,238 4,130 7,943 1,266 753 85 32,415
9.00% and over...... 2,243 99 3,940 39 -- -- 6,321
- - --------------------------------------------------------------------------------------------------------------------------
$1,657,995 $580,971 $229,039 $118,035 $15,384 $7,843 $2,609,267
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995 and 1994, deposits of certain state and municipal agencies
and other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $44,132,000 and $11,374,000, respectively,
and investment securities with carrying values of $659,000 and $4,999,000,
respectively.
In accordance with regulatory requirements, at June 30, 1995 and 1994, the
Corporation maintained $10,196,000 and $10,639,000, respectively, in cash on
hand and deposits at the Federal Reserve Bank in noninterest earning reserves
against certain transaction checking accounts and nonpersonal certificates of
deposit.
Note 13. Advances From The Federal Home Loan Bank:
At June 30 the Corporation was indebted to the Federal Home Loan Bank of Topeka
on notes maturing as follows:
<TABLE>
- - --------------------------------------------------------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------------------
Weighted Weighted
Interest Average Average
Year Ending June 30, Rate Range Rate Amount Rate Amount
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995............................ 5.64% $ 454,347
1996............................ 4.72% - 10.75% 6.14% $ 667,714 6.05 243,672
1997............................ 4.61 - 9.25 5.67 721,633 5.15 580,115
1998............................ 5.06 - 7.90 5.69 231,297 5.59 221,077
1999............................ 5.25 - 6.21 5.70 35,608 5.51 25,305
2000............................ 7.19 7.19 350
- - --------------------------------------------------------------------------------------------------------------------------
4.61% - 10.75% 5.87% $1,656,602 5.51% $1,524,516
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995 and 1994, the Corporation had pledged a portion of its
real estate loans and mortgage-backed securities as well as Federal Home Loan
Bank stock as collateral for outstanding advances. At June 30, 1995 and 1994,
there were no commitments for advances from the Federal Home Loan Bank.
55
<PAGE>
- - --------------------------------------------------------------------------------
Note 14. Securities Sold Under Agreements to Repurchase:
At June 30, 1995 and 1994, securities sold under agreements to repurchase
identical securities totaled $195,755,000 and $157,432,000, respectively, with
weighted average interest rates of 7.04% and 6.08%, respectively. There were no
securities sold under agreements to repurchase substantially identical
securities at June 30, 1995 or 1994. An analysis of securities sold under
agreements to repurchase identical securities for the years ended June 30 is
summarized as follows:
<TABLE>
- - --------------------------------------------------------------------------------------------
1995 1994
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum month-end balance...................................... $195,755 $157,432
- - --------------------------------------------------------------------------------------------
Average balance................................................ $101,924 $155,897
- - --------------------------------------------------------------------------------------------
Weighted average interest rate during the period............... 7.61% 6.15%
Weighted average interest rate at end of period................ 7.04% 6.08%
- - --------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995, securities sold under agreements to repurchase had
maturities ranging from January 1996 to June 1997 with a weighted average
maturity at June 30, 1995, of 491 days. At June 30, 1995 and 1994, mortgage-
backed securities with carrying values totaling $234,176,000 and $172,467,000,
respectively, and market values totaling $231,360,000 and $168,506,000,
respectively, were pledged as collateral for securities sold under agreements to
repurchase.
It is the Corporation's policy to enter into repurchase agreements only
with major brokerage firms that are primary dealers in government securities. At
June 30, 1995, the Corporation had repurchase agreements with two such dealers
with the amount at risk in excess of 10.0% of stockholders' equity with Morgan
Stanley & Co. Incorporated and the Federal Home Loan Mortgage Corporation
totaling $160,755,000 and $35,000,000, respectively, with weighted average
maturities of 444 and 707 days, respectively.
Note 15. Other Borrowings:
Other borrowings at June 30 consist of the following:
<TABLE>
- - ------------------------------------------------------------------------------------------------
1995 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C>
Subordinated notes, interest 10.25%, due December 15, 1999......... $40,250 $40,250
Collateralized mortgage obligations................................ 12,454 16,567
Other borrowings................................................... 2,699 2,923
- - ------------------------------------------------------------------------------------------------
$55,403 $59,740
- - ------------------------------------------------------------------------------------------------
</TABLE>
The subordinated notes pay interest semi-annually on June 15 and December
15. The subordinated notes are not redeemable prior to December 15, 1995;
thereafter, such notes are redeemable, at the election of the Corporation, in
whole or in part, at par plus accrued interest to the date of redemption. The
subordinated notes have no sinking fund, are unsecured general obligations of
the Corporation, and are subordinated to all existing and future senior
indebtedness of the Corporation. The Note Indenture, among other provisions,
restricts the ability of the Corporation and its subsidiaries, under certain
circumstances, to incur additional indebtedness and restricts the Corporation's
ability to pay cash dividends or to make other capital distributions. The
Corporation is also required to maintain not less than $3,500,000 in cash and
cash equivalents under the terms of the Note Indenture.
56
<PAGE>
- - --------------------------------------------------------------------------------
At June 30, 1995, the remaining two notes issued in conjunction with
collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due
in varying amounts contractually through September 1, 2015. The notes are
secured by FNMA mortgage-backed securities with a book value of approximately
$17,023,000. As the principal balance on the collateral on these notes repay,
the notes are correspondingly repaid.
Other borrowings are collateralized by unencumbered first mortgage loans
with unpaid principal balances of approximately $6,959,000 at June 30, 1995.
Principal maturities of other borrowings as of June 30, 1995, for the next
five fiscal years are as follows: 1996 - $3,869,000; 1997 - $3,314,000; 1998 -
$2,888,000; 1999 - $2,535,000; 2000 - $40,975,000; and thereafter -$1,822,000.
Note 16. Interest Rate Hedging:
<TABLE>
The following table summarizes the Bank's interest rate hedging agreements at June 30:
- - ---------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Notional principal amount, fixed rate agreements................ $ 78,500 $109,500 $194,500
Weighted average fixed rate paid................................ 10.40% 9.62% 8.75%
Weighted average variable rate received......................... 5.63% 3.55% 3.56%
Net interest expense............................................ $ 4,345 $ 8,485 $ 12,196
Range of remaining terms........................................ 3-29 mos. 1-41 mos. 2-53 mos.
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest expense as disclosed in the above table also represents gross
interest expense since no interest income on these interest rate swap agreements
has been received during the three fiscal years presented. The Bank is not
involved in any derivative activities nor has the Bank terminated any contracts
during the fiscal years ended June 30, 1995, 1994 and 1993. The interest rate
swap agreements were collateralized at June 30, 1995 and 1994, by mortgage-
backed securities with carrying values of $18,817,000 and $22,500,000,
respectively. Swap agreements totaling $68,500,000 will mature in the next
fiscal year.
Entering into interest rate swap agreements involves the credit risk of
dealing with intermediary and primary counterparties and their ability to meet
the terms of the respective contracts. The Bank is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swaps if the
Bank is in a net interest receivable position at the time of potential default
by the counterparties. However, at June 30, 1995, the Bank was in a net interest
payable position. The Bank does not anticipate nonperformance by the
counterparties.
57
<PAGE>
- - --------------------------------------------------------------------------------
Note 17. Income Taxes:
<TABLE>
The following is a comparative analysis of the provision for federal and state taxes on income:
- - ------------------------------------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.................................. $ 6,432 $ 8,921 $ 7,445
State.................................... 670 210 806
- - ------------------------------------------------------------------------------------------------------
7,102 9,131 8,251
- - ------------------------------------------------------------------------------------------------------
Deferred:
Federal.................................. 13,491 5,012 11,286
State.................................... 139 88 304
- - ------------------------------------------------------------------------------------------------------
13,630 5,100 11,590
- - ------------------------------------------------------------------------------------------------------
Total provision for income taxes............ $20,732 $14,231 $19,841
- - ------------------------------------------------------------------------------------------------------
</TABLE>
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was passed, which
raised the corporate income tax rate from 34.0% to 35.0% retroactive to January
1, 1993. The following is a reconciliation of the statutory federal income tax
rate to the consolidated effective tax rate:
<TABLE>
- - ----------------------------------------------------------------------------------------------------------
Year Ended June 30,
-------------------------------------
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate............................... 35.0% 35.0% 34.0%
Amortization of discounts, premiums and
intangible assets from acquisitions.......................... 15.5 144.5 6.6
Income tax credits.............................................. (3.5) (5.8) (.4)
Bad debt deduction.............................................. (3.2) (23.5) (1.3)
State income taxes, net of federal income tax benefit........... 1.2 2.6 1.4
Tax exempt interest income...................................... (.2) (1.4) (.3)
Effect of change in enacted tax rate............................ -- 13.9 --
Other items, net................................................ (1.8) .4 (.8)
- - -----------------------------------------------------------------------------------------------------------
Effective tax rate.............................................. 43.0% 165.7% 39.2%
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
58
<PAGE>
- - --------------------------------------------------------------------------------
The tax effect of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
- - -------------------------------------------------------------------------------------------------------------------------
1995 1994
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Finance lease contracts treated as operating leases for income tax purposes.......... $55,847 $46,962
Federal Home Loan Bank stock......................................................... 10,716 10,321
Differences between book and tax basis of premises and equipment..................... 6,234 6,008
Core value of acquired deposits...................................................... 3,911 6,946
Basis differences between tax and financial reporting arising from acquisition....... 1,937 --
Other items.......................................................................... 2,137 1,797
- - --------------------------------------------------------------------------------------------------------------------------
80,782 72,034
- - --------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible............... 13,286 11,147
Tax credit carryforwards............................................................. 4,035 10,974
Collateralized mortgage obligations.................................................. 3,402 3,401
State operating loss carryforwards................................................... 2,724 2,892
Basis differences between tax and financial reporting arising from acquisitions...... 2,585 1,397
Accretion of discount on purchased loans............................................. 2,372 2,063
Employee benefits.................................................................... 1,807 1,485
Other items.......................................................................... 1,832 2,358
- - --------------------------------------------------------------------------------------------------------------------------
32,043 35,717
Valuation allowance..................................................................... (2,659) (2,753)
- - --------------------------------------------------------------------------------------------------------------------------
29,384 32,964
- - --------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability.............................................................. $51,398 $39,070
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance of $2,659,000 at June 30, 1995, decreased from
$2,753,000 at June 30, 1994, primarily due to a decrease in state net operating
losses available for income tax purposes. At June 30, 1995, the Corporation had
federal alternative minimum tax credit carryforwards available approximating
$2,827,000 which will carry forward indefinitely.
Under APB Opinion No. 11, the components of the deferred income tax provision
for fiscal year 1993 is as follows:
<TABLE>
- - --------------------------------------------------------------------------------------------------
<S> <C>
Finance lease contracts treated as operating leases for income tax purposes........ $10,044
Utilization of net operating loss carryforward..................................... 5,264
Utilization of alternative minimum tax credit carryforward......................... (1,636)
FHLB stock dividends, net of redemptions........................................... (357)
Provision for losses on real estate held for investment, net....................... (136)
Collateralized mortgage obligations................................................ (665)
Options and hedging activities..................................................... 97
Other items, net................................................................... (1,021)
- - --------------------------------------------------------------------------------------------------
$11,590
- - --------------------------------------------------------------------------------------------------
</TABLE>
59
<PAGE>
- - --------------------------------------------------------------------------------
Savings institutions that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
before such deduction. The deduction percentage is 8.0% for fiscal years ended
June 30, 1995, 1994 and 1993. Alternatively, a qualified savings institution may
compute its bad debt deduction based upon actual loan loss experience (i.e.,
experience method). The bad debt deduction for fiscal year 1995 was computed
under the percentage of taxable income method since it yielded a greater
deduction than did the experience method. In fiscal years 1994 and 1993 the Bank
computed its bad debt deduction utilizing the experience method. In accordance
with provisions of SFAS No. 109, a deferred tax liability has not been
recognized for the bad debt reserves of the Bank created in the tax years which
began prior to December 31, 1987 (the base year). At June 30, 1995, the amount
of these reserves totaled approximately $79,660,000 with an unrecognized
deferred tax liability associated with such reserves totaling approximately
$28,367,000. Such deferred tax liability could be recognized in the future, in
whole or in part, if (i) the tax bad debt reserves exceed the base year amount,
(ii) there is a change in federal tax law, (iii) the Bank fails to meet the
definition of a "qualified savings institution," (iv) certain distributions are
made with respect to the stock of the Bank or (v) the bad debt reserves are used
for any purpose other than absorbing bad debt losses.
Note 18. Stockholders' Equity And Regulatory Restrictions:
On December 31, 1984, the Bank completed its conversion from mutual to
stock ownership and became a wholly-owned subsidiary of Commercial Federal
Corporation. Federal regulations require that, upon conversion from mutual to
stock form of ownership, a "liquidation account" be established by restricting a
portion of net worth for the benefit of eligible savings account holders who
maintain their savings accounts with the Bank after conversion. In the event of
complete liquidation, and only in such event, each savings account holder who
continues to maintain his savings account shall be entitled to receive a
distribution from the liquidation account after payment to all creditors but
before any liquidation distribution with respect to common stock. This account
will be proportionately reduced for any subsequent reduction in the eligible
holder's savings accounts. Except for the repurchase of stock and payment of
dividends by the Corporation, the existence of the liquidation account will not
restrict use or application of the Corporation's net worth.
On December 19, 1988, the Board of Directors of the Corporation adopted a
Shareholder Rights Plan and declared a distribution of stock purchase rights
consisting of one primary right and one secondary right for each outstanding
share of common stock payable on December 30, 1988, to stockholders of record on
that date. These rights are attached to and trade only together with the common
stock shares. The provisions of the Shareholder Rights Plan are designed to
protect the interests of the stockholders of record in the event of an
unsolicited or hostile attempt to acquire the Corporation at a price or on terms
that are not fair to all shareholders. Unless rights are exercised, holders have
no rights as a stockholder of the Corporation (other than rights resulting from
such holder's ownership of common shares), including, without limitation, the
right to vote or to receive dividends. With certain exceptions, the rights
expire December 31, 1998, unless earlier redeemed by the Corporation. At June
30, 1995, no such rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to fix and
state voting powers, designation preferences, and other special rights of such
shares and the qualifications, limitations and restrictions thereof. The
preferred stock may rank prior to the common stock as to dividend rights,
liquidation preferences, or both, and may have full or limited voting rights.
On June 30, 1992, the Corporation sold 3,500,000 shares of its common stock
in a public offering with the shares priced at $10.00 per share ($.01 par
value). At June 30, 1992, the Corporation recorded the subscription of the
common stock to stockholders' equity which totaled $32,137,000 after deducting
the underwriter discount and expenses associated with the offering. An
additional 525,000 shares of common stock from the overallotment option were
exercised subsequently in July 1992. The cash proceeds on the total sale of the
4,025,000 shares after deducting the underwriter discount and expenses
associated with the offering totaled $36,958,000 and were paid to the
Corporation on July 9, 1992.
In addition, on May 4, 1993, warrants for 1,250,000 shares of the
Corporation's common stock were exercised (1,000,000 shares at $2.00 per share
and 250,000 shares at $3.625 per share) resulting in net proceeds totaling
$2,846,000 from the issuance of such shares.
60
<PAGE>
- - --------------------------------------------------------------------------------
Under the Office of Thrift Supervision's (OTS's) capital distribution
regulations, a savings institution that, immediately prior to, and on a pro
forma basis after giving effect to, a proposed dividend, has total capital that
is at least equal to the amount of its fully phased-in capital requirements (a
"Tier 1 Association") is permitted to pay dividends during a calendar year in an
amount equal to the greater of (i) 75.0% of its net income for the recent four
quarters, or (ii) 100.0% of its net income to date during the calendar year plus
an amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At June 30, 1995, the Bank
qualified as a Tier 1 Association, and would be permitted to pay an aggregate
amount approximating $81,268,000 in dividends under these regulations. Should
the Bank's regulatory capital fall below certain levels, applicable law would
require prior approval of such proposed dividends and, in some cases, would
prohibit the payment of dividends.
Under certain other federal regulations, the Bank is not permitted to pay
dividends on its capital stock if its net worth is or would thereby be reduced
below the applicable net worth regulatory capital requirements prescribed for
insured institutions or reduced below the amount required for the liquidation
account established in connection with the conversion. The Corporation has not
paid cash dividends to its common stock shareholders as of June 30, 1995.
Note 19. Regulatory Capital Requirements:
At June 30, 1995, the Bank's estimates of its capital amounts and the capital
levels required under OTS capital regulations are as follows:
<TABLE>
- - -----------------------------------------------------------------------------------------------------------------------
Actual Requirement Excess
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank's stockholder's equity.............................................. $336,545
Less unrealized holding gain on securities available for sale, net....... (79)
Less intangible assets................................................... (31,283)
Less phase-out of investments in non-includable subsidiaries............. (1,704)
- - -----------------------------------------------------------------------------------------------------------------------
Tangible capital......................................................... $303,479 $ 88,849 $214,630
- - -----------------------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1).................................. 5.12% 1.50% 3.62%
- - -----------------------------------------------------------------------------------------------------------------------
Tangible capital......................................................... $303,479
Plus certain restricted amounts of other intangible assets............... 21,430
- - -----------------------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital)............................................ $324,909 $178,341 $146,568
- - -----------------------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2)...................................... 5.47% 3.00% 2.47%
- - -----------------------------------------------------------------------------------------------------------------------
Core capital............................................................. $324,909
Plus general loan loss allowances........................................ 31,553
Less that portion of land loans and non-residential
construction loans in excess of an 80.0% loan-to-value ratio.......... (729)
- - -----------------------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital)....................................... $355,733 $211,525 $144,208
- - -----------------------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3)........................... 13.45% 8.00% 5.45%
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on adjusted total assets totaling $5,923,283,000.
(2) Based on adjusted total assets totaling $5,944,713,000.
(3) Based on risk-weighted assets totaling $2,644,066,000.
- - --------------------------------------------------------------------------------
61
<PAGE>
- - --------------------------------------------------------------------------------
The OTS, as the primary federal regulator of savings institutions, has
broad supervisory and enforcement powers. The Bank is also subject to regulatory
and supervisory enforcement authority under the Federal Deposit Insurance
Corporation (FDIC) with respect to certain activities that may pose a risk to
the deposit insurance fund. At periodic intervals, both the OTS and the FDIC
routinely examine the Bank's financial statements as part of their legally
prescribed oversight of the savings and loan industry. Based on these
examinations, the regulators can direct the Bank's financial statements be
adjusted in accordance with their findings.
In April 1991, the OTS proposed to amend its core capital requirement to
establish a minimum 3.0% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
institutions, the minimum core capital ratio would be 3.0% plus at least an
additional 1.0% to 2.0%, determined on a case-by-case basis by the OTS after
assessing both the quality of risk management systems and the level of overall
risk in each individual savings institution. The Bank does not anticipate that
it will be materially affected by this regulation if adopted in its current
form.
Effective July 1, 1994, the OTS amended its risk-based capital standards
that included an interest rate risk component. The amendment requires thrifts
with interest rate risk in excess of certain levels to maintain additional
capital. Under this amendment, thrifts are divided into two groups, those with
"normal" levels of interest rate risk and those with "greater than normal"
levels of interest rate risk. Thrifts with greater than normal levels are
subject to a deduction from total capital for purposes of calculating risk-based
capital. Based on the Bank's interest rate risk profile and the level of
interest rates at June 30, 1995, as well as the Bank's level of risk-based
capital at June 30, 1995, management does not believe that these changes will
have a material adverse effect on the Bank's level of required risk-based
capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established five regulatory capital categories: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized; and authorized banking regulatory agencies to take prompt
corrective action with respect to institutions in the three undercapitalized
categories. These corrective actions become increasingly more stringent as an
institution's regulatory capital declines. At June 30, 1995, the Bank exceeded
the minimum requirements for the well-capitalized category as shown in the
following table.
<TABLE>
- - --------------------------------------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual capital........................ $324,909 $324,909 $355,733
Percentage of adjusted assets......... 5.47% 12.29% 13.45%
Minimum requirements to be
classified well-capitalized........ 5.00% 6.00% 10.00%
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
- - --------------------------------------------------------------------------------
Note 20. Commitments And Contingencies:
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve elements
of credit and interest rate risk in excess of the amount recognized in the
Consolidated Statement of Financial Condition. The contractual amounts of these
instruments represent the maximum credit risk to the Corporation. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At June 30, 1995, the Corporation had issued commitments, excluding
undisbursed portions of loans in process, of approximately $103,781,000 as
follows: $33,805,000 to originate loans, $33,723,000 to purchase loans,
$15,000,000 to purchase investment securities, $4,761,000 to purchase mortgage-
backed securities and $16,492,000 to provide consumers unused lines of credit.
At June 30, 1994, the Corporation had commitments, excluding undisbursed
portions of loans in process, of approximately $156,052,000 as follows:
$36,277,000 to originate loans, $76,218,000 to purchase loans, $28,816,000 to
purchase mortgage-backed securities and $14,741,000 to provide consumers unused
lines of credit. In addition, at June 30, 1995 and 1994, outstanding commitments
from mortgage banking operations to purchase mortgage loan servicing rights
totaled $521,000 and $1,557,000, respectively.
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn upon. The Bank evaluates each customer's credit worthiness on a separate
basis and requires collateral based on this evaluation. Collateral consists
mainly of residential family units and personal property.
At June 30, 1995 and 1994, the Corporation had approximately $66,496,000
and $121,880,000, respectively, in mandatory forward delivery commitments to
sell residential mortgage loans. At June 30, 1995 and 1994, loans sold subject
to recourse provisions totaled approximately $49,678,000 and $58,483,000,
respectively, which represents the total potential credit risk associated with
these particular loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 13, 1994, the Bank commenced litigation against the United
States in the United States Court of Federal Claims seeking to recover monetary
relief for the government's refusal to honor certain contracts between the Bank
and the Federal Savings and Loan Insurance Corporation. The suit alleges that
such governmental action constitutes breach of contract and an unlawful taking
of property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome, and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing and the dollar amount of damages which
may be awarded to the Bank if it finally prevails in this litigation.
Note 21. Employee Benefit and Incentive Plans and Other Postretirement Benefits:
RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred
savings 401(k) plan covering substantially all employees. Participants may
contribute up to 10.0% of their pre-tax base pay with the Corporation matching
contributions equal to 100.0% of the first 8.0% of participant contributions.
Participants vest immediately in their own contributions and over a five-year
period for Corporation contributions. Contribution expense was $1,208,000,
$1,164,000 and $996,000 for the years ended June 30, 1995, 1994 and 1993,
respectively.
63
<PAGE>
- - --------------------------------------------------------------------------------
STOCK OPTION AND INCENTIVE PLAN - The Corporation's 1984 Stock Option and
Incentive Plan, as amended (the Plan), permits the granting of stock options,
restricted stock awards and stock appreciation rights. Stock options are
immediately exercisable over a period not to exceed 10 years from the date of
grant with the option price equal to market value on the date of grant.
Recipients of restricted stock have the usual rights of a shareholder, including
the rights to receive dividends and to vote the shares; however, the common
stock will not be vested until certain restrictions are satisfied. The term of
the Plan extends to July 31, 2002.
The following table presents the activity of the stock options for the fiscal
years ended June 30, 1995, 1994 and 1993:
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------
Stock Option Option Price Aggregate
Shares Per Share Amount
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1992.................................. 450,875 $2.50 - $19.13 $2,773
Granted................................................ -- -- --
Exercised.............................................. (116,365) 2.50 - 9.75 (676)
Canceled............................................... -- -- --
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993.................................. 334,510 2.50 - 19.13 2,097
Granted................................................ -- -- --
Exercised.............................................. (32,699) 2.50 - 9.75 (209)
Canceled............................................... -- -- --
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994.................................. 301,811 2.50 - 19.13 1,888
Granted................................................ 61,462 27.31 1,679
Exercised.............................................. (74,358) 2.50 - 9.75 (376)
Canceled............................................... (262) 5.67 (1)
- - -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995.................................. 288,653 $2.50 - $27.31 $3,190
- - -------------------------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1995....... 319,439
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
On June 30, 1995, stock options for 61,462 shares of the Corporation's
common stock were granted to executives and managers of the Corporation in
accordance with a management incentive plan pursuant to the attainment of
certain operating goals of the Corporation for fiscal year 1995.
Management incentive plans were adopted in fiscal year 1993 with restricted
stock to be granted for awards earned each fiscal year. Accordingly, on June 30,
1995, 1994 and 1993 (the grant dates), the Corporation issued 28,417 shares,
59,660 shares and 55,376 shares, respectively, of restricted stock with an
aggregate market value of $776,000, $1,525,000 and $1,402,000, respectively. The
awards of restricted stock vest 20.0% on each anniversary of the grant date,
provided that the employee has completed the specified service requirement, or
earlier if the employee dies or is permanently and totally disabled or upon a
change in control. Total deferred compensation on the unvested restricted stock
totaled $1,951,000, $2,480,000 and $1,402,000, at June 30, 1995, 1994 and 1993,
respectively, and is recorded as a reduction of stockholders' equity.
The value of the restricted shares will be amortized to compensation
expense over the five-year vesting period. Compensation expense applicable to
the restricted stock totaled $1,173,000 and $395,000 for fiscal years 1995 and
1994, respectively. During fiscal year 1993, the restrictions on 163,325 shares
of restricted stock and related stock appreciation rights previously granted
were removed as a result of the rescission of the Bank's capital directive.
Accordingly, deferred compensation equivalent to the market value of these
restricted shares and related stock appreciation rights totaling $2,222,000 was
amortized to compensation expense in fiscal year 1993.
64
<PAGE>
- - --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS - Effective July 1, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The provisions of
this statement changed the method of accounting for postretirement benefits
other than pensions from a cash to an accrual basis. Under SFAS No. 106, the
determination of the accrual liability requires a calculation of the accumulated
postretirement benefit obligation (APBO). The APBO represents the actuarial
present value of postretirement benefits other than pensions to be paid out in
the future (such as health care benefits to be paid to retirees) that have been
earned as of the end of the year. The Corporation elected to recognize the
cumulative effect of the initial APBO immediately resulting in an increase in
accrued postretirement health care costs of $519,000 and a decrease in net
income of $336,000 ($.03 per share), net of an income tax benefit of $183,000
which was recorded as a cumulative effect of a change in accounting principle as
of July 1, 1993. The Corporation's postretirement benefit plan is unfunded. The
following table reconciles the status of the plan with the amounts recognized in
the Consolidated Statement of Financial Condition at June 30:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
1995 1994
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................................... $260 $177
Fully eligible active plan participants...................................... 118 51
Other active plan participants............................................... 581 369
- - ----------------------------------------------------------------------------------------------------------------
959 597
Unrecognized net loss........................................................... (426) (42)
- - ----------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in other liabilities............... $533 $555
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the components of the net periodic postretirement
benefit cost for the fiscal years ended June 30:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
1995 1994
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost - benefits earned during the fiscal year........................... $ 61 $ 56
Interest cost on accumulated postretirement benefit obligation.................. 43 39
- - ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost..................................... $104 $ 95
- - ----------------------------------------------------------------------------------------------------------------
Postretirement benefit claims paid for the year................................. $126 $ 59
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used to determine the APBO was 7.5% for
both fiscal years ended June 30, 1995 and 1994. The assumed health care cost
trend rate used in measuring the APBO as of July 1, 1994, was 8.0% decreasing
gradually until it reaches 5.0% in 2007, when it remains constant. A one-
percentage-point increase in the assumed health care cost trend rate for each
year would increase the APBO as of June 30, 1995, by $100,000 and the aggregate
of the service and interest cost components of the net periodic postretirement
cost for fiscal year 1995 by $28,000.
65
<PAGE>
- - --------------------------------------------------------------------------------
Note 22. Financial Information (Parent Company Only):
<TABLE>
CONDENSED STATEMENT OF FINANCIAL CONDITION
- - ----------------------------------------------------------------------------------------------------------------
June 30,
ASSETS 1995 1994
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash........................................................ $ 10,493 $ 7,099
Other assets................................................ 3,433 3,819
Equity in Commercial Federal Bank........................... 336,545 309,188
- - ----------------------------------------------------------------------------------------------------------------
Total Assets................................................ $350,471 $320,106
- - ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ----------------------------------------------------------------------------------------------------------------
Liabilities:
Other liabilities........................................ $ 720 $ 405
Subordinated notes....................................... 40,250 40,250
- - ----------------------------------------------------------------------------------------------------------------
Total liabilities........................................... 40,970 40,655
Total stockholders' equity.................................. 309,501 279,451
- - ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity.................. $350,471 $320,106
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CONDENSED STATEMENT OF OPERATIONS
- - ----------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income from the Bank....................................... $ 4,400 $ 5,050 $ 2,200
Interest income..................................................... 571 370 --
Interest expense.................................................... (4,462) (4,426) (2,362)
Operating expenses.................................................. (283) (1,066) (164)
- - ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, cumulative effect
of change in accounting principles and equity in
undistributed earnings (losses) of subsidiaries.................. 226 (72) (326)
Income tax benefit.................................................. (1,478) (1,877) (1,191)
- - ----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principles and equity in undistributed
earnings (losses) of subsidiaries................................ 1,704 1,805 865
Cumulative effect of change in accounting principles................ -- (198) --
- - ----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
earnings (losses) of subsidiaries................................ 1,704 1,607 865
Equity in undistributed earnings (losses) of subsidiaries........... 25,831 (1,449) 29,913
- - ----------------------------------------------------------------------------------------------------------------
Net income.......................................................... $27,535 $ 158 $30,778
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
- - --------------------------------------------------------------------------------
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
- - -----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $27,535 $ 158 $30,778
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cumulative effect of change in accounting principles..................... -- 198 --
Equity in (earnings) losses of subsidiaries.............................. (25,831) 1,449 (29,913)
Other items, net......................................................... 563 336 (1,277)
------- ----- ------
Total adjustments....................................................... (25,268) 1,983 (31,190)
------- ----- ------
Net cash provided (used) by operating activities...................... 2,267 2,141 (412)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of stock of the Bank.................................................. -- (5,000) (58,450)
Other items.................................................................... (136) (244) (17)
------- ----- ------
Net cash used by investing activities................................. (136) (5,244) (58,467)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options and other employee plans........... 1,263 887 1,002
Issuance of subordinated notes, net............................................ -- -- 38,841
Issuance of 4,025,000 shares of common stock................................... -- -- 36,958
Issuance of common stock from warrants exercised............................... -- -- 2,846
Payment of note payable........................................................ -- -- (11,600)
------- ----- ------
Net cash provided by financing activities............................. 1,263 887 68,047
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position....................................... 3,394 (2,216) 9,168
Balance, beginning of year..................................................... 7,099 9,315 147
------- ----- ------
Balance, end of year........................................................... $10,493 $ 7,099 $ 9,315
- - ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................................................ $ 4,126 $ 4,126 $ 1,983
Income tax refunds, net of payments......................................... (3,670) (1,100) (1,237)
Non-cash investing activities:
Increase to assets and liabilities for prior business combinations.......... -- 198 --
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
- - --------------------------------------------------------------------------------
Note 23. Segment Information:
The Corporation and its subsidiaries operate primarily in the savings and
loan and mortgage banking industries. Savings and loan operations (financial
institution) involve a variety of traditional banking and financial services.
Mortgage banking operations (mortgage banking) involve the origination and
purchase of mortgage loans, sale of mortgage loans in the secondary mortgage
market, servicing of mortgage loans and the purchase of rights to service
mortgage loans.
Segment information at and for the fiscal years ended June 30 is summarized as
follows:
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Financial institution.................................... $ 407,451 $ 358,744 $ 366,842
Mortgage banking......................................... 4,478 6,730 5,936
----------------------------------------------------
Total................................................. 411,929 365,474 372,778
Intersegment interest income:
Financial institution.................................... (9,666) (9,296) (8,961)
Mortgage banking......................................... 6,417 5,345 4,441
----------------------------------------------------
(3,249) (3,951) (4,520)
Intersegment elimination................................. 3,249 3,951 4,520
----------------------------------------------------
Total................................................. -- -- --
----------------------------------------------------
Total interest income:
Financial institution.................................... 397,785 349,448 357,881
Mortgage banking......................................... 10,895 12,075 10,377
Intersegment elimination................................. 3,249 3,951 4,520
----------------------------------------------------
Total................................................. $ 411,929 $ 365,474 $ 372,778
- - ------------------------------------------------------------------------------------------------------------------------
Other income:
Financial institution - loan servicing fees.............. $ 146 $ 78 $ 1,282
Financial institution - other income..................... 16,620 18,355 6,691
Mortgage banking - loan servicing fees................... 22,389 20,348 15,788
Mortgage banking - other income (loss)................... (1,558) (6,441) (484)
----------------------------------------------------
Total................................................. 37,597 32,340 23,277
----------------------------------------------------
Intersegment other income:
Financial institution - loan servicing fees.............. -- -- --
Financial institution - other income..................... -- -- --
Mortgage banking - loan servicing fees................... 12,218 11,428 10,993
Mortgage banking - other income (loss)................... -- -- --
----------------------------------------------------
12,218 11,428 10,993
Intersegment elimination................................. (12,218) (11,428) (10,993)
----------------------------------------------------
Total................................................. -- -- --
----------------------------------------------------
Total other income:
Financial institution - loan servicing fees.............. 146 78 1,282
Financial institution - other income..................... 16,620 18,355 6,691
Mortgage banking - loan servicing fees................... 34,607 31,776 26,781
Mortgage banking - other income (loss)................... (1,558) (6,441) (484)
Intersegment elimination................................. (12,218) (11,428) (10,993)
----------------------------------------------------
Total................................................. $ 37,597 $ 32,340 $ 23,277
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
- - --------------------------------------------------------------------------------
<TABLE>
- - ----------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit (1):
Financial institution.................... $ 35,913 $ 86 $ 37,995
Mortgage banking......................... 17,099 13,992 15,150
----------------------------------------------------
53,012 14,078 53,145
Less:
General corporate expenses............... 283 1,066 164
Corporate interest expense............... 4,462 4,426 2,362
----------------------------------------------------
Total................................. $ 48,267 $ 8,586 $ 50,619
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating profit is income before income taxes, extraordinary items and
cumulative effects of changes in accounting principles. Operating profit for
banking operations includes the effect of the intangible assets valuation
adjustment totaling $52.7 million for fiscal year 1994.
<TABLE>
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable assets:
Financial institution................... $5,940,095 $5,467,687 $4,804,628
Mortgage banking........................ 94,066 123,859 110,391
Eliminations............................ (79,853) (70,206) (43,657)
----------------------------------------------------
Total................................ $5,954,308 $5,521,340 $4,871,362
- - ---------------------------------------------------------------------------------------------------------
Additions to premises and equipment:
Financial institution................... $ 5,244 $ 3,278 $ 1,293
Mortgage banking........................ 5,298 381 885
----------------------------------------------------
Total................................ $ 10,542 $ 3,659 $ 2,178
- - ---------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Financial institution................... $ 3,972 $ 3,845 $ 3,804
Mortgage banking........................ 998 420 339
----------------------------------------------------
Total................................ $ 4,970 $ 4,265 $ 4,143
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Beginning in fiscal year 1994, the mortgage banking operations expanded its
loan program whereby certain costs normally paid by the borrower were paid by
the mortgage banking operations in return for a higher interest rate charged on
the loan to the borrower. The mortgage banking operations sold loans to the Bank
at par and incurred losses equal to expenses paid for borrowers net of fees
collected. Such losses approximating $1,236,000 and $5,900,000 were incurred
during fiscal years 1995 and 1994, respectively, with gains on sales to the Bank
approximating $179,000 for the fiscal year ended June 30, 1993.
Purchased mortgage loan servicing rights are included in the Consolidated
Statement of Financial Condition under the caption "Prepaid expenses and other
assets." The activity of purchased mortgage loan servicing rights at June 30 is
summarized as follows:
<TABLE>
- - ------------------------------------------------------------------------------------------------------------
1995 1994 1993
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance...................................... $ 33,943 $ 33,855 $ 18,750
Purchases of mortgage loan servicing rights............ 9,386 7,636 20,873
Acquisition of mortgage loan servicing rights.......... 1,046 -- --
Amortization expense................................... (8,293) (7,548) (5,768)
- - ------------------------------------------------------------------------------------------------------------
Ending balance......................................... $ 36,082 $ 33,943 $ 33,855
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of loans serviced by the mortgage banking operations at June 30,
1995 and 1994 totaled $7,842,700,000 and $7,024,800,000, respectively,
(including approximately $3,236,800,000 and $2,982,500,000, respectively, for
the Bank).
69
<PAGE>
- - --------------------------------------------------------------------------------
Note 24. Quarterly Financial Data (Unaudited):
The following summarizes the unaudited quarterly results of operations for the
last three fiscal years ended June 30:
<TABLE>
- - --------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
June 30 March 31 December 31 September 30
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1995:
Total interest income......................................... $108,158 $103,995 $101,676 $98,100
Net interest income........................................... 33,333 33,949 33,666 33,175
Provision for loan losses..................................... (1,508) (1,509) (1,508) (1,508)
Loss on sales of loans........................................ (47) (189) (80) (280)
Accelerated amortization of goodwill.......................... -- -- 10,678 10,679
Net income.................................................... 12,251 13,527 1,250 507
Earnings per share............................................ .94 1.04 .10 .04
- - --------------------------------------------------------------------------------------------------------------------------------
FISCAL 1994:
Total interest income......................................... $ 93,426 $ 91,685 $ 90,729 $89,634
Net interest income........................................... 32,160 32,533 30,122 30,709
Provision for loan losses..................................... (1,508) (1,509) (1,508) (1,508)
Gain (loss) on sales of securities and loans.................. 101 (510) (257) 158
Intangible assets valuation adjustment........................ (52,703) -- -- --
Income (loss) before cumulative effects of changes
in accounting principles................................ (32,811) 9,697 9,070 8,399
Cumulative effects of changes in accounting principles........ -- -- -- 5,803
Net income (loss)............................................. (32,811) 9,697 9,070 14,202
Earnings (loss) per share (fully diluted):
Income (loss) before cumulative effects of changes
in accounting principles................................ (2.54) .75 .70 .65
Cumulative effects of changes in accounting principles..... -- -- -- .45
Net income (loss).......................................... (2.54) .75 .70 1.10
- - --------------------------------------------------------------------------------------------------------------------------------
FISCAL 1993:
Total interest income......................................... $ 90,586 $ 92,871 $ 94,613 $94,708
Net interest income........................................... 29,515 30,395 30,094 26,306
Provision for loan losses..................................... (1,161) (1,594) (1,529) (1,451)
Loss on sales of securities and loans......................... (81) (187) (44) (40)
Net income.................................................... 9,211 8,317 7,272 5,978
Earnings per share............................................ .72 .65 .58 .48
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
- - --------------------------------------------------------------------------------
Note 25. Fair Value Of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Corporation disclose estimated fair value amounts of its financial instruments.
It is management's belief that the fair values presented below are reasonable
based on the valuation techniques and data available to the Corporation as of
June 30, 1995 and 1994, as more fully described in the following table. It
should be noted that the operations of the Corporation are managed from a going
concern basis and not a liquidation basis. As a result, the ultimate value
realized for the financial instruments presented could be substantially
different when actually recognized over time through the normal course of
operations. Additionally, a substantial portion of the Corporation's inherent
value is the Bank's capitalization and franchise value. Neither of these
components have been given consideration in the presentation of fair values
which follow.
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation at June 30, 1995 and 1994. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
<TABLE>
- - ------------------------------------------------------------------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED ASSETS
- - ------------------------------------------------------------------------------------------------------------------------
Cash (including short-term investments)............. $ 29,330 $ 29,330 $ 21,208 $ 21,208
Investment securities............................... 294,237 291,651 280,600 273,601
Mortgage-backed securities.......................... 1,331,783 1,323,280 1,305,434 1,252,470
Loans receivable, net............................... 3,991,638 4,023,716 3,592,938 3,560,633
Federal Home Loan Bank stock........................ 97,110 97,110 90,913 90,913
- - ------------------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- - ------------------------------------------------------------------------------------------------------------------------
Deposits:
Passbook accounts................................ 538,207 538,207 468,308 468,308
Market rate savings accounts..................... 169,892 169,892 220,250 220,250
NOW checking accounts............................ 273,809 273,809 254,442 254,442
Certificates of deposit.......................... 2,609,267 2,615,417 2,412,597 2,392,546
--------------------------------------------------------------
Total deposits................................ 3,591,175 3,597,325 3,355,597 3,335,546
Advances from Federal Home Loan Bank................ 1,656,602 1,643,593 1,524,516 1,486,895
Securities sold under agreements to repurchase...... 195,755 196,779 157,432 158,188
Other borrowings.................................... 55,403 57,308 59,740 62,476
- - ------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
- - ------------------------------------------------------------------------------------------------------------------------
Interest rate swap agreements....................... -- (2,409) -- (9,318)
Commitments......................................... -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Corporation's financial instruments at June 30,
1995 and 1994.
Cash and short-term investments:
The book value of cash and short-term investments is assumed to approximate
the fair value of such assets.
Investment securities:
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities.
Mortgage-backed securities:
For mortgage-backed securities available for sale and held to maturity the
Bank has utilized quotes for similar or identical securities in an actively
traded market,
71
<PAGE>
- - --------------------------------------------------------------------------------
where such a market exists, or has obtained quotes from independent security
brokers to determine the fair value of such assets.
Loans receivable:
The fair value of loans receivable was estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for similar remaining maturities. When
using the discounting method to determine fair value, loans were gathered by
homogeneous groups with similar terms and conditions and discounted at a target
rate at which similar loans would be made to borrowers as of June 30, 1995 and
1994, respectively. The fair value of loans held for sale is determined by
outstanding commitments from investors or current investor yield requirements
calculated on an aggregate loan basis. In addition, when computing the estimated
fair value for all loans, allowances for loan losses have been subtracted from
the calculated fair value for consideration of credit issues.
Federal Home Loan Bank stock:
The fair value of such stock approximates book value since the Bank is able
to redeem this stock with the Federal Home Loan Bank at par value.
Deposits:
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, market rate savings accounts and NOW checking accounts, since
such deposits are immediately withdrawable, fair value is determined to
approximate the carrying value (the amount payable on demand); (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by the current rates as of June 30, 1995 and 1994,
offered on certificates of deposit with similar maturities. In accordance with
provisions of SFAS No. 107, no value has been assigned to the Bank's long-term
relationships with its deposit customers (core value of deposits intangible)
since such intangible is not a financial instrument as defined under SFAS No.
107.
Advances from Federal Home Loan Bank:
The fair value of such advances was estimated by discounting the expected
future cash flows using current interest rates as of June 30, 1995 and 1994, for
advances with similar terms and remaining maturities.
Securities sold under agreements to repurchase:
The fair value of securities sold under agreements to repurchase was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of June 30, 1995 and 1994, over the contractual
maturity of such borrowings.
Other borrowings:
Subordinated notes with a carrying value of $40.25 million is included in
other borrowings with the fair value of such notes based on a dealer quoted
market price as of June 30, 1995 and 1994. The fair value of other borrowings,
excluding the subordinated notes, was estimated by discounting the expected
future cash flows using derived interest rates approximating market as of June
30, 1995 and 1994, over the contractual maturity of such other borrowings.
Commitments:
The commitments to originate and purchase loans have terms that are
consistent with current market terms. Accordingly, the Corporation estimates
that the face amount of these commitments approximates carrying value.
Interest rate swap agreements:
The fair value of interest rate swap agreements is the estimated amount
that would be paid to terminate the swap agreements at June 30, 1995 and 1994,
respectively, taking into consideration current interest rates as of June 30,
1995 and 1994.
Limitations:
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, customer relationships and the value of assets and
liabilities that are not considered financial instruments. These estimates do
not reflect any premium or discount that could result from offering the
Corporation's entire holdings of a particular financial instrument for sale at
one time. Furthermore, since no market exists for certain of the Corporation's
financial instruments, fair value estimates may be based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various
72
<PAGE>
- - --------------------------------------------------------------------------------
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of June 30, 1995 and 1994, are not intended to represent
the underlying value of the Corporation, on either a going concern or a
liquidation basis.
Note 26. Current Accounting Pronouncements:
Disclosure of Certain Significant Risks and Uncertainties:
In December 1994, the Accounting Standards Executive Committee issued
Statement of Position 94-6 (SOP 94-6) entitled "Disclosure of Certain
Significant Risks and Uncertainties." The disclosures required by SOP 94-6 focus
primarily on risks and uncertainties that could significantly affect the amounts
reported in the financial statements in the near term or the near-term
functioning of the reporting entity. The risks and uncertainties this SOP deals
with result from the nature of the entity's operations, from the necessary use
of estimates in the preparation of the entity's financial statements, and from
significant concentrations in certain aspects of the entity's operations. The
disclosure requirements of the SOP in many circumstances are similar to or
overlap the disclosure requirements in certain pronouncements of the FASB and
the Securities and Exchange Commission. The provisions of SOP 94-6 are effective
for fiscal years ending after December 15, 1995, or effective as of July 1,
1995, for the Corporation, and for financial statements for interim periods in
fiscal years subsequent to the year for which the SOP is first applied. Since
this statement requires only disclosures about significant risks and
uncertainties, with such disclosures, in most cases, having already been met by
compliance with other authoritative pronouncements, the provisions of SOP 94-6
will not affect the Corporation's financial position or results of operations.
Accounting for the Impairment of Long-Lived Assets:
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121 (SFAS No. 121) entitled "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes
accounting standards for the recognition and measurement of the impairment of
long-lived assets, certain identifiable intangibles and goodwill. This statement
does not apply to core deposit intangibles or mortgage and other servicing
rights. The provisions of this statement require that long-lived assets and
certain identifiable intangibles to be held and used be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review of recoverability, the
provisions of SFAS No. 121 require the estimation of the expected future cash
flows (undiscounted and without interest charges) to result from the use of the
asset and its eventual disposition with an impairment loss recognized if the sum
of such cash flows is less than the carrying amount of the asset. SFAS No. 121
is effective for fiscal years beginning after December 15, 1995, or effective as
of July 1, 1996, for the Corporation. Management of the Corporation has not
determined the time period in which to implement the provisions of SFAS No. 121
and does not believe such adoption will have a material effect on the
Corporation's financial position or results of operations.
Accounting for Mortgage Servicing Rights:
In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122 (SFAS No. 122) entitled
"Accounting for Mortgage Servicing Rights." SFAS No. 122 amends SFAS No. 65,
"Accounting For Certain Mortgage Banking Operations" by eliminating the
distinction in accounting for mortgage servicing rights depending on whether the
loan was originated by the servicer or purchased. SFAS No. 122 requires mortgage
servicers that sell or securitize loans and retain the servicing rights to
allocate the total cost of the loans to the servicing rights and loans based on
their fair value if practicable to estimate. If not practicable, the cost of
acquiring the loans should be allocated to the mortgage loans only. Purchased
mortgage servicing rights are mortgage servicing rights that have been purchased
from other parties. Originated mortgage servicing rights generally represent the
mortgage servicing rights acquired when an institution originates and
subsequently sells mortgage loans but retains the servicing rights. Currently,
only purchased mortgage servicing rights are capitalized as assets. However,
upon implementation of SFAS No. 122, originated mortgage servicing rights must
be capitalized as assets on a prospective basis. In addition, SFAS No. 122
requires all capitalized mortgage servicing rights, both originated and
purchased, to be evaluated for impairment based on their fair values.
73
<PAGE>
- - --------------------------------------------------------------------------------
SFAS No. 122 is effective for fiscal years beginning after December 15,
1995, or effective as of July 1, 1996, for the Corporation, with earlier
application encouraged and retroactive restatement prohibited. The effect of
SFAS No. 122 is dependent, among other items, upon the volume and type of loans
originated, the general levels of market interest rates and the rate of
estimated loan prepayments. Management of the Corporation is currently reviewing
the provisions of this statement to determine its implementation date and has
not as of this date determined the effect of such implementation.
Note 27. Subsequent Events - Acquisitions:
Railroad Financial Corporation:
On April 18, 1995, the Corporation entered into a Reorganization and Merger
Agreement (the Agreement) by and among the Corporation, the Bank, Railroad
Financial Corporation (Railroad) and Railroad Savings Bank, a wholly-owned
subsidiary of Railroad. On September 22, 1995, the stockholders of Railroad
approved this merger which is expected to close in October 1995. Under the terms
of the Agreement, the Corporation will exchange its common stock for all of the
outstanding shares of Railroad with the number of shares to be issued based upon
the average closing price of the Corporation's common stock for the twenty-fifth
through the sixth trading days preceding the effective date of the merger. Based
on the Corporation's closing stock price on September 22, 1995, of $35.75, each
share of Railroad common stock would be exchanged for .6389 shares of the
Corporation's common stock, resulting in the exchange of approximately 1,361,222
shares of the Corporation's common stock with an aggregate value approximating
$48,664,000. Cash will be paid in lieu of fractional shares. At June 30, 1995,
Railroad had assets of approximately $615,271,000, deposits of approximately
$421,651,000 and stockholders' equity of approximately $28,113,000. Railroad
operates 18 branches and 71 agency offices in Kansas. It is anticipated that
this acquisition will be accounted for as a pooling of interests.
Conservative Savings Corporation:
On August 15, 1995, the Corporation entered into a Reorganization and
Merger Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Conservative Savings Corporation (Conservative) and Conservative Savings Bank,
FSB. Under the terms of the Merger Agreement, the Corporation will acquire all
of the outstanding shares of Conservative's common stock (1,846,005 shares) and
preferred stock (460,000 shares). As defined in the Merger Agreement,
Conservative's common and preferred stock will be exchanged for cash and the
Corporation's common stock based on the average closing price of such stock for
the twenty-fifth through the sixth trading days preceding the effective date of
the proposed merger. Based on the Corporation's closing stock price on September
22, 1995, of $35.75, the transaction has a per share value of $15.37 for the
common stock and $34.73 for the preferred stock and an aggregate value of
approximately $44,343,000 for all outstanding common and preferred stock.
The Corporation also announced that it has entered into a stock option
agreement with Conservative under which the Corporation has been granted an
option to purchase 19.9% of Conservative's outstanding shares of common stock
under certain circumstances provided in the agreement in the event the
transaction is terminated.
At June 30, 1995, Conservative had assets of approximately $383,400,000,
deposits of approximately $198,100,000 and stockholders' equity of approximately
$34,800,000. Conservative operates nine branches with seven located in Nebraska,
one in Overland Park, Kansas and one in Harlan, Iowa. This proposed acquisition,
which is subject to regulatory approvals and the approval of Conservative's
shareholders, is expected to be completed by March 31, 1996. The acquisition is
to be completed no later than June 30, 1996, unless extended by mutual agreement
of both the Corporation and Conservative. This acquisition will be accounted for
as a purchase with core value of deposits resulting from this transaction to be
amortized on an accelerated basis over a period not to exceed 10 years and
goodwill, if any, to be amortized on a straight line basis over a period not to
exceed 20 years.
74
<PAGE>
Management's Report on Internal Controls
- - --------------------------------------------------------------------------------
Management of Commercial Federal Corporation (the Corporation) is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements and all other information presented
in this Annual Report. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, as such,
include amounts based on informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting in conformity with both
generally accepted accounting principles and the Office of Thrift Supervision
instructions for Thrift Financial Reports. The internal control structure
contains monitoring mechanisms and actions are taken to correct any deficiencies
identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statements preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and Thrift Financial Report instructions as of June 30,
1995. This assessment was based on the criteria for effective internal control
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
Management believes that the Corporation maintained an effective internal
control structure over financial reporting as of June 30, 1995.
/s/ William A. Fitzgerald /s/ James A. Laphen
William A. Fitzgerald James A. Laphen
Chairman of the Board and President, Chief Operating Officer
Chief Executive Officer and Chief Financial Officer
75
<PAGE>
Independent Auditors' Report
- - --------------------------------------------------------------------------------
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial
condition of Commercial Federal Corporation and subsidiaries as of June 30, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1995. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commercial
Federal Corporation and subsidiaries as of June 30, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Corporation changed its method of accounting for certain investments in debt and
equity securities to conform with Statement of Financial Accounting Standards
No. 115 in 1995. As discussed in Notes 1 and 21 to the consolidated financial
statements, in 1994 the Corporation changed its method of accounting for income
taxes to conform with Statement of Financial Accounting Standards No. 109, its
method of accounting for postretirement benefits to conform with Statement of
Financial Accounting Standards No. 106 and its method of accounting for
intangible assets.
/s/ Deloitte & Touche LLP
August 25, 1995
(September 22, 1995 as to Note 27)
Omaha, Nebraska
76
<PAGE>
- - --------------------------------------------------------------------------------
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
Commercial Federal Corporation
Commercial Federal Tower
2120 S. 72nd Street
Omaha, NE 68124
GENERAL COUNSEL
Fitzgerald, Schorr, Barmettler & Brennan
1000 Woodman Tower
Omaha, NE 68102
WASHINGTON COUNSEL
Housley Goldberg Kantarian & Bronstein, P.C.
1220 19th Street N.W.
Suite 700
Washington, D.C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2000 First National Center
Omaha, NE 68102
SHAREHOLDER SERVICES AND
INVESTOR RELATIONS
Shareholders desiring to change the address or ownership of stock, report lost
certificates or to consolidate accounts should contact:
Transfer Agent
Chemical Bank/GeoServe
Stock Transfer Department
P.O. Box 24935
Church Street Station
New York, NY 10249
(800) 851-9677
Analysts, investors and others seeking a copy of the Form 10-K without charge or
other financial information should contact:
Investor Relations Department
Commercial Federal Corporation
2120 S. 72nd Street
Omaha, NE 68124
Telephone (402) 390-6553
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday,
November 21, 1995. The meeting will be held at the Holiday Inn Central
Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C"
Meeting Room. Further information with regard to this meeting can be found in
the proxy statement.
STOCK LISTING
Commercial Federal Corporation's common stock is traded on the New York Stock
Exchange (NYSE) using the common stock symbol "CFB." The Wall Street Journal
publishes daily trading information for the stock under the abbreviation "Comrcl
Fed" in the NYSE listings.
<PAGE>
EXECUTIVE OFFICERS OF THE CORPORATION
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
JAMES A. LAPHEN
President and
Chief Operating Officer
GARY L. MATTER
Senior Vice President,
Controller and Secretary
JOY J. NARZISI
Treasurer of the Corporation, and
Senior Vice President and Treasurer of the Bank
SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES
MARGARET E. ASH
Senior Vice President
Retail Operations
JON W. STEPHENSON
Senior Vice President
State Director - Oklahoma/Kansas
TERRY A. TAGGART
Senior Vice President
State Director - Colorado
GARY D. WHITE
Senior Vice President
State Director - Nebraska
RONALD A. AALSETH
First Vice President of the Bank
and President of Commercial Federal
Investment Services, Inc., and Commercial
Federal Insurance Corp.
MICHAEL C. BRUGGEMAN
First Vice President
Human Resources
DAVID E. GUNTER, JR.
First Vice President of the Bank and
President of Commercial Federal Service Corp.
JOHN L. LAUGHLIN
First Vice President
Consumer Lending
ROGER L. LEWIS
First Vice President
Marketing
KEVIN C. PARKS
First Vice President
Internal Audit
THOMAS N. PERKINS
First Vice President
Acquisitions and Expansion
DENNIS R. ZIMMERMAN
First Vice President
Information Systems
78
<PAGE>
BRANCH LOCATIONS*
NEBRASKA (30)
OMAHA
1912 Harney Street
4724 S. 24th Street
4503 N. 30th Street
3605 "Q" Street
4444 Farnam Street
5007 Grover Street
5901 N.W. Radial Highway (Benson)
1818 S. 72nd Street
8510 Dodge Street
3520 N. 90th Street
4860 S. 96th Street
12255 W. Center Road
13737 "Q" Street
11910 Stonegate Circle
BEATRICE
633 N. 6th Street
BELLEVUE
505 Galvin Road
FREMONT
1330 E. 23rd Street
GRAND ISLAND
3301 W. State Street
KEARNEY
4407 Second Street
LAVISTA/PAPILLION
8125 S. 84th Street
LINCOLN
1314 "O" Street
5555 "O" Street
2103 S. 16th Street (Central Park)
3045 N. 70th Street (70th & Adams)
6345 Havelock Avenue
3800 Normal Boulevard
5700 Village Boulevard
NORFOLK
602 Norfolk Avenue
NORTH PLATTE
301 W. Fourth Street
SOUTH SIOUX CITY
1001 Dakota Avenue
COLORADO (20)
DENVER
600 17th Street
3102 S. Sheridan Boulevard (Bear Valley)
2 Steele Street (Cherry Creek)
7995 E. Hampden Avenue
(Tamarac Square)
2700 S. Colorado Boulevard
(University Hills)
330 S. Dayton Street (Windsor Gardens)
ARAPAHOE COUNTY (SOUTH)
7310 E. Arapahoe Road (Arapahoe Plaza)
6941 S. University (Southglenn Mall)
ARVADA
7355 Ralston Road, Building 1
AURORA
700 S. Abilene Street (Aurora Mall)
BROOMFIELD
One Garden Center
ENGLEWOOD
3513 S. Logan Street, Suite A
GREELEY
1111 11th Street
JEFFERSON COUNTY (SOUTH)
9111 W. Bowles Avenue (Southwest Plaza)
LAKEWOOD
7077 W. Alameda (Villa Italia)
10425 W. Colfax (Westland Mall)
LONGMONT
700 5th Avenue (Downtown)
LOVELAND
303 E. 6th Street
NORTHGLENN
10393 N. Huron Street
WHEAT RIDGE
7575 W. 44th Avenue
OKLAHOMA (17)
OKLAHOMA CITY
5757 N.W. Expressway
5603 N. Pennsylvania (Penn Plaza)
12401 N. May (Quail Creek)
5401 N.W. 23rd (Windsor Hills)
89th & Penn
ADA
301 S. Broadway
606 E. Main
ARDMORE
321 N. Commerce
BARTLESVILLE
100 S. E. 4th
CUSHING
323 E. Broadway
EDMOND
901 West Edmond Road
ENID
701 W. Broadway
PONCA CITY
400 E. Central
1417 E. Hartford
TULSA
6100 E. 51st (Southeast)
2201 E. 21st (Utica)
SEMINOLE
1907 N. Milt Phillips
KANSAS (5*)
KANSAS CITY
1380 W. 87th Parkway (Lenexa)
6263 Nall Avenue (Mission)
IOLA
120 E. Madison
LYNDON
730 Topeka Avenue
OTTAWA
700 S. Main Street
* Commercial Federal expects to close in October 1995 its previously announced
acquisition of 18 full-service retail offices and 71 agency offices from
Railroad Financial. These offices are located throughout the state of Kansas.
In addition, the Company anticipates that its acquisition of nine retail
offices--seven in Nebraska, one in Kansas and one in Iowa--from Conservative
Savings Corporation will be completed in March 1996.
79
<PAGE>
EXHIBIT 21
EXHIBIT 21. PARENTS AND SUBSIDIARIES
- - -------------------------------------
Percent State of
Parent Company Subsidiaries Owned Incorporation
- - -------------------- --------------------------- -------- -------------
Commercial Federal Commercial Federal Bank, 100% Nebraska
Corporation a Federal Savings Bank
Commercial Investment 100% Nebraska
Subsidiary, Inc.
Commercial Federal Commercial Federal Service 100% Nebraska
Bank, a Federal Corporation
Savings Bank
Trampe and Associates Company 100% Nebraska
Commercial Federal Mortgage 100% Nebraska
Corporation
Commercial Marketing, Inc. 100% Nebraska
Commercial Federal Investment 100% Nebraska
Corporation
Commercial Federal Investment 100% Nebraska
Services, Inc.
Commercial Financial Investment 100% Nebraska
Associates, Inc.
ESL Corporation 100% Colorado
Commercial Federal Insurance 100% Nebraska
Corporation
Empire Capital Corporation I 100% Colorado
Roxborough Acquisition Corp. 100% Nebraska
CF Woodlands Properties, Inc. 100% Nebraska
CFT Company 100% Nebraska
Provident Investment, Inc. 100% Nebraska
<PAGE>
EXHIBIT 23
EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS
- - --------------------------------------------
INDEPENDENT AUDITORS' CONSENT
- - -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
33-36708, 33-5616, 33-39762, 33-31685, 33-60448 and Post-Effective Amendment No.
1 to Registration Statement Nos. 33-1333 and 33-10396 of Commercial Federal
Corporation on Form S-8 of our report dated August 25, 1995 (September 22, 1995,
as to Note 27), incorporated by reference in the Annual Report on Form 10-K of
Commercial Federal Corporation for the year ended June 30, 1995.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
September 27, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 26,230
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,322
<INVESTMENTS-CARRYING> 1,615,698
<INVESTMENTS-MARKET> 1,604,609
<LOANS> 3,991,638
<ALLOWANCE> 46,567
<TOTAL-ASSETS> 5,954,308
<DEPOSITS> 3,591,175
<SHORT-TERM> 716,583
<LIABILITIES-OTHER> 145,872
<LONG-TERM> 1,191,177
<COMMON> 129
0
0
<OTHER-SE> 309,372
<TOTAL-LIABILITIES-AND-EQUITY> 5,954,308
<INTEREST-LOAN> 306,033
<INTEREST-INVEST> 105,896
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 411,929
<INTEREST-DEPOSIT> 165,124
<INTEREST-EXPENSE> 277,806
<INTEREST-INCOME-NET> 134,123
<LOAN-LOSSES> 6,033
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 117,420
<INCOME-PRETAX> 48,267
<INCOME-PRE-EXTRAORDINARY> 27,535
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,535
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 2.42
<LOANS-NON> 29,217
<LOANS-PAST> 0
<LOANS-TROUBLED> 17,002
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42,926
<CHARGE-OFFS> 3,503
<RECOVERIES> 1,334
<ALLOWANCE-CLOSE> 46,567
<ALLOWANCE-DOMESTIC> 15,280
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 31,287
</TABLE>
