<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 19, 1996
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COMMERCIAL FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
NEBRASKA 1-11515 47-0658852
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number Identification Number)
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
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
The original document is comprised of 50 pages.
1
<PAGE>
COMMERCIAL FEDERAL CORPORATION
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FORM 8-K
--------
Item 5. Other Events:
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On October 2, 1995, Commercial Federal Corporation (the Corporation)
consummated its acquisition of Railroad Financial Corporation (Railroad).
This acquisition was accounted for as a pooling of interests and,
accordingly, the Corporation's historical consolidated financial statements
have been restated for all periods prior to the acquisition to include the
accounts and results of Railroad.
As such, the Corporation has restated its audited consolidated statements
of financial condition 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; and has
filed such restated financial statements herein.
Item 7. Financial Statements and Exhibits:
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(c) Exhibits:
Exhibit 99. Consolidated statements of financial condition 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, and independent auditors' reports.
2
<PAGE>
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
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(Registrant)
Date: March 19, 1996 /s/ James A. Laphen
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James A. Laphen, President,
Chief Operating Officer and
Chief Financial Officer
(Duly Authorized and Principal
Financial Officer)
Date: March 19, 1996 /s/ Gary L. Matter
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Gary L. Matter, Senior Vice
President, Controller and
Secretary (Principal
Accounting Officer)
3
<PAGE>
EXHIBIT 99
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Consolidated Financial Statements and
Independent Auditors' Reports
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
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(Dollars in Thousands)
June 30,
ASSETS 1995 1994
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<S> <C> <C>
Cash (including short-term investments of $6,345 and $5,551)........................... $ 35,145 $ 27,575
Investment securities available for sale, at fair value................................ 2,988 5,360
Mortgage-backed securities available for sale, at fair value........................... 36,974 45,011
Loans held for sale.................................................................... 113,385 187,679
Investment securities held to maturity (fair value of $294,805 and $278,406)........... 297,493 285,447
Mortgage-backed securities held to maturity (fair value of $1,319,333 and $1,252,360).. 1,327,933 1,305,391
Loans receivable, net of allowances of $48,463 and $44,645............................. 4,427,307 3,782,947
Federal Home Loan Bank stock........................................................... 103,648 96,095
Interest receivable, net of reserves of $352 and $557.................................. 42,211 36,699
Real estate............................................................................ 16,786 24,374
Premises and equipment................................................................. 67,204 57,669
Prepaid expenses and other assets...................................................... 61,242 60,399
Goodwill and core value of deposits,
net of accumulated amortization of $136,032 and $104,388............................. 37,263 67,661
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Total Assets.................................................................... $6,569,579 $5,982,307
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits............................................................................. $4,011,323 $3,675,825
Advances from Federal Home Loan Bank................................................. 1,787,352 1,625,456
Securities sold under agreements to repurchase....................................... 208,373 157,432
Other borrowings..................................................................... 65,303 66,640
Interest payable..................................................................... 24,223 26,331
Other liabilities.................................................................... 135,391 126,055
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Total Liabilities.................................................................... 6,231,965 5,677,739
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Commitments and contingencies.......................................................... -- --
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Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued....................................................................... -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
14,272,793 and 14,160,039 shares issued and outstanding........................... 143 142
Additional paid-in capital.......................................................... 146,530 144,739
Unrealized holding gain on securities available for sale, net....................... 86 198
Retained earnings, substantially restricted......................................... 190,855 159,489
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Total Stockholders' Equity...................................................... 337,614 304,568
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Total Liabilities and Stockholders' Equity...................................... $6,569,579 $5,982,307
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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(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
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<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992 $ 86 $ 101,292 $ -- $ 120,403 $ (390) $ 32,137
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 -- -- -- --
Issuance of 134,019 shares under certain
compensation and employee plans 1 1,027 -- -- -- --
Issuance of 1,250,000 shares on
exercise of warrants 12 2,834 -- -- -- --
Restricted stock and deferred
compensation plans, net 1 1,240 -- -- -- --
Purchase and retirement of 11,726 shares
of treasury stock -- (122) -- -- -- --
Net change in value of marketable
equity securities -- -- -- -- 390 --
Net income -- -- -- 34,116 -- --
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Balance at June 30, 1993 140 143,189 -- 154,519 -- --
Issuance of 90,836 shares under certain
compensation and employee plans 1 1,021 -- -- -- --
Issuance of 16,247 shares of common stock
upon acquisition of business 1 169 -- -- -- --
Restricted stock and deferred
compensation plans, net -- 395 -- -- -- --
Purchase and retirement of 2,844 shares
of treasury stock -- (35) -- -- -- --
Unrealized holding gain on securities
available for sale, net -- -- 198 -- -- --
Net income -- -- -- 4,970 -- --
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Balance at June 30, 1994 142 144,739 198 159,489 -- --
Railroad Financial Corporation activity
for six months ended June 30, 1994:
Issuance of 32,473 shares under certain
compensation and employee plans -- 146 -- -- -- --
Purchase and retirement of 39,953 shares
of treasury stock -- (590) -- -- -- --
Unrealized holding loss on securities
available for sale, net -- -- (728) -- -- --
Net Income -- -- -- 185 -- --
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Restated balance at June 30, 1994 142 144,295 (530) 159,674 -- --
Issuance of 111,994 shares under certain
compensation and employee plans 1 1,333 -- -- -- --
Restricted stock and deferred
compensation plans, net -- 1,173 -- -- -- --
Purchase and retirement of 17,759 shares
of treasury stock -- (271) -- -- -- --
Unrealized holding gain on securities
available for sale, net -- -- 616 -- -- --
Net income -- -- -- 31,181 -- --
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Balance at June 30, 1995 $ 143 $ 146,530 $ 86 $ 190,855 $ -- $ --
====================================================================================================================================
<CAPTION>
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Total
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<S> <C>
Balance, June 30, 1992 $ 253,528
Issuance of 3,500,000 shares of
common stock subscribed --
Issuance of 525,000 shares of common
stock under over-allotment option 4,821
Issuance of 134,019 shares under certain
compensation and employee plans 1,028
Issuance of 1,250,000 shares on
exercise of warrants 2,846
Restricted stock and deferred
compensation plans, net 1,241
Purchase and retirement of 11,726 shares
of treasury stock (122)
Net change in value of marketable
equity securities 390
Net income 34,116
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Balance at June 30, 1993 297,848
Issuance of 90,836 shares under certain
compensation and employee plans 1,022
Issuance of 16,247 shares of common stock
upon acquisition of business 170
Restricted stock and deferred
compensation plans, net 395
Purchase and retirement of 2,844 shares
of treasury stock (35)
Unrealized holding gain on securities
available for sale, net 198
Net income 4,970
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Balance at June 30, 1994 304,568
Railroad Financial Corporation activity
for six months ended June 30, 1994:
Issuance of 32,473 shares under certain
compensation and employee plans 146
Purchase and retirement of 39,953 shares
of treasury stock (590)
Unrealized holding loss on securities
available for sale, net (728)
Net Income 185
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Restated balance at June 30, 1994 303,581
Issuance of 111,994 shares under certain
compensation and employee plans 1,334
Restricted stock and deferred
compensation plans, net 1,173
Purchase and retirement of 17,759 shares
of treasury stock (271)
Unrealized holding gain on securities
available for sale, net 616
Net income 31,181
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Balance at June 30, 1995 $ 337,614
=============================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
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(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1995 1994 1993
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<S> <C> <C> <C>
Interest Income:
Loans receivable.......................................................... $ 344,109 $ 306,725 $ 321,748
Mortgage-backed securities................................................ 84,404 61,491 52,304
Investment securities..................................................... 25,855 25,638 30,576
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Total interest income................................................ 454,368 393,854 404,628
Interest Expense:
Deposits.................................................................. 180,163 142,557 139,500
Advances from Federal Home Loan Bank...................................... 109,314 96,216 112,771
Securities sold under agreements to repurchase............................ 7,837 9,592 17,632
Other borrowings.......................................................... 7,212 7,737 6,681
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Total interest expense............................................... 304,526 256,102 276,584
Net Interest Income......................................................... 149,842 137,752 128,044
Provision for Loan Losses................................................... (6,408) (6,248) (6,185)
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Net Interest Income After Provision for Loan Losses......................... 143,434 131,504 121,859
Other Income (Loss):
Loan servicing fees....................................................... 24,731 22,227 18,776
Retail fees and charges................................................... 9,547 9,155 7,874
Real estate operations.................................................... 1,490 (1,449) (5,243)
Gain (loss) on sales of loans............................................. (1,695) 1,433 1,194
Gain on sales of loan servicing rights.................................... 3,519 5,929 6,903
Other operating income.................................................... 7,474 7,398 4,938
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Total other income................................................... 45,066 44,693 34,442
Other Expense:
General and administrative expenses-
Compensation and benefits............................................... 43,737 37,407 35,724
Occupancy and equipment................................................. 20,925 19,147 18,316
Regulatory insurance and assessments.................................... 9,317 8,217 7,168
Advertising............................................................. 4,594 3,954 3,201
Amortization of purchased and originated mortgage loan servicing rights. 8,323 7,671 5,771
Other operating expenses................................................ 15,658 17,719 19,380
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Total general and administrative expenses............................ 102,554 94,115 89,560
Amortization of goodwill and core value of deposits....................... 10,262 14,131 10,544
Accelerated amortization of goodwill...................................... 21,357 -- --
Intangible assets valuation adjustment.................................... -- 52,703 --
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Total other expense.................................................. 134,173 160,949 100,104
Income Before Income Taxes and Cumulative Effects of
Changes in Accounting Principles.......................................... 54,327 15,248 56,197
Provision for Income Taxes.................................................. 23,146 16,875 22,081
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Income (Loss) Before Cumulative Effects of Changes in Accounting Principles. 31,181 (1,627) 34,116
Cumulative Effects of Changes in Accounting Principles:
Change in method of accounting for income taxes........................... -- 6,933 --
Postretirement benefits, net of income tax benefit of $183................ -- (336) --
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Total cumulative effects of changes in accounting principles......... -- 6,597 --
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Net Income.................................................................. $ 31,181 $ 4,970 $ 34,116
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</TABLE>
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
<TABLE>
<CAPTION>
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(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1995 1994 1993
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<S> <C> <C> <C>
Earnings Per Common Share:
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Income (loss) before cumulative effects
of changes in accounting principles..................................... $2.16 $(.11) $2.43
Cumulative effects of changes in accounting principles.................... -- .46 --
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Net income................................................................ $2.16 $ .35 $2.43
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
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(Dollars in Thousands) Year Ended June 30,
1995 1994 1993
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 31,181 $ 4,970 $ 34,116
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.................... 10,262 14,131 10,544
Intangible assets valuation adjustment................................. -- 52,703 --
Cumulative effects of changes in accounting principles................. -- (6,414) --
Provisions for loss on loans and real estate........................... 6,607 7,912 7,948
Depreciation and amortization.......................................... 5,613 4,768 4,548
Accretion of deferred discounts and fees............................... (2,476) (9,983) (10,426)
Amortization of purchased mortgage loan servicing rights............... 8,323 7,671 5,771
Amortization of deferred compensation on restricted stock and premiums. 1,340 948 1,740
Deferred tax provision................................................. 14,374 5,078 11,268
(Gain) loss on sale of real estate, net................................ (2,198) (2,231) 3,525
(Gain) loss on sales of loans, net..................................... 1,695 (1,433) (1,194)
Gain on sales of loan servicing rights................................. (3,519) (5,929) (6,903)
Proceeds from the sale of loans........................................ 652,744 1,959,827 1,550,787
Origination of loans for resale........................................ (332,831) (996,518) (1,126,036)
Purchase of loans for resale........................................... (378,886) (977,624) (693,796)
(Increase) decrease in interest receivable............................. (3,781) (452) 4,856
Decrease in interest payable........................................... (2,431) (11,884) (10,303)
(Decrease) increase in other liabilities............................... (7,021) 2,438 (26,313)
Other items, net....................................................... (1,493) (16,747) 12,101
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Total adjustments..................................................... (12,321) 26,261 (261,883)
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Net cash provided (used) by operating activities..................... 18,860 31,231 (227,767)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans.......................................................... (688,313) (1,117,176) (398,067)
Origination of loans, net of repayments..................................... 176,911 375,259 257,670
Principal repayments of mortgage-backed securities held to maturity......... 137,060 263,599 215,861
Purchases of mortgage-backed securities held to maturity.................... (11,504) (214,811) (149,107)
Proceeds from sale of mortgage-backed securities available for sale......... 40,774 20,821 18,826
Purchase of mortgage-backed securities available for sale................... -- -- (41,090)
Purchases of investment securities held to maturity......................... (25,000) (153,650) (110,848)
Maturities and repayments of investment securities held to maturity......... 24,172 119,185 169,060
Maturities and repayments of investment securities available for sale....... 800 460 25,224
Proceeds from sale of investment securities available for sale.............. 14,797 -- 58,306
Purchase of investment securities available for sale........................ -- (1,551) (80,234)
Acquisitions, net of cash (paid) received................................... 75,414 785,140 --
Purchases of mortgage loan servicing rights................................. (9,386) (7,774) (20,873)
Proceeds from sale of loan servicing rights................................. 3,519 5,981 6,923
Purchases of Federal Home Loan Bank stock................................... (16,236) (8,078) (8,414)
Proceeds from sale of Federal Home Loan Bank stock.......................... 13,548 8,408 3,081
Proceeds from sale of real estate........................................... 12,009 21,568 27,903
Payments to acquire real estate............................................. (1,444) (2,773) --
Purchases of premises and equipment, net.................................... (11,241) (4,403) (2,910)
Other items, net............................................................ -- 504 4,739
---------- ----------- -----------
Net cash (used) provided by investing activities..................... (264,120) 90,709 (23,950)
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</TABLE>
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
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(Dollars in Thousands) Year Ended June 30,
1995 1994 1993
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<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits........................................................ $ 103,936 $ 121,062 $ 70,638
Proceeds from Federal Home Loan Bank advances............................... 617,602 885,290 1,159,032
Repayment of Federal Home Loan Bank advances................................ (506,392) (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.................................. 4,000 -- 45,741
Repayment of other borrowings............................................... (5,702) (10,579) (23,990)
Issuance of common stock.................................................... 1,334 1,022 40,832
Other items, net............................................................ (271) (35) (468)
---------- ----------- -----------
Net cash provided (used) by financing activities..................... 252,830 (129,636) 244,566
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CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position.................................... 7,570 (7,696) (7,151)
Balance, beginning of year.................................................. 27,575 35,271 42,422
---------- ----------- -----------
Balance, end of year........................................................ $ 35,145 $ 27,575 $ 35,271
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense.......................................................... $ 306,634 $ 259,705 $ 285,621
Income taxes, net......................................................... 4,179 13,193 7,814
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities............................ 189,031 605,490 273,009
Loans transferred to real estate.......................................... 7,853 9,345 19,198
Loans to facilitate the sale of real estate............................... 583 12,847 15,334
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 --
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(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.
POOLING OF INTERESTS - On October 2, 1995, the Corporation consummated its
acquisition of Railroad Financial Corporation (Railroad), parent company of
Railroad Savings Bank, fsb. Pursuant to the terms of the merger agreement
2,156,232 shares of Railroad's common stock were delivered to the Corporation in
exchange for approximately 1,377,617 shares of the Corporation's common stock
(exchange ratio of .6389 based on an average closing price of $35.063). Cash was
paid for fractional shares. Railroad operated 18 branches and 71 agency offices
throughout the state of Kansas and at September 30, 1995, had assets of
approximately $602,900,000, deposits of approximately $421,400,000 and
stockholders' equity of approximately $27,700,000. This acquisition was
accounted for as a pooling of interests and, accordingly, the Corporation's
historical consolidated financial statements have been restated for all periods
prior to the acquisition to include the accounts and results of operations of
Railroad. Railroad's results of operations were reported on a calendar year
basis previous to its merger into the Corporation. However, in restating prior
periods for the most recent fiscal year, Railroad's accounts and results of
operations were conformed to the Corporation's four quarters ended June 30,
1995. Accordingly, in changing fiscal years, Railroad's accounts and, results of
operations for the six months ended June 30, 1994, including total revenue of
$18,129,000 and net income totaling $185,000, were excluded from reported
results of operations for the restated combined companies and have been
reflected in the Consolidated Statement of Stockholders' Equity.
NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and
loan holding company whose primary asset is the Bank which is a consumer-
oriented financial institution that emphasizes single-family residential real
estate lending, consumer lending, retail deposit activities, mortgage banking
and other retail financial services. The Bank conducts loan origination
activities through its branch office network, loan offices of its wholly-owned
mortgage banking subsidiary and a nationwide correspondent network.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from those estimated.
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.
<PAGE>
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.
Premiums and discounts are amortized over the contractual lives of the related
securities on the level yield method. Unrealized losses on securities, if any,
reflecting a decline in the fair value of such securities to be other than
temporary, are charged against income.
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.
LOANS - Loans receivable are recorded at the contractual amounts owed by
borrowers less unamortized discounts, net of premiums, undisbursed funds on
loans in process, deferred loan fees and allowance for loan losses. Interest on
loans is accrued to income as earned, except that interest is not accrued on
first mortgage loans contractually delinquent three months or more. Any related
discounts or premiums on loans purchased are amortized into interest income
using the level yield method over the contractual lives of the loans, adjusted
for actual prepayments. Loan origination fees, commitment fees and direct loan
origination costs are deferred and recognized over the estimated average life of
the loan as a yield adjustment. Loans held for sale are carried at the lower of
aggregate cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on an aggregate loan
basis. Valuation adjustments, if necessary, to reflect the lower of aggregate
cost or market value, are recorded 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
$5,151,100,000, $4,635,945,000 and $4,327,354,000, 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.
<PAGE>
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 market 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 in value has been identified, the Corporation establishes general
valuation allowances 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.
<PAGE>
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.
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 policy 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.
In October 1994, the Financial Accounting Standards Board (FASB) issued
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). The provisions of
SFAS No. 119 are effective as of June 30, 1995. 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.
<PAGE>
Effective July 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Railroad's adoption of the provisions of this statement was changed from the
year ended December 31, 1992 to the year ended December 31, 1993 to conform to
the Corporation's adoption, and therefore is included in the cumulative effect
of changes in accounting principles for the fiscal year ended June 30, 1994.
This statement supersedes both Accounting Principles Board Opinion No. 11 (APB
Opinion No. 11) and the guidance of APB Opinion No. 23 on the tax treatment of
savings and loan bad debt reserves. SFAS No. 109 calculates income taxes on the
liability method, under which the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various assets and liabilities of the Corporation and gives current
recognition to changes in tax rates and laws. The effect of applying the
provisions of SFAS No. 109 was a one-time adjustment that increased net income
for fiscal year 1994 by $6,933,000 ($.48 per share) recorded as a cumulative
effect of a change in accounting principle resulting from increasing the net
deferred tax liability by $8,262,000 offset by additional deferred taxes
totaling $15,195,000 recorded to adjust the assets and liabilities for prior
business combinations from net-of-tax to pre-tax amounts. The principal
temporary difference creating this increase to net income is the Bank's reserve
for losses on loans and real estate. In addition, valuation allowances were
established against certain deferred tax assets recorded for state income tax
purposes.
EARNINGS PER SHARE - Earnings per common share are calculated on the basis of
the weighted average common shares outstanding and those outstanding options and
warrants that are dilutive.
NOTE 2. PURCHASE ACQUISITIONS:
FIRST BANK, FSB - On June 23, 1995 the Corporation acquired from First Bank
insured deposits approximating $90,700,000 and seven branches located in Kansas.
This acquisition has been accounted for as a purchase resulting in core value of
deposits recorded from this transaction totaling $2,798,000 and goodwill
totaling $354,000. Such core value of deposits is being amortized on a straight-
line basis over seven years and goodwill on a straight-line basis over 20 years.
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 total assets approximating
$100,200,000, deposits approximating $87,300,000 and stockholders' equity
approximating $8,700,000. This acquisition has been accounted for as a purchase.
Core value of deposits totaling $1,331,000 were recorded from this transaction.
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 the last three aforementioned acquisitions
is amortized on an accelerated basis over 10 years and goodwill is amortized on
a straight-line basis over 20 years. The effect of these acquisitions on a pro
forma basis as if such acquisitions had occurred at the beginning of the fiscal
years 1995 and 1994 has not been presented because such effect on the
Corporation's consolidated financial statements was not material.
<PAGE>
NOTE 3. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and other Government agency obligations.... $ 3,001 $ -- $ (13) $ 2,988
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................... 6.64%
- ------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury and other Government agency obligations.... $ 296,443 $ 1,078 $ (3,743) $ 293,778
Other securities......................................... 1,050 -- (23) 1,027
- ------------------------------------------------------------------------------------------------------------------
$ 297,493 $ 1,078 $ (3,766) $ 294,805
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................... 6.26%
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury and other Government agency obligations.... $ 5,342 $ 18 $ -- $ 5,360
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................... 5.07%
- ------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury and other Government agency obligations.... $ 285,397 $ 2,181 $ (9,222) $ 278,356
Other securities......................................... 50 -- -- 50
- ------------------------------------------------------------------------------------------------------------------
$ 285,447 $ 2,181 $ (9,222) $ 278,406
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................... 6.15%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995 and 1994, investment securities totaling $659,000 and
$4,999,000, respectively, were pledged to secure public funds.
<PAGE>
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>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
---------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less................... $ 1,000 $ 1,000 $ 44,953 $ 44,976
Due after one year through five years..... 2,001 1,988 231,550 229,310
Due after five years through ten years.... -- -- 20,990 20,519
Due after ten years....................... -- -- -- --
- -------------------------------------------------------------------------------------------------
$ 3,001 $ 2,988 $ 297,493 $ 294,805
- -------------------------------------------------------------------------------------------------
</TABLE>
During the fiscal years ended June 30, 1995 and 1994, there were no sales of
investment securities. 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 certain investment securities totaled $58,306,000 for
the fiscal year ended June 30, 1993, with gross realized gains totaling $74,000
and gross realized losses totaling $308,000 with such net loss of $234,000
included in other operating income.
<PAGE>
NOTE 4. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
Federal Home Loan Mortgage Corporation..............$ 21,454 $ 144 $ (89) $ 21,509
Government National Mortgage Association............ 8,982 196 (27) 9,151
Federal National Mortgage Association............... 370 4 -- 374
Collateralized Mortgage Obligations................. 6,022 5 (87) 5,940
- --------------------------------------------------------------------------------------------------------------
$ 36,828 $ 349 $ (203) $ 36,974
- --------------------------------------------------------------------------------------------------------------
Weighted average interest rate...................... 7.01%
- --------------------------------------------------------------------------------------------------------------
Held to Maturity:
Federal Home Loan Mortgage Corporation..............$ 190,136 $ 1,457 $ (2,495) $ 189,098
Government National Mortgage Association............ 778,855 2,045 (10,971) 769,929
Federal National Mortgage Association............... 269,314 3,721 (2,633) 270,402
Collateralized Mortgage Obligations................. 58,114 29 (1,352) 56,791
Privately Issued Mortgage Pool Securities........... 31,514 1,781 (182) 33,113
- --------------------------------------------------------------------------------------------------------------
$1,327,933 $ 9,033 $ (17,633) $ 1,319,333
- --------------------------------------------------------------------------------------------------------------
Weighted average interest rate...................... 6.36%
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1994 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------
Available for Sale:
Federal Home Loan Mortgage Corporation..............$ 23,646 $ 5 $ (259) $ 23,392
Government National Mortgage Association............ 11,269 358 (11) 11,616
Federal National Mortgage Association............... 419 1 (3) 417
Collateralized Mortgage Obligations................. 9,542 44 -- 9,586
- --------------------------------------------------------------------------------------------------------------
$ 44,876 $ 408 $ (273) $ 45,011
- --------------------------------------------------------------------------------------------------------------
Weighted average interest rate...................... 5.97%
- --------------------------------------------------------------------------------------------------------------
Held to Maturity:
Federal Home Loan Mortgage Corporation..............$ 218,256 $ 1,955 $ (6,218) $ 213,993
Government National Mortgage Association............ 678,927 2 (40,106) 638,823
Federal National Mortgage Association............... 299,520 2,256 (9,330) 292,446
Collateralized Mortgage Obligations................. 68,140 6 (3,089) 65,057
Privately Issued Mortgage Pool Securities........... 40,548 1,786 (293) 42,041
- --------------------------------------------------------------------------------------------------------------
$1,305,391 $ 6,005 $ (59,036) $ 1,252,360
- --------------------------------------------------------------------------------------------------------------
Weighted average interest rate...................... 5.74%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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.............$ 780,311 $ 774,262 6.08% $ 717,055 $ 688,893 5.07%
Fixed-rate, 5-year term..... 16,274 16,028 6.03 17,997 17,287 5.70
Fixed-rate, 7-year term..... 50,399 49,575 6.29 54,979 51,930 5.97
Fixed-rate, 15-year term.... 308,335 305,954 6.76 315,236 299,056 6.65
Fixed-rate, 30-year term.... 114,501 116,724 7.49 131,984 130,137 7.35
- ------------------------------------------------------------------------------------------------------
1,269,820 1,262,543 6.38 1,237,251 1,187,303 5.77
Collateralized mortgage
obligations.............. 58,113 56,790 5.96 68,140 65,057 5.32
- ------------------------------------------------------------------------------------------------------
$1,327,933 $1,319,333 6.36% $1,305,391 $1,252,360 5.74%
- ------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1995 the Corporation recorded an unrealized gain on securities
available for sale as an increase to stockholders' equity totaling $134,000, net
of a deferred income tax benefit of approximately $48,000.
Proceeds from the sale of mortgage-backed securities available for sale totaled
$40,774,000, $20,821,000 and $18,826,000, respectively, for the fiscal years
ended June 30, 1995, 1994 and 1993 resulting in net pre-tax losses of $41,000
and $292,000, respectively, for fiscal years 1995 and 1993 and a net pre-tax
gain of $220,000 for fiscal year 1994 all of which are included in other
operating income. During fiscal year 1995 the Corporation acquired mortgage-
backed securities totaling $34,756,000 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. Additional sales during fiscal years
1995, 1994 and 1993 were through the Corporation's mortgage banking operations
resulting from originated residential loans that were subsequently securitized.
At June 30, 1995 and 1994, the Corporation pledged mortgage-backed securities
totaling $317,701,000 and $227,410,000, respectively, as collateral for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase, Federal Home Loan Bank advances, interest rate swap
agreements and other borrowings.
NOTE 5. LOANS HELD FOR SALE:
Loans held for sale from mortgage banking operations at June 30, 1995 and 1994,
totaled $113,385,000 and $187,679,000, respectively, with weighted average rates
of 8.02% and 6.89%, respectively. Loans held for sale are secured by single-
family residential properties consisting of fixed and adjustable rate mortgage
loans totaling $83,598,000 and $29,787,000, respectively, at June 30, 1995, and
$135,078,000 and $52,601,000, respectively, at June 30, 1994.
<PAGE>
NOTE 6. LOANS RECEIVABLE:
Loans receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Conventional mortgage loans.............................................$ 3,583,517 $ 3,048,106
FHA and VA loans........................................................ 340,864 358,403
Commercial real estate loans............................................ 210,676 205,162
Consumer and other loans................................................ 242,697 197,892
Construction loans...................................................... 186,679 53,381
- --------------------------------------------------------------------------------------------------
4,564,433 3,862,944
Less:
Unamortized discounts, net of premiums............................... (5,957) (1,762)
Loans-in-process..................................................... (80,211) (32,085)
Deferred loan fees, net.............................................. (2,495) (1,505)
Allowance for loan losses............................................ (48,463) (44,645)
- --------------------------------------------------------------------------------------------------
$ 4,427,307 $ 3,782,947
- --------------------------------------------------------------------------------------------------
Weighted average interest rate.......................................... 8.26% 7.76%
- --------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995, conventional, FHA and VA loans, including loans held for sale,
totaling $4,215,956,000 are secured by single-family residential properties
located as follows: 19% in Nebraska and Colorado, 7% in Kansas, 5% each in
Texas, Georgia and Oklahoma, and the remaining 40% in 44 other states. At June
30, 1994, conventional, FHA and VA loans, including loans held for sale,
totaling $ 3,646,312,000 are secured by single-family residential properties
located as follows: 21% in Nebraska, 19% in Colorado, 8% in Kansas, 6% in
Georgia, 5% in Texas, and the remaining 41% in 45 other states. The commercial
real estate portfolio at June 30, 1995, is secured by properties located as
follows: 44% in Colorado, 14% in Nebraska, 12% in Kansas, 8% in Florida and the
remaining 22% in 16 other states. The commercial real estate portfolio at June
30, 1994, is secured by properties located as follows: 57% in Colorado, 11% in
Nebraska, 10% in Florida and the remaining 22% in 14 other states.
Nonperforming loans at June 30, 1995 and 1994, aggregated $32,258,000 and
$33,492,000, respectively. Of the nonperforming loans at June 30, 1995,
approximately 12% are secured by properties located in California, 11% in Texas,
9% in Colorado, 8% in Georgia, 6% in Nebraska and Missouri, and the remaining
48% located in 44 other states. Of the nonperforming loans at June 30, 1994,
approximately 15% are secured by properties located in Colorado, 13% in Texas,
12% in California, 7% in Georgia, 5% in Missouri and Nebraska, and the remaining
43% located in 31 other states.
Also included in loans receivable at June 30, 1995 and 1994, are loans with
carrying values of $20,984,000 and $23,591,000, 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 $1,677,000 and $1,954,000, respectively, whereas under
their original terms the Corporation would have recognized interest income of
$1,900,000 and $2,202,000, 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.
<PAGE>
NOTE 7. REAL ESTATE:
Real estate at June 30 is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned and in judgment, net of allowance for losses of $4,583 and $4,956.............$ 7,260 $14,636
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
- --------------------------------------------------------------------------------------------------------------------
$16,786 $24,374
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial and residential real estate comprise approximately 77% and 23%,
respectively, of the total amount of real estate at June 30, 1995, and
approximately 81% and 19%, respectively, of the total amount of real estate at
June 30, 1994. Real estate located by states at June 30, 1995, is as follows:
48% in Nebraska, 33% in Colorado, 5% in Texas, and the remaining 14% in 18 other
states. Real estate located by states at June 30, 1994, is as follows: 34% in
Nebraska, 29% in Texas, 14% in Colorado, 9% in California and the remaining 14%
in 14 other states.
<PAGE>
NOTE 8. ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE:
An analysis of the allowance for losses on loans and real estate is summarized
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Loans Real Estate Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1992...............................................$ 50,704 $ 4,413 $ 55,117
- -----------------------------------------------------------------------------------------------------------------
Provision charged to operations...................................... 6,185 1,763 7,948
Charges.............................................................. (3,782) (1,270) (5,052)
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............................................... 46,908 5,738 52,646
- -----------------------------------------------------------------------------------------------------------------
Provision charged to operations...................................... 6,248 1,664 7,912
Charges.............................................................. (4,098) (1,367) (5,465)
Recoveries........................................................... 743 337 1,080
Estimated allowance for purchased loans.............................. 39 -- 39
Change in estimate of allowance for purchased loans.................. (4,357) -- (4,357)
Charge-offs to allowance for purchased loans......................... (632) -- (632)
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 (1)........................................... 44,851 6,372 51,223
- -----------------------------------------------------------------------------------------------------------------
Provision charged to operations...................................... 6,408 199 6,607
Charges.............................................................. (3,771) (683) (4,454)
Recoveries........................................................... 1,334 152 1,486
Allowances from purchase acquisitions................................ 1,818 -- 1,818
Railroad activity for the six months ended June 30, 1994, net........ (58) (66) (124)
Change in estimate of allowance for purchased loans.................. (1,705) -- (1,705)
Charge-offs to allowance for purchased loans......................... (336) -- (336)
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 (1)...........................................$ 48,541 $ 5,974 $ 54,515
- -----------------------------------------------------------------------------------------------------------------
</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
$22,271,000, respectively, has been allocated from these discount amounts to
provide for the credit risk associated with such purchased loans. This
estimated allowance for purchased loans is available only to absorb losses
associated with the respective purchased loan packages, and is not available to
absorb losses from other loans.
<PAGE>
NOTE 9. PREMISES AND EQUIPMENT:
Premises and equipment at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Land.................................................................$ 10,681 $ 9,705
Buildings and improvements........................................... 54,177 48,745
Leasehold improvements............................................... 2,640 2,692
Furniture, fixtures and equipment.................................... 56,336 47,610
- ------------------------------------------------------------------------------------------------
123,834 108,752
Less accumulated depreciation and amortization....................... 56,630 51,083
- ------------------------------------------------------------------------------------------------
$ 67,204 $ 57,669
- ------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expenses, totaled $5,613,000, $4,768,000 and $4,548,000 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 $2,939,000, $2,690,000 and $2,289,000 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 - $1,854,000; 1997
- - $1,368,000; 1998 - $953,000; 1999 - $833,000; 2000 - $652,000; 2001 and
thereafter - $5,243,000.
<PAGE>
NOTE 10. GOODWILL AND CORE VALUE OF DEPOSITS:
An analysis of goodwill and core value of deposits is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Core Value
Goodwill of Deposits Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1992...............................................$ 64,532 $ 33,958 $ 98,490
Amortization expense................................................. (6,807) (3,737) (10,544)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993............................................... 57,725 30,221 87,946
- ------------------------------------------------------------------------------------------------------------------
Additions from acquisitions.......................................... 359 28,674 29,033
Adoption of SFAS No. 109 for prior business combinations............. -- 15,692 15,692
Valuation adjustment................................................. (29,267) (20,763) (50,030)
Amortization expense................................................. (6,241) (7,890) (14,131)
Sale of an investment in a subsidiary................................ (849) -- (849)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994............................................... 21,727 45,934 67,661
- ------------------------------------------------------------------------------------------------------------------
Additions from acquisitions, net..................................... 1,510 6,521 8,031
Accelerated amortization expense..................................... (21,357) -- (21,357)
Write-off due to recognition of pre-acquisition
tax credits and net operating losses................................ -- (6,810) (6,810)
Amortization expense................................................. (48) (10,214) (10,262)
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995...............................................$ 1,832 $ 35,431 $ 37,263
- ------------------------------------------------------------------------------------------------------------------
</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 1995 or 1994.
<PAGE>
NOTE 11. DEPOSITS:
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995 1994
---------------------- ------------------------
Description and interest rates Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (average of 4.38% and 2.93%)............... $ 549,857 13.7% $ 475,932 12.9%
NOW accounts (average of .93% and .95%)...................... 296,552 7.4 275,721 7.5
Market rate savings (average of 3.36% and 2.80%)............. 190,994 4.8 245,948 6.7
- ------------------------------------------------------------------------------------------------------------------
Total savings (no stated maturities)......................... 1,037,403 25.9 997,601 27.1
- ------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00%............................................ 11,846 .3 15,876 .4
3.00% - 3.99%............................................. 67,404 1.7 691,464 18.8
4.00% - 4.99%............................................. 518,061 12.9 870,124 23.7
5.00% - 5.99%............................................. 1,017,841 25.4 741,221 20.2
6.00% - 6.99%............................................. 1,026,035 25.5 210,230 5.7
7.00% - 7.99%............................................. 290,950 7.2 90,973 2.5
8.00% - 8.99%............................................. 34,798 .9 45,100 1.2
9.00% and over............................................ 6,985 .2 13,236 .4
- ------------------------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 5.33% and 5.13%).................................. 2,973,920 74.1 2,678,224 72.9
- ------------------------------------------------------------------------------------------------------------------
$ 4,011,323 100.0% $ 3,675,825 100.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposit accounts for the years ended June 30 issummarized as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts...................................................... $ 23,696 $ 8,729 $ 5,749
NOW accounts........................................................... 2,586 2,882 2,730
Market rate savings.................................................... 7,356 5,881 6,379
Certificates of deposit................................................ 146,525 125,065 124,642
- ------------------------------------------------------------------------------------------------------------------
$ 180,163 $ 142,557 $ 139,500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
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% ..... 62,679 4,014 684 27 -- -- 67,404
4.00% - 4.99% ..... 467,509 41,404 6,950 1,825 68 305 518,061
5.00% - 5.99% ..... 684,440 167,222 68,979 87,363 5,167 4,670 1,017,841
6.00% - 6.99% ..... 601,585 291,865 90,774 25,475 11,983 4,353 1,026,035
7.00% - 7.99% ..... 31,944 167,253 72,076 14,128 4,620 929 290,950
8.00% - 8.99% ..... 19,811 4,149 8,599 1,308 783 148 34,798
9.00% and over ..... 2,447 102 4,299 123 14 -- 6,985
- ----------------------------------------------------------------------------------------------------------------------
$ 1,879,476 $ 676,435 $ 252,456 $ 130,267 $ 22,646 $ 12,640 $ 2,973,920
- ----------------------------------------------------------------------------------------------------------------------
</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 $11,197,000 and $11,035,000, 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 12. 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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1995 1994
---------------------------------------- ------------------------
Weighted Weighted
Interest Average Average
Year Ending June 30, Rate Range Rate Amount Rate Amount
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995............................. 5.23% $ 548,287
1996............................. 4.45% - 10.75% 6.15% $ 766,214 6.04 245,672
1997............................. 4.61 - 9.25 5.67 721,633 5.15 583,615
1998............................. 5.06 - 7.90 5.74 252,797 5.59 221,077
1999............................. 5.25 - 6.21 5.70 35,608 5.50 26,805
2000............................. 6.78 - 7.19 6.79 10,350
Thereafter....................... 6.55 6.55 750
- ---------------------------------------------------------------------------------------------------
4.45% - 10.75% 5.89% $1,787,352 5.37% $ 1,625,456
- ---------------------------------------------------------------------------------------------------
</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.
<PAGE>
NOTE 13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
At June 30, 1995 and 1994, securities sold under agreements to repurchase
identical securities totaled $208,373,000 and $157,432,000, respectively, with
weighted average interest rates of 7.08% and 6.08%, respectively. There were no
securities sold under agreements to repurchase substantially identical
securities at June 30, 1995 or 1994. An analysis of securities sold under
agreements to repurchase identical securities for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maximum month-end balance...................................................$ 208,373 $ 157,432
- ------------------------------------------------------------------------------------------------------
Average balance.............................................................$ 103,223 $ 155,897
- ------------------------------------------------------------------------------------------------------
Weighted average interest rate during the period............................ 7.59% 6.15%
Weighted average interest rate at end of period............................. 7.08% 6.08%
- ------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1995, securities sold under agreements to repurchase had maturities
ranging from August 1995 to June 1997 with a weighted average maturity at June
30, 1995, of 465 days. At June 30, 1995 and 1994, mortgage-backed securities
with carrying values totaling $247,413,000 and $172,467,000, respectively, and
market values totaling $244,772,000 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, repurchase agreements with the amount at risk in excess of 10.0%
of stockholders' equity were with Morgan Stanley & Co. Incorporated and the
Federal Home Loan Mortgage Corporation totaling $160,755,000 and $35,000,000,
respectively, with weighted average maturities of 444 and 707 days,
respectively.
<PAGE>
NOTE 14. OTHER BORROWINGS:
Other borrowings at June 30 consist of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Subordinated notes, interest 10.25%, due December 15, 1999......................$ 40,250 $ 40,250
Collateralized mortgage obligations............................................. 12,454 16,567
Senior notes, interest 10.00%, due January 31, 1999............................. 6,900 6,900
Other borrowings................................................................ 5,699 2,923
- -------------------------------------------------------------------------------------------------------------
$ 65,303 $ 66,640
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The subordinated notes pay interest semi-annually on June 15 and December 15.
The subordinated notes are redeemable commencing December 15, 1995, at the
election of the Corporation, in whole or in part, at par plus accrued interest
to the date of redemption. The subordinated notes have no sinking fund, are
unsecured general obligations of the Corporation, and are subordinated to all
existing and future senior indebtedness of the Corporation. The Note Indenture,
among other provisions, restricts the ability of the Corporation and its
subsidiaries, under certain circumstances, to incur additional indebtedness and
restricts the Corporation's ability to pay cash dividends or to make other
capital distributions. The Corporation is also required to maintain not less
than $3,500,000 in cash and cash equivalents under the terms of the Note
Indenture.
At June 30, 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.
The senior notes, assumed in the Railroad merger, pay interest monthly and have
been redeemable since February 1, 1995, at the election of the Corporation, in
whole or in part, at par plus accrued interest to the date of redemption. The
senior notes have no sinking fund, are unsecured general obligations of the
Corporation, and are senior to all existing and future indebtedness of the
Corporation other than debt obligations secured by certain liens. Senior
noteholders do not have priority over depositors and other creditors of the
Bank. The Note Indenture, among other provisions, restricts the ability of the
Corporation and its subsidiaries, under certain circumstances, to incur
additional indebtedness and restricts the Corporation's ability to pay cash
dividends or to make other capital distributions.
At June 30, 1995 other borrowings included an unsecured note for $3,000,000
bearing interest at the prime rate plus .25%, or 9.25% at June 30, 1995, and is
due in varying periods contractually through October 1, 1997. This note was
paid in full on November 13, 1995. Other borrowings totaling $2,699,000 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 - $5,069,000; 1997 - $4,514,000; 1998 -
$3,488,000; 1999 - $9,435,000; 2000 - $40,975,000; and thereafter - $1,822,000.
<PAGE>
NOTE 15. INTEREST RATE HEDGING:
The following table summarizes the Corporation's interest rate hedging
agreements at June 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
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 Corporation is
not involved in any derivative activities nor has the Corporation terminated any
contracts during the fiscal years ended June 30, 1995, 1994 or 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 Corporation is exposed to
credit loss in the event of nonperformance by the counterparties to the interest
rate swaps if the Corporation is in a net interest receivable position at the
time of potential default by the counterparties. However, at June 30, 1995, the
Corporation was in a net interest payable position. The Corporation does not
anticipate nonperformance by the counterparties.
At June 30, 1995 the Corporation also had one outstanding interest rate cap
agreement totaling $10,000,000 with a fixed interest rate of 7.00% and a
termination date of March 9, 1997. The Corporation will receive interest based
on a floating rate with interest payments settled quarterly. Through June 30,
1995, the Corporation was not owed any interest from its counterparty for such
quarterly interest settlement. The premium paid on March 9, 1995 (the effective
date of this agreement) totaled $115,000 with $19,000 amortized to interest
expense for the fiscal year ended June 30, 1995. This interest rate cap
agreement is unsecured.
<PAGE>
NOTE 16. INCOME TAXES:
The following is a comparative analysis of the provision for federal and state
taxes on income:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.......................................................$ 7,816 $10,980 $ 9,440
State......................................................... 956 817 1,373
- -------------------------------------------------------------------------------------------------------
8,772 11,797 10,813
- -------------------------------------------------------------------------------------------------------
Deferred:
Federal....................................................... 14,123 4,992 10,988
State......................................................... 251 86 280
- -------------------------------------------------------------------------------------------------------
14,374 5,078 11,268
- -------------------------------------------------------------------------------------------------------
Total provision for income taxes...............................$23,146 $16,875 $22,081
- -------------------------------------------------------------------------------------------------------
</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>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
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........................... 13.8 81.4 5.9
Income tax credits............................................. (3.1) (3.3) (0.4)
Bad debt deduction............................................. (2.9) (13.3) (1.2)
State income taxes, net of federal income tax benefit.......... 1.6 4.1 1.9
Tax exempt interest income..................................... (0.2) (0.8) (0.2)
Effect of change in enacted tax rate........................... -- 7.8 0.5
Other items, net............................................... (1.6) (0.2) (1.2)
- -------------------------------------------------------------------------------------------------------
Effective tax rate............................................. 42.6% 110.7% 39.3%
- -------------------------------------------------------------------------------------------------------
</TABLE>
<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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
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............................................................. 10,779 10,908
Differences between book and tax basis of premises and equipment......................... 6,444 6,170
Core value of acquired deposits.......................................................... 3,931 6,982
Basis differences arising from acquisition............................................... 1,937 --
Other items.............................................................................. 3,479 2,459
- ---------------------------------------------------------------------------------------------------------------------
82,417 73,481
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible................... 14,277 12,157
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................................................. 2,371 2,063
Employee benefits........................................................................ 1,977 1,617
Other items.............................................................................. 2,022 2,926
- ---------------------------------------------------------------------------------------------------------------------
33,393 37,427
Valuation allowance....................................................................... 2,659 2,753
- ---------------------------------------------------------------------------------------------------------------------
30,734 34,674
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax liability................................................................$ 51,683 $ 38,807
- ---------------------------------------------------------------------------------------------------------------------
</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
$2,827,000 which will carry forward indefinitely.
Under APB Opinion No. 11, the components of the deferred income tax provision
for fiscal year 1993 are as follows:
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Finance lease contracts treated as operating leases for income tax purposes.............................$ 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........................................................................................ (1,343)
- ---------------------------------------------------------------------------------------------------------------------
$ 11,268
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<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 $83,971,000 with an unrecognized
deferred tax liability associated with such reserves totaling approximately
$30,230,000. 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 17. 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.
<PAGE>
Under the Office of Thrift Supervision's (OTS) capital distribution regulations,
a savings institution that, immediately prior to, and on a pro forma basis after
giving effect to, a proposed dividend, has total capital that is at least equal
to the amount of its fully phased-in capital requirements (a "Tier 1
Association") is permitted to pay dividends during a calendar year in an amount
equal to the greater of (i) 75.0% of its net income for the recent four
quarters, or (ii) 100.0% of its net income to date during the calendar year plus
an amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At June 30, 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.
However, on October 4, 1995, the Board of Directors established a quarterly
dividend policy and, on the same day, declared a cash dividend of $.10 per share
on the Corporation's common stock. Accordingly, a cash dividend totaling
$1,429,000 was paid on October 31, 1995, to stockholders of record on October
16, 1995. In addition, on January 12, 1996, the Corporation paid a second
quarterly cash dividend of $.10 per share totaling $1,434,000 to stockholders of
record on December 29, 1995.
NOTE 18. REGULATORY CAPITAL REQUIREMENTS:
At June 30, 1995, the Bank's estimates of its capital amounts and the capital
levels required under OTS capital regulations are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Actual Requirement Excess
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank's stockholder's equity ..........................................$ 374,021
Less unrealized holding gain on securities available for sale, net.... (86)
Less intangible assets................................................ (34,834)
Less phase-out of investments in non-includable subsidiaries.......... (1,650)
- ---------------------------------------------------------------------------------------------------------------
Tangible capital......................................................$ 337,451 $ 98,017 $ 239,434
- ---------------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1)............................... 5.16% 1.50% 3.66%
- ---------------------------------------------------------------------------------------------------------------
Tangible capital......................................................$ 337,451
Plus certain restricted amounts of other intangible assets............ 21,430
- ---------------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital).........................................$ 358,881 $ 196,677 $ 162,204
- ---------------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2)................................... 5.47% 3.00% 2.47%
- ---------------------------------------------------------------------------------------------------------------
Core capital..........................................................$ 358,881
Plus general loan loss allowances..................................... 33,504
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)....................................$ 391,656 $ 238,844 $ 152,812
- -----------------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3)........................ 13.12% 8.00% 5.12%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on adjusted total assets totaling $6,534,485,000.
(2) Based on adjusted total assets totaling $6,555,915,000.
(3) Based on risk-weighted assets totaling $2,985,549,000.
<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.
Effective July 1, 1994, the OTS amended its risk-based capital standards to
include an interest rate risk component. The amendment requires thrifts with
interest rate risk in excess of certain levels to maintain additional capital.
Under this amendment, thrifts are divided into two groups, those with "normal"
levels of interest rate risk and those with "greater than normal" levels of
interest rate risk. Thrifts with greater than normal levels are subject to a
deduction from total capital for purposes of calculating risk-based capital. In
a letter dated August 21, 1995 the OTS notified all savings associations that it
had delayed this interest rate risk capital deduction until further notice,
pending the testing of the OTS appeals process pursuant to Thrift Bulletin No.
67. Based on the Bank's interest rate risk profile and the level of interest
rates at June 30, 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.
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>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
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 ....................................... $ 358,881 $ 358,881 $ 391,656
Percentage of adjusted assets ........................ 5.47% 12.02% 13.12%
Minimum requirements to be
classified well-capitalized ........................ 5.00% 6.00% 10.00%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
NOTE 19. 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 $150,651,000 as follows:
$76,675,000 to originate loans, $33,723,000 to purchase loans, $15,000,000 to
purchase investment securities, $8,761,000 to purchase mortgage-backed
securities and $16,492,000 to provide consumers unused lines of credit. At June
30, 1994, the Corporation had commitments, excluding undisbursed portions of
loans in process, of approximately $229,943,000 as follows: $90,253,000 to
originate loans, $96,133,000 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 Corporation evaluates each customer's credit worthiness on a
separate basis and requires collateral based on this evaluation. Collateral
consists mainly of residential family units and personal property.
At June 30, 1995 and 1994, the Corporation had approximately $82,376,000 and
$233,014,000, respectively, in commitments to sell residential mortgage loans.
In addition, at June 30, 1995 the Corporation had $59,000,000 in outstanding
commitments to sell mortgage-backed securities. 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.
<PAGE>
NOTE 20. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT
BENEFITS:
RETIREMENT SAVINGS PLANS - The Corporation maintains contributory deferred
savings 401(k) plans covering substantially all employees. The Corporation's
matching contributions are equal to 100.0% of the first 8.0% of participant
contributions (up to 3.0% of participant contributions for the plan sponsored by
Railroad). Participants vest immediately in their own contributions and over a
five-year period for Corporation contributions (over a three-year period for
company contributions for the plan sponsored by Railroad). Contribution expense
was $1,684,000, $1,434,000 and $1,240,000 for the years ended June 30, 1995,
1994 and 1993, respectively.
STOCK OPTION AND INCENTIVE PLANS - 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. Railroad had three stock option and incentive
plans for certain employees and its directors (collectively referred to as
"Railroad's Plans") under which such options generally became exercisable when
granted and exercised within a 10-year period after the date of grant. On
October 2, 1995 Railroad's Plans were terminated with any outstanding options
converted into Commercial Federal Corporation options pursuant to the merger
agreement.
The following table presents the activity of the stock options for the fiscal
years ended June 30, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Stock Option Option Price Aggregate
Shares Per Share Amount
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1992................................ 546,812 $ 2.50 - $19.13 $3,189
Granted............................................... 3,623 9.31 - 12.08 38
Exercised............................................. (118,151) 2.50 - 9.75 (688)
Canceled.............................................. -- -- --
- -------------------------------------------------------------------------------------------------------
Balance at June 30, 1993................................ 432,284 2.50 - 19.13 2,539
Granted............................................... 3,738 13.57 - 19.69 64
Exercised............................................. (64,291) 2.50 - 15.26 (342)
Canceled.............................................. (302) 9.31 (3)
-----------------------------------------------
371,429 2.50 - 19.69 2,258
Railroad activity for the six months ended June 30, 1994:
Granted............................................... 60,951 14.09 - 15.07 864
Exercised............................................. (32,473) 3.80 - 13.57 (146)
Canceled.............................................. -- -- --
- -------------------------------------------------------------------------------------------------------
Restated balance at June 30, 1994...................... 399,907 2.50 - 19.13 2,976
Granted............................................... 62,612 14.48 - 27.31 1,696
Exercised............................................. (87,740) 2.50 - 19.69 (505)
Canceled.............................................. (4,783) 5.67 - 17.48 (65)
- -------------------------------------------------------------------------------------------------------
Balance at June 30, 1995................................ 369,996 $ 2.50 - $27.31 $4,102
- -------------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1995..... 379,623
- -------------------------------------------------------------------------------------------------------
</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.
<PAGE>
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, 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.
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 $28,000.
<PAGE>
NOTE 21. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF FINANCIAL CONDITION
- ----------------------------------------------------------------------------------------------------------------
June 30,
ASSETS 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash................................................................................$ 10,546 $ 7,222
Other assets........................................................................ 3,996 5,648
Equity in Commercial Federal Bank................................................... 374,021 339,265
- ----------------------------------------------------------------------------------------------------------------
Total Assets........................................................................$ 388,563 $ 352,135
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Other liabilities..................................................................$ 799 $ 417
Note payable....................................................................... 3,000 --
Senior notes....................................................................... 6,900 6,900
Subordinated notes................................................................. 40,250 40,250
- ----------------------------------------------------------------------------------------------------------------
Total liabilities................................................................... 50,949 47,567
Total stockholders' equity.......................................................... 337,614 304,568
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity..........................................$ 388,563 $ 352,135
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income from the Bank.....................................$ 5,660 $ 5,740 $ 2,719
Interest income................................................... 600 426 50
Interest expense.................................................. (5,310) (5,186) (3,062)
Operating expenses................................................ (576) (1,200) (241)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes, cumulative effect
of change in accounting principles and equity in
undistributed earnings of subsidiaries........................... 374 (220) (534)
Income tax benefit................................................ (1,882) (2,212) (1,481)
- ----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principles and equity in undistributed
earnings of subsidiaries......................................... 2,256 1,992 947
Cumulative effect of change in accounting principles.............. -- (198) --
- ----------------------------------------------------------------------------------------------------------------
Income before equity in
undistributed earnings of subsidiaries........................... 2,256 1,794 947
Equity in undistributed earnings of subsidiaries.................. 28,925 3,176 33,169
- ----------------------------------------------------------------------------------------------------------------
Net income........................................................$ 31,181 $ 4,970 $ 34,116
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................$ 31,181 $ 4,970 $ 34,116
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cumulative effect of change in accounting principles...................... -- 198 --
Equity in earnings of subsidiaries........................................ (28,925) (3,176) (33,169)
Other items, net.......................................................... 1,100 93 (1,922)
--------- -------- ---------
Total adjustments...................................................... (27,825) (2,885) (35,091)
--------- -------- ---------
Net cash provided (used) by operating activities..................... 3,356 2,085 (975)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of stock of and cash distributions into the Bank.................... (3,850) (5,098) (63,735)
Purchase of investment securities available for sale......................... -- -- (1,669)
Proceeds from maturities of investment securities available for sale......... -- -- 828
Other items, net............................................................. (245) (244) (17)
--------- -------- ---------
Net cash used by investing activities................................ (4,095) (5,342) (64,593)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options and other employee plans......... 1,334 1,022 1,028
Proceeds from issuance of notes payable...................................... 4,000 -- --
Payment of notes payable..................................................... (1,000) -- (11,600)
Purchase of treasury stock................................................... (271) (35) (122)
Issuance of senior and subordinated notes, net............................... -- -- 45,741
Issuance of 4,025,000 shares of common stock................................. -- -- 36,958
Issuance of common stock from warrants exercised............................. -- -- 2,846
--------- -------- ---------
Net cash provided by financing activities............................ 4,063 987 74,851
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position..................................... 3,324 (2,270) 9,283
Balance, beginning of year................................................... 7,222 9,492 209
--------- -------- ---------
Balance, end of year.........................................................$ 10,546 $ 7,222 $ 9,492
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................................................$ 4,816 $ 4,816 $ 2,622
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.......... -- 368 --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 22. 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>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Financial institution..........................................$ 446,747 $ 381,316 $ 391,601
Mortgage banking............................................... 7,621 12,538 13,027
----------------------------------------
Total........................................................ 454,368 393,854 404,628
----------------------------------------
Intersegment interest income:
Financial institution.......................................... (6,601) (5,087) (3,855)
Mortgage banking............................................... 6,417 5,345 4,441
----------------------------------------
(184) 258 586
Intersegment elimination....................................... 184 (258) (586)
----------------------------------------
Total........................................................ -- -- --
----------------------------------------
Total interest income:
Financial institution.......................................... 440,146 376,229 387,746
Mortgage banking............................................... 14,038 17,883 17,468
Intersegment elimination....................................... 184 (258) (586)
----------------------------------------
Total........................................................$ 454,368 $ 393,854 $ 404,628
- ---------------------------------------------------------------------------------------------------------
Other income:
Financial institution - loan servicing fees....................$ 146 $ 78 $ 1,282
Financial institution - other income........................... 20,317 21,853 7,714
Mortgage banking - loan servicing fees......................... 24,585 22,149 17,494
Mortgage banking - other income................................ 18 613 7,952
----------------------------------------
Total........................................................ 45,066 44,693 34,442
----------------------------------------
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................................ -- -- --
----------------------------------------
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........................... 20,317 21,853 7,714
Mortgage banking - loan servicing fees......................... 36,803 33,577 28,487
Mortgage banking - other income................................ 18 613 7,952
Intersegment elimination....................................... (12,218) (11,428) (10,993)
----------------------------------------
Total........................................................$ 45,066 $ 44,693 $ 34,442
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit (1):
Financial institution..........................................$ 45,664 $ 6,618 $ 42,163
Mortgage banking............................................... 14,518 14,960 17,287
---------- ---------- -------------
60,182 21,578 59,450
Less:
General corporate expenses..................................... 545 1,144 191
Corporate interest expense..................................... 5,310 5,186 3,062
---------- ---------- ------------
Total........................................................$ 54,327 $ 15,248 $ 56,197
- ---------------------------------------------------------------------------------------------------------
</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..........................................$6,478,017 $5,831,476 $5,145,815
Mortgage banking............................................... 171,415 221,037 160,178
Eliminations................................................... (79,853) (70,206) (43,657)
------------ ----------- -----------
Total........................................................$6,569,579 $5,982,307 $5,262,336
- ---------------------------------------------------------------------------------------------------------
Additions to premises and equipment:
Financial institution..........................................$ 5,863 $ 3,823 $ 1,644
Mortgage banking............................................... 5,378 580 1,266
----------- ----------- ------------
Total........................................................$ 11,241 $ 4,403 $ 2,910
- ---------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Financial institution..........................................$ 4,568 $ 4,159 $ 4,071
Mortgage banking............................................... 1,045 609 477
----------- ------------ ------------
Total........................................................$ 5,613 $ 4,768 $ 4,548
- ---------------------------------------------------------------------------------------------------------
</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 $179,000 for the fiscal year ended June 30, 1993. In addition,
Railroad mortgage loans were not assessed charges for servicing its loans from
its mortgage banking operation and, therefore, no loan servicing fees on such
loans are included in the section captioned intersegment other income.
<PAGE>
Purchased mortgage loan servicing rights are included in the Consolidated
Statement of Financial Condition under the caption "Prepaid expenses and other
assets." The activity of purchased mortgage loan servicing rights at June 30 is
summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance................................................$ 34,128 $ 34,025 $ 18,923
Purchases of mortgage loan servicing rights...................... 9,386 7,774 20,873
Acquisition of mortgage loan servicing rights.................... 1,045 -- --
Amortization expense............................................. (8,323) (7,671) (5,771)
- ---------------------------------------------------------------------------------------------------------
Ending balance...................................................$ 36,236 $ 34,128 $ 34,025
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The amount of loans serviced by the mortgage banking operations at June 30, 1995
and 1994 totaled $8,927,933,000 and $7,970,327,000, respectively, (including
approximately $ 3,776,833,000 and $3,334,382,000, respectively, for the Bank).
<PAGE>
NOTE 23. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the
last three fiscal years ended June 30:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended
June 30 March 31 December 31 September 30
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1995:
Total interest income.............................................$ 120,330 $ 114,876 $ 111,913 $ 107,249
Net interest income............................................... 37,513 37,671 37,697 36,961
Provision for loan losses......................................... (1,583) (1,584) (1,658) (1,583)
Gain on sales of securities, loans
and loan servicing rights...................................... 426 699 481 177
Accelerated amortization of goodwill.............................. -- -- 10,678 10,679
Net income........................................................ 12,699 15,033 2,181 1,268
Earnings per share................................................ .88 1.04 .15 .09
- ---------------------------------------------------------------------------------------------------------------------------
FISCAL 1994:
Total interest income.............................................$ 100,708 $ 98,370 $ 98,185 $ 96,591
Net interest income............................................... 35,354 35,335 33,457 33,606
Provision for loan losses......................................... (1,508) (1,544) (1,613) (1,583)
Gain on sales of securities, loans
and loan servicing rights...................................... 2,231 1,885 1,817 1,649
Intangible assets valuation adjustment............................ (52,703) -- -- --
Income (loss) before cumulative effects of changes
in accounting principles....................................... (31,919) 10,627 10,318 9,347
Cumulative effects of changes in accounting principles............ -- -- -- 6,597
Net income (loss)................................................. (31,919) 10,627 10,318 15,944
Earnings (loss) per share (fully diluted):
Income (loss) before cumulative effects of changes
in accounting principles.................................... (2.22) .74 .72 .65
Cumulative effects of changes in accounting principles......... -- -- -- .46
Net income (loss).............................................. (2.22) .74 .72 1.11
- ---------------------------------------------------------------------------------------------------------------------------
FISCAL 1993:
Total interest income.............................................$ 98,309 $ 100,313 $ 102,762 $ 103,244
Net interest income............................................... 32,778 32,989 33,078 29,199
Provision for loan losses......................................... (1,161) (1,666) (1,692) (1,666)
Gain on sales of securities, loans
and loan servicing rights...................................... 1,144 1,789 2,628 2,305
Net income........................................................ 10,018 9,092 8,122 6,884
Earnings per share................................................ .71 .65 .58 .49
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 24. 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>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1995 1994
--------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED ASSETS
- --------------------------------------------------------------------------------------------------------------------
Cash (including short-term investments).....................$ 35,145 $ 35,145 $ 27,575 $ 27,575
Investment securities....................................... 300,481 297,793 290,807 283,766
Mortgage-backed securities.................................. 1,364,907 1,356,307 1,350,402 1,297,371
Loans receivable, net....................................... 4,540,692 4,574,506 3,970,626 3,942,698
Federal Home Loan Bank stock................................ 103,648 103,648 96,095 96,095
- --------------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- --------------------------------------------------------------------------------------------------------------------
Deposits:
Passbook accounts......................................... 549,857 549,857 475,932 475,932
Market rate savings accounts.............................. 190,994 190,994 245,948 245,948
NOW checking accounts..................................... 296,552 296,552 275,721 275,721
Certificates of deposit................................... 2,973,920 2,979,513 2,678,224 2,660,612
-------------------------------------------------------
Total deposits............................................ 4,011,323 4,016,916 3,675,825 3,658,213
Advances from Federal Home Loan Bank........................ 1,787,352 1,774,577 1,625,456 1,587,825
Securities sold under agreements to repurchase.............. 208,373 209,390 157,432 158,188
Other borrowings............................................ 65,303 67,212 66,640 69,575
- --------------------------------------------------------------------------------------------------------------------
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 Corporation has utilized quotes for similar or
identical securities in an actively traded market, where such a market exists,
or has obtained quotes from independent security brokers to determine the fair
value of such assets.
<PAGE>
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 Corporation is able to redeem this stock with the Federal Home
Loan Bank at par value.
DEPOSITS: The fair value of savings deposits were determined as follows: (i)
for passbook accounts, market rate savings accounts and NOW checking accounts,
since such deposits are immediately withdrawable, fair value is determined to
approximate the carrying value (the amount payable on demand); (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by 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 Corporation's
long-term relationships with its deposit customers (core value of deposits
intangible) since such intangible is not a financial instrument as defined under
SFAS No. 107.
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of such advances was
estimated by discounting the expected future cash flows using current interest
rates as of June 30, 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 the senior
notes with a carrying value of $6.9 million at June 30, 1995 and 1994 was
determined based on a dealer quoted market price as of June 30, 1995, and for
June 30, 1994, based on the final maturity of the notes and the spread of the
interest rate on such notes to similar maturing U.S. Treasury notes compared to
the original rate spread at date of issuance. 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. Since all outstanding commitments are
short-term or adjustable rate, the fair value of the commitments is not
significant.
INTEREST RATE SWAP AGREEMENTS: The fair value of interest rate swap agreements
is the estimated amount that would be paid to terminate the swap agreements at
June 30, 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 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.
<PAGE>
NOTE 25. 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 for the fiscal year ended
June 30, 1996 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 adopted the provisions of SFAS No. 121 as of July 1, 1995 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 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.
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 adopted the provisions of this
statement as of July 1, 1995. The effect of adopting the provisions of SFAS No.
122 is anticipated to increase pre-tax earnings for fiscal year 1996.
<PAGE>
NOTE 26. SUBSEQUENT EVENTS:
ACQUISITION - CONSERVATIVE SAVINGS CORPORATION:
On February 1, 1996, the Corporation consummated its acquisition of Conservative
Savings Corporation (Conservative), parent company of Conservative Savings Bank,
FSB. Under the terms of the Reorganization and Merger Agreement (the Merger
Agreement), the Corporation acquired all of the outstanding shares of
Conservative's common stock (1,844,838 shares) and preferred stock (460,000
shares). Each share of Conservative's common stock was exchanged for $6.34 in
cash and .2453 shares of the Corporation's common stock. Each share of
Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares
of the Corporation's common stock. Based on the Corporation's closing stock
price of $36.50 at February 1, 1996, the total consideration for this
acquisition approximates $44,114,000.
At January 26, 1996, Conservative had assets of approximately $303,979,000,
deposits of approximately $198,375,000 and stockholders' equity of approximately
$36,278,000. Conservative operated nine branches with seven located in
Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. It is
anticipated that three of the former Conservative branches and two branches of
the Corporation will be closed in the consolidation process pursuant to this
acquisition. The Conservative acquisition will be accounted for as a purchase
with the fair value of the assets and liabilities being determined including an
independent core value study, branch appraisals and a valuation of the loan
servicing portfolio, to be completed on or before June 30, 1996. In addition,
costs and expenses associated with this acquisition are estimated to approximate
$1,800,000. Core value of deposits resulting from this transaction will be
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. The effect of this acquisition on the Corporation's consolidated
financial statements will not be material.
DISPOSITION OF LEVERAGED LEASES:
Commercial Federal Investment Corporation (CFIC), a wholly-owned subsidiary of
the Bank, purchased through a trustee in two separate transactions in 1986
portions of El Paso Electric Company's (El Paso) ownership interest in a nuclear
generating facility located in Palo Verde, Arizona. The transactions
effectively involved a sale by El Paso of a portion of the interest in the
generating facility and the leaseback of the facility to El Paso. In December
1991, CFIC's investment in the leveraged leases was reduced to zero after CFIC
drew two letters of credit which collateralized such investment.
Effective February 12, 1996, after a series of actions and plans of
reorganization in bankruptcy court, El Paso's Fourth Amended Plan of
Reorganization was approved, providing for the transfer of CFIC's ownership
interest in the Palo Verde facility back to El Paso. Accordingly, the
disposition of CFIC's ownership interest in this asset results in the
recognition of taxable income approximating $154,900,000 for tax purposes only
and in estimated federal and state tax liabilities totaling approximately
$54,827,000. Such tax cash payments are due June 1996 for the federal liability
and in September and October 1996 for the state liabilities. Such amounts are
recorded as deferred income taxes payable on CFIC's statement of financial
condition.
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Commercial
Federal Corporation and subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of income, 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 Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of Commercial Federal Corporation and Railroad Financial Corporation,
which has been accounted for as a pooling of interests as described in Note 1 to
the consolidated financial statements. We did not audit the financial statements
of Railroad Financial Corporation and subsidiaries for the years ended December
31, 1994, 1993 and 1992, which statements reflect total assets of $561,496,000,
$460,967,000, and $390,974,000 as of December 31, 1994, 1993 and 1992,
respectively, and total revenues of $39,712,000, $39,858,000, and $43,026,000
for the respective years then ended. Those financial statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Railroad Financial Corporation and
subsidiaries for such periods, is based solely on the report of such other
auditors. As described in Note 1 to the consolidated financial statements,
subsequent to the issuance of the report of the other auditors, the financial
statements of Railroad Financial Corporation and subsidiaries were restated to
conform to the fiscal year of the Commercial Federal Corporation for the period
ended June 30, 1995.
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, based on our audits and the report of the other auditors, 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.
We also audited the adjustments that were applied to restate the 1995, 1994 and
1993 financial statements of Railroad Financial Corporation. In our opinion,
such adjustments are appropriate and have been properly applied.
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 20 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 and Touche LLP
March 19, 1996
Omaha, Nebraska
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Railroad Financial Corporation:
We have audited the consolidated balance sheets of Railroad Financial
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1994 (before
adjustments by Commercial Federal Corporation to conform the accounting for
income taxes to Commercial Federal Corporation's method of accounting). These
consolidated financial statements (not presented separately herein) are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 Railroad Financial
Corporation and subsidiaries as of December 31, 1994 and 1993, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in note 1(b) to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, in 1993. As discussed in note 10 to the consolidated
financial statements, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, in 1992.
/s/ KPMG PEAT MARWICK LLP
Wichita, Kansas
February 10, 1995
