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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number: 1-11515
COMMERCIAL FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 South 72nd Street, Omaha, Nebraska 68124
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 19, 1996, was
$541,113,993.
As of September 19, 1996, there were issued and outstanding 13,846,491 shares
of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1996 - Parts I, II and IV.
2. Portions of the Proxy Statement relating to the 1996 Annual Meeting of
Stockholders - Part III.
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PART I
Item 1. Business
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GENERAL
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Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. The Corporation incurs
interest expense on $47.15 million of subordinated and senior debt and pays
operating expenses primarily for shareholder and stock related expenditures such
as the annual report, proxy, corporate filing fees and assessments and certain
costs directly attributable to the holding company. The Corporation will also
incur interest expense on a short-term note for $28.0 million borrowed in August
1996 pursuant to the repurchase of a portion of the Corporation's common stock.
Such note bears interest at the prime rate and matures January 31, 1997. See
the "Recent Development -- Subsequent Event -- Repurchase of Common Stock"
section of this report for additional information. In addition, on October 4,
1995, the Board of Directors of the Corporation established a policy of paying a
regular quarterly cash dividend on its common stock. Prior to October 4, 1995,
the Corporation had never paid dividends. Accordingly, cash dividends totaling
$5.9 million, or $.40 per common share, were declared during fiscal year 1996
with $4.4 million paid through June 30, 1996. During fiscal year 1996 the
Corporation received dividends totaling $9.3 million from the Bank which were
made primarily to cover (i) the interest payments on the Corporation's
subordinated debt and senior notes which amount totaled $4.9 million in the
aggregate and (ii) the common stock cash dividends of $4.4 million paid by the
Corporation to its shareholders through June 30, 1996. The Bank pays dividends
to the Corporation on a periodic basis primarily to cover the amount of the
interest payable to the subordinated and senior debt noteholders and for the
common stock cash dividends paid to the Corporation's shareholders.
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is a consumer-oriented
financial institution that emphasizes traditional savings and loan operations,
including single-family residential real estate lending, retail deposit
activities and mortgage banking. All loan origination activities are conducted
through the Bank's branch office network, through the loan offices of Commercial
Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage banking
subsidiary, and through a nationwide correspondent network numbering
approximately 375. The Corporation also provides insurance and securities
brokerage and other retail financial services.
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage financing, consumer
loans and other types of loans, which, in turn, are affected by the interest
rates at which such financings may be offered, the availability of funds, and
other factors, such as the supply of housing for mortgage loans.
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At June 30, 1996, the Corporation had assets of $6.6 billion and stockholders'
equity of $413.3 million, and through the Bank operated 34 branch offices in
Nebraska, 20 branch offices in greater metropolitan Denver, Colorado, 19 branch
offices in Oklahoma, 24 branches in Kansas, and one branch in Iowa. The
increase in branches over fiscal year 1995 was primarily the result of two
acquisitions during fiscal year 1996. On October 2, 1995, the Corporation
consummated its merger with Railroad Financial Corporation ("Railroad") of
Wichita, Kansas (18 branches, 71 agency offices and total assets of $602.9
million at the date of merger). On February 1, 1996, the Corporation acquired
Conservative Savings Corporation ("Conservative") of Omaha, Nebraska (nine
branches and total assets of $302.9 million at acquisition). The Bank is one of
the largest retail financial institutions in the Midwest, and, based upon total
assets at June 30, 1996, the Corporation was the 18th largest publicly-held
thrift institution holding company in the United States. In addition, CFMC
serviced a loan portfolio totaling $9.8 billion at June 30, 1996, with $5.9
billion in loans serviced for third parties and $3.9 billion in loans serviced
for the Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General" in the Corporation's 1996 Annual Report to
Stockholders (the "Annual Report") which is incorporated herein by reference.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans) and providing
customers with a full array of financial products and a high level of customer
service. As part of its long-term strategic plan, the Corporation intends to
expand its operations within its market areas either through direct marketing
efforts aimed at increasing market share, branch expansions, or opening
additional branches. The Corporation's retail strategy will continue to be
centered on attracting new customers and selling both new and existing customers
multiple products and services. Additionally, the Corporation will continue to
build and leverage an infrastructure designed to increase fee and other income.
Complementing its strategy of internal growth, the Corporation will continue to
grow its five-state franchise through an ongoing program of selective
acquisitions of other financial institutions. Acquisition candidates will be
selected based on the extent to which the candidates can enhance the
Corporation's retail presence in new or existing markets and complement the
Corporation's present retail network.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
RECENT DEVELOPMENTS
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Subsequent Event - Repurchase of Common Stock.
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On August 21, 1996, the Corporation consummated the repurchase of 1,250,100
shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately $48.9
million. Such purchase price, excluding transaction costs incurred by the
Corporation for this repurchase, consisted of cash consideration of
approximately $28.2 million and surrender of a warrant (valued at approximately
$20.7 million) which would have enabled the Corporation to purchase 99 shares of
non-voting common stock of CAI Corporation. The repurchased shares represented
8.3% of the outstanding shares of the Corporation's common stock prior to the
repurchase. After repurchase, a total of 13,844,036 shares of common stock
remain issued and outstanding as of August 21, 1996. The cash portion of the
repurchase was financed in part by a loan from a financial institution secured
by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As
consideration, the Corporation also reimbursed CAI Corporation for certain
expenses totaling $2.2 million incurred in connection with its ownership of the
1,250,100 shares, including costs and expenses incurred by CAI Corporation in
connection with the 1995 proxy contest, and paid CAI Corporation cash totaling
$62,500 in lieu of the pro rata portion of any dividend CAI Corporation
otherwise would have received for the quarter ended September 30, 1996.
Concurrent with the close of the repurchase, two directors of the Corporation,
who also serve as executive officers of CAI Corporation, resigned from the
Corporation's Board of Directors. In addition, CAI Corporation and each of its
shareholders agreed to a standstill agreement for a period of 60 months
beginning August 21, 1996. The Corporation and CAI Corporation have each agreed
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to waive and release all claims against the other and the Corporation has agreed
to indemnify CAI Corporation and its directors, officers and affiliates against
certain derivative claims.
Regulatory Issues.
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The Corporation's savings deposits are insured by the SAIF, which is
administered by the FDIC. The assessment rate currently ranges from 0.23% of
deposits for well-capitalized institutions to 0.31% of deposits for
undercapitalized institutions. The FDIC also administers the Bank Insurance
Fund ("BIF"), which has the same designated reserve ratios as the SAIF. On
August 8, 1995, the FDIC adopted an amendment to the BIF risk-based assessment
schedule which lowered the deposit insurance assessment rate for most commercial
banks and other depository institutions with deposits insured by the BIF to a
range from 0.31% of insured deposits for undercapitalized BIF-insured
institutions to 0.04% of deposits for well-capitalized institutions, which
constitute over 90% of BIF-insured institutions. The FDIC amendment became
effective September 30, 1995. Subsequently, the FDIC reduced the premium rate
for the most highly rated BIF-insured institutions to the statutory minimum of
$1,000 per semi-annual period and reduced the rate paid by undercapitalized BIF-
insured institutions to 0.27% of insured deposits. The FDIC amendment creates a
substantial disparity in the deposit insurance premiums paid by the BIF and SAIF
members and places SAIF-insured savings institutions at a significant
competitive disadvantage to BIF-insured institutions.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate the premium disparity. Any such proposals would require a one time
assessment of an amount sufficient to bring the SAIF to a level equal to 1.25%
of insured deposits to be imposed on all SAIF-insured deposits held as of March
31, 1995. Recently, the FDIC revised its estimate of the size of the special
assessment to 68 basis points of insured deposits to bring the SAIF statutory
level to the 1.25% of insured deposits. Any such assessment will depend on the
SAIF fund balance once BIF-SAIF legislation has been passed. It would also
depend on adjustments in the assessable base provided in legislation, but still
would be allocated among institutions on the basis of deposits at March 31,
1995.
Assuming a .68% assessment on a $4.2 billion deposit base, the assessment would
result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge
of approximately $18.3 million to the Corporation. Such assessment would have
the effect of reducing the Bank's tangible capital to $390.4 million, or 5.92%
of adjusted total assets, core capital to $406.6 million, or 6.15% of adjusted
total assets, and risk-based capital to $442.3 million, or 13.08% of
risk-weighted assets. The Bank would, on a pro forma basis as of June 30, 1996,
continue to exceed the minimum requirements to be classified as a
"well-capitalized" institution under applicable regulations. If such a special
assessment were required and the SAIF as a result was fully recapitalized, it
could have the effect of reducing the Bank's deposit insurance premiums to the
SAIF, thereby increasing net income in future periods.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) require recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These changes will
result in the recognition of additional deferred tax liabilities of
approximately $103,000 in the first quarter of fiscal year 1997. The remaining
unrecognized deferred tax liability could be recognized in the future, in whole
or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to
meet certain definitional tests and other conditions in the federal tax law,
(iii) certain distributions are made with respect to the stock of the Bank or
(iv) the bad debt reserves are used for any purpose other than absorbing bad
debt losses.
Also under consideration by Congress are proposals relating to merger of the BIF
and SAIF funds and elimination of the thrift charter. Management of the
Corporation is unable to predict accurately at this time whether any of these
proposals will be adopted in their current form or the impact of these proposals
on the Corporation.
Pending Acquisition.
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On May 16, 1996, the Corporation entered into a Reorganization and Merger
Agreement (the "Merger Agreement") by and among the Corporation, the Bank,
Heritage Financial, Ltd. ("Heritage") and Hawkeye Federal Savings Bank
("Hawkeye Federal"). Under the terms of the Merger Agreement, the Corporation
will acquire all 180,762 of the
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outstanding shares of Heritage's common stock. As defined in the Merger
Agreement, Heritage's common stock will be exchanged for cash and a pro-rata
amount of the Corporation's common stock. Based on the Corporation's closing
stock price on June 30, 1996, of $38.25, each share of Heritage common stock
would be exchanged for $18.73 in cash and 2.559 shares of the Corporation's
common stock, resulting in the exchange of approximately 462,570 shares of the
Corporation's common stock with a total aggregate value approximating $21.1
million. Cash will be paid in lieu of fractional shares. In addition, holders
of Heritage stock options, which totaled 23,037 at June 30, 1996, will receive
in cancellation of their options a cash payment in an amount equal to the per
share value of the proposed merger, less the exercise price of such option, net
of any cash which must be withheld under federal and state tax requirements.
Additional cash consideration up to approximately $1.2 million may be paid to
Heritage shareholders pending the final disposition of an impaired asset of
Hawkeye Federal totaling $1.8 million at June 30, 1996. At June 30, 1996,
Heritage had assets of approximately $182.1 million deposits of approximately
$157.9 million and stockholders' equity of approximately $12.9 million. Heritage
operates six branches located in Iowa. This pending acquisition is expected to
be completed in October 1996.
Acquisitions During Fiscal Year 1996.
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Conservative. On February 1, 1996, the Corporation consummated its acquisition
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of Conservative, parent company of Conservative Savings Bank, FSB. Under the
terms of the merger agreement the Corporation acquired all of the outstanding
shares of Conservative's common stock (1,844,838 shares) and preferred stock
(460,000 shares). Each share of Conservative's common stock was exchanged for
$6.34 in cash and .2453 shares of the Corporation's common stock. Each share of
Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares
of the Corporation's common stock. Based on the Corporation's closing stock
price of $36.50 at February 1, 1996, the total consideration for this
acquisition approximated $44.1 million.
Before purchase accounting adjustments, Conservative had assets of approximately
$302.9 million, deposits of approximately $197.9 million and stockholders'
equity of approximately $35.1 million. Conservative operated nine branches with
seven located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa.
Three of the former Conservative branches and two branches of the Corporation
closed in the consolidation process pursuant to this acquisition. The
Conservative acquisition was accounted for as a purchase with core value of
deposits and goodwill resulting from this transaction totaling $13.0 million.
Railroad. On October 2, 1995, the Corporation consummated its acquisition of
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Railroad, parent company of Railroad Savings Bank, FSB and, pursuant to the
terms of the merger agreement, 2,156,232 shares of Railroad's common stock were
delivered to the Corporation in exchange for approximately 1,377,617 shares of
the Corporation's common stock. Railroad operated 18 branches and 71 agency
offices throughout the state of Kansas and at September 30, 1995, had assets of
approximately $602.9 million, deposits of approximately $421.4 million and
stockholders' equity of approximately $27.7 million. This acquisition was
accounted for as a pooling of interests and, accordingly, the Corporation's
historical consolidated financial statements have been restated for all periods
prior to the acquisition to include the accounts and results of operations of
Railroad.
Railroad's results of operations were reported on a calendar year basis previous
to its merger into the Corporation. However, in restating prior periods,
Railroad's accounts and results of operations were conformed to the
Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years,
Railroad's accounts and results of operations for the six months ended June 30,
1994, including total revenue of $18.1 million and net income totaling $185,000
were excluded from reported results of operations for the restated combined
companies but are included in the Corporation's Consolidated Statement of
Stockholders' Equity. Fiscal year 1996 operations include $3.6 million (pre-
tax) of merger and transition related expenses from this acquisition.
Accounting for Mortgage Servicing Rights.
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As of July 1, 1995, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 122 ("SFAS No. 122") entitled "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires capitalization of internally
originated mortgage servicing rights as well as purchased servicing rights. The
net effect of adopting the
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provisions of SFAS No. 122 was to increase fiscal year 1996 pre-tax earnings
approximately $4.0 million. At June 30, 1996, mortgage servicing rights totaled
$45.0 million. SFAS No. 122 also requires that mortgage servicing rights be
reported at the lower of cost or fair value. Mortgage servicing rights are
stratified by loan type and interest rate for purposes of impairment
measurement. Impairment losses are recognized to the extent the unamortized
mortgage servicing right for each stratum exceeds the current market value. At
June 30, 1996, the fair value of the Corporation's mortgage servicing rights
approximated $77.5 million and no valuation allowance for capitalized servicing
rights was necessary to be established. The future effect of SFAS No. 122 is
dependent, among other items, upon the volume and type of loans originated, the
general levels of market interest rates and the rate of estimated loan
prepayments. Accordingly, management is unable to predict with any reasonable
certainty what effect this statement will have on the Corporation's future
results of operations or its financial position.
Common Stock Dividends.
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On October 4, 1995, the Corporation's Board of Directors established a policy of
paying a regular quarterly cash dividend on its common stock. Accordingly, cash
dividends totaling $5.9 million, or $.40 per common share, were declared during
fiscal year 1996 with $4.4 million paid through June 30, 1996. The Corporation
plans to continue to pay dividends on a quarterly basis. The declaration and
amount of such dividends on the common stock is subject to the discretion of the
Board of Directors of the Corporation and depends on a variety of factors,
including operating results and financial condition, liquidity, regulatory
capital limitations and other factors.
Nonrecurring Expenses in Fiscal Year 1996.
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Fiscal year 1996 net income includes $4.5 million of pre-tax nonrecurring
expenses associated with the Railroad merger and the 1995 proxy contest. The
Railroad merger expenses totaled $3.6 million and consisted of accounting,
legal, investment banking, severance benefits, advertising and miscellaneous
transition and conversion expenses. The 1995 proxy contest expenses totaling
$901,000 consisted of consulting services, legal fees, solicitation fees and
printing and mailing costs.
Supervisory Goodwill Lawsuit.
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On September 13, 1994, the Bank commenced litigation against the United States
in the United States Court of Federal Claims seeking to recover monetary relief
for the government's refusal to honor certain contracts between the Bank and the
Federal Savings and Loan Insurance Corporation. The suit alleges that such
governmental action constitutes breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome, and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing, and the dollar amount of damages
which may be awarded to the Bank if it finally prevails in this litigation.
Reclassification of Securities
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During fiscal year 1996, in accordance with the one-time reclassification
permitted under a special accounting report, and the reassessment of the
appropriateness of the classifications of all securities held, management of the
Corporation developed as asset/liability management strategy to reclassify
substantially all of its 15- and 30-year fixed rate mortgage-backed securities
approximating $370.4 million and agency investment securities approximating
$49.9 million from held to maturity to available for sale. In addition,
approximately $9.4 million of adjustable-rate mortgage-backed securities were
reclassified from available for sale to held to maturity. The purpose of this
strategy is to sell such securities and use the proceeds to fund FHLB advances
as they become due and to have the flexibility, should the opportunity arise, to
reinvest proceeds into adjustable-rate or shorter duration interest-earning
assets. During fiscal year 1996, approximately $230.8 million of such securities
were sold with the proceeds used primarily to pay maturing FHLB advances. Net
pre-tax gains totaled $253,000 from such sales.
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Regulatory Capital Compliance.
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The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios as set forth in the following tables of
tangible, core and total risk-based capital. Prompt Corrective Action provisions
contained in the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") require specific supervisory actions as capital levels decrease. To
be considered well-capitalized under the regulatory framework for Prompt
Corrective Action under FDICIA, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based and total risk-based capital ratios as set forth in the
following tables. At June 30, 1996, the Bank exceeded the minimum requirements
for the well-capitalized category. As of June 30, 1996, the most recent
notification from the OTS categorized the Bank as "well-capitalized" under the
regulatory framework for Prompt Corrective Action provisions under FDICIA. There
are no conditions or events since such notification that management believes
have changed the Bank's classification.
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements as of June 30, 1996.
<TABLE>
<CAPTION>
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Actual Capital Required Capital
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(Dollars In Thousands) Amount Ratio Amount Ratio
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<S> <C> <C> <C> <C>
OTS Capital Adequacy:
Tangible capital $408,708 6.18% $ 99,137 1.50%
Core capital 424,909 6.41 198,760 3.00
Risk-based capital 460,674 13.62 270,629 8.00
FDICIA Regulations to be Classified Well-Capitalized:
Tier 1 leverage capital 424,909 6.41 331,266 5.00
Tier 1 risk-based capital 424,909 12.56 202,971 6.00
Total risk-based capital 460,674 13.62 338,286 10.00
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</TABLE>
See "Regulation -- Regulatory Capital Requirements" and Note 20 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
Effects of New Accounting Pronouncements.
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During fiscal year 1996, the Corporation adopted the provisions of two
accounting pronouncements: Statement No. 121 entitled "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" and Statement No. 122
entitled "Accounting for Mortgage Servicing Rights." See Note 1 to the
Consolidated Financial Statements for a discussion of the implementation of the
provisions of these new accounting pronouncements and their effect, if any, on
the Corporation's financial position and results of operations.
Other Information.
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Additional information concerning the general development of the business of the
Corporation during fiscal year 1996 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
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LENDING ACTIVITIES
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General. The Corporation concentrates its lending activities primarily on the
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origination of first mortgage loans for the purpose of financing or refinancing
single-family residential properties, single-family residential construction
loans, commercial real estate loans consumer and home improvement loans. As a
result of a continued emphasis on consumer-oriented operations, including
single-family residential lending and mortgage-banking activities, the
origination of residential loans during fiscal year 1996 increased over fiscal
year 1995. However, loan origination activity was significantly lower for fiscal
years 1996 and 1995 compared to fiscal year 1994 due to a relatively lower
interest rate environment in 1994 than the past two fiscal years. See "Loan
Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 98 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's various loan offices
located in its existing market areas, loan offices of CFMC and through its
nationwide correspondent network.
At June 30, 1996, the Corporation's total loan and mortgage-backed securities
portfolio was $6.0 billion, representing over 90.7% of its $6.6 billion of total
assets at that date. Mortgage-backed securities totaled $1.2 billion at June
30, 1996, representing 19.7% of the Corporation's total loan and mortgage-
backed securities portfolio at such date. Approximately 95.0% of the
Corporation's total gross loan and mortgage-backed securities portfolio has
historically been and continues to be secured by real estate. Commercial real
estate and land loans (collectively referred to as "income property loans")
totaled $284.2 million or 4.7% of the total loan and mortgage-backed securities
portfolio at June 30, 1996, compared to $226.7 million or 3.8% of such total
portfolio at June 30, 1995. These loans are secured by various types of
commercial properties including office buildings, shopping centers, warehouses
and other income producing properties. Single-family residential construction
loans totaled $185.3 million or 3.0% of the total loan and mortgage-backed
securities portfolio at June 30, 1996, compared to $177.5 million or 3.0% of
such portfolio at June 30, 1995. The Corporation's single-family residential
construction lending activity is primarily a result of the construction lending
operation's conducted by Railroad and continued by the Corporation after the
October 1995 acquisition of Railroad. The Corporation conducts single-family
residential construction lending operations primarily in Las Vegas, Nevada and
in its primary five-state market area. At June 30, 1996, multi-family
residential loans consisting of loans secured by various types of properties,
including townhomes, condominiums and apartment projects with more than four
dwelling units, totaled $40.3 million, or .7% of the total loan portfolio,
compared to $33.7 million or .6% at June 30, 1995. The Bank presently does not
originate a significant amount of multi-family residential loans, and expects to
originate such loans primarily for purposes of resolving certain nonperforming
assets.
The Corporation's primary emphasis in recent years has been on the origination
of loans secured by existing single-family residences. Adjustable-rate single-
family residential loans are originated primarily for retention in the
Corporation's loan portfolio to match more closely the repricing of the
Corporation's interest-bearing liabilities as a result of changes in interest
rates. Fixed-rate single-family residential loans are originated using
underwriting guidelines, appraisals and documentation which are acceptable to
the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National
Mortgage Corporation ("GNMA") and the Federal National Mortgage Corporation
("FNMA") to facilitate the sale of such loans to such agencies in the secondary
market. The Corporation also originates fixed-rate single-family residential
loans using internal lending policies in accordance with what management
believes are prudent underwriting standards but which may not strictly adhere to
FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans are
originated or purchased for the Corporation's loan portfolio if such loans have
characteristics which are consistent with the Corporation's asset and liability
goals and long-term interest rate yield requirements.
8
<PAGE>
In recent years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. However, beginning
fiscal year 1994, the Corporation has initiated commercial and multi-
family real estate lending, on a limited basis, with such loans secured by
properties located within the Corporation's primary market areas. Such loans,
which are subject to prudent credit review and other underwriting standards and
procedures, are not expected to constitute a significant portion of the
Corporation's lending business in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, savings account and commercial business loans (collectively,
"consumer loans") through the Corporation's branch network and direct mail
solicitation. However, the Corporation presently does not originate commercial
business loans, except for loans to resolve nonperforming assets.
Regulatory guidelines generally subject savings institutions to the same loans
to one borrower limitations that are applicable to national banks. At June 30,
1996, all loans to one borrower were within the Corporation's limitation of
$69.5 million. See "Regulation -- Limitations on Loans to One Borrower."
9
<PAGE>
Composition of Loan Portfolio. The following table sets forth the composition
- ------------------------------
of the Corporation's loan and mortgage-backed securities portfolios (including
loans held for sale and mortgage-backed securities available for sale) as of the
dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Portfolio
- --------------
Conventional real estate
mortgage loans:
Loans on existing
properties -
Single-family residential $3,739,191 61.1% $3,603,379 59.8% $3,125,477 58.0% $2,784,073 59.5% $2,683,033 62.1%
Multi-family residential 37,322 .6 33,338 .5 43,379 .8 60,935 1.3 75,233 1.7
Land 14,582 .2 7,257 .1 9,080 .2 9,322 .2 10,356 .2
Commercial real estate 258,933 4.2 210,676 3.5 203,840 3.8 254,281 5.4 272,769 6.3
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 4,050,028 66.1 3,854,650 63.9 3,381,776 62.8 3,108,611 66.4 3,041,391 70.3
Construction loans -
Single-family residential 185,327 3.0 177,539 3.0 50,870 1.0 20,851 .5 13,670 .3
Multi-family residential 3,027 .1 380 -- -- -- -- -- -- --
Land -- -- 1,600 -- 1,640 -- -- -- 1,581 --
Commercial real estate 10,734 .2 7,195 .1 871 -- -- -- 4,810 .2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 199,088 3.3 186,714 3.1 53,381 1.0 20,851 .5 20,061 .5
FHA and VA loans 347,569 5.7 392,463 6.5 415,866 7.7 461,066 9.8 355,474 8.2
Mortgage-backed securities 1,171,256 19.1 1,354,142 22.5 1,338,775 24.8 947,919 20.2 777,874 18.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total real estate loans 5,767,941 94.2 5,787,969 96.0 5,189,798 96.3 4,538,447 96.9 4,194,800 97.0
Consumer and other loans -
Home improvement and other
consumer loans 344,129 5.6 231,818 3.8 188,756 3.5 131,432 2.8 116,544 2.7
Savings account loans 11,648 .2 10,026 .2 9,136 .2 8,713 .2 9,713 .2
Other loans 2,113 -- 853 -- 1,322 -- 3,696 .1 3,845 .1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer and other loans 357,890 5.8 242,697 4.0 199,214 3.7 143,841 3.1 130,102 3.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans $6,125,831 100.0% $6,030,666 100.0% $5,389,012 100.0% $4,682,288 100.0% $4,324,902 100.0%
---------- ===== ---------- ===== ---------- ===== ---------- ===== ---------- =====
</TABLE>
(Continued on next page)
10
<PAGE>
Composition of Loan Portfolio (continued):
- ------------------------------------------
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance forward of total loans $6,125,831 100.0% $6,030,666 100.0% $5,389,012 100.0% $4,682,288 100.0% $4,324,902 100.0%
===== ===== ===== ===== =====
Less:
Unamortized discounts, net
of premiums 12,335 6,884 11,938 (4,941) (17,747)
Deferred loan fees, net (3,673) (1,362) (1,126) (7,365) (8,211)
Loans in process (91,262) (80,211) (32,085) (12,905) (5,970)
Allowance for loan losses (49,278) (48,541) (44,851) (46,908) (50,704)
Allowance for losses on mortgage-
backed securities (742) (1,837) (1,860) (1,890) (2,007)
---------- ---------- ---------- ---------- ----------
Loan portfolio $5,993,211 $5,905,599 $5,321,028 $4,608,279 $4,240,263
========== ========== ========== ========== ==========
</TABLE>
- --------------------------------------------------------------------------------
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes to the Consolidated Financial Statements
in the Annual Report.
11
<PAGE>
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities and
before any reduction for unamortized discounts (net of premiums), undisbursed
loan proceeds, deferred loan fees and allowance for loan losses) as of the dates
indicated:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ---------------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 929,982 20.2% $ 836,054 18.9% $ 767,988 19.9% $ 654,850 18.2% $ 403,140 11.8%
Colorado 843,670 18.3 909,363 20.5 797,141 20.7 814,384 22.7 682,725 20.0
Kansas 350,248 7.6 317,109 7.2 282,238 7.3 271,892 7.6 308,011 9.0
Georgia 217,957 4.7 202,331 4.6 210,299 5.5 241,286 6.7 303,321 8.9
Oklahoma 212,468 4.6 198,480 4.5 135,893 3.5 91,302 2.5 76,754 2.2
Texas 204,002 4.4 225,866 5.1 181,547 4.7 190,605 5.3 191,516 5.6
Missouri 170,032 3.7 180,144 4.1 158,291 4.1 197,978 5.5 249,856 7.3
California 151,412 3.3 154,803 3.5 172,767 4.5 127,260 3.5 181,969 5.3
Virginia 123,806 2.7 111,081 2.5 81,290 2.1 67,821 1.9 47,849 1.4
New Jersey 113,824 2.5 119,223 2.7 110,267 2.9 38,064 1.1 42,723 1.3
Maryland 112,152 2.4 100,762 2.3 76,365 2.0 69,769 1.9 77,936 2.3
Florida 111,692 2.4 100,471 2.3 92,531 2.4 97,116 2.7 95,428 2.8
Iowa 80,820 1.8 70,515 1.6 65,365 1.7 65,512 1.8 35,689 1.0
Nevada 80,624 1.8 51,817 1.2 -- -- -- -- -- --
Illinois 79,570 1.7 78,043 1.7 57,378 1.5 69,596 1.9 94,088 2.8
Connecticut 75,946 1.7 81,418 1.8 83,002 2.2 85,204 2.4 92,321 2.7
Arizona 68,637 1.5 63,467 1.4 60,995 1.6 77,448 2.2 84,827 2.5
Washington 64,796 1.4 55,812 1.3 40,558 1.1 37,294 1.0 29,057 .8
Pennsylvania 59,859 1.3 53,355 1.2 43,223 1.1 30,372 .8 38,716 1.1
Ohio 47,396 1.0 47,851 1.1 37,603 1.0 15,192 .4 11,229 .3
Michigan 46,548 1.0 45,784 1.0 46,239 1.2 10,391 .3 11,486 .3
Massachusetts 44,300 1.0 45,233 1.0 17,658 .5 6,371 .2 6,694 .2
Minnesota 42,144 .9 32,866 .7 23,347 .6 30,880 .9 17,146 .5
South Carolina 40,674 .9 26,402 .6 27,163 .7 13,792 .4 15,451 .5
Alabama 39,514 .9 38,147 .8 38,604 1.0 43,126 1.2 53,700 1.6
New York 38,794 .8 40,532 .9 27,700 .7 13,014 .4 16,725 .5
North Carolina 31,601 .7 23,260 .5 19,683 .5 20,404 .6 22,277 .7
Indiana 27,191 .6 25,048 .5 13,652 .3 7,556 .2 6,092 .2
Tennessee 22,247 .5 23,194 .5 20,434 .5 24,256 .7 31,831 .9
Other States 164,779 3.7 175,396 4.0 161,802 4.2 177,793 5.0 188,369 5.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$4,596,685 100.0% $4,433,827 100.0% $3,851,023 100.0% $3,590,528 100.0% $3,416,926 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
12
<PAGE>
The following table presents the composition of the Corporation's total
real estate portfolio (excluding mortgage-backed securities and before any
reduction for unamortized discounts (net of premiums), undisbursed loan
proceeds, deferred loan fees and allowance for loan losses) by state and
property type at June 30, 1996:
<TABLE>
<CAPTION>
Residential Multi- Land Sub Commercial % of
State 1-4 Units Family Loans FHA/VA Total Loans Total Total
------------ ---------- -------- ------- --------- ---------- ----------- ------ -----
(Dollars in Thousands)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 775,847 $ 9,865 $ 3,420 $ 57,129 $ 846,261 $ 83,721 $ 929,982 20.2%
Colorado 717,519 13,690 2,448 20,517 754,174 89,496 843,670 18.3
Kansas 272,029 55 454 46,161 318,699 31,549 350,248 7.6
Georgia 204,675 -- -- 10,079 214,754 3,203 217,957 4.7
Oklahoma 183,206 2,527 -- 19,203 204,936 7,532 212,468 4.6
Texas 169,397 9,903 -- 20,999 200,299 3,703 204,002 4.4
Missouri 146,107 555 -- 17,869 164,531 5,501 170,032 3.7
California 131,447 8 -- 13,879 145,334 6,078 151,412 3.3
Virginia 108,911 -- -- 14,895 123,806 -- 123,806 2.7
New Jersey 112,723 -- -- 1,101 113,824 -- 113,824 2.5
Maryland 97,241 -- -- 14,911 112,152 -- 112,152 2.4
Florida 84,576 -- -- 13,321 97,897 13,795 111,692 2.4
Iowa 61,148 3,746 -- 11,215 76,109 4,711 80,820 1.8
Nevada 66,885 -- 8,260 5,098 80,243 381 80,624 1.8
Illinois 68,482 -- -- 11,088 79,570 -- 79,570 1.7
Connecticut 75,835 -- -- 111 75,946 -- 75,946 1.7
Arizona 52,041 -- -- 10,623 62,664 5,973 68,637 1.5
Washington 57,943 -- -- 6,853 64,796 -- 64,796 1.4
Pennsylvania 58,243 -- -- 1,616 59,859 -- 59,859 1.3
Ohio 41,089 -- -- 6,307 47,396 -- 47,396 1.0
Michigan 45,277 -- -- 1,271 46,548 -- 46,548 1.0
Massachusetts 43,653 -- -- 229 43,882 418 44,300 1.0
Minnesota 37,391 -- -- 4,753 42,144 -- 42,144 .9
South Carolina 36,822 -- -- 2,852 39,674 1,000 40,674 .9
Alabama 32,251 -- -- 7,263 39,514 -- 39,514 .9
New York 37,438 -- -- 571 38,009 785 38,794 .8
North Carolina 26,871 -- -- 4,730 31,601 -- 31,601 .7
Indiana 22,439 -- -- 4,752 27,191 -- 27,191 .6
Tennessee 17,615 -- -- 4,632 22,247 -- 22,247 .5
Other States 139,417 -- 13,541 152,958 11,821 164,779 3.7
---------- ------- -------- ---------- -------- ---------- -----
Total $3,924,518 $40,349 $14,582 $347,569 $4,327,018 $269,667 $4,596,685 100.0%
========== ======= ======= ======== ========== ======== ========== =====
% of Total 85.4% .9% .3% 7.5% 94.1% 5.9% 100.0%
========== ======= ======= ======== ========== ======== ==========
</TABLE>
13
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
- ---------------------------------
information at June 30, 1996, regarding the dollar amount of all loans and
mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of possible prepayments. Demand loans (loans having no stated schedule
of repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of
mortgage loans and mortgage-backed securities, management believes that the
following table will bear little resemblance to what will be the actual
repayments of the loan and mortgage-backed securities portfolios. Loan balances
have not been reduced for (i) unamortized discounts (net of premiums),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Due During the Year Ended June 30,
--------------------------------------------
- --------------------------------------------------------------------------------
1998- After
1997 2001 2001 Total
-------- ---------- ---------- ----------
Principal Repayments (In Thousands)
- --------------------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1)
Fixed-rate $ 74,549 $ 345,800 $1,760,100 $2,180,449
Adjustable-rate 28,292 138,224 1,739,016 1,905,532
Multi-family residential, land
and commercial real estate
Fixed-rate 18,177 37,135 44,505 99,817
Adjustable-rate 17,298 66,642 127,859 211,799
-------- ---------- ---------- ----------
138,316 587,801 3,671,480 4,397,597
-------- ---------- ---------- ----------
Construction loans:
Fixed-rate 80,269 3,313 -- 83,582
Adjustable-rate 115,506 -- -- 115,506
-------- ---------- ---------- ----------
195,775 3,313 -- 199,088
-------- ---------- ---------- ----------
Mortgage-backed securities:
Fixed-rate 37,716 192,330 158,038 388,084
Adjustable-rate 12,166 54,213 716,793 783,172
-------- ---------- ---------- ----------
49,882 246,543 874,831 1,171,256
-------- ---------- ---------- ----------
Consumer and other loans:
Fixed-rate 75,019 260,384 -- 335,403
Adjustable-rate 6,025 16,462 -- 22,487
-------- ---------- ---------- ----------
81,044 276,846 -- 357,890
-------- ---------- ---------- ----------
Principal repayments $465,017 $1,114,503 $4,546,311 $6,125,831
======== ========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional mortgage loans, FHA and VA loans.
14
<PAGE>
Scheduled contractual principal repayments do not reflect the actual maturities
of such assets. The average maturity of loans is substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Corporation the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Annual Report.
The following table sets forth the amount of all loans and mortgage-backed
securities due after June 30, 1997, which have fixed interest rates and those
which have adjustable interest rates. Such loans and mortgage-backed securities
have not been reduced for (i) unamortized discounts (net of premiums),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Adjustable
Fixed-Rate Rate Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $2,105,900 $1,877,240 $3,983,140
Multi-family residential,
land and commercial 81,640 194,501 276,141
Construction loans 3,313 -- 3,313
Mortgage-backed securities 350,368 771,006 1,121,374
Consumer and other loans 260,384 16,462 276,846
---------- ---------- ----------
Principal repayments due
after June 30, 1997 $2,801,605 $2,859,209 $5,660,814
========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
LOAN ORIGINATIONS
- -----------------
Residential Loans. The Corporation, through its 98 branch network and CFMC's
- ------------------
loan offices and nationwide correspondent network, originates and purchases both
fixed-rate and adjustable-rate mortgage loans secured by single-family units.
Such residential mortgage loans are either (i) FHA/VA loans which qualify for
sale in the form of securities guaranteed by GNMA, (ii) conventional mortgage
loans which comply with the requirements for sale to, or conversion into
securities issued by, FNMA or FHLMC ("conventional conforming loans") or (iii)
mortgage loans which exceed the maximum loan amount allowed by FNMA or FHLMC,
but which otherwise generally comply with FNMA and FHLMC loan requirements
("conventional nonconforming loans"). The Corporation originates substantially
all conventional conforming loans or conventional nonconforming loans
(collectively, "conventional loans") with loan-to-value ratios at or below 80.0%
unless the borrower obtains private mortgage insurance, at the borrower's own
expense, for the Corporation's benefit covering that portion of the loan in
excess of 80.0% of the appraised value. Occasional exceptions to the 80.0% loan-
to-value ratio for conventional loans are made for loans to facilitate the
resolution of nonperforming assets.
15
<PAGE>
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans generally are also
originated with terms of 15 and 30 years. However, certain adjustable-rate
loans contain provisions which permit the borrower, at the borrower's option, to
convert at certain periodic intervals over the life of the loan to a long-term
fixed-rate loan. The adjustable-rate loans currently have interest rates which
are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Board Cost of Funds Index. The amount of any such
interest rate increase is limited to one or two percentage points annually and
four to six percentage points over the life of the loan. Certain adjustable-
rate loans are also offered which have interest rates fixed over annual periods
ranging from two through seven years, and also ten year loans, with such loans
repricing annually after the fixed interest-rate term. In order to encourage
public acceptance of adjustable-rate loans, such loans are currently offered at
initial rates below the fully indexed rate, which is a common practice in the
Corporation's market area.
Residential Construction Loans. In years prior to 1993, the Corporation was not
- -------------------------------
actively pursuing construction loans, but provided interim construction
financing that was tied to permanent real estate mortgage loans. After fiscal
year 1993, and especially the last two fiscal years, the Corporation's single-
family residential construction lending activity has increased primarily as a
result of the construction lending operations conducted by Railroad and
continued by the Corporation after the October 1995 acquisition of Railroad.
During fiscal years 1996, 1995 and 1994, the Corporation originated $206.4
million, $216.2 million and $63.4 million, respectively, of residential
construction loans. The Corporation conducts its single-family residential
construction lending operations predominantly in its primary five-state market
area and Las Vegas, Nevada. Such lending operations, which loans are subject to
prudent credit review and other underwriting standards and procedures, are not
expected to constitute any greater portion of the Corporation's lending business
in the future than in fiscal year 1996.
Commercial Real Estate and Land Loans. The Corporation originated commercial
- --------------------------------------
real estate loans totaling $45.2 million, $29.4 million and $18.0 million,
respectively, during fiscal years 1996, 1995 and 1994. Commercial real estate
lending may entail significant additional risks compared with residential real
estate lending. These additional risks are due to larger loan balances which
are more sensitive to economic conditions, business cycle downturns and
construction related risks. The payment of principal and interest due on the
Corporation's commercial real estate loans is substantially dependent upon the
performance of the projects securing such loans. As an example, to the extent
that the occupancy and rental rates are not high enough to generate the income
necessary to make such payments, the Corporation could experience an increased
rate of delinquency and could be required either to declare such loans in
default and foreclose upon such properties or to make concessions on the terms
of the repayment of such loans. See "Asset Quality" herein.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $1.843
billion at June 30, 1996. This restriction has not and is not expected to
materially affect the Corporation's business.
Consumer Loans. Federal regulations permit federal savings institutions to make
- ---------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. During fiscal years 1996, 1995 and 1994, the Corporation
originated $276.5 million, $164.5 million and $157.7 million, respectively, of
consumer loans. Consumer loans originated by the Corporation are primarily
second mortgage loans, loans to depositors on the security of their savings
accounts and loans secured by automobiles. The Corporation has increased its
secured consumer lending activities in order to meet its customers' financial
needs and will continue to emphasize such lending activities in the future in
its primary market areas.
16
<PAGE>
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Corporation, and a borrower may be
able to assert against such assignee claims and defenses which it has against
the seller of the underlying collateral.
Bulk Loan Purchases. Between January 1991 and June 30, 1992, as part of its
- --------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the Resolution Trust Corporation ("RTC"),
comprised of 46,500 loans primarily collateralized by single-family residential
properties with principal balances aggregating $2.5 billion. These purchased
loans had a weighted average yield of 8.71%. At June 30, 1996, 1995 and 1994,
the aggregate principal balance of these bulk purchased loans associated with
such restructuring was $574.4 million, $701.9 million and $868.0 million,
respectively.
To supervise and coordinate the residential loan purchase program, the
management of the Corporation established a loan purchase committee responsible
for identifying the loan packages to review, directing the loan review process,
preparing the bid or rejecting the package, facilitating the purchase and
transfer of loan servicing and coordinating the put back process as necessary.
Management established specific guidelines to define the types of loans
management would consider for purchase, and established internal standards for
underwriting and documentation for loan purchases. Management implemented
procedures to analyze the credit and servicing risks of a loan package and the
expected return of the loan package. Based upon both a review and analysis of
the information provided by the seller with respect to each loan package and
management's own due diligence review of a certain percentage (usually 5.0% to
10.0%) of the loans within a loan package, management established specific
estimated allowance amounts which were allocated from the discount amounts on
the loan packages. At June 30, 1996, 1995 and 1994, $12.8 million, $15.3
million and $17.3 million, respectively, of the discount amount relating to
these purchased loans was allocated to an estimated allowance amount for
potential credit risk associated with such bulk purchased loans. These
allowances are available to absorb losses associated with the respective
purchased loan packages and are not available to absorb losses from other loans.
The loan purchase agreements generally provided for a 30-to-90 day period after
purchase and delivery of the loan in which to identify and put back loans which
did not conform to legal documentation presented by the seller. In addition,
the loan purchase agreements contained representations and warranties concerning
the loans in the package generally warranting, at a minimum, as of the date of
sale of the loans, the accuracy of information previously disclosed by seller,
and the validity, enforceability, and first lien status of the loans and the
delinquency or current payment status of the loans. The Corporation's right to
enforce remedies for breach of representations or warranties was generally not
limited in duration except as measured from the time that a breach is
discovered. Substantially all of the obligations of sellers in RTC loan sales
are guaranteed by the RTC in its corporate capacity. At June 30, 1996, 1995 and
1994, $17.8 million, $17.8 million and $17.5 million, respectively, of these
purchased loans were past due 90 days or more.
To the extent opportunities to make similar bulk purchases of loans become
available, the Corporation will consider making such purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1996, 1995 and 1994, the
Corporation purchased $286.1 million, $461.3 million and $545.8 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
17
<PAGE>
Loan Sales. In addition to originating loans for it's portfolio, the
- -----------
Corporation, through its mortgage banking subsidiary, participates in secondary
mortgage market activities by selling whole and securitized loans to
institutional investors or other financial institutions with the Corporation
generally retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole loans
to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC
which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1996, 1995 and 1994, the Corporation sold an aggregate of
$667.7 million, $654.4 million and $2.0 billion, respectively, in mortgage loans
resulting in net gains of $164,000 and $1.4 million, respectively, in fiscal
years 1996 and 1994, and a net loss of $1.7 million in fiscal year 1995. Of the
amount of mortgage loans sold during fiscal year 1996, $570.7 million were sold
in the secondary market, of which 57.0% were converted into GNMA securities,
42.0% were sold directly to FNMA or FHLMC for cash or were exchanged for
securities issued by FNMA or FHLMC, and the remaining were sold to other
institutional investors. At June 30, 1996, the carrying value of loans held for
sale totaled $89.4 million.
The net gain recorded in fiscal year 1996 is attributable to the relatively
stable interest rate environment and to the adoption effective July 1, 1995, of
the provisions of Statement of Financial Accounting Standards No. 122 ("SFAS No.
122") entitled "Accounting for Mortgage Servicing Rights," which prescribes
accounting methods that generally result in comparatively higher amounts of
gains, or lower losses realized from the sales of loans.
SFAS No. 122 requires capitalization of internally originated mortgage servicing
rights as well as purchased mortgage servicing rights. The net effect of
adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre-tax
earnings approximately $4.0 million. At June 30, 1996, mortgage servicing
rights totaled $45.0 million. SFAS No. 122 also requires that mortgage
servicing rights be reported at the lower of cost or fair value. Mortgage
servicing rights are stratified by loan type and interest rate for purposes of
impairment measurement. Impairment losses are recognized to the extent the
unamortized mortgage servicing right for each stratum exceeds the current market
value, as reductions in the carrying value of the asset, through the use of a
valuation allowance, with a corresponding reduction to loan servicing income.
No valuation allowance for capitalized servicing rights was necessary to be
established as of June 30, 1996. The future effect of SFAS No. 122 is
dependent, among other items, upon the volume and type of loans originated, the
general levels of market interest rates and the rate of estimated loan
prepayments. Accordingly, management of the Corporation is unable to predict
with any reasonable certainty what effect this statement will have on the
Corporation's future results of operations or its financial position.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on an annual basis. However, in connection with a 1987 acquisition
of a financial institution, the Bank assumed agreements providing for recourse
in the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1996, the remaining balance
of such loans sold with recourse totaled $39.3 milllion.
18
<PAGE>
Set forth below is a table showing the Corporation's loan and mortgage-backed
securities activity for the fiscal years indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans -
Residential loans (1) $ 593,488 $ 564,731 $1,453,444
Construction loans 206,364 216,191 63,419
Commercial real estate and land loans 45,214 29,381 17,967
Consumer loans 276,507 164,499 157,728
---------- ---------- ----------
Loans originated $1,121,573 $ 974,802 $1,692,558
========== ========== ==========
Loans purchased:
Conventional mortgage loans -
Residential loans 607,878 $ 604,958 $1,548,977
Bulk loan purchases 286,066 461,299 545,823
Commercial loans -- 942 --
Mortgage-backed securities 50,197 11,504 214,811
---------- ---------- ----------
Loans purchased $ 944,141 $1,078,703 $2,309,611
========== ========== ==========
Loans securitized:
Conventional mortgage loans securitized
into mortgage-backed securities $ 63,445 $ 189,031 $ 605,490
========== ========== ==========
Acquisitions:
Residential real estate loans $ 138,679 $ 101,067 $ 771
Consumer loans 27,599 12,173 19,027
Mortgage-backed securities 82,580 42,648 --
---------- ---------- ----------
Loans from acquisitions $ 248,858 $ 155,888 $ 19,798
========== ========== ==========
Loans sold:
Conventional mortgage loans $ 667,683 $ 654,439 $1,958,394
Mortgage-backed securities 178,580 40,815 20,601
---------- ---------- ----------
Loans sold $ 846,263 $ 695,254 $1,978,995
========== ========== ==========
- -------------------------------------------------------------------------------
</TABLE>
(1) Includes single-family and multi-family residential loans and FHA and VA
loans. In addition, includes loans refinanced of $176,520, $32,564 and
$359,135 for fiscal years 1996, 1995 and 1994, respectively.
19
<PAGE>
Loan Servicing. The Corporation, through its mortgage banking subsidiary,
- ---------------
services substantially all of the mortgage loans that it originates and
purchases (whether retained for the Bank's portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1996, the Bank's
mortgage banking subsidiary was servicing approximately 107,800 loans and
participations for others with principal balances aggregating $5.9 billion,
compared to 93,100 loans with principal balances totaling $5.2 billion at June
30, 1995. At June 30, 1996, adjustable-rate mortgage loans represented 21.2% of
the aggregate dollar amount of loans in the servicing portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General," -- "Loan Servicing Fees" and -- "Note 24 - Segment
Information" in the Annual Report for information pertaining to revenue from
servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .50% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .42% for fiscal
years 1996 and 1995. The Corporation's servicing portfolio is subject to
reduction primarily by reason of normal amortization and prepayment of
outstanding mortgage loans. In general, the value of the Corporation's loan
servicing portfolio may also be adversely affected as mortgage interest rates
decline and loan prepayments increase. It is expected that income generated
from the Corporation's loan servicing portfolio also will decline in such an
environment. This negative effect on the Corporation's income may be offset
somewhat by a rise in origination and servicing fee income attributable to new
loan originations, which historically have increased in periods of low mortgage
interest rates. The weighted average mortgage loan note rate of the
Corporation's servicing portfolio at June 30, 1996, was 7.90% compared to 7.76%
(excluding the effect of Railroad) at June 30, 1995.
At June 30, 1996, 95.0% of the Corporation's mortgage servicing portfolio for
other institutions was covered by servicing agreements pursuant to the mortgage-
backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1996, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $1.5 million.
Interest Rates and Loan Fees. Interest rates charged by the Corporation on its
- -----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. Nebraska, Iowa and Oklahoma
law do not provide an interest rate limitation on loans secured by real estate,
however, such states do impose various limitations on the interest rate which
may be charged on installment and personal loans made to non-corporate
borrowers. Generally, interest rates on these loans are limited in Nebraska as
follows: (i) 19.0% for unsecured loans made for the purpose of property
alterations or repairs and for loans made in accordance with the provisions of
Titles I or II of the National Housing Act, and (ii) 16.0% for loans to
individuals providing such loans are not secured by real estate, total less than
$25,000 and are not home improvement loans. Oklahoma and Iowa laws generally
limit interest rates charged on installment and personal loans made to non-
corporate borrowers to 21.0%, although loans in excess of $45,000 and $25,000,
respectively, are not subject to any interest rate limitation. Colorado
statutory usury limitations prohibit the Corporation from contracting for
payment by the debtor of any loan finance charge in excess of a 45.0% annual
percentage rate when the loan is secured by a first lien against real estate or
is for a business or commercial purpose. Colorado usury limitations also
restrict the Corporation for all other loans, excluding business or commercial
purpose loans, from contracting for payment by the debtor of any loan finance
charge in excess of a 21.0% annual percentage
20
<PAGE>
rate. Kansas law limits the interest rate on fixed-rate non-business loans
secured by real estate to an index based on FHLMC securities, while interest
rates imposed on variable rate mortgages are generally not limited. Kansas law
imposes various interest rate limitations on consumer loans of $25,000 or less
which are generally limited to 18.0% per annum.
In addition to interest earned on loans, the Corporation receives loan
origination fees for originating certain loans. These fees are a percentage of
the principal amount of the mortgage loan and are charged to the borrower.
Loan Commitments. At June 30, 1996, the Corporation had issued commitments of
- -----------------
$173.6 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are generally expected to settle within three
months following June 30, 1996. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in the Annual Report.
Collection Procedures. If a borrower fails to make required payments on a loan,
- ----------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
21
<PAGE>
ASSET QUALITY
- -------------
Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a
- ---------------------
nonaccruing status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on a nonaccruing status when
either principal or interest is 90 days or more past due. Interest accrued and
unpaid at the time a loan is placed on nonaccruing status is charged against
interest income. Subsequent payments are applied to the outstanding principal
balance until such time as the loan is removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. Such property is stated at the lower of cost or fair value, minus
estimated costs to sell. Valuation allowances for estimated losses on real
estate are subsequently provided when the carrying value exceeds the fair value
minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when a
delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of ownership
would still be retained by the borrower. The evaluation of borrowers and
collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring. In
these circumstances, the Corporation would strive to ensure that the borrower's
continued participation in and management of the collateral does not put the
Corporation at further risk of loss. In situations in which the borrower is not
performing under the restructured terms, foreclosure proceedings are commenced
when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Corporation would not otherwise consider.
The Corporation's nonperforming assets totaling $66.5 million increased by $3.8
million, or 6.1%, at June 30, 1996, compared to June 30, 1995, primarily as a
result of net increases of $5.6 million in nonperforming loans and $1.3 million
in real estate offset by a net decrease of $3.1 million in troubled debt
restructurings.
22
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
nonaccruing basis: (1)
Real estate -
Residential $34,660 $30,784 $27,470 $ 29,888 $ 33,871
Commercial 2,357 773 5,613 1,377 11,937
Consumer 888 701 409 322 100
------- ------- ------- -------- --------
Total 37,905 32,258 33,492 31,587 45,908
------- ------- ------- -------- --------
Accruing loans which are
contractually past
due 90 days or more - -- -- -- --
------- ------- -------- --------
Total nonperforming loans 37,905 32,258 33,492 31,587 45,908
------- ------- ------- -------- --------
Real estate: (2)
Commercial 8,850 8,795 16,869 23,808 53,035
Residential 4,986 3,784 4,566 6,519 8,517
------- ------- ------- -------- --------
Total 13,836 12,579 21,435 30,327 61,552
------- ------- ------- -------- --------
Troubled debt restructurings: (3)
Commercial 13,894 16,566 19,455 39,852 40,322
Residential 909 1,294 1,580 2,164 3,233
------- ------- ------- -------- --------
Total 14,803 17,860 21,035 42,016 43,555
------- ------- ------- -------- --------
Nonperforming assets $66,544 $62,697 $75,962 $103,930 $151,015
======= ======= ======= ======== ========
Nonperforming loans to total loans (4) .78% .70% .83% .80% 1.29%
Nonperforming assets to total assets 1.01% .95% 1.27% 1.97% 3.00%
- --------------------------------------------------------------------------------------------
Allowance for loan losses:
Other loans $36,513 $33,261 $27,530 $ 24,637 $ 20,973
Bulk purchased loans (5) 12,765 15,280 17,321 22,271 29,731
------- ------- ------- -------- --------
Total $49,278 $48,541 $44,851 $ 46,908 $ 50,704
======= ======= ======= ======== ========
Allowance for bulk purchased loan
losses to bulk purchased loans (5) 2.22% 2.18% 2.00% 1.69% 1.88%
Allowance for loan losses
(other loans) to total loans
(less bulk purchased loans) .85% .86% .87% 1.02% 1.07%
Allowance for loan losses
to total loans (4) 1.01% 1.06% 1.11% 1.26% 1.43%
Allowance for loan losses
to total nonperforming assets 74.05% 77.42% 59.04% 45.13% 33.58%
Allowance for loan losses (other loans)
to total nonperforming loans (less
nonperforming bulk purchased
loans) (6) 182.0% 230.1% 171.61% 183.16% 74.29%
- --------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
23
<PAGE>
(1) During fiscal years 1996, 1995 and 1994, the Corporation did not record any
interest income on these nonaccruing loans. Had these loans been current in
accordance with their original terms and outstanding throughout this fiscal
year or since origination, the Corporation would have recorded gross
interest income on these loans of $2.2 million, $1.9 million and $2.0
million, respectively. Gross interest income has not been restated for
fiscal years 1995 and 1994 for the effect of the Railroad merger which was
accounted for as a pooling of interests. Such restatement would not be
material.
(2) Real estate as a component of nonperforming assets does not include
performing real estate held for investment, which totaled $2.8 million, $4.2
million and $2.9 million, respectively, at June 30, 1996, 1995 and 1994.
(3) During fiscal years 1996, 1995 and 1994, the Corporation recognized interest
income on these loans classified as troubled debt restructurings aggregating
$1.7 million, $2.0 million and $1.8 million, respectively, whereas under
their original terms the Corporation would have recognized interest income
of $1.5 million, $1.9 million and $2.2 million, respectively. At June 30,
1996, the Corporation had no material commitments to lend additional funds
to borrowers whose loans were subject to troubled debt restructuring.
(4) Based on the total balance of loans receivable (before any reduction for
unamortized discounts (net of premiums, undisbursed loan proceeds, deferred
loan fees and allowance for loan losses) at the respective dates.
(5) At June 30, 1996, 1995 and 1994, $12.8 million, $15.3 million and $17.3
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans is included in the total
allowance for loan losses to provide for the credit risk associated with
these bulk purchased loans, which had balances of $574.4 million, $701.9
million and $868.0 million, respectively, at June 30, 1996, 1995 and 1994.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(6) Nonperforming bulk purchased loans approximating $17.8 million, $17.8
million and $17.5 million, respectively, at June 30, 1996, 1995 and 1994,
and the allowance for loan losses associated with the total bulk purchased
loans, have been excluded from this calculation since these allowances are
not available to absorb the losses associated with other loans in the
portfolio.
- --------------------------------------------------------------------------------
For a discussion of the major components of the $3.8 million increase in
nonperforming assets during the fiscal year ended June 30, 1996, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Provision for Loan Losses and Real Estate Operations" in the
Annual Report.
24
<PAGE>
The geographic concentration of nonperforming loans at June 30 was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
State
- -----
California $ 4,624 $ 3,758 $ 3,966 $ 2,802 $ 5,077
Georgia 3,389 2,559 2,355 3,273 2,870
Texas 3,290 3,601 4,417 3,377 3,408
Colorado 2,789 2,794 5,016 2,260 10,078
Nebraska 2,352 2,037 1,551 2,237 3,607
Missouri 2,018 1,864 1,720 2,334 2,991
Kansas 2,012 469 1,022 1,407 2,230
Maryland 1,548 743 613 -- 140
Oklahoma 1,496 1,019 541 609 1,189
Illinois 1,158 1,234 1,502 1,976 1,835
New Jersey 1,069 1,680 1,361 793 1,003
Florida 891 1,553 1,148 1,268 2,355
Virginia 880 446 790 552 332
Connecticut 739 643 37 385 594
Pennsylvania 663 715 823 967 388
Washington 647 745 841 465 376
New York 447 855 407 366 189
Arizona 411 539 569 2,061 160
Indiana 238 411 145 113 9
North Carolina 205 455 237 220 178
Other states 7,039 4,138 4,431 4,122 6,899
------- ------- ------- ------- -------
Nonperforming loans $37,905 $32,258 $33,492 $31,587 $45,908
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
</TABLE>
Nonperforming loans at June 30, 1996, consisted of 1,015 loans with an average
balance of $37,345. Nonperforming loans totaling $37.9 million at June 30,
1996, consisted of $2.4 million (5 loans) collateralized by commercial real
estate, $32.1 million (717 loans) collateralized by residential real estate,
$2.5 million (21 loans) collateralized by residential construction real estate
and $888,000 (272 loans) of consumer loans.
25
<PAGE>
The geographic concentration of nonperforming real estate at June 30 was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
State
-----
Colorado $ 6,011 $ 6,823 $ 4,027 $ 8,871 $17,390
Nebraska 5,356 5,770 6,868 8,241 8,727
Texas 1,608 999 8,323 8,772 20,712
Oklahoma 384 391 1,348 1,016 561
Florida 312 197 115 551 535
New Jersey 270 280 90 -- --
California 187 109 64 -- 1,979
Georgia 187 510 2,549 2,888 3,741
Missouri 125 262 219 -- --
Pennsylvania 116 326 351 362 555
Iowa 108 129 248 653 4,083
Kansas 36 47 138 1,664 1,887
Tennessee -- 119 -- 23 --
Other states 2,063 624 1,484 774 3,696
Unallocated reserves (2,927) (4,007) (4,389) (3,488) (2,314)
------- ------- ------- ------- -------
Nonperforming real estate $13,836 $12,579 $21,435 $30,327 $61,552
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, total commercial real estate was $8.8 million (15 properties)
or 63.5% of the $13.8 million in total nonperforming real estate (consisting of
90 properties), and the remaining $5.0 million (75 properties) consisted of
residential real estate. The Corporation's commercial real estate at June 30,
1996, is located primarily in Colorado and Nebraska.
26
<PAGE>
Classification of Assets. Savings institutions are required to review their
- -------------------------
assets on a regular basis and, as warranted, classify them as "substandard,"
"doubtful," or "loss as defined by OTS regulations." Adequate general valuation
allowances are required to be established for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as loss
or charge off such amount. An asset which does not currently warrant
classification as substandard but which possesses credit deficiencies or
potential weaknesses deserving close attention is required to be designated as
"special mention." In addition, a savings institution is required to set aside
adequate valuation allowances to the extent that any affiliate possesses assets
which pose a risk to the savings institution. The OTS has the authority to
approve, disapprove or modify any asset classification or any amount established
as an allowance pursuant to such classification. Based on a review of the
Corporation's portfolio at June 30, 1996, pursuant to reporting on the quarterly
thrift financial report, the Corporation had $24.6 million in assets classified
as special mention, $61.8 million in assets classified as substandard, no assets
classified as doubtful or as loss. As required, specific valuation allowances
have been established in an amount equal to 100.0% of all assets classified as
loss. Substantially all nonperforming assets at June 30, 1996, are classified as
either substandard or loss pursuant to applicable asset classification
standards. Of the Corporation's loans which were not classified at June 30,
1996, there were no loans where known information about possible credit problems
of borrowers caused management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms.
Loan and Real Estate Review Policy. Management of the Corporation has the
- -----------------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan and real estate portfolios.
Management is also responsible for the determination of all specific and
general provisions for loan and real estate losses, taking into consideration a
number of factors, including changes in the composition of the Corporation's
loan portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
affect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
real estate portfolios, and regular review of specific problem loans and real
estate. See "Nonperforming Assets."
Management also has the responsibility of ensuring timely charge-offs of loan
and real estate balances, as appropriate, when general and economic conditions
warrant a change in the value of these loans and real estate. To ensure that
credit risk is properly and timely monitored, this responsibility has been
delegated to a credit review group which consists of key personnel of the
Corporation knowledgeable in the specific areas of loan and real estate
valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and the likelihood of liquidation of
real estate and other assets and their book value, (ii) to identify problem
assets at the earliest possible time, (iii) to assure an adequate level of
allowances for possible losses to cover identified and anticipated credit risks,
(iv) to monitor the Corporation's compliance with established policies and
procedures, and (v) to provide the Corporation's management with information
obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loan or real estate value weakness. Accordingly, these types of
loans and real estate are assigned a credit risk rating ranging from one
(excellent) to six (loss). Loans and real estate with minimal credit risk (not
adversely classified or with a credit risk rating of one to four) generally have
general reserves established on the basis of the Corporation's historical loss
experience. Loans and real estate adversely classified (substandard, loss or
with a credit risk rating of five or six) generally have greater levels of
general reserves similarly established on the basis of the Corporation's
historical loss experience, as well as specific reserves established as
applicable to recognize permanent declines in the value of loans or real estate.
27
<PAGE>
It is management's responsibility to maintain a reasonable allowance for loan
losses applicable to all categories of loans through periodic charges to
operations. The Corporation employs a systematic methodology to determine the
amount of general loan losses, in addition to specific valuation allowances, to
be recorded as a percentage of the respective loan balances as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
<S> <C>
Residential real estate loans:
Current .25%
90 days delinquent (or classified substandard) 7.50
Residential construction loans:
Current 1.00
90 days delinquent 12.50
Commercial real estate loans:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
Consumer loans:
Current .50
Classified substandard and 90 days delinquent 20.00
120 days delinquent 100.00
- --------------------------------------------------------------------------------
</TABLE>
As appropriate, management of the Corporation attempts to ensure that the
Corporation's reserves are in general compliance with previously established
regulatory examination guidelines.
Allowance for Losses on Loans. The allowance for loan losses is based upon
- ------------------------------
management's continuous evaluation of the collectibility of outstanding loans,
which takes into consideration such factors as changes in the composition of the
loan portfolio and economic conditions that may affect the borrower's ability to
pay, regular examinations by the Corporation's credit review group of specific
problem loans and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Provision for Loan
Losses and Real Estate Operations" in the Annual Report.
The Corporation's policy is to charge-off loans or portions thereof against the
allowance for loan losses in the period in which loans or portions thereof are
determined to be uncollectible. A majority of the Corporation's loans are
collateralized by residential or commercial real estate. Therefore, the
collectibility of such loans is susceptible to changes in prevailing real estate
market conditions and other factors which can cause the fair value of the
collateral to decline below the loan balance. When the Corporation records
charge-offs on these loans, it also begins the foreclosure process of taking
possession of the real estate which served as collateral for such loans.
Recoveries of loan charge-offs generally occur only when the loan deficiencies
are completely cured. Upon foreclosure and conversion of the loan into real
estate owned, the Corporation may realize a credit to real estate operations
through the disposition of such real estate when the sale proceeds exceed the
value of the real estate.
Although management believes that the Corporation's allowance for loan losses is
adequate to reflect the risk inherent in its portfolios, there can be no
assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans on a regular
basis as an integral part of their examination process. Such agencies may
require additions to the allowance based on their judgments of information
available to them at the time of their examination.
28
<PAGE>
The following table sets forth the activity in the Bank's allowance for loan
losses for the fiscal years ended June 30 as indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for losses on
loans at beginning of year $48,541 $44,851 $46,908 $50,704 $ 54,605
------- ------- ------- ------- --------
Loans charged-off:
Single-family residential (1,130) (1,171) (940) (1,475) (1,848)
Multi-family residential
and commercial real estate (210) (842) (2,083) (1,264) (6,098)
Consumer (4,193) (1,758) (1,075) (1,043) (2,151)
------- ------- ------- ------- --------
Loans charged-off (5,533) (3,771) (4,098) (3,782) (10,097)
------- ------- ------- ------- --------
Recoveries:
Single-family residential 20 64 147 -- --
Multi-family residential
and commercial real estate 46 815 164 857 --
Consumer 668 455 432 404 760
------- ------- ------- ------- --------
Recoveries 734 1,334 743 1,261 760
------- ------- ------- ------- --------
Net loans charged-off (4,799) (2,437) (3,355) (2,521) (9,337)
Provision charged to operations 6,107 6,408 6,248 6,185 7,981
------- ------- ------- ------- --------
Railroad activity for the six months
ended June 30, 1994 -- (58) -- -- --
Allowances from acquisitions 1,944 1,818 -- -- --
Estimated allowance net
for bulk purchased loans (1) -- -- 39 173 17,268
Change in estimate of allowance
for bulk purchased loans (1)(2) (2,273) (1,705) (4,357) (5,334) (18,728)
Charge off to allowance
for bulk purchased loans (1) (242) (336) (632) (2,299) (1,085)
------- ------- ------- ------- --------
Allowance for losses on loans
at end of year $49,278 $48,541 $44,851 $46,908 $ 50,704
======= ======= ======= ======= ========
- ----------------------------------------------------------------------------------------
Ratio of net loans charged-off
to average loans outstanding
during the year .10% .07% .11% .13 % .33%
- ----------------------------------------------------------------------------------------
</TABLE>
(1) At June 30, 1996, 1995 and 1994, $12.8 million, $15.3 million and $17.3
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans, was included in the total
allowance for loan losses. Such bulk purchased loans had balances of
$574.4 million, $701.9 million and $868.0 million, respectively, at June
30, 1996, 1995 and 1994. These allowances are available only to absorb
losses associated with the respective bulk purchased loans and are not
available to absorb losses from other loans.
(2) Consists of changes in estimates of allowance amounts for bulk purchased
loans resulting from the securitization of these bulk purchased loans into
mortgage-backed securities or from loan principal payoffs such that these
allowance amounts either will be amortized into income as a yield
adjustment over the respective remaining lives of the related mortgage-
backed securities or accreted directly to interest income on payoffs of
purchased loans.
29
<PAGE>
INVESTMENT ACTIVITIES
- ---------------------
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) equal to the monthly average of not less than a
specified percentage (currently 5.0%) of its net withdrawable savings deposits
plus short-term borrowings. The Corporation is also required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of net withdrawable savings accounts and
borrowings payable in one year or less.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1996,
the Corporation had total average liquid assets of $378.9 million, which
consisted of $39.0 million in cash, $3.6 million in federal funds and $336.3
million in agency-backed securities. The Corporation's liquidity and short-term
liquidity ratios were 7.07% and 1.75%, respectively, at June 30, 1996. See
"Regulation -- Liquidity Requirements." The Corporation's management objective
is to maintain liquidity at a level sufficient to assure adequate funds, taking
into account anticipated cash flows and available sources of credit, to allow
future flexibility to meet withdrawal requests, to fund loan commitments and to
make other investments. Such liquid funds are managed in an effort to produce
the highest yield consistent with maintaining safety of principal and within
regulations governing the thrift industry. In recent years, because of the
uncertain nature of interest rates, the Corporation has deemed it prudent to
purchase short-term securities. Due to the maturities on such funds, the yields
tend to respond quickly to changes in the level of interest rates in the money
market.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury and other
Government agency obligations $213,800 $296,443 $285,397
Obligations of states and
political subdivisions 18,642 -- --
Other securities 10,703 1,050 50
-------- -------- --------
Total investment
securities held to maturity 243,145 297,493 285,447
Cash on deposit 2,400 6,345 5,551
-------- -------- --------
Total Investments $245,545 $303,838 $290,998
======== ======== ========
- -----------------------------------------------------------------------
</TABLE>
30
<PAGE>
The following table sets forth the scheduled maturities, carrying values, market
values and weighted average yields for the Corporation's investment securities
held to maturity at June 30, 1996:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Year Over One Within Over Five Within More Than
or Less Five Years Ten Years Ten Years Total
------------------ ------------------ ------------------ ------------------ --------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held
to maturity:
- ---------------------------
U.S. Treasury and other
Government agency
obligations $46,173 6.82% $167,627 5.79% $ -- --% $ -- --% $213,800 $210,236 6.01%
States and political
subdivisions -- -- 213 4.46 14,135 5.91 4,294 5.39 18,642 18,202 5.78
Other securities -- -- 50 6.06 -- -- 10,653 7.52 10,703 10,703 7.51
------- ---- -------- ---- ------- ---- ------- ---- -------- -------- ----
Total $46,173 6.82% $167,890 5.79% $14,135 5.91% $14,947 6.91% $243,145 $239,141 6.06%
======= ==== ======== ==== ======= ==== ======= ==== ======== ======== ====
</TABLE>
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report.
31
<PAGE>
SOURCES OF FUNDS
- ----------------
General. Deposits have historically been the major source of the Corporation's
- --------
funds for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, prepayment and
maturity of investment securities, and other borrowings.
The Corporation has considered, and anticipates that it will in the future
continue to consider, possible mergers with and acquisitions of other selected
financial institutions. During fiscal year 1996 the Corporation consummated the
merger with Railroad and the acquisition of Conservative. In addition, on
May 16, 1996, the Corporation entered into a merger agreement with Heritage
Financial, Ltd. See Notes 2, 3 and 27 to the Consolidated Financial Statements
for additional information on these completed and pending acquisitions. Such
completed and proposed acquisitions present the Corporation with the opportunity
to further expand its retail network over last fiscal year in the Iowa, Kansas
and Nebraska markets; and to increase its earnings potential by increasing its
mortgage and consumer loan volumes funded by deposits which generally bear lower
rates of interest than alternative sources of funds. The cash proceeds from the
fiscal year 1994 deposit acquisitions allowed the Corporation to repay advances
from the FHLB and to originate and purchase primarily single-family residential
loans.
Deposits. The Corporation's deposit strategy is to emphasize retail branch
- ---------
deposits by offering a variety of rates and deposit programs to satisfy customer
needs. As such, during fiscal year 1996, NOW accounts increased $35.7 million,
from $296.5 million at June 30, 1995, to $332.2 million at June 30, 1996. In
addition, during fiscal year 1996 passbook accounts increased $73.6 million,
from $549.9 million at June 30, 1995 to $623.5 million at June 30, 1996. Rates
on deposits are priced based on investment opportunities as the Corporation
attempts to control the flow of funds in its deposit accounts according to its
business objectives and the cost of alternative sources of funds.
Fixed-term, fixed-rate retail certificates are the primary sources of deposits
for the Corporation and at June 30, 1996, represented 74.1% of the Bank's total
deposits compared to 74.1% and 72.9%, respectively, at June 30, 1995 and 1994.
The Corporation offers certificate accounts with terms ranging from one month to
120 months.
Total deposits increased $293.3 million during fiscal year 1996 from $4.011
billion at June 30, 1995, to $4.305 billion at June 30, 1996. This increase is
primarily a result of the acquisition of Conservative with deposits totaling
$197.9 million and to increases in retail deposits in the Colorado and Oklahoma
markets. The additional amount of the increase is attributable to (i) this
larger franchise base from such acquisitions the last three fiscal years which
has broadened the Corporation's retail deposit base and (ii) to an increase
primarily in Colorado and Oklahoma deposits, and to a leser extent in Kansas
deposits, due to increased marketing efforts and product promotion.
32
<PAGE>
The following table sets forth the balances and percentages of the various types
of deposits offered by the Corporation at the dates indicated and the change in
the dollar amount of deposits between such dates:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
-------------------------------- -------------------------------- --------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
---------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 623,505 14.5% $ 73,648 $ 549,857 13.7% $ 85,018 $ 73,925 12.9%
NOW accounts 332,233 7.7 35,681 296,552 7.4 9,738 20,831 7.5
Market rate savings 159,672 3.7 (31,322) 190,994 4.8 (54,954) 245,948 6.7
Certificates of deposit 3,189,166 74.1 215,246 2,973,920 74.1 295,696 2,678,224 72.9
---------- ----- -------- ---------- ----- -------- ---------- -----
Total Deposits $4,304,576 100.0% $293,253 $4,011,323 100.0% $335,498 $3,675,825 100.0%
========== ===== ======== ========== ===== ======== ========== =====
</TABLE>
33
<PAGE>
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 582,706 4.24% $ 541,061 4.38% $ 298,008 2.93%
NOW accounts 436,027 .63 277,995 .93 301,198 .95
Market rate savings 170,886 3.34 218,646 3.36 210,486 2.80
Certificates of deposit 2,966,505 6.10 2,752,501 5.33 2,441,971 5.13
---------- ---- ---------- ---- ---------- ----
Average deposit accounts $4,156,124 5.15% $3,790,203 4.76% $3,251,663 4.39%
========== ==== ========== ==== ========== ====
- -----------------------------------------------------------------------------------
</TABLE>
The following table sets forth the Corporation's certificates of deposit (fixed
maturities) classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
June 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Rate
- ---------------
Less than 3.00% $ 8,848 $ 11,846 $ 15,876
3.00% - 3.99% 19,978 67,404 691,464
4.00% - 4.99% 285,083 518,061 870,124
5.00% - 5.99% 1,948,836 1,017,841 741,221
6.00% - 6.99% 606,704 1,026,035 210,230
7.00% - 7.99% 300,040 290,950 90,973
8.00% - 8.99% 15,090 34,798 45,100
9.00% and over 4,587 6,985 13,236
---------- ---------- ----------
Certificates of deposit $3,189,166 $2,973,920 $2,678,224
========== ========== ==========
- -----------------------------------------------------------------------------------
</TABLE>
The following table presents, the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity as of the dates
indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Maturity Period June 30,
- --------------- ----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 98,128 $ 63,978 $ 36,640
Over three through six months 43,718 37,346 24,572
Over six through twelve months 73,999 37,025 45,689
Over twelve months 62,994 64,728 68,644
-------- -------- --------
Total $278,839 $203,077 $175,545
======== ======== ========
- -----------------------------------------------------------------------------------
</TABLE>
For further information regarding the Corporation's deposits, see Note 13 to the
Notes to Consolidated Financial Statements in the Annual Report.
34
<PAGE>
Borrowings. The Corporation has also relied upon other borrowings, primarily
- -----------
advances from the FHLB of Topeka, as additional sources of funds. Advances from
the FHLB of Topeka are typically secured by the Corporation's stock in the FHLB,
a portion of first mortgage real estate loans and mortgage-backed securities.
The maximum amount of FHLB advances which the FHLB will advance for purposes
other than meeting deposit withdrawals fluctuates from time to time in
accordance with federal regulatory policies. The Corporation is required to
maintain an investment in FHLB stock in an amount equal to the greater of 1.0%
of the aggregate unpaid loan principal of the Corporation's loans secured by
home mortgage loans, home purchase contracts and similar obligations, or 5.0% of
advances from the FHLB to the Corporation. The Corporation is also required to
pledge such stock as collateral for FHLB advances. In addition to this
collateral requirement, the Corporation is required to pledge additional
collateral which may be unencumbered whole residential first mortgages with an
aggregate unpaid principal amount equal to 158.0% of the Corporation's total
outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of
the market value of U.S. government or U.S. government agency guaranteed
securities, including mortgage-backed securities, as collateral for the
outstanding FHLB advances. Pursuant to this requirement, as of June 30, 1996,
the Corporation had pledged a portion of its real estate loans and its FHLB
stock of $79.1 million.
At June 30, 1996, the Corporation had advances totaling approximately $1.4
billion from the FHLB of Topeka at interest rates ranging from 4.61% to 9.43%
and at a weighted average rate of 5.66%. At June 30, 1995, such advances from
the FHLB totaled $1.8 billion at interest rates ranging from 4.45% to 10.75% and
at a weighted average rate of 5.89%.
The Corporation also borrows funds under repurchase agreements. During fiscal
years 1996 and 1995 the Corporation utilized securities sold under agreements to
repurchase primarily for liquidity and asset liability management purposes.
Under a repurchase agreement, the Corporation sells securities
(generally, government agency securities and GNMA, FNMA, FHLMC and AA rated
privately issued mortgage-backed securities) and agrees to buy such securities
back at a specified price at a subsequent date. Repurchase agreements are
generally made for terms ranging from one day to four years, are subject to
renewal, and are deemed to be borrowings collateralized by the securities sold.
At June 30, 1996, the Corporation's repurchase agreements aggregated $380.8
million at an average rate of 6.51%. The Corporation's repurchase agreements
were collateralized by $410.5 million of mortgage-backed securities at June 30,
1996. At June 30, 1996, these repurchase agreements had maturities ranging from
September 1996 to January 1998 with a weighted average maturity of 372 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at end of year $380,755 $208,373 $157,432
Maximum month-end balance $380,755 $208,373 $157,432
Average balance $187,563 $103,223 $155,897
Weighted average interest rate
during the year 7.14% 7.59% 6.15%
Weighted average interest rate
at end of year 6.51% 7.08% 6.08%
</TABLE>
- --------------------------------------------------------------------------------
For further information regarding the Corporation's FHLB advances and securities
sold under agreements to repurchase, see Notes 14 and 15 to the Notes to the
Consolidated Financial Statements in the Annual Report.
35
<PAGE>
Customer Services. The Corporation aggresssively markets its various checking
- ------------------
account products and telephone bill paying system. It is the Corporation's
objective to utilize these services and its technology, rather than paying above
market interest rates on deposits, to attract and service customers to which it
can cross sell its numerous services on a cost-effective, profitable basis.
Accordingly, management continues to update data processing equipment in the
Corporation's branch operations in order to provide a cost-effective and
efficient delivery of services to its customers. The Corporation has also been
proactive in the implementation of new consumer-oriented technologies, offering
home banking services by providing Microsoft's Money, Intuit's Quicken and
America Online's BankNow financial software to its customer base. Customers can
now conduct business through home banking via personal computers, extended
evening and weekend branch hours, 24-hour customer service lines and telephone
bill paying. Additional information about the Corporation and its competitive
products can also be accessed through the Corporation's "web site" which such
address on the internet as http://www.comfedbank.com. At June 30, 1996, there
were 102 strategically located proprietary automatic teller machines ("ATM.") in
use. These ATMs are also linked with a series of regional, national and
international ATM services, including CASHBOX, CIRRUS, NETS, and MINIBANK. As a
result of the Corporation's participation in these ATM services, electronic
banking machines are currently available worldwide for the convenience of the
Corporation's customers.
SUBSIDIARIES
- ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1996, the Bank was authorized to invest up to
$198.8 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1996, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $55.1
million less unsecured loans including conforming loans from those entities
totaling $3.7 million for a net investment of $51.4 million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has one subsidiary, Commercial Federal Service Corporation,
engaged in activities not permissible for national banks. Investments in such
subsidiary must be deducted from capital, for the Bank, at 60.0% of such
investment until July 1, 1996, when the deduction will be 100.0%. See
"Regulation -- Regulatory Capital Requirements." At June 30, 1996, $2.2 million
of the $3.6 million total investment in such subsidiary was deducted from
capital for this purpose. Capital deductions are not required for investment in
subsidiaries engaged in non-national bank activities as agent for customers
rather than as principal, subsidiaries engaged solely in mortgage banking
activities, and certain other exempted subsidiaries. The capital deductions
under applicable regulations have the effect of reducing the Bank's capital
during the phase-out period.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
At June 30, 1996, the Bank had fifteen wholly-owned subsidiaries, three of which
own and operate certain real estate properties of the Bank. As such, these
subsidiaries are considered engaged in permissible activities and do not require
deductions from capital as discussed above. During fiscal year 1994, CFMC was
approved by the OTS to be classified as an "operating subsidiary." As such,
CFMC ceased to be subject to the regulatory investment in service corporation
limitations as of June 30, 1994. The remaining wholly-owned subsidiaries,
exclusive of CFMC, are classified as service corporations. The principal active
subsidiaries of the Bank are described below.
Commercial Federal Mortgage Corporation ("CFMC"). CFMC is a full-service
- -------------------------------------------------
mortgage banking company. The Corporation's real estate lending, secondary
marketing, mortgage servicing and foreclosure activities are conducted primarily
through CFMC. At June 30, 1996, CFMC serviced 62,000 loans for the Bank and
107,800 loans for others. See "Loan Originations -- Loan Servicing."
36
<PAGE>
Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers to customers
- ------------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 26 of the Corporation's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities.
Commercial Federal Insurance Corporation ("CIC"). CIC was formed in November
- -------------------------------------------------
1983 and serves as a full-service independent insurance agency, offering a full
line of homeowners, commercial, health, auto and life insurance products.
Additionally, a wholly-owned subsidiary of CIC provides reinsurance on credit
life and disability policies written by an unaffiliated carrier for consumer
loan borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to
- ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC must be excluded from regulatory capital in
increasing amounts over a phase-out period ending on July 1, 1996. See
"Regulation -- Regulatory Capital Requirements."
EMPLOYEES
- ---------
At June 30, 1996, the Corporation and its wholly-owned subsidiaries had 1,399
full-time equivalent employees. The Corporation provides its employees with a
comprehensive benefit program, including basic and major medical insurance,
dental plan, life insurance, accident insurance, short and long-term disability
coverage and sick leave. The Corporation also offers loans with below market
rates to its employees who qualify based on term of employment (except that no
preferential rates or terms are offered to executive officers and senior
management) and offers a deferred compensation plan (401(k) plan) for eligible
employees. The Corporation considers its employee relations to be good.
EXECUTIVE OFFICERS
- ------------------
For certain information concerning the Registrant's directors and executive
officers as of June 30, 1996, refer to Part III -- Item 10. "Directors and
Executive Officers of the Registrant" of this report.
COMPETITION
- -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate loans. Its most direct competition for savings
deposits has come historically from thrift institutions and from commercial
banks located in its primary market areas. The Corporation's primary market
area for savings deposits includes Nebraska, Colorado, Kansas, Oklahoma and Iowa
and, for loan originations, includes Nebraska, Colorado, Kansas, Oklahoma, Iowa
and Las Vegas, Nevada (residential construction lending). Management believes
that the Corporation's extensive branch network has enabled the Corporation to
compete effectively for deposits and loans against commercial banks and other
financial institutions. The Corporation has been able to attract savings
deposits primarily by offering depositors a wide variety of deposit accounts,
competitive rates of interest, convenient branch locations and a full range of
financial services.
The Corporation's competition for real estate loans comes principally from other
thrift institutions, mortgage banking companies, commercial banks, insurance
companies and other institutional lenders. The Corporation competes for loans
principally through the efficiency and quality of the services it provides to
borrowers and the interest rates and loan fees it charges.
37
<PAGE>
REGULATION
----------
GENERAL
- -------
As a federal savings bank, the Bank is subject to extensive regulation by the
OTS. The lending and deposit taking activities and other investments of the Bank
must comply with various regulatory requirements. The OTS periodically examines
the Bank for compliance with various regulatory requirements and the FDIC also
has the authority to conduct special examinations of the Bank because its
deposits are insured by the SAIF. The Bank must file reports with the OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Corporation is subject
to the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
At June 30, 1996, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Actual Requirement Excess
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank's stockholder's equity $447,817
Add unrealized holding loss on securities available for sale, net 2,703
Less intangible assets (39,630)
Less phase-out of investments in non-includable subsidiaries (2,182)
- --------------------------------------------------------------------------------------------------------
Tangible capital $408,708 $ 99,137 $309,571
- --------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1) 6.18% 1.50% 4.68%
- --------------------------------------------------------------------------------------------------------
Tangible capital $408,708
Plus certain restricted amounts of other intangible assets 16,201
- --------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital) $424,909 $198,760 $226,149
- --------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2) 6.41% 3.00% 3.41%
- --------------------------------------------------------------------------------------------------------
Core capital $424,909
Plus general loan loss allowances 35,933
Less amount of land loans and non-residential
construction loans in excess of an 80.0% loan-to-value ratio (168)
- --------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital) $460,674 $270,629 $190,045
- --------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3) 13.62% 8.00% 5.62%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on adjusted total assets totaling $6,609,129,000.
(2) Based on adjusted total assets totaling $6,625,329,000.
(3) Based on risk-weighted assets totaling $3,382,857,000.
- --------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized; and authorized banking regulatory agencies to take prompt
corrective action with respect to institutions in the three undercapitalized
categories. These corrective actions become increasingly more stringent as an
institution's regulatory capital declines. In addition, the OTS has adopted a
prompt corrective action rule under which a savings
38
<PAGE>
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. At June 30, 1996,
the Bank exceeded the minimum requirements for the well-capitalized category as
shown in the following table.
- --------------------------------------------------------------------------------
<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>
Percentage of adjusted assets...... 6.41% 12.56% 13.62%
Minimum requirements to be
classified well-capitalized..... 5.00% 6.00% 10.00%
</TABLE>
- --------------------------------------------------------------------------------
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "-- Prompt Corrective Regulatory
Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights and purchased credit card relationships.
Purchased mortgage servicing rights and purchased credit card relationships may
be deducted from tangible capital, if not meeting certain criteria, at the lower
of 90.0% of fair market value, 90.0% of original cost, or 100.0% of current
amortized book value.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. Effective December 31, 1994, no newly added
intangible assets other than those includable in tangible capital are permitted
to be included in core capital. The Bank's core capital of $424.9 million at
June 30, 1996, includes no qualifying supervisory goodwill and $16.2 million of
restricted amounts of certain intangible assets (core value of deposits).
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempted from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not
applied to federal savings associations existing as of August 9, 1989, that were
either chartered as a state savings bank or state cooperative bank prior to
October 1, 1982, or that acquired their principal assets from such an
association. The required deduction for this purpose is 60.0% as of July 1,
1993, and 100.0% as of July 1, 1994. However, this phase-in provision was
amended to allow institutions to request, at their option, a delayed phase-in
schedule for subsidiary investments until July 1, 1996. The Bank requested
regulatory approval of such a delayed phase-in and on December 18, 1992, such
request was approved by the OTS. Pursuant to such approval, the Bank's deduction
was 60.0% until July 1, 1996, when such deduction will be 100.0%.
Accordingly, at June 30, 1996, the Bank had approximately $3.6 million of debt
and equity invested in service corporations engaged in activities not
permissible for national banks, 60.0% (or approximately $2.2 million) of which
was deducted from capital in accordance with the OTS approved delayed phase-in
schedule previously discussed. See "Business -- Subsidiaries."
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Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loss allowances. Allowances for
loan and lease losses includable in capital are includable only up to 1.25% of
risk-weighted assets. In addition, equity investments and those portions of
nonresidential construction and land loans, and loans with loan-to-value ratios
in excess of 80.0% must be deducted from total capital under the same phase-out
period as is applied to investments in subsidiaries engaged in activities not
permissible for national banks. The Bank's investments subject to this
deduction totaled $168,000 at June 30, 1996, which was deducted from capital in
accordance with applicable regulations.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each on-balance-sheet asset and the credit-equivalent
amount of each off-balance-sheet item after being multiplied by an assigned risk
weight. Under the OTS risk-weighting system, cash and securities backed by the
full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80.0% and average annual occupancy rates over 80.0%, and certain
qualifying loans for the construction of one- to four-family residences pre-sold
to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non-
qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100.0%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100.0% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
Effective July 1, 1994, the OTS amended its risk-based capital standards to
include an interest rate risk component. The amendment requires thrifts with
interest rate risk in excess of certain levels to maintain additional capital.
Under this amendment, thrifts are divided into two groups, those with "normal"
levels of interest rate risk and those with "greater than normal" levels of
interest rate risk. Thrifts with greater than normal levels are subject to a
deduction from total capital for purposes of calculating risk-based capital. In
a letter dated August 21, 1995, the OTS notified all savings associations that
it had delayed this interest rate risk capital deduction until further notice,
pending the testing of the OTS appeals process pursuant to Thrift Bulletin No.
67. Based on the Bank's interest rate risk profile and the level of interest
rates at June 30, 1996, as well as the Bank's level of risk-based capital at
June 30, 1996, management believes that the Bank does not have a greater than
normal level of interest rate risk as measured under the OTS rule and will not
be required to increase its capital as a result of the rule.
In April 1991, the OTS proposed to amend its core capital requirement to
establish a minimum 3.0% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
institutions, the minimum core capital ratio would be 3.0% plus at least an
additional 1.0% to 2.0%, determined on a case-by-case basis by the OTS after
assessing both the quality of risk management systems and the level of overall
risk in each individual savings institution. The Bank does not anticipate that
it will be materially affected by this regulation if adopted in its current
form. In addition to the proposed rule, the OTS has adopted a prompt corrective
action rule under which a savings
40
<PAGE>
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. See "Prompt
Corrective Regulatory Action."
In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of
the OTS may treat the failure of any savings institution to maintain capital at
or above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
- -----------------------------
The Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Topeka, the Bank is required to acquire and hold shares of capital stock
in the FHLB of Topeka in an amount at least equal to the greater of 1.0% of the
Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
5.0% of its then outstanding advances (borrowings) from the FHLB of Topeka. The
Bank was in compliance with this requirement at June 30, 1996, with an
investment in FHLB of Topeka stock totaling $79.1 million compared to a required
amount of $67.5 million. During fiscal years 1996, 1995 and 1994, the Bank
received income from its investment in FHLB stock totaling $5.8 million, $6.0
million and $6.5 million, respectively.
The FHLB of Topeka serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Topeka. Under applicable
law, long-term advances may only be made for the purpose of providing funds for
residential housing lending. At June 30, 1996, the Bank had advances of $1.4
billion from the FHLB of Topeka.
LIQUIDITY REQUIREMENTS
- ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquidity assets (defined as cash, deposits maintained pursuant
Federal Reserve Board requirements, time and savings deposits in certain
institutions, U.S. Treasury and other government agency obligations, obligations
of states and political subdivisions thereof, shares in mutual funds with
certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. This liquidity requirement, which is currently
5.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0% depending upon economic conditions and the savings flows of
savings associations. Regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet liquidity requirements. The average liquidity and
short-term liquidity ratios of the Bank as of June 30, 1996, were 7.07% and
1.75%, respectively.
QUALIFIED THRIFT LENDER TEST
- ----------------------------
The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a
qualified thrift lender ("QTL") test. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of
41
<PAGE>
dividends by a national bank. Upon the expiration of three years from the date
the institution ceases to be a QTL, it must cease any activity and not retain
any investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65.0% of "portfolio assets." Under OTS regulations, portfolio assets
are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20.0% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50.0% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20.0% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200.0% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the savings institution must maintain a weekly average
percentage of Qualified Thrift Investments to portfolio assets equal to 65.0% on
a monthly average basis in nine out of 12 months. A savings institution that
fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.
At June 30, 1996, approximately 92.6% of the Bank's portfolio assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75.0% of its net income for the previous four quarters; or (b) up to 100.0% of
its net income to date during the calendar year plus an amount that would reduce
by one-half the amount by which its ratio of total capital to assets exceeded
its fully phased-in risk-based capital ratio requirement at the beginning of the
calendar year. A savings institution with total capital in excess of current
minimum capital ratio requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Association") is permitted, after notice, to make
capital distributions without OTS approval of up to 75.0% of its net income for
the previous four quarters, less dividends already paid for such period. At June
30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to
pay an aggregate amount approximating $92.9 million in dividends under these
regulations. A savings institution that fails to meet current minimum capital
requirements (a "Tier 3 Association") is prohibited from making any capital
distributions without the prior approval of the OTS. A Tier 1 Association that
has been notified by the OTS that its is in need of more than normal supervision
will be treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1
Association. Despite the above authority, the OTS may prohibit any savings
institution from making a capital distribution that would otherwise be permitted
by the regulation, if the OTS were to determine that the distribution
constituted an unsafe or unsound practice. Furthermore, under the OTS's prompt
corrective action regulations, which took effect on December 19, 1992, the Bank
would be prohibited from making any capital distributions if, after making the
distribution, the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0%. See "-- Prompt Corrective Regulatory Action."
ENFORCEMENT
- -----------
Under the Federal Deposit Insurance Act (the "FDI Act"), the OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on a
savings institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1.0 million per day.
Criminal penalties for most financial institution crimes include fines of up to
$1.0 million and
42
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imprisonment for up to 30 years. In addition, regulators have substantial
discretion to take enforcement action against an institution that fails to
comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement actions range from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS enforcement action to be taken with respect
to a particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances.
DEPOSIT INSURANCE
- -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment rate is not less than 0.23% for the
period from January 1, 1991, through December 31, 1993. The minimum rate may be
decreased to not less than 0.18% for the period January 1, 1994, through
December 31, 1997. After December 31, 1997, the SAIF assessment rate will be a
rate established by the FDIC but not less than 0.15%.
The FDIC has adopted a risk-based deposit insurance assessment system under
which the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period. Well capitalized institutions are
institutions satisfying the following capital ratio standards: (i) total risk-
based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of
6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately
capitalized institutions are institutions that do not meet the standards for
well capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rate ranges from 0.23% of deposits for well capitalized institutions
in Subgroup A to 0.31% of deposits for undercapitalized institutions in Subgroup
C. The Bank's deposit insurance premium has been .23% of deposits since July 1,
1994.
On August 8, 1995, the FDIC approved a significant reduction in the deposit
insurance premiums charged to those financial institutions that are members of
the Bank Insurance Fund ("BIF"). The FDIC adopted an amendment to the BIF risk-
based assessment schedule which lowered the deposit insurance assessment rate
for most commercial banks and other depository institutions with deposits
insured by the BIF to a range from 0.31% of insured deposits for
undercapitalized BIF-insured institutions to 0.04% of deposits for well-
capitalized institutions, which constitute over 90% of BIF-insured institutions.
The FDIC amendment became effective September 30, 1995. No similar reduction
was approved for institutions, such as the Bank, that are members of the SAIF.
Subsequently, the FDIC reduced the premium rate for the most highly rated BIF-
insured institutions to the statutory minimum of $1,000 per semi-annual period
and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27%
of insured deposits. The FDIC amendment creates a substantial disparity in the
deposit insurance premiums paid by the BIF and SAIF members and places SAIF-
insured savings institutions at a significant competitive disadvantage to BIF-
insured institutions.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate the premium disparity. Any such proposals would require a one time
assessment of an amount sufficient to bring the SAIF to a level equal to 1.25%
of insured deposits to be imposed on all SAIF-insured deposits held as of March
31, 1995. Recently, the FDIC revised
43
<PAGE>
its estimate of the size of the special assessment to 68 basis points of insured
deposits to bring the SAIF statutory level to the 1.25% of insured deposits. Any
such assessment will depend on the SAIF fund balance once BIF-SAIF legislation
has been passed. It would also depend on adjustments in the assessable base
provided in legislation, but still would be allocated among institutions on the
basis of deposits at March 31, 1995.
Assuming a .68% assessment on a $4.2 billion deposit base, the assessment would
result, on a pro forma basis as of June 30, 1996, in a one-time after-tax charge
of approximately $18.3 million to the Corporation. Such assessment would have
the effect of reducing the Bank's tangible capital to $390.4 million, or 5.92%
of adjusted total assets, core capital to $406.6 million, or 6.15% of adjusted
total assets, and risk-based capital to $442.3 million, or 13.08% of risk-
weighted assets. The Bank would, on a pro forma basis as of June 30, 1996,
continue to exceed the minimum requirements to be classified as a "well-
capitalized" institution under applicable regulations. If such a special
assessment were required and the SAIF as a result was fully recapitalized, it
could have the effect of reducing the Bank's deposit insurance premiums to the
SAIF, thereby, increasing net income in future periods.
The FDIC is authorized to raise insurance premiums for SAIF-member institutions
in certain circumstances. If the FDIC determines to increase the assessment
rate for all SAIF-member institutions, institutions in all risk categories could
be affected. While an increase in premiums for the Bank could have an adverse
effect on the Bank's earnings, a decrease in premiums could have a positive
impact on the earnings of the Bank.
SAIF members are generally prohibited from converting to the status of members
of the BIF, also administered by the FDIC, or merging with or transferring
assets to a BIF member prior to the date on which the SAIF meets the required
ratio of reserves to insured deposits (1.25%). The FDIC, however, may approve
such a transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfers of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF and an entrance fee to BIF. A savings institution is not prohibited
from adopting a commercial bank or savings bank charter prior to the expiration
of the moratorium on SAIF - BIF conversions provided that the resulting bank
remains a SAIF member.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2.0% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4.0% of total assets for all but the most highly rated state
non-member banks.
TRANSACTIONS WITH RELATED PARTIES
- ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections 23A and 23B (i)
limit the extent to which the savings institution or its
44
<PAGE>
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10.0% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20.0% of such capital stock and surplus and (ii) require that
all such transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to a non-
affiliate. The term "covered transaction" includes the making of loans, purchase
of assets, issuance of a guarantee and similar other types of transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10.0% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
CLASSIFICATION OF ASSETS
- ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets,
Doubtful Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of
45
<PAGE>
currently existing facts, conditions, and values, highly questionable and
improbable. That portion of an asset classified loss is considered uncollectible
and of such little value that its continuance as an asset, without establishment
of a specific valuation allowance or charge-off, is not warranted. This
classification does not necessarily mean that an asset has absolutely no
recovery or salvage value; but rather, it is not practical or desirable to defer
writing off a basically worthless asset (or portion thereof) even though partial
recovery may be effected in the future.
With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for off-
balance sheet items, such as letters of credit, when loss becomes probable and
estimable.
In August 1993, the OTS issued revised guidance for the classification of assets
and a new policy on the classification of collateral-dependent loans (where
proceeds from repayment can be expected to come only from the operation and sale
of the collateral). With limited exceptions, effective September 30, 1993, for
troubled collateral-dependent loans where it is probable that the lender will be
unable to collect all amounts due, an institution must classify as "loss" any
excess of the recorded investment in the loan over its "value", and classify the
remainder as "substandard". The "value" of a loan is either all present value
of the expected future cash flows, the loan's observable market price or the
fair value of the collateral. The Bank did not incur any adverse impact
from the implementation of the revised guidance for classification of assets or
collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all credit
losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit losses
forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
Additionally, an adequate level of ALLL should reflect an additional
margin for imprecision inherent in most estimates of expected credit
losses.
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of the following amounts:
(a) 50 percent of the portfolio that is classified doubtful,
(b) 15 percent of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is
46
<PAGE>
reasonable, supported by the weight of reliable evidence and that all relevant
factors have been appropriately considered.
PROMPT CORRECTIVE REGULATORY ACTION
- -----------------------------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must
include a guarantee by the institution's holding company that the institution
will comply with the plan until it has been adequately capitalized on average
for four consecutive quarters, under which the holding company would be liable
up to the lesser of 5.0% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order
or written directive to meet or maintain a specific capital level is deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMEL rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of core capital to total
assets of less than 2.0%. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMEL rating
category. The Bank is classified as "well capitalized" under the OTS
regulations.
47
<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS
- ------------------------------------
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
- --------------------------------
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect on August 9,
1995. The guidelines require savings associations to maintain internal controls
and information systems and internal audit systems that are appropriate for the
size, nature and scope of the association's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings associations should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings association is not in compliance with the safety and soundness
guidelines, it may require the association to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
association to regulatory sanctions. Management believes that the Bank meets all
the standards adopted in the interagency guidelines, and therefore does not
believe that these regulatory standards materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
FEDERAL RESERVE SYSTEM
- ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$52.0 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1996, the Bank met its reserve requirements.
LIMITATIONS ON LOANS TO ONE BORROWER
- ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000 (ii) the savings
association is in compliance with its fully phased-in capital standards, (iii)
the loans comply with applicable loan-to-value requirements, (iv) the aggregate
amount of loans made under this authority does not exceed 150.0% of unimpaired
capital and surplus and (v) the savings association is, and continues to be, in
compliance with its fully phased in capital requirements. At June 30, 1996, the
Bank's loan to one borrower limitation was $115.8 million and all loans to one
borrower were within such limitation.
48
<PAGE>
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $1.8 billion. At June 30,
1996 the Bank's nonresidential real property loans totaled $284.2 million.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
- -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA.
As such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- -----------------------
The Board of Directors of the Corporation presently intends to operate the
Corporation as a unitary savings and loan holding company. There are generally
no restrictions on the activities of a unitary savings and loan holding company.
However, if the Director of the OTS determines that there is reasonable cause to
believe that the continuation by a savings and loan holding company of an
activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings institution, the Director of the OTS may
impose such restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the savings institution; (ii) transactions
between the savings institution and its affiliates; and (iii) any activities of
the savings institution that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the QTL test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and, unless the
savings institution requalifies as a QTL within one year thereafter, register
as, and become subject to, the restrictions applicable to a bank holding
company. See "Qualified Thrift Lender Test."
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
49
<PAGE>
RESTRICTIONS ON ACQUISITIONS
- ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an under-
capitalized savings institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
50
<PAGE>
TAXATION
- --------
The Corporation and its subsidiaries, including the Bank, currently file a
consolidated federal income tax return based on a fiscal year ending June 30.
Consolidated taxable income is determined on an accrual basis. Consolidated
returns have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the taxable
year in which the distributions occur. However, under certain circumstances,
dividends and other distributions by a thrift institution can result in the
recapture into taxable income of previously deducted provisions to the bad debt
reserve.
Savings institutions such as the Bank are subject to the provisions of the
Internal Revenue Code (the "Code") in the same general manner as other
corporations. However, institutions such as the Bank which meet certain
definitional tests and other conditions prescribed by the Code may benefit from
certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. For purposes of the bad debt
reserve deduction, loans are separated into "qualifying real property loans,"
which generally are loans secured by interests in improved real property, and
"nonqualifying real property loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). The Bank
computed its bad debt deduction utilizing the percentage of taxable income
method in 1996 and 1995 and the experience method in fiscal year 1994.
Under the percentage of taxable income method, the bad debt reserve deduction
for qualifying real property loans is computed as a percentage of taxable
income, with certain adjustments. The allowable deduction under the percentage
of taxable income method (the "percentage bad debt deduction") was 8.0% for
fiscal years 1996 and 1995. The percentage bad debt deduction may be claimed as
long as not less than 60.0% of the total dollar amount of the assets of an
institution falls within certain designated categories. In the event the
percentage of assets in the designated categories falls below 60.0%, the
institution could be required to recapture, generally over a period of up to
four years, its existing bad debt reserve, although net operating loss
carryforwards available to the thrift could be used to offset such recapture.
As of June 30, 1996, the Bank's assets falling within such categories exceeded
60.0%. It is anticipated that the Bank will continue to meet the 60.0% of
assets test in the foreseeable future.
The bad debt deduction under the percentage of taxable income method is limited
to the amount which (i) does not exceed the amount necessary to increase the
balance at the close of the taxable year of the reserves for losses on
qualifying real property loans to 6.0% of such loans outstanding at such time,
and (ii) the amount when added to the addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12.0% of total
deposits or withdrawable accounts of depositors at year-end exceeds the sum of
surplus, undivided profits and reserves at the beginning of the year. It is not
expected that either limitation will restrict the Bank from making the maximum
addition to its bad debt reserve. The percentage bad debt deduction is reduced
by the deduction for losses on nonqualifying loans.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) require recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These changes will
result in the recognition of additional deferred tax liabilities of
approximately $103,000 in the first quarter of fiscal year 1997. The remaining
unrecognized deferred tax liability could be recognized in the future, in whole
or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to
meet certain definitional tests and other conditions in the federal tax law,
(iii) certain distributions are made with respect to the stock of the Bank or
(iv) the bad debt reserves are used for any purpose other than absorbing bad
debt losses.
To the extent earnings appropriated to a thrift institution's bad debt reserves
for qualifying real property loans and deducted for federal income tax purposes
exceed the allowable amount of such reserves computed under the experience
method ("Excess"), and to the extent of the institution's supplemental reserves
for losses on loans, such Excess and the supplemental reserve may not, without
adverse tax consequences, be utilized for payment of dividends or certain other
distributions to a shareholder (including distributions in redemption,
dissolution, or liquidation) or for any other purpose
51
<PAGE>
(except to absorb bad debt losses). The Code provides different sequences of
accounts to which a distribution is attributed, depending upon whether the
distribution is or is not a redemption, dissolution or liquidation distribution.
To the extent a distribution by the Bank is deemed paid out of the Excess or the
supplemental reserves under these rules, the Excess or supplemental reserve
would be reduced and the Bank's gross income for tax purposes would be increased
by the amount which, when reduced by the income tax, if any, attributable to the
inclusion of such amount in its gross income, equals the amount deemed paid out
of the Excess or supplemental reserve. As of June 30, 1996, the Bank had $8.4
million of Excess and supplemental reserves. However, at June 30, 1996, the Bank
has an estimated $98.1 million in its earnings and profit account, which account
would be utilized prior to reaching the Excess or the supplemental reserves in
the case of a distribution that is not part of a redemption, dissolution or
liquidation.
The Corporation's federal income tax returns were last audited in 1985.
Management is unaware of any significant income tax deficiencies outstanding.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation and will be assessed at a rate of $.47 per $1,000 of
average deposits. The franchise tax is limited to 3.81% of the Bank's income
before tax (including subsidiaries) as reported on the regular books and
records. At June 30, 1996, the Bank paid its tax based on the average level of
deposits.
Savings institutions are taxed like other corporations in certain other states.
Colorado imposes an income tax of 5.0% of net income apportioned to Colorado.
Oklahoma imposes a 6.0% privilege tax, essentially equivalent to an income tax
on income apportioned to Oklahoma. Kansas also has a privilege tax on income
from Kansas sources. A corporation's "net income" for Colorado and Oklahoma
income tax purposes is equal to the corporation's federal taxable income
increased and decreased by certain items including the federal net operating
loss deduction and the interest income on obligations issued by the U.S.
Government. Iowa imposes a 5.0% franchise tax, essentially equivalent to an
income tax on corporate income apportioned to Iowa.
For further information regarding federal income taxes payable by the
Corporation, see Note 18 of the Notes to the Consolidated Financial Statements.
Item 2. Properties
- -------------------
At June 30, 1996, the Corporation conducted business through 34 offices in
Nebraska, 20 offices in Colorado, 24 offices in Kansas, 19 offices in Oklahoma
and one office in Iowa. See Item 1. Business - "Recent Developments--Pending
Acquisition" for additional branches to be added pursuant to a pending
acquisition.
At June 30, 1996, the Corporation owned the buildings for 70 of its branch
offices and leased the remaining 28 offices under leases expiring (not assuming
exercise of renewal options) between November 1996 and August 2031. The
Corporation has 102 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas
and Oklahoma. At June 30, 1996, the total net book value of land, office
properties and equipment owned by the Corporation was $73.6 million. Management
believes that the Corporation's premises are suitable for its present and
anticipated needs.
Item 3. Legal Proceedings
- --------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position.
See Item 1. Business -- "Recent Developments -- Supervisory Goodwill Lawsuit"
for other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
52
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-------------------
The information contained under "Regulation -- Restrictions on Capital
Distributions" in Part I of this Report and the section "Stock Prices and
Dividends" appearing on page 33 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The presentation of selected financial data for the years ended June 30, 1992
through 1996 is included in the "Selected Consolidated Financial Data" section
appearing on pages 12 and 13 of the Annual Report and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-----------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1996 compared
to fiscal year 1995 and fiscal year 1995 compared to fiscal year 1994 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 14 through 33 of the Annual
Report and are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The "Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report" set forth on pages 34 through 74
of the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None.
53
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1996 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference. For information regarding certain beneficial ownership
reports filed by management and 10.0% or more owners of the Corporation's common
stock, reference is made to "Beneficial Ownership Reports" in the Proxy
Statement, which is incorporated herein by reference.
The executive officers of the Corporation and the Bank as of June 30, 1996, are
as follows:
<TABLE>
<CAPTION>
Age at
Name June 30, 1996 Current Position(s) as of June 30, 1996
- --------------------------- ------------- ---------------------------------------
<S> <C> <C>
William A. Fitzgerald 58 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank
James A. Laphen 48 President, Chief Operating Officer and Chief Financial Officer of the Corporation
and the Bank
Gary L. Matter 51 Senior Vice President, Controller and Secretary of the Corporation and of the Bank
Joy J. Narzisi 40 Treasurer of the Corporation and Senior Vice President, Treasurer and Assistant
Secretary of the Bank
Margaret E. Ash 43 Senior Vice President and Assistant Secretary of the Bank
Gary L. Baugh 55 Senior Vice President of the Bank
Jon W. Stephenson 48 Senior Vice President of the Bank
Terry A. Taggart 41 Senior Vice President of the Bank
Gary D. White 51 Senior Vice President of the Bank
Ronald A. Aalseth 40 First Vice President of the Bank
R. Hal Bailey 48 First Vice President of the Bank
Michael C. Bruggeman 48 First Vice President of the Bank
David E. Gunter, Jr. 58 First Vice President of the Bank
</TABLE>
(Continued on next page)
54
<PAGE>
<TABLE>
<CAPTION>
Age at
Name June 30, 1996 Current Position(s) as of June 30, 1996
- --------------------------- ------------- ---------------------------------------
<S> <C> <C>
Roger L. Lewis 46 First Vice President and Assistant Secretary of the Bank
Kevin C. Parks 41 First Vice President of the Bank
Thomas N. Perkins 44 First Vice President of the Bank
Dennis R. Zimmerman 45 First Vice President of the Bank
</TABLE>
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the
- ----------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Nebraska League
of Savings Institutions and the board of America's Community Bankers. Mr.
Fitzgerald joined Commercial Federal's Board of Directors in 1973.
James A. Laphen is President, Chief Operating Officer and Chief Financial
- ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania, and prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
Gary L. Matter, a Senior Vice President, Controller, and Secretary of the
- ---------------
Corporation and the Bank, joined the Bank in December 1990 as First Vice
President and Controller. Mr. Matter, a certified public accountant, was the
Treasurer of Anchor Glass Container Corporation from June 1983 to November 1990.
Joy J. Narzisi, Treasurer of the Corporation and Senior Vice President,
- ---------------
Assistant Secretary and Treasurer of the Bank, joined the Bank in September
1980. Ms. Narzisi was named Senior Vice President and Assistant Secretary of the
Bank in July 1995 after first being appointed Treasurer of the Corporation in
November 1994, Treasurer of the Bank in 1991 and First Vice President in June of
1989. Prior to 1989, Ms. Narzisi was Investment Portfolio Manager since July
1987. Since joining the Bank, she has held other various Treasury related
management positions.
Margaret E. Ash, was named Senior Vice President and Assistant Secretary of the
- ----------------
Bank in July 1995. Ms. Ash joined Commercial Federal in 1973 and has held
numerous management positions within the Bank for 19 years. Most recently she
was First Vice President of Retail Operations since July 1993, First Vice
President of the Colorado Retail Division since 1989 and Vice President/Regional
Manager of Colorado Retail prior to that time.
Gary L. Baugh, a Senior Vice President responsible for the Kansas operation of
- --------------
the Bank since November 1995, joined the Bank pursuant to the Railroad
acquisition. Mr. Baugh, a certified public accountant, joined Railroad in 1973,
was employed in various capacities, and in June 1988 was named President and
Chief Operating Officer.
Jon W. Stephenson, a Senior Vice President of the Bank since July 1995, joined
- ------------------
the Bank as First Vice President in July 1994, with responsibility for Oklahoma
retail operations. Mr. Stephenson, a certified public accountant, was President
and Chief Executive Officer of Home Federal Savings and Loan Association of Ada,
Oklahoma prior to joining Commercial Federal.
Terry A. Taggart, was named Senior Vice President of Corporate Retail Banking in
- -----------------
August 1993. Mr. Taggart has held various positions of responsibility within
the Bank, including First Vice President/Retail Operations in May 1989 and Vice
President/Regional Sales Manager in March 1988. Mr. Taggart joined the Bank in
January 1986 as an advanced manager trainee.
55
<PAGE>
Gary D. White, was named Senior Vice President of the Bank and State Director in
- --------------
July 1995. Previous positions held include Director of Residential Mortgage
Lending in May 1994 and First Vice President and Director of Human Resources in
March 1984. Mr. White joined the Bank in 1976 as an Investment Account
Executive and has held the positions of Branch Manager and Employment Manager.
Prior to 1976, Mr. White was Vice President of College Relations at the College
of Saint Mary.
Ronald A. Aalseth, a First Vice President of the Bank since November 1994,
- ------------------
joined the Bank in December 1984 and serves as President of Commercial Federal
Insurance Corporation; ComFed Insurance Services Company, Limited; and
Commercial Federal Investment Services, Inc. He has served in this capacity
since June 1987.
R. Hal Bailey, is First Vice President and Director of Residential Construction
- --------------
Lending. He joined Railroad Savings Bank in June 1987 as Senior Vice President
and Chief Lending Officer. Prior to that he worked for American Savings and
Loan in Salt Lake City, Utah, Bank of America in Los Angeles and Smith Barney in
San Francisco.
Michael C. Bruggeman is First Vice President and Director of Human Resources.
- --------------------
He joined the Bank in August 1994. Prior to 1994, Mr. Bruggeman was Vice
President of Human Resources and Public Affairs for Ransomes America Corporation
and Cushman Inc., where he also served as a Board of Director member and
Corporate Secretary.
David E. Gunter, Jr., has been with the Bank since 1982. Mr. Gunter became
- ---------------------
First Vice President of the Bank in December 1992 with responsibility for
commercial real estate lending and income recovery. Mr. Gunter is also the
President of Commercial Federal Service Corporation.
Roger L. Lewis, a First Vice President and Assistant Secretary of the Bank,
- ---------------
joined the Bank in 1986 as Vice President and Director of Public Relations until
he became First Vice President and Director of Marketing in March 1988. Prior
to joining Commercial Federal, Mr. Lewis was Vice President and Communications
Director for Omaha National Bank.
Kevin C. Parks was named First Vice President of the Bank responsible for
- --------------
Internal Audit, Legal Oversight/Compliance and Security in November 1993. Mr.
Parks, a certified public accountant, certified internal auditor, and chartered
bank auditor, was previously self employed as a practicing accountant since
1989. Prior to 1989, Mr. Parks was Manager of Internal Audit for Security
Pacific Bank - Arizona since 1985.
Thomas N. Perkins is First Vice President and Acquisitions Manager. Mr. Perkins
- -----------------
joined the Bank in 1976 and has held various management positions in the Bank's
Retail division prior to assuming the Acquisitions position in August 1993.
Dennis R. Zimmerman became First Vice President in October 1991 and Director of
- -------------------
Information Systems as of July 1993. Mr. Zimmerman joined the Bank in 1987 and
has held the positions of Information Systems Audit Manager, Internal Audit
Manager and Director of Internal Audit/Legal Oversight. Prior to 1987, Mr.
Zimmerman was the Director of Financial Systems for a subsidiary of Enron
Corporation.
56
<PAGE>
Item 11. Executive Compensation
- --------------------------------
The information under the section captioned "Proposal I -- Election of Directors
- -- Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders " and "Proposal I --
Election of Directors" in the Proxy Statement and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
57
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements (incorporated herein by reference from
the indicated section of the Annual Report):
Consolidated Statement of Financial Condition at June 30, 1996 and 1995.
Consolidated Statement of Stockholders' Equity for the Years Ended June
30, 1996, 1995 and 1994.
Consolidated Statement of Operations for the Years Ended June 30, 1996,
1995 and 1994.
Consolidated Statement of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedules:
All schedules have been omitted as the required information is not
applicable, not required or is included in the financial statements or
related notes thereto.
(3) Exhibits:
2.1 Reorganization and Merger Agreement by and between Commercial
Federal Corporation and Commercial Federal Bank, a Federal Savings
Bank and Heritage Financial, Ltd. and Hawkeye Savings Bank, dated
May 16, 1996 (incorporated by reference to the Registrant's Form
S-4 Registration Statement No. 333-08591)
3.1 Articles of Incorporation of Registrant (incorporated by reference
to the Registrant's Form S-4 Registration Statement No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Form S-4 Registration Statement No.
33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated
by reference to the Registrant's Form S-1 Registration Statement
No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company (incorporated
by reference to the Registrant's Form 8-K Current Report Dated
January 9, 1989)
58
<PAGE>
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William A.
Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated
by reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement entered
into with Senior Vice Presidents and First Vice Presidents
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1,
1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994 - File No.
0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and Registrant,
dated August 21, 1996 (filed herewith)
10.8 Employment Agreement With William A. Fitzgerald, dated May 15,
1974, As Amended February 14, 1996 (filed herewith)
10.9 Commercial Federal Savings and Loan Association Survivor Income
Plan, As Amended February 14, 1996 (filed herewith)
10.10 Form of Change of Control Executive Severance Agreements entered
into with Two First Vice Presidents Dated October 2, 1995 (filed
herewith)
10.11 Change of Control Executive Severance Agreement entered into with
a Vice President Dated October 2, 1995 (filed herewith)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for
the Fiscal Year Ended June 30, 1996 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
(b) Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K dated May 16, 1996,
reporting the Corporation entering into, on the same date, a merger
agreement by and among the registrant, the Bank, Heritage Financial,
Ltd. and Hawkeye Federal Savings Bank. Under the terms of the merger
agreement, the Corporation will acquire all 180,762 of the outstanding
shares of Heritage's common stock which will be exchanged for cash and
the Corporation's common stock. At June 30, 1996, Heritage had assets of
$182.1 million, deposits of $157.9 million and stockholders' equity of
$12.9 million. Heritage operates six branches located in Iowa. This
pending acquisition is expected to close by October 31, 1996.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) No financial statement schedules are filed, and as such are excluded
from the Annual Report as provided by Exchange Act Rule 14A-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1996 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 27, 1996 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Principal Executive Officer:
Date: September 27, 1996 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Principal Financial Officer:
Date: September 27, 1996 By: /s/ James A. Laphen
-------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
Principal Accounting Officer:
Date: September 27, 1996 By: /s/ Gary L. Matter
------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
Directors:
Date: September 27, 1996 By: /s/ Talton K. Anderson
----------------------
Talton K. Anderson
Director
Date: September 27, 1996 By: /s/ Robert F. Krohn
-------------------
Robert F. Krohn
Director
60
<PAGE>
Date: September 27, 1996 By: /s/ Charles M. Lillis
---------------------
Charles M. Lillis
Director
Date: September 27, 1996 By: /s/ Carl G. Mammel
------------------
Carl G. Mammel
Director
Date: September 27, 1996 By: /s/ Robert S. Milligan
----------------------
Robert S. Milligan
Director
Date: September 27, 1996 By: /s/ James P. O'Donnell
----------------------
James P. O'Donnell
Director
61
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- --------
<C> <S> <C>
2.1 Reorganization and Merger Agreement by and between Commercial Federal
Corporation and Commercial Federal Bank, a Federal Savings Bank and
Heritage Financial, Ltd. and Hawkeye Savings Bank, dated May 16, 1996
(incorporated by reference to the Registrant's Form S-4 Registration
Statement No. 333-08591)
3.1 Articles of Incorporation of Registrant (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by reference
to the Registrant's Form S-4 Registration Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated by
reference to the Registrant's Form S-1 Registration Statement No. 33-
003300)
4.2 Shareholder Rights Agreement between Commercial Federal Corporation and
Manufacturers Hanover Trust Company (incorporated by reference to the
Registrant's Form 8-K Current Report Dated January 9, 1989)
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William A.
Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by
reference to the Registrant's Form S-4 Registration Statement No. 33-
60589)
10.3 Form of Change in Control Executive Severance Agreement entered into
with Senior Vice Presidents and First Vice Presidents (incorporated by
reference to the Registrant's Form S-4 Registration Statement No. 33-
60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994
(incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July
1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as
Amended and Restated Effective August 1, 1992 (incorporated by reference
to the Registrant's Form S-8 Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated
August 21, 1996 (filed herewith)
10.8 Employment Agreement With William A. Fitzgerald, dated May 15, 1974, As
Amended February 14, 1996 (filed herewith)
10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, As
Amended February 14, 1996 (filed herewith)
10.10 Form of Change of Control Executive Severance Agreements entered into
with Two First Vice Presidents Dated October 2, 1995 (filed herewith)
10.11 Change of Control Executive Severance Agreement entered into with a Vice
President Dated October 2, 1995 (filed herewith)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1996 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
</TABLE>
<PAGE>
Exhibit 10.7
Stock Purchase Agreement
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement"), is dated as of August 21,
1996, by and among CAI Corporation, a Delaware corporation ("CAI"), Commercial
Federal Corporation, a Nebraska corporation ("CFC"), Mr. Robin R. Glackin
("Glackin"), Mr. Steven M. Ellis ("Ellis") and Mr. Bryon A. Lax ("Lax"). Each
of Glackin, Ellis and Lax is sometimes hereinafter referred to as a
"Shareholder", and collectively as the "Shareholders."
WHEREAS, CAI owns an aggregate of 1,250,100 shares of common stock, par value
$0.01 per share (the "CFC Common Stock"), of CFC; and
WHEREAS CFC owns the Warrant to Purchase 99 Shares of Common Stock (Par
Value $.01 per Share) of CAI Corporation, dated December 31, 1989 (the
"Warrant"), which entitles the holder thereof to purchase, upon exercise
thereof, 99 shares of non-voting common stock of CAI; and
WHEREAS, CFC desires to purchase from CAI the shares of CFC Common Stock owned
by CAI; and
WHEREAS, CAI wishes to acquire from CFC, and cancel, the Warrant; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE 1
SALE AND TRANSFER OF
COMMON STOCK; RETURN OF WARRANT
1.1 Sale and Transfer of Common Stock. Upon the basis of the representations,
---------------------------------
warranties and agreements herein contained, and subject to the terms and
conditions hereof, CAI agrees to sell, transfer and assign to CFC 1,250,100
shares of CFC Common Stock (such shares of CFC Common Stock are hereinafter
referred to as the "Shares"), in exchange for (i) a payment of $28,227,162
(the "Cash Consideration"), (ii) the transfer and assignment to CAI of the
Warrant (in whole and not in part), unexercised and free and clear of any
Liens (as defined herein), (iii) a payment of $2,200,000 in reimbursement
of certain costs and expenses incurred by CAI in connection with its
ownership of the Shares, including costs and expenses incurred in
connection with the proxy contest of 1995 (the "Expense Reimbursement
Payment"), and (iv) a payment of $62,500 as an agreed upon amount in lieu
of the pro rata portion of the dividend on the Shares of CFC's current
fiscal quarter (the "Dividend Amount").
1.2 Return of Warrant; Payment of Consideration. Upon the basis of the
-------------------------------------------
representations, warranties and agreements herein contained, and subject to
the terms and conditions hereof, CFC agrees to (i) purchase and accept from
CAI the Shares, (ii) transfer and assign the Warrant (in whole and not in
part), unexercised and free and clear of any Liens, to CAI, (iii) pay CAI
the Cash Consideration, (iv) pay CAI the Expense Reimbursement Payment and
(v) pay CAI the Dividend Amount.
1.3 Closing. The closing of the sale and purchase of the Shares and the
-------
other transactions contemplated hereby (the "Closing") shall take place in
Omaha, Nebraska on August 21, 1996, or at such other time or place as the
parties may mutually agree (the "Closing Date").
1.4 Closing Deliveries. At the Closing, the parties shall deliver the
------------------
following documents, and take the following actions, all of which
deliveries and actions shall be deemed to occur simultaneously and none of
which shall be effective until all have occurred:
<PAGE>
(a) CFC shall deliver, or cause to be delivered, to CAI (i) the Warrant (in
whole and not in part), duly endorsed, unexercised and free and clear
of any Liens, (ii) the Cash Consideration, the Expense Reimbursement
Payment and the Dividend Amount, in the form of a cash payment of
$30,489,662, by wire transfer of immediately available same day funds
in United States dollars to an account designated in writing by CAI;
and
(b) CAI shall deliver, or cause to be delivered pursuant to book entry at
DTC, to CFC 1,250,000 of the Shares and stock powers and certificate
for 100 of the Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CFC
CFC hereby represents and warrants to CAI and the Shareholders as follows:
2.1 Corporate Organization. CFC is a corporation duly organized, validly
----------------------
existing and in good standing under the laws of the State of Nebraska. CFC
has the corporate power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being conducted and is
duly licensed or qualified to do business in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary.
2.2 Authority; No Violation.
-----------------------
(a) CFC has full corporate power and authority to execute and deliver this
Agreement and the other documents and instruments contemplated hereby
and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by CFC of each of this Agreement and the
other documents and instruments contemplated hereby and the
consummation of the transactions contemplated hereby and thereby have
been duly and validly approved by the Board of Directors of CFC, and no
other corporate proceedings on the part of CFC are necessary to
consummate the transactions contemplated hereby and thereby. This
agreement has been, and upon execution and delivery thereof by CFC,
each of the other documents and instruments contemplated hereby will
be, duly and validly executed and delivered by CFC and (assuming due
authorization, execution and delivery by CAI) this Agreement
constitutes, and upon execution and delivery thereof by CFC, each of
the other documents and instruments contemplated hereby will
constitute, a valid and binding obligation of CFC enforceable against
CFC in accordance with its respective terms.
(b) Neither the execution and delivery of this Agreement or any other
document or instrument contemplated hereby by CFC nor the consummation
by CFC of the transactions contemplated hereby and thereby, nor
compliance by CFC with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Articles of
Incorporation, By-Laws or similar governing documents of CFC, or (ii)
(x) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction ("Law") applicable to CFC or any of
its properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute
a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a
right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any Lien upon any of the
respective properties or assets of CFC under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed
of trust, license, lease, agreement or other instrument or obligation
to which CFC is a party, or by which it or any of its properties or
assets may be bound or affected.
2.3 Consents and Approvals. No consents or approvals of, or filings
----------------------
registration with, any court, administrative agency or commission or other
governmental authority or instrumentality (each a "Governmental Authority")
or with any third party are necessary in connection with (a) the execution
and delivery of CFC of this Agreement and the other documents and
instruments contemplated hereby and (b) the consummation by CFC of the
transaction contemplated hereby and thereby.
<PAGE>
2.4 Title to Warrant. CFC has, and upon the transfer of the Warrant to CAI in
----------------
accordance with the terms hereof, CAI will have, good, valid and marketable
title to the Warrant (in whole and not in part), free and clear of any
liens, charges, encumbrances, pledges, options, trusts, voting trusts,
restrictions, members or shareholders' agreements, adverse rights or claims
and security interests whatsoever ("Liens"). Except for this Agreement,
CFC does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character
calling for the purchase, issuance, transfer or assignment of the Warrant,
any interest in the Warrant or the shares of non-voting common stock of CAI
purchasable upon exercise of the Warrant. Without limiting the generality
of the foregoing, CFC is the Holder (as defined in the Warrant) of the
Warrant and there are no other Holders of the Warrant.
2.5 Status of Warrant.
-----------------
(a) CFC's election, pursuant to its letter, dated August 13, 1996, to
exercise the Warrant has been effectively and irrevocably rescinded and
withdrawn for all purposes prior to the effectiveness of such election,
pursuant to the letter, dated August 14, 1996, a true, correct and
complete copy of which is attached hereto as Exhibit A.
(b) Neither CFC nor any other Holder (including, without limitation any
prior Holder) has exercised, in whole or in part, the Warrant, and no
person or entity (other than CFC in its capacity as Holder) has the
right or power to exercise or cause the exercise of the Warrant.
Without limiting the generality of the foregoing, neither CFC nor any
of its Representatives (as defined herein) has taken any action which
has caused (or which, with notice or the passage of time, will cause)
any shares of common stock or other securities of CAI to become
issuable or to be deemed to have been issued or to have become issuable
pursuant to the Warrant for any reason.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CAI
CAI hereby represents and warrants to CFC as follows:
3.1 Corporate Organization. CAI is a corporation duly organized, validly
----------------------
existing and in good standing under the laws of the State of Delaware. CAI
has the corporate power and authority to own or lease all of its properties
and assets and to carry on its business as it is now being conducted and is
duly licensed or qualified to do business in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualifications necessary.
3.2 Authority; No Violation.
-----------------------
(a) CAI has full corporate power and authority to execute and deliver this
Agreement and the other documents and instruments contemplated hereby
and to consummate the transactions contemplated hereby and thereby.
The execution and delivery by CAI of each of this Agreement and the
other documents and instruments contemplated hereby and the
consummation of the transactions contemplated hereby and thereby have
been duly and validly approved by the Board of Directors of CAI, and no
other corporate proceedings on the part of CAI are necessary to
consummate the transactions contemplated hereby and thereby. This
Agreement has been, and upon execution and delivery thereof by CAI,
each of the other documents and instrument contemplated hereby will be,
duly and validly executed and delivered by CAI and (assuming due
authorization, execution and delivery by CFC) this Agreement
constitutes, and upon execution and delivery thereof by CAI, each of
the documents and instruments contemplated hereby will constitute, a
valid and binding obligation of CAI enforceable against CAI in
accordance with its respective terms.
(b) Neither the execution and delivery of this Agreement or any other
document or instrument contemplated hereby by CAI nor the consummation
by CAI of the transactions contemplated hereby and thereby, nor
compliance by CAI with any of the terms or provisions hereof or
thereof, will (i) violate any provision of
<PAGE>
the Certificate of Incorporation, By-laws or similar governing
documents of CAI, or (ii) (x) violate any Law applicable to CAI or any
of its properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute
a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a
right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any Lien upon any of the
respective properties or assets of CAI under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed
of trust, license, lease, agreementt or other instrument or obligation
to which CAI is a party, or by which it or any of its properties or
assets may be bound or affected.
3.3 Consents and Approvals. No consents or approvals of, or filings or
----------------------
registration with, any Governmental Authority or with any third party are
necessary in connection with (a) the execution and delivery by CAI of this
Agreement and the other documents and instruments contemplated hereby and
(b) the consummation by CAI of the transactions contemplated hereby and
thereby.
3.4 Ownership of Shares.
-------------------
(a) The Shares are the only shares of CFC Common Stock beneficially owned
by CAI.
(b) CAI has (except for a lien of Comerica Bank on the Shares, which lien
will be paid in full from the Cash Consideration, and upon the
transfer of the Shares to CFC in accordance with the terms hereof CFC
will have, good, valid and marketable title to the Shares, free and
clear of any Liens. CAI does not have and is not bound by any
outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase, issuance,
transfer or assignment of the Shares or any interest in the Shares
other than the Comerica Lien.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
Each Shareholder hereby represents and warrants on his own behalf to CFC as
follows:
4.1 Execution and Delivery. This Agreement has been, and upon execution and
----------------------
delivery thereof by such Shareholder, each of the other documents and
instruments contemplated hereby will be, duly and validly executed and
delivered by such Shareholder and (assuming due authorization, execution
and delivery by CFC) this Agreement constitutes, and upon execution and
delivery thereof by such Shareholder, each of the other documents and
instruments contemplated hereby will constitute, a valid and binding
obligation of such Shareholder, enforceable against such Shareholder in
accordance with its respective terms.
4.2 Ownership of CFC Common Stock. Except for the Shares, such Shareholder
-----------------------------
does not beneficially own any shares of CFC Common Stock, other than, with
respect to Glackin and Ellis, shares of CFC Common Stock granted to such
Shareholder as part of his compensation as a director of CFC.
ARTICLE V
CERTAIN COVENANTS AND AGREEMENTS
5.1 Forbearances. None of CFC, CAI nor any Shareholder shall take any action
------------
that is intended or may reasonably be expected to result in any of it
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect at any time prior to the Closing,
except, in every case, as required by Law.
5.2 No Exercise or Transfer of Warrant. CFC hereby agrees that from and after
----------------------------------
the date of this Agreement, it shall not (a) exercise, in whole or in part,
give any notice of exercise, in whole or in part, or permit or cause any
other person or entity to exercise or give any notice of exercise, in whole
or in part, of, the Warrant or (b) except as contemplated hereby, sell,
assign, convey or otherwise transfer (including, without limitation,
through merger
<PAGE>
or consolidation or otherwise by operation of law), in whole or in part,
the Warrant or any interest therein, including, without limitation, any
right to acquire, hold or exercise the Warrant or any part thereof.
5.3 Standstill. CAI and each Shareholder hereby agrees that during the
----------
Standstill Period (as defined herein), it shall not, directly or
indirectly, (a) acquire, agree to acquire or make any proposal to acquire,
the securities of CFC or any of its subsidiaries, any warrant or option to
acquire any such securities, any security convertible into or exchangeable
for any such securities or any other right to acquire any such securities
(except, in the case of Glackin and Ellis, for securities of CFC or any of
its subsidiaries issued to such Shareholders as members of the Board of
Directors of CFC); (b) seek or propose any merger, consolidation, business
combination, tender or exchange offer, sale or purchase of assets or
securities, dissolution, liquidation, restructuring, recapitalization or
similar transaction of or involving CFC or any of its subsidiaries; and (c)
make, or in any way participate in, any "solicitation" of proxies or
consents within the meaning of Rule 14a-1 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), with respect to any securities of
CFC or any of its subsidiaries, or seek to advise or influence any person
with respect to the voting of any securities of CFC or any of its
subsidiaries or demand a copy of the stock ledger, list of stockholders or
any other books and records of CFC or any of its subsidiaries (except in
connection with the enforcement of any claim of CAI or any such Shareholder
under this Agreement); (d) form, join or in any way participate in a
"group" (within the meaning of Section 13(d)(3) of the Exchange Act), with
respect to any securities of CFC or any of its subsidiaries; e) otherwise
act, alone or in concert with others, to seek to control or influence, in
any manner, the management, Board of Directors or policies of CFC or any of
its subsidiaries; (f) have any discussions or enter into any arrangements,
understandings or agreements (whether written or oral) with, or advise,
finance, assist or encourage, any other persons in connection with any of
the foregoing; or make any other investment in any other person that
engages, or offers or proposes to engage, in any of the foregoing;
provided, however, nothing contained herein shall be deemed to prohibit CAI
or any Shareholder from acquiring any publicly-traded security (other than
any security of CFC or any of its subsidiaries); provided, further, that if
the issuer (or any Affiliate thereof) of such publicly-traded security is
engaged in any activity otherwise prohibited under this Section 5.5,
neither CAI nor any of the Shareholders shall acquire a controlling
interest in such issuer or otherwise actively participate in the business
activities of such issuer. CAI and each Shareholder also agrees during
such period not to make any proposal, statement or inquiry, or disclose any
intention, plan or arrangement (whether written or oral) inconsistent with
the foregoing, or request CFC, directly or indirectly, to amend, waive or
terminate any provision of this Section 5.3 (including this sentence).
Notwithstanding anything in this Agreement to the contrary, no restriction
or prohibition set forth in this Section 5.3 shall apply to either of
Glackin or Ellis in his capacity as a director of CFC or any of its
subsidiaries. For purposes of this Agreement, the "Standstill Period"
shall mean the period of 60 months beginning on the date of this Agreement.
5.4 Indemnification. CFC hereby agrees to indemnify, defend and hold harmless
---------------
CAI and each director, officer and Affiliate (as defined herein) of CAI,
including, without limitation, the Shareholders (collectively, the "CAI
Group"), from and against all reasonable fees and expenses of counsel
incurred by any member of the CAI Group in connection with the defense of
any litigation brought against any member of the CAI Group by or on behalf
of any shareholder of CFC challenging the validity of this Agreement or the
transactions contemplated hereby; provided, that the CAI Group shall
reasonably cooperate with CFC in the defense or settlement of any such
litigation. The indemnification provided hereunder is not intended to
apply to the conduct of any member of the CAI Group outside the scope of
this Agreement or the transactions contemplated hereby. Nothing contained
herein shall be deemed a waiver of any right of indemnification otherwise
available to any member of the CAI Group.
<PAGE>
5.5 Waiver and Release.
------------------
(a) CFC, on behalf of itself and its Representatives (as defined herein),
for good and sufficient consideration, the receipt and adequacy of
which are hereby acknowledged, hereby waives, releases and forever
discharges CAI and each Shareholder, and their respective
Representatives, from each and every class, individual, or derivative
claim, of any kind, known or unknown, from the beginning of the world
to the Closing, which CFC or its Representatives had, now have, or may
hereafter have, in any capacity, against CAI, the Shareholders and
their respective Representatives, or any of them, except for claims
arising out of this Agreement. For purposes of this Agreement,
"Representatives" shall mean, with respect to a particular party, its
officers, directors, employees, shareholders, Affiliates (as such term
is defined in Rule 12b-2 under the Exchange Act), and their respective
heirs, executors, successors, and administrators.
(b) CAI and each Shareholder, on behalf of itself and its respective
Representatives, for good and sufficient consideration, the receipt and
adequacy of which are hereby acknowledged, hereby waives, releases and
forever discharges CFC and its Representatives, from each and every
class, individuals, or derivative claim, of any kind, known or unknown,
from the beginning of the world to the Closing, which CAI, any
Shareholder, or any of their respective Representatives had, now have,
or may hereafter have, in any capacity, against CFC and its
Representatives, or any of them, except for claims arising out of this
Agreement, the Note or the Security Agreement.
5.6 Public Announcements. Promptly following execution of this Agreement, CFC
--------------------
shall issue a press release in the form attached hereto as Exhibit B. CFC
shall not, and for so long as CFC shall be in compliance with all of its
obligations under the Note and the Security Agreement, neither CAI nor any
Shareholder shall, (i) make any public statement that is contrary to such
press release or (ii) make any public or private statement or issue any
press release concerning the subject matter hereof which contains
derogatory information or statements regarding the other parties hereto or
their Representatives.
5.7 Resignations. At or prior to payment in full of the Note by CFC, each of
------------
Ellis and Glackin shall deliver to CFC a duly executed letter of
resignation from the Board of Directors of CFC, substantially in the form
of Exhibit C attached hereto.
ARTICLE VI
MISCELLANEOUS
6.1 Survival of Representations, Warranties and Agreements. Each of the
------------------------------------------------------
representations, warranties, covenants and agreements of the parties
contained herein shall survive the Closing indefinitely.
6.2 Expenses. Except as otherwise provided in this Agreement, all costs and
--------
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense.
6.3 Notices. All notices and communications required or permitted hereunder
-------
shall be in writing, and effective upon receipt, if delivered in person,
sent by certified or registered mail (postage prepaid), sent by a
nationally recognized overnight courier or sent by means of facsimile with
telephone confirmation or receipt as follows (or at such other address or
telecopy number for a party as shall be specified by like notice):
To CFC: Commercial Federal Corporation
P.O. Box 1103
2120 South 72nd Street
Omaha, Nebraska 68101
Attention: William A. Fitzgerald
Telephone: (402) 554-9200
Telecopy: (402) 390-5256
<PAGE>
To the CAI Corporation
Shareholders 12770 Coit Road, Suite 902
and CAI: Dallas, Texas 75251
Attention: Robin R. Glackin
Telephone: (214) 991-7716
Telecopy: (214) 991-8922
6.4 Modifications; Waivers. The provisions of this Agreement may only be
----------------------
modified by written agreement duly executed by all parties hereto. No
waiver of any provision of this Agreement shall be binding unless executed
in writing by granting the waiver. No waiver of any provision of this
Agreement shall be deemed or shall constitute a waiver of any other
provision, whether or not similar, nor shall any waiver constitute a
continuing waiver.
6.5 Headings. Captions and headings appearing in this Agreement are for ease
--------
of reference only and do not constitute a part of this Agreement.
6.6 GOVERNING LAW. THIS AGREEMENT AND ALL QUESTIONS CONCERNING ITS VALIDITY,
-------------
CONSTRUCTION OR PERFORMANCE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
6.7 Counterparts. This Agreement may be executed in more than one counterpart,
------------
each of which shall be deemed to be an original, but all of which together
shall constitute one and the same document.
6.8 Assignment; Successors and Assigns. This Agreement may not be assigned by
----------------------------------
any party hereto without the prior written consent of CAI, on behalf of
itself and the Shareholders, in the case of any assignment by CFC, and CFC,
in the case of an assignment by CAI or any Shareholder. This Agreement
shall inure to the benefit of, be binding upon, and be enforceable by and
against the parties and their respective successors and permitted assigns.
6.9 Entire Agreement. This Agreement constitutes the entire agreement and
----------------
supersedes all prior agreements and understandings, both written and oral,
among or between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement or caused this
Agreement to be executed and delivered by their respective officers or
representatives thereunto duly authorized, in each case, as of the date first
indicated above.
COMMERCIAL FEDERAL CORPORATION CAI CORPORATION
By: /s/William A. Fitzgerald By: /s/ Steven M. Ellis
William A. Fitzgerald Steven M. Ellis
Chairman of the Board and Senior Vice President
Chief Executive Officer
/s/ Robin R. Glackin
Robin R. Glackin
/s/ Steven M. Ellis
Steven M. Ellis
/s/ Byron A. Lax
Byron A. Lax
<PAGE>
Exhibit 10.8
Employment Agreement With William A. Fitzgerald
Dated May 15, 1974, As Amended February 14, 1996
<PAGE>
EXHIBIT 10.8
AGREEMENT
---------
This Agreement, by and between COMMERCIAL FEDERAL SAVINGS AND LOAN
ASSOCIATION, hereinafter referred to as "Association" and William A. Fitzgerald
---------------------
residing in the City of Omaha, Nebraska, hereinafter referred to us as
"Fitzgerald".
- ------------
WITNESSETH:
- ----------
That in consideration of the Agreement hereinafter contained, the parties
hereto agree as follows:
1. Fitzgerald has been an employee of the Association since 1955 and shall
---------- ----
continue in the employ of the Association and agrees to serve the Association in
such capacity as the Board of Directors of the Association may designate from
time to time until terminated by either party on at least 90 days prior to
written notice to the other.
2. During the term of his employment, Fitzgerald shall devote his
----------
attention, skill and efforts to the performance of his duties for the good of
the Association as he has in the past.
3. The Association shall pay the employee, beginning 5/16/74 and
-------
continuing during the term of his employment hereunder, such salary payable
monthly, fringe benefits and retirement plan coverage as the Board may from time
to time determine, together with deferred compensation payable as provided in
paragraph 4 below, unless forfeited by the occurrence of any of the events
specified in paragraph 7 below.
4. The benefits to be paid as deferred compensation, unless forfeited as
provided herein, shall be paid as follows:
A. If Fitzgerald's employment hereunder is terminated on or after he
------------
shall have reached the age of 65, the Association shall pay to him in 120
equal monthly installments, an amount equal to three times the highest
annual salary which Fitzgerald received from the Association during the
----------
five-year period ending with the close of the Association's fiscal year in
which Fitzgerald attained the age of 65 years. For the purpose of this
----------
agreement, the term "highest annual salary" shall mean the basic
compensation paid by the Association to Fitzgerald for such year, excluding
----------
fringe benefits paid for Fitzgerald, contributions to any profit sharing
----------
and pension plans, and any reimbursement for expenses incurred by
Fitzgerald on behalf of the Association. If Fitzgerald should die on or
---------- ----------
after his 65th birthday and before the said 120 monthly installments are
paid, the unpaid balance shall continue to be paid in installments for the
unexpired portion of such 120 month period to such beneficiary as
Fitzgerald may designate in writing to the Association.
----------
B. If Fitzgerald's employment is terminated because of disability of
------------
death before he has reach the age of 65, and while he is still in the
employ of the Association, then the Association shall pay to Fitzgerald (in
----------
the event of his disability) or his designated beneficiary (in the event of
his death), in 120 equal monthly installments an amount equal to three
times the highest annual salary which Fitzgerald received from the
----------
Association during the five-year period ending with the close of the
Association's fiscal year in which Fitzgerald became disabled or died. If
----------
Fitzgerald should die after his disability and before all of the said 120
----------
monthly installments are paid, the unpaid balance shall continue to be paid
in installments for the expired portion of such 120 month period to such
beneficiary as Fitzgerald may designate in writing to the Association.
----------
-1-
<PAGE>
C. If both Fitzgerald and his designated beneficiary should
----------
die before a total of 120 monthly payments are paid by the Association,
then the remaining amount due shall be paid as promptly as possible in
one lump sum to the estate of such designated beneficiary.
D. The beneficiary referred to in this paragraph may be
designated or changed by Fitzgerald (without the consent of any prior
----------
beneficiary) on a form provided by the Association and delivered to the
Association before his death. If no such beneficiary shall have been
designated, or if no designated beneficiary shall survive Fitzgerald,
----------
the installment payments payable under this paragraph shall be payable
to Fitzgerald's estate.
------------
E. Fitzgerald shall be deemed to have become disabled, for
----------
purposes of paragraph 4B above, if the Board of Directors of Association
shall find, on the basis of medical evidence satisfactory to such Board,
that Fitzgerald is totally disabled, mentally or physically, so as to be
----------
prevented from carrying out the duties of his office to the satisfaction
of the Board of Directors and that such disability will be permanent and
continuous during the remainder of his life.
5. The installments to be paid to Fitzgerald under paragraph 4A and
----------
4B above, shall commence on the first day of the month next following the date
of the termination of his employment. The said installment payments to be paid
to the designated beneficiary under the provision of this paragraph 5 shall
commence on a date to be selected by the Association but within one year from
the date of death of Fitzgerald.
-----------
6. Nothing contained in this Agreement and no action taken pursuant
to the provisions of this Agreement shall create or be construed to create a
trust of any kind or a fiduciary relationship between the Association and
Fitzgerald, as designated beneficiary or any other person. To the extent that
- ----------
any person acquires the right to receive payments from the Association under
this Agreement, such right shall be no longer greater than the right of any
unsecured general creditor of the Association.
7. Notwithstanding anything herein contained to the contrary, no
payment of any unpaid installment of deferred compensation shall be made and all
rights of Fitzgerald, or his designated beneficiary, executors or
----------
administrators, or any other person, to receive payments under this Agreement
shall be forfeited if either or all of the following events shall occur:
A. Without approval of the Board of Directors of the
Association, Fitzgerald has or possesses, directly or indirectly, from
----------
this day forward, any interest in any other Association competing with
or inimical to his interest in the Association located within an area
300 miles in any direction from the City of Omaha, Nebraska, all within
the determination of the Board of Directors of the Association.
B. Fitzgerald shall engage in any activity or conduct which
----------
in the opinion of the Board of Directors of Association is inimical to
the best interests of the Association.
C. If Fitzgerald's employment by Association is terminated
------------
for any reason other than by retirement, death or disability.
8. Neither Fitzgerald nor his designated beneficiary shall have the
----------
right to commute, encumber or dispose of the right to receive payments
hereunder, which payments and the right thereto are expressly declared to be
nonassignable and nontransferable, except by which or by the laws of descent and
distribution.
-2-
<PAGE>
9. If the Board of Directors of the Association shall find that any
person to whom any payment is payable under this Agreement is unable to care for
his affairs because of illness or accident, or is a minor, any payment due
(unless a prior claim thereof shall have been made by duly appointed guardian,
committee or other legal representative) may be paid to the spouse, child,
parent, brother or sister, or to any person deemed by the Board of Directors of
the Association may determine. Any such payment shall be a complete discharge of
the liabilities of the Association under this Agreement.
10. Nothing contained herein shall be construed as conferring upon
Fitzgerald the right to continue the employ of the Association as an executive
- ----------
or in any other capacity.
11. Any deferred compensation payable under this Agreement shall not
be deemed salary or other compensation to Fitzgerald for the purposes of
----------
computing benefits to which he may be entitled under any pension, profit sharing
or other arrangement of the Association for the benefit of its employees.
12. This Agreement shall be binding upon and inure to the benefit of
the Association, its successors and assign and Fitzgerald, his heirs, executors,
----------
administrators and legal representatives.
13. The deferred compensation under this Agreement is understood to
be in addition to the compensation salary, or other benefits Fitzgerald is now
----------
receiving or such compensation, salary or other benefits as he may be receiving
by action of the Board of Directors of the Association up to the date of his
retirement pursuant to the terms of this Agreement.
14. This Agreement has been executed in the State of Nebraska and
shall be construed in accordance with the laws of the State of Nebraska.
Executed this 15th day of May, 1974.
COMMERCIAL FEDERAL SAVINGS AND
LOAN ASSOCIATION,
Attest:
/s/ Opal M. Wiess By /s/ William F. Fitzgerald
- -------------------------------- ---------------------------------
Assistant Secretary President
/s/ Donald L. Schinzel /s/ William F. Fitzgerald
- -------------------------------- -----------------------------------
Witness
-3-
<PAGE>
AMENDMENT NO. 1
TO THE 1974 AGREEMENT ("PLAN") DATED
MAY 15,1974 BETWEEN WILLIAM A. FITZGERALD ("FITZGERALD")
AND COMMERCIAL FEDERAL SAVINGS & LOAN
(n/k/a "COMMERCIAL FEDERAL BANK F.S.B.") ("BANK")
The current plan between Fitzgerald and Bank be, and is hereby amended, by
adding a new subparagraph 7(a). By virtue of this attachment, Fitgerald will, as
the date of this amendment, become fully vested in all benefits provided to him
by the Plan.
All as of this 14th day of February, 1996.
By /s/ James A. Laphen
--------------------
Chief Operating Officer
of Commercial Federal Bank
/s/ William A. Fitzgerald
-------------------------
<PAGE>
Exhibit 10.9
Commercial Federal Savings and Loan Association
Survivor Income Plan, As Amended February 14, 1996
<PAGE>
- -------------------------------------------------------------------------------
EXHIBIT 10.9
COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION
SURVIVOR INCOME PLAN
(Amended and Restated July 1, 1986)
Commercial Federal Savings and Loan Association ("Commercial Federal")
hereby establishes a survivor income plan for certain of its and its
subsidiaries' Key Executives in recognition of the loyalty, length of service
and contributions which said employees have made and will make to the success of
said companies, as follows:
Section 1. Definitions.
-----------
The following terms shall have the meanings set forth below:
(a) "Base Benefits' shall mean an amount equal to 40% of base
salary of a Key Executive (before any reduction for salary reduction or
deferral amounts) but not less than $40,000 per year.
(b) "Beneficiary" means the person or persons entitled under
Section 5 to receive a Survivor Benefit after a Participant's death.
(c) "Committee" means the Committee appointed to administer this
Plan under Section 7 of this Plan.
(d) "Key Executive" means the President, Executive Vice Presidents
and Senior Vice Presidents of Commercial Federal Savings and Loan
Association, and the Presidents and salaried Chairmen of such of its
subsidiaries who adopt the Plan.
(e) "Participant" means a present or former Key Executive
designated to participate in this Plan on whose account a Survivor Benefit
will be payable under Section 3.
(f) "Plan" means this Survivor Income Plan, as amended from time
to time.
(g) "Survivor Benefit" means a benefit payable under Section 3 of
this Plan.
Section 2. Participation.
-------------
All officers of Commercial Federal who are Key Executives shall participate
in the Plan. Key Executives of subsidiaries of Commercial Federal appointed by
the subsidiaries adopting the Plan also shall participate. A Beneficiary shall
be eligible for benefits only as hereinafter provided.
Section 3. Survivor Benefit.
----------------
(a) If a Participant's employment ends because of death while he is a
Key Executive, his Beneficiary shall receive an annual Survivor Benefit
equal to 100% of the Participant's Base Benefit, for a period of 10 years.
A Participant shall be considered to be employed while on an authorized
leave of absence, as determined by Commercial Federal.
(b) If a Participant (i) remains a Key Executive of Commercial Federal
until his retirement at normal retirement age (as established from time to
time by the Committee), and (ii) dies following such normal retirement,
then his Beneficiary shall receive upon his death an annual Survivor
Benefit equal to 100% of the Participant's Base Benefit, for a period of 10
years.
(c) If a Participant does not satisfy the conditions of Section 3(a) or
3(b) above, no Survivor Benefit shall be payable on his account.
<PAGE>
Section 4. Payment of Survivor Benefit.
---------------------------
(a) The annual Survivor Benefit shall be paid in equal monthly
installments, commencing on the first day of the second month following
the Participant's death. The monthly installments shall continue for 120
months. The amount of each monthly installment shall be equal to 100% of
the Participant's Base Benefit divided by 12.
(b) A Participant, with the consent of the Committee, may during his
lifetime elect a different method of payment, provided that in all
events the Survivor Benefit shall be payable over a period of not less
than one month nor more than 180 months. If a Participant elects to have
the Survivor Benefit paid in a manner other than 120 equal monthly
installments, the actuaries then servicing Commercial Federal shall
determine the present value, (using an interest rate determined by the
Committee) of the payment method so elected, and the amount of the
Survivor Benefit shall be revised accordingly, so that the value of the
Survivor Benefit, determined at the time of the Participant's death, is
the same as if the standard method of payment was used.
Section 5. Beneficiaries.
-------------
(a) A Participant may designate one or more Beneficiaries to receive a
Survivor Benefit payable on the Participant's account under this Plan.
Beneficiaries shall be designated only upon forms made available by or
satisfactory to the Committee, and filed by the Participant with the
Committee.
(b) At any time prior to his death, a Participant may change his
designation of Beneficiary by filing a substitute designation of
Beneficiary with the Committee.
(c) In the absence of an effective designation of Beneficiary, or if
all persons so designated shall have predeceased the Participant or
shall have died before the Survivor Benefit shall have been fully
distributed, the balance of the Survivor Benefit shall be paid to the
Participant's surviving spouse, or if none, to the Participant's issue
per stripes or, of no issue, to the personal representative of the
Participant's estate.
Notwithstanding the foregoing, unless the Participant has made a
designation to the contrary, if a Participant designates his surviving
spouse as primary beneficiary to his Survivor Benefit and if said
spouse dies after payments have begun but before all payments have been
made, the remaining Survivor Benefit shall be paid to such persons as
said spouse may appoint by will, or, in the absence of such appointment,
to said spouse's estate.
(d) If a Survivor Benefit is payable to a minor or person
declared incompetent or to a person incapable of handling the
disposition of his property, the Committee may direct Commercial Federal
to pay such Survivor Benefit to the guardian, legal representative or
person having the care and custody of such minor, incompetent or person.
The Committee may require proof of incompetency, minority, incapacity or
guardianship as it may deem appropriate prior to distribution of the
Survivor Benefit. Such distribution shall completely discharge the
Committee and Commercial Federal from all liability with respect to such
benefit.
Section 6. Unfunded Plan.
-------------
(a) Benefits to be provided under this Plan are unfunded
obligations of Commercial Federal and its subsidiaries. Nothing
contained in this Plan shall require Commercial Federal to segregate any
monies from its general funds, to create any trust, to make any special
deposits, or to purchase any policies of insurance with respect to such
obligations. If Commercial Federal or it subsidiaries elect to purchase
individual policies of insurance on one or more of the Participants to
help finance its obligations under this Plan, such individual policies
and the proceeds there-from shall at all times remain the sole property
of Commercial Federal or such subsidiaries shall have ownership rights
in such policies of insurance.
<PAGE>
(b) No Participant shall be required or permitted to make
contributions to this Plan.
Section 7. Plan Administration.
-------------------
(a) This Plan shall be administered by a Committee appointed by the
Board of Directors of Commercial Federal. The Committee shall be the
administrator of this Plan and shall be solely responsible for its general
administration and interpretation and for carrying out the respective
provisions hereof, and shall have such powers as may be necessary to do so.
Commercial Federal may from time to time establish rules for the
administration of this Plan and the transaction of its business. Any action
by the Committee shall be final, conclusive and binding on each Participant
and all persons claiming by, through or under any Participant.
(b) Commercial Federal may employ or engage such agents,
accountants, actuaries, counsel, other experts and other persons as it
shall deem necessary or desirable in connection with the interpretation and
administration of this Plan. Commercial Federal shall be entitled to rely
upon all certificates made by an accountant or actuary selected by
Commercial Federal. Commercial Federal and its committees, officers,
directors and employees shall not be liable for any action taken, suffered
or omitted by them in good faith in reliance upon the advice or opinion or
any counsel, accountant, actuary or other expert and all action so taken,
suffered or omitted shall be conclusive upon each of them and upon all
other persons interested in this Plan.
(c) Commercial Federal may require proof of the death of any
Participant and evidence of the right of any person to receive any Survivor
Benefit.
(d) Claims under this Plan shall be filed with Commercial Federal
on its prescribed forms.
(e) Commercial Federal shall withhold from benefits paid under this
Plan any taxes or other amounts required to be withheld by law.
Section 8. Miscellaneous.
-------------
(a) No Survivor Benefit shall be subject in any manner to
alienation, sale, transfer, assignment, pledge or encumbrance of any kind
unless specifically approved in writing in advance by the Committee. Any attempt
to alienate, sell, transfer, assign, pledge or otherwise encumber any Survivor
Benefit, whether presently or hereafter payable, shall be void unless so
approved. Except as required by law, no Survivor Benefit payable under this Plan
shall in any manner be subject to garnishment, attachment, execution, or other
legal process, or be liable for or subject to the debts or liability of any
Participant or Beneficiary.
Notwithstanding any Plan provision to the contrary, the Board of
Directors of Commercial Federal shall have the right to amend, modify, suspend,
or terminate this Plan at any time. No amendment, suspension or termination
shall adversely affect the right of a Beneficiary to receive a Survivor Benefit
payable as the result of the death of a Participant which occurred prior to the
effective date of such amendment, suspension or termination.
(c) This document shall be construed in accordance with the laws of
the State of Nebraska.
(d) Nothing contained in this Plan shall be construed as a contract
of employment between any Participant and Commercial Federal or to suggest or
create a right in any Participant to be continued in employment as a Key
Executive or other employee of Commercial Federal.
<PAGE>
(e) Commercial Federal and the Committee may impose such other lawful
terms and conditions on participation in this Plan as deemed desirable. Members
of the Committee may participate in this Plan.
(f) This Plan shall become effective as of the 1st day of July, 1986.
COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION
By /s/ Donald L. Schinzel
--------------------------------------------
<PAGE>
AMENDMENT NO. 1
TO COMMERCIAL FEDERAL SAVINGS & LOAN
SURVIVOR INCOME PLAN
Section 2(c) of the Plan shall be amended to read as follows:
If a Participant does not satisfy the conditions of Section 3(a) or 3(b)
above, no Survivor Benefit shall be payable on his account; provided,
however if a Participant terminates employment to his normal retirement
date, the Company may, in its sole discretion, grant to the
Participant's Beneficiary a Survivor Benefit in such amount and for such
period as is determined by the Committee.
DATED this 27th day of August 1986.
---- ------
COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION
By /s/ Donald L. Schinzel
--------------------------------------------
<PAGE>
AMENDMENT NO. 2
TO COMMERCIAL FEDERAL SAVINGS PLAN
SURVIVOR INCOME PLAN
The Plan shall be amended effective July 1, 1987 as follows:
1. Section 4 shall be amended to read as follows:
"Section 4. Payment of Survivor Benefit.
---------------------------
The annual Survivor Benefit shall be paid in equal monthly installments,
commencing on the first day of the second month following the Participant's
death. The monthly installments shall continue for 120 months. The amount of
each monthly installment shall be equal to 100% of the Participant's Base
Benefit divided by 12."
2. Section 5 shall be amended to read as follows:
"Section 5. Beneficiaries.
-------------
"(a) Upon the death of the Participant the Survivor Benefit shall be paid
to the Participants' surviving spouse, if any. If the Participant has no
surviving spouse or if said spouse shall have died before the Survivor
Benefit shall have been fully distributed, the Benefit shall be distributed
to the Participant's issue per stirpes, or if no issue, to the Participant's
parents. If there is no beneficiary as listed above, no Benefit will be
paid.
"(b) If a Survivor Benefit is payable to a minor or person declared
incompetent or to a person incapable of handling the disposition of his
property, the Committee may direct Commercial Federal to pay such Survivor
Benefit to the guardian, legal representative or person having the care and
custody of such minor, incompetent or incapable person. The Committee may
require proof of incompetency, minority, incapacity or guardianship as it
may deem appropriate prior to distribution of the Survivor Benefit. Such
distribution shall completely discharge the Committee and Commercial Federal
from all liability with respect to such benefit."
DATED this 24th day of June 1987.
---- ----
COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION
BY /s/ Donald L. Schinzel
--------------------------------------------
<PAGE>
AMENDMENT NO. 3
TO COMMERCIAL FEDERAL SAVINGS AND LOAN
SURVIVOR INCOME PLAN
The Plan shall be effective August 31, 1988 amended as follows:
1. Section 1(d) shall be amended to read as follows:
"Key Executive" means a member of the group of persons consisting of the
President, Executive Vice President and Senior Vice President of
Commercial Federal Savings and Loan Association and the Presidents and
salaried Chairmen of such of its subsidiaries to adopt the Plan.
2. Section 2 shall be amended to read as follows:
Key Executives of Commercial Federal who are designated by the Executive
Personnel Committee of the Board of Directors of Commercial Federal as
Participants shall participate in the Plan. Key Executives of subsidiaries
of Commercial Federal appointed by the subsidiaries adopoting the Plan
shall also participate. A Beneficiary shall be eligible for benefits only
as hereinafter provided.
3. Amendment No. 1 to Commercial Federal Savings and Loan Survivor Income
Plan shall be amended by deleting the reference to "Section 2(c)" and
inserting in its place as follows:
Dated this 31st day of August 1998.
---- ------
COMMERCIAL FEDERAL SAVINGS AND LOAN ASSOCIATION
By /s/ Donald L. Schinzel
--------------------------------------------
<PAGE>
AMENDMENT NO.4
TO COMMERCIAL FEDERAL BANK
SURVIVOR INCOME PLAN
(f/k/a COMMERCIAL FEDERAL SAVINGS & LOAN)
The Commercial Federal Bank Survivor Income Plan ("Plan") is hereby amended as
follows:
1. A new paragraph numbered as Section 4 and entitled Vesting Schedule shall be
added to the Plan. The terms of such amendment shall be those out in Exhibit
I attached to this resolution;
2. In addition, current paragraphs 4,5,6,7 and 8 renumbered as 5,6,7,8 and 9,
and
3. The Chief Operating Officer, or his designee, is hereby authorized to take
all steps, and do all things necessary to implement this amendment.
All as of this 14th day of February, 1996.
By /s/ James A. Laphen
----------------------------
Chief Operating Officer
of Commercial Federal Bank
<PAGE>
Exhibit 10.10
Form of Change of Control Executive
Severance Agreements entered into with
Two First Vice Presidents Dated October 2, 1995
<PAGE>
EXHIBIT 10.10
CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT
------------------------------------------------
THIS CHANGE OF CONTROL EXECUTIVE SEVERANCE ("Agreement") is entered into as
of the 2nd of October 1995, by and between COMMERCIAL FEDERAL CORPORATION, a
--- ------------
Nebraska corporation (the "Corporation"), and its wholly-owned subsidiary,
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK (the "Bank"), referred to
collectively as the "Employer," and ____________________ (the "Executive").
RECITALS:
A. The Executive is a key member of the management of the Employer. It is
in the best interests of the Corporation, its shareholders, and the Bank to
provide an inducement to the Executive to remain in the service of the Employer
in the event of any proposed or anticipated Change of Control of the Employer as
defined herein, as well as to facilitate an orderly transition in the event of a
Change of Control.
B. The Employer wishes to provide economic security for the Executive in
the event of a Change of Control.
C. The following provisions have been approved by the Boards of Directors
of the Corporation and the Bank (the "Boards"), and apply in the event of a
Change of Control:
1. Duration. This Agreement will remain in force until such time as the
--------
Employer terminates this Agreement, or the Executive terminates his or her
employment, or the Employer terminates the employment of the Executive prior to
a Change of Control. The Employer may amend or terminate this Agreement at any
time prior to a Change of Control Event, as defined herein. However, if this
Agreement is terminated in anticipation of a Change of Control Event, such
termination shall be a "Constructive Involuntary Termination" as defined herein.
2. Change of Control. A Change of Control shall be deemed to have
-----------------
occurred in each of the following events, referred to herein as a "Change of
Control Event":
a. At any time a majority of the directors of the Corporation or the
Bank are not the persons for whom election proxies have been solicited by
the Boards, or persons then serving as directors appointed by the Boards,
except where such appointments are necessitated by the removal of
directors.
b. At any time forty nine percent (49%) or more of the outstanding
stock of the Corporation or the Bank is acquired or beneficially owned (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, or any successor thereto) by any person or entity (excluding the
Corporation, the Bank, or the Executive) or any combination or persons of
entities acting in concert.
c. At any time the shareholders of the Corporation or the Bank
approve an agreement to merge or consolidate the Corporation or the Bank
with or into another corporation, or to sell or otherwise dispose of all,
or substantially all of the assets of the Corporation or the Bank.
3. Constructive Involuntary Termination. A Constructive Involuntary
------------------------------------
Termination is deemed to have occurred if, in anticipation of a Change of
Control Event, or after such an event has occurred, any of the following occurs:
a. This Agreement or the Executive's employment is terminated by
Employer in anticipation of a Change of Control, or by the successor
corporation after a Change of Control.
b. The Executive's compensation level is reduced, the Executive is
given diminished responsibilities, or the Executive is given a lower job
title.
<PAGE>
c. The level of the Executive's participation in incentive
compensation is reduced or eliminated.
d. The Executive's benefit coverage or perquisites are reduced or
eliminated, except to the extent such reduction or elimination applies to all
other employees.
e. The Executive's office location is changed to a location greater
than fifty (50) miles from the location of the Executive's office at the time of
the Change of Control Event.
4. Termination for Cause. The benefits provided herein shall not be due
---------------------
in the event the Executive's employment is terminated for cause. With respect to
the Corporation, the term "cause" shall mean, and be limited to any act of
personal dishonesty, willful misconduct, or willful violation of law, which act
results in substantial loss to the Employer or its reputation. With respect to
the Bank, termination for cause shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
5. Voluntary Termination. The benefits provided herein shall not be due
---------------------
in the event of a voluntary termination. A voluntary termination will have
occurred if the Executive resigns from the successor corporation after a Change
of Control under conditions other than as specified in Section 3.
6. Regulatory Provisions Applicable Only to the Bank.
-------------------------------------------------
a. If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12U.S.C.(S)
1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall be
suspended as of the date of service unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Bank may in its discretion (i) pay
the Executive all or part of the compensation withheld while its contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
b. If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12U.S.C.(S)
1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
c. If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations of the Bank under this Agreement
shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
d. All obligations of the Bank under this Agreement shall be
terminated, except to the extent determined that continuation of this Agreement
is necessary for the continued operation of the Bank:
i. At the time the Federal Deposit Insurance Corporation
("FDIC") or the Resolution Trust Corporation ("RTC") enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance
Act; or
ii. At the time the FDIC or the RTC approves a supervisory
merger to resolve problems related to operation of the Bank is
determined by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not
be affected by such action.
7. Severance Award. If, in anticipation of a Change of Control, or after
---------------
a Change of Control Event has occurred, the Executive's employment is terminated
without cause, or a Constructive Involuntary Termination occurs, the following
provisions apply:
<PAGE>
a. The Executive will continue to receive, in equal monthly
payments, the base salary and all commissions and bonuses (including short-
and long-term incentive programs and stock options granted pursuant to the
Corporation's executive incentive plan) in effect at the time of the
involuntary termination for a period of 18 months from the date of
termination. For purposes of this paragraph, commissions and bonuses shall
be determined by computing the average monthly commission and/or bonus
earned by the Executive for the twenty four (24) months immediately
preceding the month in which such termination of employment occurs. The
amount so determined shall be paid to the Executive each month together
with such base salary, during such 18 month period. It is not the intent of
the parties to this Agreement that payment hereunder will constitute a
"parachute payment" as defined in Section 280G of the Internal Revenue Code
of 1986 (the "Code"). Any payments made by the Bank to the Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned
upon their compliance with 12 U.S.C. (S)1828 (K) any regulation promulgated
thereunder. All benefits and payments all be reduced, if necessary, to the
largest aggregate amount that will result in no portion thereof being
subject to federal excise tax or being nondeductible to the Employer for
federal income tax purposes. The Executive will determine which payments or
benefits are to be reduced, if necessary to conform to this provision.
b. During the period of months for which the Executive receives
compensation under the preceding paragraph, the Executive will also
continue to participate in any health, disability, and life insurance plan
to the same extent as if the Executive were an employee of the Employer or
any successor corporation. In the event that the executive's participation
in any of these plans is prohibited, the Employer or successor corporation,
at its sole expense, shall provide the Executive with benefits
substantially similar to those which the Executive is entitled to receive
under any such plan. The Executive shall remain responsible for that
portion of the costs of such plans for which the Executive was responsible
prior to termination.
c. The Executive will also continue to participate until the end
of such period in any perquisite program (auto, country club, dining club,
physical, tax planning, etc.) of the Employer or any successor corporation,
to the same extent as if the Executive were an employee of the successor
corporation. In the event the providing of any such program is not
possible, the Employer shall arrange, at its sole cost, to provide an
equivalent benefit. The Employer may elect to substitute a cash payment
equivalent to the projected value of any perquisite over the transition
period.
d. In the event the Executive obtains employment during the period
salary, commissions, and bonuses are payable under Section 7(a), any
amounts received by the Executive as a result of such employment shall be
offset against and shall serve to reduce the amount payable by the
Employer. In addition, any benefits the Executive receives which are
similar to those described in Paragraphs 7(b) and (c) shall relieve the
Employer from any obligation to provide such benefits to the Executive. The
Executive shall provide to the Employer all federal and state tax returns
file for any period in which any amounts are paid pursuant to this
Agreement, within fifteen (15) days after such returns are filed, and shall
provide such other information the Employer may reasonably require to
assure compliance with this paragraph.
8. Legal Fees and Expenses. To the extent not prohibited by law, the
-----------------------
Employer shall also pay to the Executive one-half (1/2) of all legal fees and
expenses reasonably incurred by the Executive as a result of an involuntary
termination, including, but not limited to, fees and expenses incurred in
seeking to enforce any right or benefit provided by this Agreement.
9. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors of the Corporation and the Bank.
The Executive shall have no right to assign, pledge, or otherwise dispose
of or transfer any interest in this Agreement, whether directly or indirectly,
or in whole or in part.
<PAGE>
10. Joint an Several Liability. It is the intent of the parties hereto
--------------------------
that the liability of the Corporation and the Bank hereunder be joint and
several. If either such party shall be prohibited for any reason from fulfilling
the terms hereof, the other such party shall nevertheless be and remain fully
liable.
11. Severability. In the event that any portion of this Agreement is held
------------
to be invalid or unenforceable for any reason, it is hereby agreed that
invalidity or unenforceability shall not affect the other portions of this
Agreement and that the remaining covenants, terms, and conditions shall remain
in full force and effect and any court of competent jurisdiction may so modify
the objectionable provisions as to make it valid and enforceable.
12. Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of Nebraska, and supersedes any existing Change of Control
agreement between the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMMERCIAL FEDERAL CORPORATION
By /s/ James A. Laphen
-------------------------------
James A. Laphen, President
COMMERCIAL FEDERAL BANK, A
FEDERAL SAVINGS BANK
By /s/ James A. Laphen
-------------------------------
James A. Laphen, President
By /s/
-------------------------------
<PAGE>
Exhibit 10.11
Change of Control Executive Severance
Agreement entered into with a Vice President
Dated October 2, 1995
<PAGE>
EXHIBIT 10.11
CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT
-----------------------------------------------
THIS CHANGE OF CONTROL EXECUTIVE SEVERANCE AGREEMENT ("Agreement") is
entered into as of the 2nd day of October, 1995, by and between COMMERCIAL
--- -------------
FEDERAL CORPORATION, a Nebraska corporation (the "Corporation"), and its
wholly-owned subsidiary, COMMERCIAL FEDERAL BANK, a FEDERAL SAVINGS BANK (the
"Bank"), referred to collectively as the "Employer," and STAN R. BLAKEY (the
"Executive").
RECITALS:
A. The Executive is a key member of the management of the Employer. It is
in the best interests of the Corporation, its shareholders, and the Bank to
provide an inducement to the Executive to remain in the service of the Employer
in the event of any proposed or anticipated Change of Control of the Employer as
defined herein, as well as to facilitate an orderly transition in the event of a
Change of Control.
B. The Employer wishes to provide economic security for the Executive in
the event of a Change of Control.
C. The following provisions have been approved by the Boards of Directors
of the Corporation and the Bank (the "Boards"), and apply in the event of a
Change of Control:
1. Duration. This Agreement will remain in force until such time as the
--------
Employer terminates this Agreement, or the Executive terminates his or her
employment, or the Employer terminates the employment of the Executive prior to
a Change of Control. The Employer may amend or terminate this Agreement at any
time prior to a Change of Control Event, as defined herein. However, if this
Agreement is terminated in anticipation of a Change of Control Event, such
termination shall be a "Constructive Involuntary Termination" as defined herein.
2. Change of Control. A Change of Control shall be deemed to have
-----------------
occurred in each of the following events, referred to herein as a "Change of
Control Event":
a. At any time a majority of the directors of the Corporation or the
Bank are not the persons for whom election proxies have been solicited by
the Boards, or persons then serving as directors appointed by the Boards,
except where such appointments are necessitated by the removal of
directors.
b. At any time forty nine percent (49%) or more of the outstanding
stock of the Corporation or the Bank is acquired or beneficially owned (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, or any successor thereto) by any person or entity (excluding the
Corporation, the Bank, or the Executive) or any combination of persons or
entities acting in concert.
c. At any time the shareholders of the Corporation or the Bank
approve an agreement to merge or consolidate the Corporation or the Bank
with or into another corporation, or to sell or otherwise dispose of all,
or substantially all of the assets of the Corporation or the Bank.
3. Constructive Involuntary Termination. A Constructive Involuntary
------------------------------------
Termination is deemed to have occurred if, in anticipation of a Change of
Control Event, or after such an event has occurred, any of the following occurs:
a. This Agreement or the Executive's employment is terminated by
Employer in anticipation of a Change of Control, or by the successor
corporation after a Change of Control.
b. The Executive's compensation level is reduced, the Executive is
given diminished responsibilities, or the Executive is given a lower job
title.
c. The level of the Executive's participation in incentive
compensation is reduced or eliminated.
- --------------------------------------------------------------------------------
<PAGE>
d. The Executive's benefit coverage or perquisites are reduced or
eliminated, except to the extent such reduction or elimination applies to
all other employees.
e. The Executive's office location is changed to a location greater
than fifty (50) miles from the location of the Executive's office at the
time of the Change of Control Event.
4. Termination for Cause. The benefits provided herein shall not be due
---------------------
in the event the Executive's employment is terminated for cause. With respect
to the Corporation, the term "cause" shall mean, and be limited to any act of
personal dishonesty, willful misconduct, or willful violation of law, which act
results in substantial loss to the Employer or its reputation. With respect to
the Bank, termination for cause shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement.
5. Voluntary Termination. The benefits provided herein shall not be due
---------------------
in the event of a voluntary termination. A voluntary termination will have
occurred if the Executive resigns from the successor corporation after a Change
of Control under conditions other than as specified in Section 3.
6. Regulatory Provisions Applicable Only to the Bank.
-------------------------------------------------
a. If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12
U.S.C.(S) 1818(e)(3) or (g)(1)), the Bank's obligations under this
Agreement shall be suspended as of the date of service unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Executive all or part of the
compensation withheld while its contract obligations were suspended; and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.
b. If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12
U.S.C.(S) 1818(e)(4) or (g)(1)), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
c. If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations of the Bank under this
Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contacting parties.
d. All obligations of the Bank under this Agreement shall be
terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank:
i. At the time the Federal Deposit Insurance Corporation
("FDIC") or the Resolution Trust Corporation ("RTC") enters into an
agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance
Act; or
ii. At the time the FDIC or the RTC approves a supervisory
merger to resolve problems related to operation of the Bank or when
the Bank is determined by the Director to be in an unsafe or unsound
condition.
Any rights of the parties that have already vested, however, shall not
be affected by such action.
7. Severance Award. If, in anticipation of a Change of Control, or after
---------------
a Change of Control Event has occurred, the Executive's employment is terminated
without cause, or a Constructive Involuntary Termination occurs, the following
provisions apply:
<PAGE>
a. The Executive will continue to receive, in equal monthly payments,
the base salary and all commissions and bonuses (including short- and long-
term incentive programs and stock options granted pursuant to the
Corporation's executive incentive plan) in effect at the time of the
involuntary termination for a period of 12 months from the date of
termination. For purposes of this paragraph, commissions and bonuses shall
be determined by computing the average monthly commission and/or bonus
earned by the Executive for the twenty four (24) months immediately)
preceding the month in which such termination of employment occurs. The
amount so determined shall be paid to the Executive each month together
with such base salary, during such 12 month period. It is not the intent of
the parties to this Agreement that payment hereunder will constitute a
"parachute payment" as defined in Section 280G of the Internal Revenue Code
of 1986 (the "Code"). Any payments made by the Bank to the Executive
pursuant to this Agreement, or otherwise, are subject to and conditioned
upon their compliance with 12 U.S.C. S 1828 (K) any regulation promulgated
thereunder. All benefits and payments shall be reduced, if necessary, to
the largest aggregate amount that will result in no portion thereof being
subject to federal excise tax or being nondeductible to the Employer for
federal income tax purposes. The Executive will determine which payments or
benefits are to be reduced, if necessary to conform to this provision.
b. During the period of months for which the Executive receives
compensation under the preceding paragraph, the Executive wil also continue
to participate in any health, disability, and life insurance plan to the
same extent as if the Executive were an employee of the Employer or any
successor corporation. In the event that the Executive's participation in
any of these plans is prohibited, the Employer or successor corporation, at
its sole expense, shall provide the Executive with benefits substantially
similar to those which the Executive is entitled to receive under any such
plan. The Executive shall remain responsible for that portion of the costs
of such plans for which the Executive was responsible prior to termination.
c. The Executive will also continue to participate until the end of
such period in any perquisite program (auto, country club, dining club,
physical, tax planning, etc.) of the Employer or any successor corporation,
to the same extent as if the Executive were an employee of the successor
corporation. In the event the providing of any such program is not
possible, the Employer shall arrange, at its sole cost, to provide an
equivalent benefit. The Employer may elect to substitute a cash payment
equivalent benefit. The Employer may elect to substitute a cash payment
equivalent to the projected value of any perquisite over the transition
period.
d. In the event the Executive obtains employment during the period
salary, commissions, and bonuses are payable under Section 7(a), any
amounts received by the Executive as a result of such employment shall be
offset against and shall serve to reduce the amount payable by the
Employer. In addition, any benefits the Executive receives which are
similar to those described in Paragraphs 7(b) and (c) shall relieve the
Employer from any obligation to provide such benefits to the Executive. The
Executive shall provide to the Employer all federal and state tax returns
filed for any period in which any amounts are paid pursuant to this
Agreement, within fifteen (15) days after such returns are filed, and shall
provide such other information the Employer may reasonably require to
assure compliance with this paragraph.
8. Legal Fees and Expenses. To the extent not prohibited by law, the
-----------------------
Employer shall also pay to the Executive one-half (1/2) of all legal fees and
expenses reasonably incurred by the Executive as a result of an involuntary
termination, including, but not limited to, fees and expenses incurred in
seeking to enforce any right or benefit provided by this Agreement.
9. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the successors of the Corporation and the Bank.
The Executive shall have no right to assign, pledge, or otherwise dispose
of or transfer any interest in this Agreement, whether directly or indirectly,
or in whole or in part.
10. Joint an Several Liability. It is the intent of the parties hereto that
--------------------------
the liability of the Corporation and the Bank hereunder be joint and several. If
either such party shall be prohibited for any reason form fulfilling the terms
hereof, the other such party shall nevertheless be and remain fully liable.
- --------------------------------------------------------------------------------
<PAGE>
11. Severability. In the event that any portion of this Agreement is
------------
held to be invalid or unenforceable for any reason, it is hereby agreed that
invalidity or unenforceable shall not affect the other portions of this
Agreement and that the remaining covenants, terms and conditions shall remain in
full force and effect and any court of competent jurisdiction may so modify the
objectionable provisions as to make it valid and enforceable.
12. Governing Law. This Agreement shall be construed in accordance
-------------
with the laws of the State of Nebraska, and supersedes any existing Change of
Control agreement between the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMMERCIAL FEDERAL CORPORATION
By /s/ James A. Laphen
-----------------------------
James A. Laphen, President
COMMERCIAL FEDERAL BANK, A
FEDERAL SAVINGS BANK
By /s/ James A. Laphen
-----------------------------
James A. Laphen, President
/s/ Stan R. Blakey
-----------------------------
STAN R. BLAKEY
<PAGE>
Exhibit 11
Computation of Earnings Per Share
<PAGE>
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Computation of Income per Common and Common Equivalent Shares:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1996 1995(1) 1994(1)
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) before cumulative effects of changes
in accounting principles $55,306,241 $31,180,779 $(1,626,577)
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- -- 6,933,271
Postretirement benefits, net of income tax benefit -- -- (336,176)
----------- ----------- -----------
Total cumulative effects of changes in
accounting principles -- 6,597,095
----------- ----------- -----------
Net income $55,306,241 $31,180,779 $ 4,970,518
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
PRIMARY:
- --------
Weighted average common shares outstanding 14,626,099 14,188,477 14,047,598
Add shares applicable to stock options and
warrants using average market price 221,044 225,123 288,265
----------- ----------- -----------
Total average common and common equivalent
shares outstanding 14,847,143 14,413,600 14,335,863
=========== =========== ===========
Income (loss) before cumulative effects of changes
in accounting principles $ 3.73 $ 2.16 $ (.11)
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- -- .48
Postretirement benefits, net of income tax benefit -- -- (.02)
----------- ----------- -----------
Total cumulative effects of changes
in accounting principles -- -- .46
----------- ----------- -----------
Net income per common and common equivalent share $ 3.73 $ 2.16 $ .35
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------
FULLY DILUTED (2):
- ------------------
Weighted average common shares outstanding 14,626,099 14,188,477 14,047,598
Add shares applicable to stock options and
warrants using the period-end market price
if higher than average market price and
other dilutive factors 226,213 228,176 291,447
----------- ----------- -----------
Total average common and common equivalent
shares outstanding assuming full dilution 14,852,312 14,416,653 14,339,045
=========== =========== ===========
Income (loss) before cumulative effects of changes
in accounting principles $ 3.72 $ 2.16 $ (.11)
Cumulative effects of changes in accounting principles:
Change in method of accounting for income taxes -- -- .48
Postretirement benefits, net of income tax benefit -- -- (.02)
----------- ----------- -----------
Total cumulative effects of changes
in accounting principles -- -- .46
----------- ----------- -----------
Net income per common share assuming full dilution $ 3.72 $ 2.16 $ .35
=========== =========== ===========
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</TABLE>
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad
which was accounted for as a pooling of interests. Accordingly, the
Corporation's results of operations, weighted average shares outstanding
and earnings (loss) per common share have been restated to include the
accounts and operating results of Railroad.
(2) This calculation is submitted in accordance with Regulation S-K under Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3.0%.a
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 13
Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1996
<PAGE>
Impressive Growth Continues
In October 1993, prior to the implementation of a strategic acquisitions and
expansion program, Commercial Federal's retail franchise consisted of 49 branch
offices in four states - 27 in Nebraska, 20 in Colorado (Metro Denver) and one
each in Kansas and Oklahoma. The markets served by these offices are represented
by the blue dots on the map below.
[MAP OF STATES APPEARS HERE]
. Markets served as of October 1993
. Markets added from October 1993
through October 1995
In addition to 24 full-service offices, Commercial Federal operates
71 agency offices located throughout the state of Kansas.
Since that time, Commercial Federal has completed six acquisitions--with a
seventh acquisition (Heritage Financial) expected to close during October 1996.
Through the acquisitions, the Company will have added (upon the close of the
Heritage acquisition) 56 branch offices (prior to consolidations) and
approximately $1.8 billion of deposits to its franchise. In addition, Commercial
Federal has, during this same time frame, added five de novo branches through
its expansion program.
As a result of its focus on growth, in a 36-month period, Commercial Federal
more than doubled its number of retail offices in highly-desirable markets
throughout five states, while increasing its deposit base to $4.3 billion.
Commercial Federal is a major regional financial services institution that
continues to grow in size, reach and strength. The Company's growth is expected
to continue during fiscal 1997 and beyond.
<PAGE>
Successful By All Measures
Commercial Federal entered the 1996 fiscal year with the dual objectives of
growing its retail franchise and further enhancing shareholder value. As a
result of the continued implementation of the Company's strategic operating
plans, we are pleased to report that those objectives were successfully met.
As your Company continues to achieve new record levels of operating
performance, the efforts of each and every Commercial Federal employee continue
to be focused on making your Company one of the premier financial services
institutions in the country. Our trend of year-over-year improvement indicates
that we are well on our way toward that goal.
Throughout this annual report to shareholders you will see evidence of your
Company's many achievements and successes. As you read this report, be assured
that Commercial Federal sees the accomplishments of fiscal 1996 as a stepping
stone to even greater future success on your behalf.
The Board of Directors,
Management & Employees of Commercial Federal
[LOGO APPEARS HERE]
Creating Growth In A Fast Changing Financial World
<PAGE>
Highlights Of The 1996 Fiscal Year
During the 1996 fiscal year, your Company:
. Attained record operating income from its core banking business;
. Achieved a 40 percent increase in the market price of the Company's common
stock, advancing from $27.25 on June 30, 1995, to $38.25 on June 30, 1996;
. Increased stockholders' equity by 22 percent and book value per common share
by 16 percent;
. Instituted the payment of regular quarterly cash dividends to shareholders;
. Increased the size of its retail franchise by 10 percent;
. Completed two strategic acquisitions and entered into a definitive acquisition
agreement scheduled to close in October 1996; and
. Established account relationships with 55,100 new households - a 26 percent
increase.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Financial Highlights.......................................... 1
Letter to Shareholders........................................ 2
Board of Directors............................................ 9
Corporate Profile............................................. 10
Financial Information......................................... 11
Investor Information.......................................... 75
Executive Officers and Senior Management...................... 76
Branch Locations.............................................. 77
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------
Amounts in thousands except per share data 1996 1995(1)
- --------------------------------------------------------------------------------
<S> <C> <C>
FOR THE YEAR:
Interest income........................................$ 491,092 $ 454,368
Net interest income.................................... 162,775 149,842
Provision for loan losses.............................. (6,107) (6,408)
Other income........................................... 49,646 45,066
General and administrative expenses.................... 114,517 102,554
Amortization of goodwill and core value of deposits.... 9,529 10,262
Accelerated amortization of goodwill................... -- 21,357
Income before income taxes............................. 82,268 54,327
Provision for income taxes............................. 26,962 23,146
Net income............................................. 55,306 31,181
Per common share:
Net income............................................ 3.73 2.16
Dividends declared.................................... .40 --
Weighted average shares outstanding.................... 14,847 14,414
General and administrative expenses divided by
average assets (2).................................... 1.75% 1.62%
Return on average assets (2)........................... .84% .49%
Return on average equity (2)........................... 14.74% 9.98%
- --------------------------------------------------------------------------------
AT JUNE 30:
Total assets...........................................$6,607,670 $6,569,579
Cash and investment securities......................... 288,870 335,626
Mortgage-backed securities............................. 1,180,046 1,364,907
Loans receivable, net.................................. 4,813,164 4,540,692
Deposits............................................... 4,304,576 4,011,323
Advances from Federal Home Loan Bank................... 1,350,290 1,787,352
Other borrowings....................................... 439,301 273,676
Stockholders' equity................................... 413,277 337,614
Book value per common share............................ 27.39 23.65
Tangible book value per common share................... 24.69 21.04
Nonperforming assets to total assets................... 1.01% .95%
Weighted average interest rates:
Yield on interest-earning assets...................... 7.81% 7.71%
Rate on interest-bearing liabilities.................. 5.33% 5.50%
Net interest rate spread.............................. 2.48% 2.21%
Net yield on interest-earning assets.................. 2.68% 2.42%
- --------------------------------------------------------------------------------
Regulatory capital ratios of the Bank:
Tangible capital...................................... 6.18% 5.16%
Core capital.......................................... 6.41% 5.47%
Risk-based capital:
Tier 1 capital....................................... 12.56% 12.02%
Total capital........................................ 13.62% 13.12%
- --------------------------------------------------------------------------------
</TABLE>
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad). This acquisition was accounted for as a
pooling of interests and, accordingly, the Corporation's historical
consolidated financial statements and consolidated financial data have
been restated to include the accounts and operating results of Railroad.
(2) General and administrative expenses divided by average assets for fiscal
year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000
and $901,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the
after-tax effect of the nonrecurring expenses totaling $2,920,000 and
$585,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the
accelerated amortization of goodwill totaling $21,357,000.
- --------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 1
<PAGE>
To Our Shareholders
By any measure, fiscal year 1996 was a successful year for your Company and
your investment. During the fiscal year, Commercial Federal continued to build
on the very beneficial growth trend previously established. As a result of
Commercial Federal's emphasis on growth, profitability and shareholder value, we
have many very positive developments to share with you in our annual report to
shareholders.
[PICTURE OF WILLIAM A. FITZGERALD & JAMES A. LAPHEN APPEARS HERE]
At the outset, it is important to note that we
are not growing the Company simply for the sake
CORE OPERATIONS of growth, rather, our designed growth plans are
($ in Millions) a means of increasing the size of our customer
base, increasing profitability and, most
[BAR GRAPH APPEARS HERE] importantly, increasing the value of your
investment in Commercial Federal. We realize
$90.9 that it is not the size of our franchise that is
$82.5 important, but the size of the returns on the
$75.9 investments we have made. As you will note in
$60.1 this report, our growth has led to excellent
$34.7 bottom-line results on your behalf.
6/92 6/93 6/94 6/95 6/96
OPERATING EARNINGS REACH RECORD LEVEL
Commercial Federal reported record operating earnings of $57.6 million, or
$3.88 per share, for the fiscal year ended June 30, 1996. This represents a 15
percent increase compared with the previous record high for operating earnings
of $50.3 million, or $3.49 per share, attained in fiscal 1995. Operating
earnings do not include the effect of nonrecurring income and expenses.
Fiscal 1996 marks the fourth consecutive year that Commercial Federal has
achieved a record high for operating earnings. Operating earnings are a key
measure of profitability in that they reflect the Company's ability to generate
income from its core operations - or basic banking business - absent the effect
of any one-time or nonrecurring items.
Reported net income for fiscal 1996 - which includes the impact of
nonrecurring income and expenses - was $55.3 million, or $3.73 per share. The
difference between reported net income and operating earnings for fiscal 1996
was the effect of the nonrecurring charges associated with the Company's
purchase of Railroad Financial Corporation - which was accounted for as a
pooling of interests - and the cost incurred by the Company as a result of the
1995 proxy contest. Together, these nonrecurring charges totaled $3.5 million
after-tax, or $.23 per share. In
2 Commercial Federal Corporation Annual Report 1996
<PAGE>
addition, the Company realized an income tax benefit of $1.0 million, or $.07
per share, for the final disposition of leases the Company owned in a nuclear
generating facility and net after-tax gains of $164,000, or $.01 per share, from
the sale of securities classified as available for sale.
The fiscal 1996 reported net income compares with reported net income of $31.2
million, or $2.16 per share, for fiscal 1995. The fiscal 1995 net income was
negatively affected by the write-off of approximately $21.4 million, or $1.49
per share, related to goodwill acquired prior to 1994. In addition, the fiscal
1995 results reflect income benefits totaling approximately $2.3 million, or
$.16 per share, resulting from lower core value amortization and provision for
income taxes.
CORE PROFITABILITY CONTINUES TO GROW
Commercial Federal's core business is focused on acquiring consumer deposits,
making loans - primarily single-family mortgage loans and consumer loans - and
mortgage loan servicing. As such, the Company's core profitability is closely
tied to both its net interest income - the difference between what it earns on
interest-earning assets and what it pays on interest-bearing liabilities - as
well as its income derived from noninterest sources such as retail fees and loan
servicing fees. The Company's growth in both net interest income and noninterest
income was exceptionally strong in fiscal 1996 and was the primary reason for
Commercial Federal's record operating income for the year.
Net interest income, after provision for loan losses, for fiscal 1996 was
$156.7 million, an increase of more than 9 percent compared with $143.4 million
for the prior fiscal year. Commercial Federal's interest rate spread increased
by
"Commercial Federal is considerably stronger than
its peers in terms of generating noninterest revenue. During
the last 12 months, noninterest revenue sources accounted
for nearly 23 percent of total revenue while the average for
the 20 largest thrifts in the nation was just 15 percent."
--Dain Bosworth
27 basis points from June 30, 1995, to June 30, 1996 - a 12 percent year-over-
year improvement. The driving factors behind this improvement were the Company's
ability to beneficially manage its cost of funds, favorable repricing of
adjustable-rate assets and the positive impact of acquisitions.
The three primary components of noninterest income - retail fees and charges,
loan servicing fees and other operating income - total $48.6 million in fiscal
1996 compared with $41.8 million for fiscal 1995 - a 16 percent increase.
Commercial Federal's loan servicing Net Interest Income
portfolio, at June 30, 1996, reached $9.8 ($ in Millions)
billion, of which $5.9 billion were loans
serviced for others. The Company generated [BAR GRAPH APPEARS HERE]
a 13 percent increase in loan servicing $156.7
fees in fiscal 1996 compared with the $143.4
previous year. Commercial Federal is not $131.5
only one of the largest loan servicers in $121.9
the Midwest, it is also one of the most $87.4
efficient servicers in the nation with an 6/92 6/93 6/94 6/95 6/96
Commercial Federal Corporation Annual Report 1996 3
<PAGE>
average of approximately 1,200 loans serviced per employee compared to a
national average of approximately 850 loans. The Company will continue to
explore opportunities to further expand this profitable business line.
"Over the past two years Commercial Federal has proven
itself to be an opportunistic yet disciplined acquirer. We expect
management will continue to look for fill-in opportunities
but not at the cost of diluting shareholder value."
--Joseph K. Morford, Alex Brown
The other major source of noninterest income for Commercial Federal is retail
fees and charges which grew by 34 percent in fiscal 1996 to reach $12.7 million
as compared to the previous year. Management anticipates further increases in
the amount of income derived from retail fees and charges in the future.
Commercial Federal is well known for providing high-quality customer service.
The Company's recent results prove that customer service is a very important
factor for consumers when selecting a financial institution. Customers are
willing to pay for outstanding service and Commercial Federal will continue to
provide its customers with the highest-quality service possible.
GROWTH THROUGH EXPANSION
AND ACQUISITION
Since October 1993, when Commercial
Fee Income Federal implemented its latest
($ in Millions) acquisitions program, the Company has
doubled, as of June 30, 1996, its number
[BAR GRAPH APPEARS HERE] of retail locations to 98 branches in
$40.6 five states. Commercial Federal's five
$34.3 state market of Nebraska (34 branches),
$31.4 Kansas (24), Oklahoma (19), Colorado
$26.7 (20) and Iowa (1) provides the Company
$23.4 with a meaningful presence in desirable
markets throughout the Midwest. Each
6/92 6/93 6/94 6/95 6/96 market is supported by strong economies
where unemployment rates are
significantly below national averages
and property values have remained steady
or are increasing.
During fiscal 1996, Commercial Federal completed two strategic acquisitions.
The first, Railroad Financial Corporation, brought Commercial Federal 18 full-
service offices and 71 agency offices throughout Kansas and added approximately
$421 million of deposits. In addition, Railroad Financial brought a construction
lending expertise to Commercial Federal that will provide a very beneficial
income source as this product is added throughout Commercial Federal's system.
Construction loans are shorter-term, higher-rate assets that will prove to be a
valuable addition to the Company's asset/liability mix.
Also during the fiscal year, Commercial Federal completed its acquisition of
Conservative Savings Corporation, headquartered in Omaha, Nebraska, which had
deposits of approximately $198 million. This transaction brought nine full-
service offices (seven in Nebraska and one each in Kansas and Iowa) to
Commercial Federal's growing franchise.
During the later part of fiscal 1996, Commercial Federal entered into a
definitive agreement to acquire Heritage
4 Commercial Federal Corporation Annual Report 1996
<PAGE>
Financial, Ltd., the parent company of Hawkeye Federal Savings, headquartered in
Boone, Iowa. Once completed - the acquisition is set to close during October
1996 - this transaction will add another six offices in Iowa and approximately
$160 million of deposits.
As previously explained, it is important to note that we are not undertaking
acquisitions simply to grow in size. Each acquisition completed to date has been
accretive to earnings, significantly improved our franchise and, most
importantly, enhanced shareholder value.
In addition to its acquisition activities, Commercial Federal has been adding
de novo branches in selected markets where opportunities warrant an enhanced
market presence. During the past two years, six new branches have been
completed -four in Oklahoma and two in Nebraska - each of which has exceeded
growth expectations. The Company currently has five additional locations planned
or under consideration - two in Colorado and one each in Kansas, Oklahoma and
Iowa-which will, upon completion, further bolster the Company's competitive
position in key markets.
Management continues to initiate discussions with other financial institutions
both within the existing five-state market and contiguous markets regarding
potential future acquisition opportunities. There remain numerous potential
acquisitions in the midwestern section of the United States. Commercial Federal
will remain true to its strategy of completing only those acquisitions which
meet the Company's requirements for accretion and franchise enhancement.
SALES CULTURE TAKES HOLD
One of the benefits of acquisitions activity is that it can significantly
enhance the number of customers served by the Company and, therefore, the number
of prospects to whom new products and services can be sold. And selling is
exactly what Commercial Federal is doing.
"While we continue to expect disciplined acquisitions to be
a catalyst for future earnings growth, so will improving
core fundamentals and the Company's commitment to
increasing its consumer loan volume and strengthening its
relationship banking (cross-selling) efforts."
--Steven R. Schroll, Piper Jaffray
During the 1996 fiscal year, Commercial Federal increased the number of
households served by 26 percent as compared with the previous year. These new
households opened, on average, in excess of 1.5 relationships per household
resulting in a total of 54,871 new relationships for Commercial Federal.
The Company's sales efforts have Gross Revenues
placed a special emphasis on checking ($ in Millions)
accounts and consumer loans, two base [BAR GRAPH APPEARS HERE]
accounts from which long-term $212.4
relationships can be built. As a result $194.9
of the Company's intensified sales efforts, $173.2 $182.4
Commercial Federal increased its number of $162.5
checking accounts by more than 37 percent
year-over-year. The number of consumer loan 6/92 6/93 6/94 6/95 6/96
customers also grew dramatically,
Commercial Federal Corporation Annual Report 1996 5
<PAGE>
increasing by 39 percent. Consumer loan outstanding balances
grew by 47 percent during fiscal 1996.
During the latter part of the year, Commercial Federal
implemented a Company-wide comprehensive sales training
program. The program, entitled Fast Forward, has, in a very
short period of time, led to a substantial increase in
"Commercial Federal's market share is significant, its asset quality is
exceptionally strong, its earnings growth driven by tight cost control and its
strategy for growth is sound."
--Caren E. Mayer, Montgomery Securities
the number of accounts sold to each household served. Our
overall cross-sell ratio for new customers has increased by
approximately 50 percent in the seven months that Fast
Forward has been in place. Commercial Federal will continue
to stress sales and cross-selling efforts throughout the
Company as a means of building profitable, long-term
relationships with its customers.
As reported to you in last year's annual
Efficiency Ratio report, Commercial Federal has made significant
investments in infrastructure designed to in-
[BAR GRAPH APPEARS HERE] crease volume capacity and turnaround times
for its mortgage loan production. Those
62.6% investments have proven successful. The
56.1% Company's fiscal 1996 mortgage loan volume
53.5% reached $1.4 billion. This represents a 77
53.3% percent increase compared with fiscal 1995
52.1% volume of $797 million - which does not
6/92 6/93 6/94 6/95 6/96 reflect the impact of the pooling of
interests accounting treatment of the
Railroad Financial acquisition. Mortgage loans can now be approved in as little
as two days and closing can be accomplished in as few as 15 days. This
competitive service advantage has increased Commercial Federal's market share in
each of the markets it serves and bodes well for future increases in mortgage
loan volume.
CHANGING FACE OF COMMERCIAL
FEDERAL
Not only is Commercial Federal a growing company, it is a dynamic and
evolving company as well. Your Board and management remain attuned to industry
changes and customer expectations while ensuring that Commercial Federal is
properly positioned to take advantage of marketplace opportunities.
To that end, Commercial Federal is undertaking steps designed to alter both
its asset and liability portfolios - over time - toward a goal of being better
able to meet the financial service needs of its customers. Changes to the asset
and liability product mixes will put a greater emphasis on shorter-term, higher-
yielding products that reprice more frequently in reaction to interest rate
movements. These changes will be undertaken so as to ensure that profitability
is continually enhanced along the way.
Commercial Federal has also been proactive in the implementation of new
consumer-oriented technologies. The Company was one of the first financial
institutions in the nation to offer home banking services by providing
Microsoft's Money, Intuit's Quicken and America
6 Commercial Federal Corporation Annual Report 1996
<PAGE>
Online's BankNow financial software to its customer base. Our customers now have
an even wider variety of ways to conduct business with Commercial Federal,
including home banking via personal computers, extended evening and weekend
branch hours, 24-hour customer service lines and Telephone Bill Paying.
Additional information about Commercial Federal and its competitive products now
can be accessed through Commercial Federal's "web site" on the internet.
Commercial Federal's internet address is: http://www.comfedbank.com.
Commercial Federal continues to make strategic investments in infrastructure
upgrades. These investments are designed to enhance customer service, increase
employee efficiency and ultimately to reduce operating expense. Your Company
has, for several years, been one of the most efficiently operated financial
institutions in the United States. Management remains focused on ensuring that
cost control and operating efficiency continue to be high priorities throughout
the Company. We realize that each dollar of operating expense saved represents
increased value for you, our shareholders.
PENDING ISSUES COULD
FAVORABLY IMPACT COMMERCIAL FEDERAL
Commercial Federal anticipates that Congress will enact legislation, during
fiscal 1997, to merge the Savings Association Insurance Fund and the Bank
Insurance Fund. At present, we believe that such legislation will call for a
one-time assessment to Commercial Federal, but would dramatically lower
Commercial Federal's future insurance premium from the current level of $.23 per
$100 of deposits to just $.04 per $100 of deposits. On the basis of Commercial
Federal's total deposits at June 30, 1996, of $4.3 billion, this action would
result in an additional $5.3 million of annual income for your Company.
We anticipate that Congress will also
consider legislation that would create a
single charter for all financial Stockholders' Equity
institutions, effectively doing away ($ in Millions)
with the regulatory differences between [BAR GRAPH APPEARS HERE]
thrifts and commercial banks. Management
believes that, if approved, the single $413.3
charter would further enhance Commercial $337.6
Federal's ability to compete in the $304.6
marketplace and thereby provide $297.8
additional value for shareholders. $253.5
6/92 6/93 6/94 6/95 6/96
In July of 1996, the Supreme Court
upheld a lower court decision regarding
the validity of claims put forth by
thrift institutions against the United Retail Deposits
States government related to the ($ in Millions)
accounting treatment of supervisory [BAR GRAPH APPEARS HERE]
goodwill. Commercial Federal has a
supervisory goodwill lawsuit pending and
is encouraged by the Supreme Court $4,305
decision. We believe that Commercial $4,011
Federal's case will be heard by the $3,676
courts during fiscal 1997. While the $2,731
outcome of the lawsuit can not be $2,660
predicted, there exists the potential 6/92 6/93 6/94 6/95 6/96
for future benefit to shareholders.
Commercial Federal Corporation Annual Report 1996 7
<PAGE>
FAVORABLE SUBSEQUENT
TRANSACTION
In a transaction that has significantly enhanced the value of your investment in
Commercial Federal, your Company, on August 21, 1996, announced that it had
repurchased 1,250,100 shares of Commercial Federal common stock. At
"...we believe the Company has earned a right to
independence through its proven ability to build franchise
value and to grow its earnings at a faster rate than the
rest of the industry."
-- Joseph K. Morford, Alex. Brown
the time of the transaction, this represented approximately 8.3 percent of the
Company's outstanding shares. This purchase will enhance future earnings per
share by between 5.0 and 6.0 percent per year. The purchase was consistent with
Commercial Federal's policy of completing transactions which will be accretive
to earnings and thereby enhance shareholder value. This is an investment in an
asset - Commercial Federal stock - that the Board of Directors and management of
your Company perceive to be very valuable. Given Commercial Federal's strong
financial position and its continued growth prospects, this is a very
significant and valuable transaction for shareholders.
FUTURE REMAINS BRIGHT
Commercial Federal made tremendous
strides during fiscal 1996 toward its
goal of becoming one of the top
Total Assets performing thrift institutions in the
($ in Millions) United States. We believe that we have,
[BAR GRAPH APPEARS HERE] in fact, attained that goal. Be assured,
however, that we are not content to rest
$6,608 on our past achievements. We now will
$6,570 strive to ensure that your Company
$5,982 becomes one of the premier financial
$5,262 institutions - bank or thrift - in this
$5,036 country. This is a lofty ambition, but
6/92 6/93 6/94 6/95 6/96 we can not and will not settle for a
lesser goal. Our shareholders - the true
owners of Commercial Federal - deserve
nothing less than our total commitment
and effort toward this objective.
The Board of Directors, management and employees of Commercial Federal remain
focused on the objective of further enhancing the value of your investment in
the Company. As you have noted in this report, the Company's results continue to
indicate that many successes are being attained on your behalf. And, we remain
optimistic about our future.
Commercial Federal's emphasis during fiscal 1997 will be to continue to build
upon the growth trends established during 1996. That growth will take many
forms, but each individual and department goal will be tied to the overall
objective of maximizing the value of your Commercial Federal stock.
Thank you for your confidence, encouragement and continued support.
/s/ William A. Fitzgerald
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen
James A. Laphen
President and
Chief Operating Officer
8 Commercial Federal Corporation Annual Report 1996
<PAGE>
Board of Directors
[PICTURE WILLIAM A. FITZGERALD - Chairman of the Board and Chief Executive
APPEARS Officer of Commercial Federal Corporation and Commercial Federal Bank.
HERE] Mr. Fitzgerald joined Commercial in 1955. He was named Vice President
in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
active in the banking community and participates in numerous industry
organizations, including the Heartland Community Bankers Association Board and
the board of America's Community Bankers. Mr. Fitzgerald joined Commercial
Federal's Board of Directors in 1973. Committee memberships: Executive (1990-
Present); Finance (1992-Present); Executive Personnel (1985-1987); Stock Option
(1984-1985); Personnel (1982-1984).
[PICTURE TALTON (TAL) K. ANDERSON - Owner and President of three automobile
APPEARS dealerships in Omaha, Nebraska, as well as one in Lincoln, Nebraska.
HERE] Mr. Anderson is also the President of a Nebraska-based automobile
leasing company and a reinsurance company. He purchased his first
dealership in 1984. In 1988, he acquired Southroads Toyota and has been owner of
Lexus of Omaha since 1990. In 1993, he bought Lincoln Dodge of Lincoln,
Nebraska. Mr. Anderson incorporated Protection Life, a reinsurance company, in
1974. Mr. Anderson also serves on the Board of Trustees for Boys Town and is
actively involved with the University of Nebraska at Omaha Alumni Board and the
University of Nebraska College of Business Administration Advisory Board. Mr.
Anderson joined Commercial Federal's Board of Directors in November 1991.
Committee memberships: Executive (1996-Present); Audit (1992-Present);
Compensation and Stock Option (1993-Present).
[PICTURE ROBERT F. KROHN - Vice Chairman and Chief Executive Officer of PSI
APPEARS Group, Inc., a national document processing company based in Omaha,
HERE] Nebraska. Mr. Krohn served as Chairman of the Board of Directors for
Commercial Federal Corporation from 1990 through 1994. He is the
former President and Chief Executive Officer of HDR, Inc., an international
architecture, planning and engineering firm. In addition to Commercial Federal's
Board of Directors, Mr. Krohn serves on the boards of Ameritas Financial
Services, Inc., Streck Laboratories, PSI Group, Inc., and Immanuel Health Care
Systems. Mr. Krohn has served on Commercial Federal's Board of Directors since
January 1984. Committee memberships: Executive Committee (1990-Present); Audit
(1996-Present); Finance (1991-1995); Compensation and Stock Option (1995);
Executive Personnel (1986 and 1990); Stock Option (1985 and 1990-1992);
Personnel (1985).
[PICTURE CHARLES M. LILLIS - President and Chief Executive Officer of US West
APPEARS Media Group, the international cellular, directory publishing and
HERE] cable television units of US West, Inc. Mr. Lillis has been published
in leading academic journals and has been the recipient of numerous
awards and recognitions. He currently serves in advisory capacities at the
University of Colorado and the University of Oregon. He is also a director of
SuperValu, Inc. Mr. Lillis has served on Commercial Federal's Board of Directors
since June 1988. Committee memberships: Finance (1992-Present); Compensation and
Stock Option (1988-1990 and 1996-Present); Audit (1991); Executive Personnel
(1989).
[PICTURE CARL G. MAMMEL - Chairman of the Board of Mammel & Associates, a
APPEARS consulting firm providing services in executive benefits, employee
HERE] benefits planning and wealth transfer planning. Mr. Mammel is
considered one of the nation's top experts in the field of employee
benefit planning and executive benefits. He is also a managing partner and
Executive Vice President of M Financial Corporation, a network of financial
service firms throughout the United States. In addition to Commercial Federal's
Board of Directors, Mr. Mammel is a member of the boards of M Life, M Financial
Management Partnership, the Salvation Army and Childrens Hospital of Omaha. Mr.
Mammel joined Commercial Federal's Board of Directors in November 1991.
Committee memberships: Finance (1992-Present); Compensation and Stock Option
(1993-Present).
[PICTURE ROBERT S. MILLIGAN - Chairman of the Board and Chief Executive Officer
APPEARS of MI Industries, a protein processing and agri-business company
HERE] headquartered in Lincoln, Nebraska, which produces products for
pharmaceutical, biological and research markets throughout the world,
and President of Oak Grove Farms, a major producer of pork. Mr. Milligan has
held positions with the U.S. Department of Justice, the U.S. Office of Trade,
the Environmental Protection Agency and the U.S. Department of Commerce. In
addition to Commercial Federal, his board memberships include Bryan Memorial
Hospital, Nebraska Wesleyan University, Boy Scouts and the Nebraska Council of
Economic Education. Mr. Milligan joined Commercial Federal's Board of Directors
in June 1987. Committee memberships: Finance (1996-Present); Audit (1990-1995);
Executive Committee (1992-1995).
[PICTURE JAMES P. O'DONNELL - Senior Vice President and Chief Financial Officer
APPEARS of ConAgra, Inc., an Omaha, Nebraska-based international diversified
HERE] food company with annual sales of approximately $25 billion. Mr.
O'Donnell, a certified management accountant, is responsible for
ConAgra's finance, control and reporting, risk management, tax, and internal
audit functions. In addition to Commercial Federal, he is a member of several
civic boards and currently serves as Chairman of the Board of Quality Living,
Inc., an Omaha rehabilitative center. Mr. O'Donnell has served on Commercial
Federal's Board of Directors since June 1991. Committee memberships: Executive
Committee (1996-Present); Finance (1991-Present); Compensation and Stock Option
(1993-Present).
Commercial Federal Corporation Annual Report 1996 9
<PAGE>
Corporate Profile
Commercial Federal Corporation (NYSE: CFB), headquartered in Omaha, Nebraska,
is one of the largest retail financial institutions in the Midwest and the 18th
largest thrift institution in the country with approximately $6.6 billion in
assets. Founded in 1887, Commercial Federal operates 98 retail locations serving
the states of Nebraska, Kansas, Oklahoma, Colorado, and Iowa. Commercial Federal
also has an acquisition pending which, when completed, will add six offices in
Iowa to Commercial Federal's franchise. In addition, Commercial Federal benefits
from a network of CASHBOX automated teller machines (ATMs) and belongs to
several regional, national and international electronic systems that provide
customers access to their accounts at more than 285,000 ATMs in this country and
abroad.
As a complement to its savings bank, the Company has other major subsidiary
operations: Commercial Federal Mortgage Corporation, a mortgage bank with
offices in Nebraska, Colorado, Kansas, Oklahoma, and Iowa; Commercial Federal
Investment Services, Inc., which provides a full range of brokerage and other
investment services to consumers; and Commercial Federal Insurance Corporation,
offering a variety of insurance products. Commercial Federal has 1,470
employees.
The Company's operations encompass traditional thrift products, mortgage
financing, consumer lending, insurance and stock brokerage services. These
services are united by a common theme of meeting the financial needs of
individuals and families for comprehensive, convenient and cost-effective retail
financial services.
10 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
<S> <C>
Selected Consolidated Financial Data............... 12
Management's Discussion and Analysis............... 14
Consolidated Statement of Financial Condition...... 34
Consolidated Statement of Stockholders' Equity..... 35
Consolidated Statement of Operations............... 36
Consolidated Statement of Cash Flows............... 38
Notes to Consolidated Financial Statements......... 40
Management's Report on Internal Controls........... 73
Independent Auditors' Report....................... 74
</TABLE>
Commercial Federal Corporation Annual Report 1996 11
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................... $ 491,092 $ 454,368 $ 393,854 $ 404,628 $ 447,883
Interest expense................................... 328,317 304,526 256,102 276,584 352,527
-------- -------- -------- -------- --------
Net interest income................................ 162,775 149,842 137,752 128,044 95,356
Provision for loan losses.......................... (6,107) (6,408) (6,248) (6,185) (7,981)
Loan servicing fees................................ 27,891 24,731 22,227 18,776 16,029
Retail fees and charges............................ 12,747 9,547 9,155 7,874 7,419
Real estate operations............................. 172 1,490 (1,449) (5,243) (9,373)
Gain (loss) on sales of loans...................... 164 (1,695) 1,433 1,194 4,489
Gain (loss) on sales of securities, net............ 253 (41) 220 (231) 37,728
Gain on sale of loan servicing rights.............. 452 3,519 5,929 6,903 12,039
Other operating income............................. 7,967 7,515 7,178 5,169 9,486
General and administrative expenses................ 114,517 102,554 94,115 89,560 80,314
Amortization of goodwill
and core value of deposits....................... 9,529 10,262 14,131 10,544 11,389
Valuation adjustment and accelerated
amortization of goodwill......................... -- 21,357 52,703 -- --
-------- ------- ------- ------- -------
Income before income taxes,
extraordinary items and cumulative effects
of changes in accounting principles.............. 82,268 54,327 15,248 56,197 73,489
Provision for income taxes......................... 26,962 23,146 16,875 22,081 27,652
------- ------- ------- ------- -------
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles................ 55,306 31,181 (1,627) 34,116 45,837
Extraordinary items (2)............................ -- -- -- -- (5,046)
Cumulative effects of changes in
accounting principles (3)........................ -- -- 6,597 -- --
------- ------- ------- ------- -------
Net income......................................... $ 55,306 $ 31,181 $ 4,970 $ 34,116 $ 40,791
======== ======== ======== ======== ========
Earnings per share (fully diluted):
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles................. $ 3.72 $ 2.16 $ (.11) $ 2.42 $ 4.68
Extraordinary items (2)............................ -- -- -- -- (.52)
Cumulative effects of changes in
accounting principles (3)........................ -- -- .46 -- --
-------- -------- -------- -------- --------
Net income......................................... $ 3.72 $ 2.16 $ .35 $ 2.42 $ 4.16
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------
Other data:
Net interest rate spread......................... 2.34% 2.26% 2.43% 2.57% 2.03%
Net yield on interest-earning assets............. 2.58% 2.46% 2.59% 2.65% 2.01%
Return on average assets (4)..................... .84% .49% .09% .67% .79%
Return on average equity (4)..................... 14.74% 9.98% 1.54% 12.39% 20.12%
Dividend payout ratio (5)........................ 10.75% -- -- -- --
Total number of branches at end of period........ 98 89 73 55 54
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
12 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
- ----------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets.................................... $6,607,670 $6,569,579 $5,982,307 $5,262,336 $5,035,913
Investment securities (6)....................... 253,643 300,481 290,807 254,889 316,366
Mortgage-backed securities (7).................. 1,180,046 1,364,907 1,350,402 952,539 779,969
Loans receivable, net (8)....................... 4,813,164 4,540,692 3,970,626 3,655,740 3,460,294
Goodwill and core value of deposits............. 40,734 37,263 67,661 87,946 98,490
Deposits........................................ 4,304,576 4,011,323 3,675,825 2,731,127 2,660,489
Advances from Federal Home Loan Bank............ 1,350,290 1,787,352 1,625,456 1,868,779 1,465,062
Securities sold under agreements to repurchase.. 380,755 208,373 157,432 154,862 445,479
Other borrowings................................ 58,546 65,303 66,640 76,966 54,311
Stockholders' equity............................ 413,277 337,614 304,568 297,848 253,528
Book value per common share..................... 27.39 23.65 21.51 21.28 20.95
Tangible book value per common share (9)........ 24.69 21.04 16.73 15.00 12.81
Regulatory capital ratios of the Bank:
Tangible capital.............................. 6.18% 5.16% 4.69% 4.62% 2.95%
Core capital ................................. 6.41% 5.47% 5.53% 5.93% 4.63%
Risk-based capital:
Tier 1 capital................................ 12.56% 12.02% 12.18% 11.93% 8.25%
Total capital................................. 13.62% 13.12% 13.16% 12.81% 8.87%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad). This acquisition was accounted for as a
pooling of interests and, accordingly, the Corporation's historical
consolidated financial statements and consolidated financial data have been
restated for all periods prior to the acquisition to include the accounts
and operating results of Railroad.
(2) Represents the loss on early extinguishment of debt, net of income tax
benefits, less the effect of the utilization of net operating losses carried
forward.
(3) Represents the cumulative effect of the change in the method of accounting
for income taxes less the cumulative effect of the change in accounting for
postretirement benefits, net of income tax benefit.
(4) Based on daily average balances during fiscal years 1996, 1995 and 1994 and
on average monthly balances for fiscal years 1993 and 1992. Return on
average assets and return on average stockholders' equity for fiscal year
1996 are .90% and 15.68%, respectively, excluding the after-tax effect of
the nonrecurring expenses totaling $2,920,000 and $585,000, respectively,
associated with the Railroad merger and the 1995 proxy contest. Return on
average assets and return on average stockholders' equity for fiscal year
1995 are .83% and 16.82%, respectively, excluding the accelerated
amortization of goodwill totaling $21,357,000. Return on average assets and
return on average stockholders' equity for fiscal year 1994 are .75% and
13.11%, respectively, excluding the after-tax effect of the intangible
assets valuation adjustment and the cumulative effects of changes in
accounting principles totaling $43,938,000 and $6,597,000, respectively.
(5) Represents dividends declared per share divided by net income per share. The
Corporation established a quarterly common stock cash dividend policy on
October 4, 1995, and declared dividends totaling $5.9 million, or $.40 per
common share, during fiscal year 1996.
(6) Includes investment securities available for sale totaling $9.9 million,
$3.0 million, $5.4 million and $1.3 million, respectively, at June 30, 1996,
1995, 1994 and 1993. No investment securities were available for sale at
June 30, 1992.
(7) Includes mortgage-backed securities available for sale totaling $263.2
million, $37.0 million, $45.0 million, $41.3 million and $20.8 million,
respectively, at June 30, 1996, 1995, 1994, 1993 and 1992.
(8) Includes loans held for sale totaling $89.4 million, $113.4 million, $187.7
million, $171.8 million and $158.4 million, respectively, at June 30, 1996,
1995, 1994, 1993 and 1992.
(9) Calculated by dividing stockholders' equity, reduced by the amount of
goodwill and core value of deposits, by the number of shares of common stock
outstanding at the respective dates.
- --------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
GENERAL
Commercial Federal Corporation (the Corporation) is a unitary non-
diversified savings and loan holding company whose primary asset is Commercial
Federal Bank, a Federal Savings Bank (the Bank), which is one of the largest
retail financial institutions in the Midwest and the 18th largest publicly held
thrift holding company in the United States. The Bank is a consumer-oriented
financial institution that emphasizes single-family residential real estate
lending, consumer lending, retail deposit activities, including demand deposit
accounts, and mortgage banking. At June 30, 1996, the Corporation operated 34
branch offices in Nebraska, 24 branch offices in Kansas, 20 branch offices in
greater metropolitan Denver, Colorado, 19 branch offices in Oklahoma and one
branch office in Iowa. Throughout its 109 year history, the Corporation has
emphasized customer service. To serve its customers, the Corporation conducts
loan origination activities through its 98 branch office network, loan offices
of its wholly-owned mortgage banking subsidiary and a nationwide correspondent
network consisting of approximately 375 mortgage loan originators. The
Corporation also provides insurance and securities brokerage and other retail
financial services.
Net income for fiscal year 1996 was $55.3 million, or $3.73 per share,
which compares to net income of $31.2 million and $5.0 million, respectively,
for fiscal years 1995 and 1994, or $2.16 per share and $.35 per share,
respectively.
On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad), parent company of Railroad Savings Bank, FSB.
This acquisition was accounted for as a pooling of interests and, accordingly,
the Corporation's historical consolidated financial statements have been
restated for all periods prior to the acquisition to include the accounts and
results of operations of Railroad. Railroad's results of operations were
reported on a calendar year basis previous to its merger into the Corporation.
However, in restating prior periods, Railroad's accounts and results of
operations were conformed to the Corporation's year ended June 30, 1995.
Accordingly, in changing fiscal years, Railroad's accounts and results of
operations for the six months ended June 30, 1994, including total revenue of
$18.1 million and net income totaling $185,000, were excluded from reported
results of operations for the restated combined companies but are included in
the Corporation's Consolidated Statement of Stockholders' Equity. Fiscal year
1996 operations also include $3.6 million (pre-tax) of merger and transition
related expenses from this acquisition.
During fiscal year 1996, in addition to Railroad, the Corporation acquired
Conservative Savings Corporation (Conservative) headquartered in Omaha,
Nebraska. See "Acquisitions During Fiscal Year 1996" for additional information.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans) and providing
customers with a full array of financial products and a high level of customer
service. As part of its long-term strategic plan, the Corporation intends to
expand its operations within its market areas either through direct marketing
efforts aimed at increasing market share, branch expansions, or opening
additional branches. The Corporation's retail strategy will continue to be
centered on attracting new customers and selling both new and existing customers
multiple products and services. Additionally, the Corporation will continue to
build and leverage an infrastructure designed to increase fee and other income.
Complementing its strategy of internal growth, the Corporation will
continue to grow its five-state franchise through an ongoing program of
selective acquisitions of other financial institutions. Acquisition candidates
will be selected based on the extent to which the candidates can enhance the
Corporation's retail presence in new or existing markets and complement the
Corporation's present retail network.
ACQUISITIONS DURING FISCAL YEAR 1996
On October 2, 1995, the Corporation consummated its acquisition of Railroad
and, pursuant to the terms of the merger agreement, 2,156,232 shares of
Railroad's common stock were delivered to the Corporation in exchange for
approximately 1,377,617 shares of the Corporation's common stock. Cash was paid
for fractional shares. Railroad operated 18 branches and 71 agency offices
throughout the state of Kansas and at September 30, 1995, had assets of
approximately $602.9 million, deposits of approximately $421.4 million and
stockholders' equity of approximately $27.7 million. This acquisition was
accounted for as a pooling of interests.
On February 1, 1996, the Corporation consummated its acquisition of
Conservative, parent company of Conservative Savings Bank, FSB. Under the terms
of the
14 Commercial Federal Corporation Annual Report 1996
<PAGE>
merger agreement the Corporation acquired all of the outstanding shares
of Conservative's common stock (1,844,838 shares) and preferred stock (460,000
shares). Each share of Conservative's common stock was exchanged for $6.34 in
cash and .2453 shares of the Corporation's common stock and each share of
Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares
of the Corporation's common stock. Cash was paid for fractional shares. Based on
the Corporation's closing stock price of $36.50 at February 1, 1996, the total
consideration for this acquisition approximated $44.1 million. Before purchase
accounting adjustments, Conservative had assets of approximately $302.9 million,
deposits of approximately $197.9 million and stockholders' equity of
approximately $35.1 million. Conservative operated nine branches with seven
located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. Three
of the former Conservative branches and two branches of the Corporation closed
in the consolidation process pursuant to this acquisition. The Conservative
acquisition was accounted for as a purchase with core value of deposits and
goodwill resulting from this transaction totaling $13.0 million.
PENDING ACQUISITION
On May 16, 1996, the Corporation entered into a Reorganization and Merger
Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye
Federal). Under the terms of the Merger Agreement, the Corporation will acquire
all 180,762 of the outstanding shares of Heritage's common stock. As defined in
the Merger Agreement, Heritage's common stock will be exchanged for cash and a
pro-rata amount of the Corporation's common stock. Based on the Corporation's
closing stock price on June 30, 1996, of $38.25, each share of Heritage common
stock would be exchanged for $18.73 in cash and 2.559 shares of the
Corporation's common stock, resulting in the exchange of approximately 462,570
shares of the Corporation's common stock with a total aggregate value
approximating $21.1 million. Cash will be paid in lieu of fractional shares.
Additional cash consideration up to approximately $1.2 million may be paid to
Heritage shareholders pending the final disposition of an impaired asset of
Hawkeye Federal. At June 30, 1996, Heritage had assets of approximately $182.1
million, deposits of approximately $157.9 million and stockholders' equity of
approximately $12.9 million. Heritage operates six branches located in Iowa.
This pending acquisition is expected to be completed in October 1996.
SUBSEQUENT EVENT-REPURCHASE OF COMMON STOCK
On August 21, 1996, the Corporation consummated the repurchase of 1,250,100
shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately $48.9
million. Such purchase price, excluding transaction costs incurred by the
Corporation for this repurchase, consisted of cash consideration of
approximately $28.2 million and surrender of a warrant (valued at approximately
$20.7 million) which would have enabled the Corporation to purchase 99 shares of
non-voting common stock of CAI Corporation. The repurchased shares represented
8.3% of the outstanding shares of the Corporation's common stock prior to the
repurchase. After repurchase, a total of 13,844,036 shares of common stock
remain issued and outstanding as of August 21, 1996. The cash portion of the
repurchase was financed in part by a loan from a financial institution secured
by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As
consideration, the Corporation also reimbursed CAI Corporation for certain
expenses totaling $2.2 million incurred in connection with its ownership of the
1,250,100 shares, including costs and expenses incurred in connection with the
1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of
the pro rata portion of any dividend CAI Corporation otherwise would have
received for the quarter ended September 30, 1996. Concurrent with the close of
the repurchase, two directors of the Corporation, who also serve as executive
officers of CAI Corporation, resigned from the Corporation's Board of Directors.
In addition, CAI Corporation and each of its shareholders agreed to a standstill
agreement for a period of 60 months beginning August 21, 1996. CAI Corporation
and the Corporation have each agreed to waive and release all claims against the
other and the Corporation has agreed to indemnify CAI Corporation and its
directors, officers and affiliates against certain derivative claims.
Commercial Federal Corporation Annual Report 1996 15
<PAGE>
REGULATORY ISSUES
The Corporation's savings deposits are insured by the Savings Association
Insurance Fund (SAIF), which is administered by the Federal Deposit Insurance
Corporation (FDIC). The assessment rate currently ranges from 0.23% of deposits
for well-capitalized institutions to 0.31% of deposits for undercapitalized
institutions. The FDIC also administers the Bank Insurance Fund (BIF), which has
the same designated reserve ratios as the SAIF. On August 8, 1995, the FDIC
adopted an amendment to the BIF risk-based assessment schedule which lowered the
deposit insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range from 0.31% of insured
deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for
well-capitalized institutions, which constitute over 90% of BIF-insured
institutions. The FDIC amendment became effective September 30, 1995.
Subsequently, the FDIC reduced the premium rate for the most highly rated BIF-
insured institutions to the statutory minimum of $1,000 per semi-annual period
and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27%
of insured deposits. The FDIC amendment creates a substantial disparity in the
deposit insurance premiums paid by the BIF and SAIF members and places SAIF-
insured savings institutions at a significant competitive disadvantage to BIF-
insured institutions.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate the premium disparity. Any such proposals would require a one
time assessment of an amount sufficient to bring the SAIF to a level equal to
1.25% of insured deposits to be imposed on all SAIF-insured deposits held as of
March 31, 1995. Recently, the FDIC revised its estimate of the size of the
special assessment to 68 basis points of insured deposits to bring the SAIF
statutory level to the 1.25% of insured deposits. Any such assessment will
depend on the SAIF fund balance once BIF-SAIF legislation has been passed. It
would also depend on adjustments in the assessable base provided in legislation,
but still would be allocated among institutions on the basis of deposits at
March 31, 1995.
Assuming a .68% assessment on a $4.2 billion deposit base, the assessment
would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax
charge of approximately $18.3 million to the Corporation. Such assessment would
have the effect of reducing the Bank's tangible capital to $390.4 million, or
5.92% of adjusted total assets, core capital to $406.6 million, or 6.15% of
adjusted total assets, and risk-based capital to $442.3 million, or 13.08% of
risk-weighted assets. The Bank would, on a pro forma basis as of June 30, 1996,
continue to exceed the minimum requirements to be classified as a "well-
capitalized" institution under applicable regulations. If such a special
assessment were required and the SAIF as a result was fully recapitalized, it
could have the effect of reducing the Bank's deposit insurance premiums to the
SAIF, thereby increasing net income in future periods.
Also under consideration by Congress are proposals relating to merger of
the BIF and SAIF funds and the elimination of the thrift charter. Management of
the Corporation is unable to predict accurately at this time whether any of
these proposals will be adopted in their current form or the impact of these
proposals on the Corporation.
ASSET/LIABILITY MANAGEMENT
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference (i.e., a mismatch) between
the amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. Consequently, when
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-bearing
liabilities. This mismatch in the maturity and interest rate sensitivity of
assets and liabilities is commonly referred to as the "gap." A gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
during a specified period exceeds the amount of interest rate sensitive
liabilities maturing or repricing during such period, and is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
during a specified period exceeds the amount of interest rate assets maturing or
repricing during such period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, and during a
period of declining interest rates, a negative gap would result in an increase
in net interest income while a positive gap would adversely affect net interest
income.
The Corporation has historically invested in interest-earning assets that
have a longer duration than its interest-bearing liabilities. The shorter
duration of the interest-sensitive liabilities indicates that the Corporation is
16 Commercial Federal Corporation Annual Report 1996
<PAGE>
exposed to interest rate risk. In a rising rate environment, in addition to
reducing the market value of long-term interest-earning assets, liabilities will
reprice faster than assets, therefore decreasing net interest income. To
mitigate this risk, the Corporation has placed a greater emphasis on shorter-
term higher yielding assets that reprice more frequently in reaction to interest
rate movements. In addition, the Corporation has continued its concentration of
adjustable-rate assets as a percentage of total assets to benefit the one-year
cumulative gap as such adjustable-rate assets reprice and are more responsive to
the sensitivity of more frequently repricing interest-bearing liabilities.
In connection with its asset/liability management program, the Corporation
has had interest rate swap agreements and an interest rate cap agreement with
other counterparties under terms that provide an exchange of interest payments
on the outstanding notional amount of the swap or cap agreement. Such agreements
were used to artificially lengthen the maturity of various interest-bearing
liabilities. In accordance with these arrangements, the Corporation pays fixed
rates and receives variable rates of interest according to a specified index.
The Corporation has reduced its level of such swap agreements to a notional
principal amount of $10.0 million at June 30, 1996, from balances of $78.5
million and $109.5 million, respectively, at June 30, 1995 and 1994. The
interest rate cap agreement, which was assumed in the Railroad merger, has a
notional principal amount of $10.0 million which pays interest when the three-
month LIBOR exceeds 7.0%. For fiscal years 1996, 1995 and 1994, the Bank
recorded $2.3 million, $4.4 million and $8.5 million, respectively, in net
interest expense from these interest rate swap and cap agreements. The interest
rate cap agreement terminates March 1997 and the swap agreement matures November
1997.
The following table represents management's projected maturity and
repricing of the Bank's interest-earning assets and interest-bearing liabilities
on an unconsolidated basis at June 30, 1996. The amounts of interest-earning
assets, interest-bearing liabilities and interest rate risk management
instruments presented which mature or reprice within a particular period were
determined in accordance with the contractual terms of such assets, liabilities
and interest rate swap agreements, except (i) adjustable-rate loans are included
in the period in which they are first scheduled to adjust and not in the period
in which they mature and are also adjusted for prepayment rates ranging from
6.5% to 33.8% for single-family residential loans and mortgage-backed
securities, (ii) prepayment rates ranging from 7.8% to 29.5%, based on the
contractual interest rate, were utilized for fixed-rate, single-family
residential loans and mortgage-backed securities, (iii) prepayment rates ranging
from 1.8% to 8.5%, based on the contractual interest rate, were utilized for
commercial real estate and multi-family loans and a prepayment rate of 42.5% was
utilized for consumer loans, (iv) passbook deposits and negotiable order of
withdrawal ("NOW") accounts totaling $534.8 million, all of which have fixed-
rates, are assumed to mature according to the decay rates as defined by
regulatory guidelines, which at June 30, 1996, ranged from 14.0% to 32.0%, (v)
market bonus savings and commercial money market accounts totaling $104.7
million are assumed to reprice or mature according to the decay rates as defined
by regulatory guidelines, which at June 30, 1996, was 31.0%, and (vi) money
market rate deposits totaling $528.0 million are deemed to reprice or mature
within the one-year category, even though a certain portion of these deposits is
not likely to be interest rate sensitive. Management believes that these
assumptions approximate actual experience and considers such assumptions
reasonable; however, the interest rate sensitivity of the Bank's interest-
earning assets and interest-bearing liabilities could vary substantially if
different assumptions were used or if actual experience differs from the
assumptions used, such as actual prepayment experience varying from estimates,
early deposit withdrawals, and caps on adjustable-rate loans and mortgage-backed
securities.
Commercial Federal Corporation Annual Report 1996 17
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Within 91 Days Over 1 3 Years
(Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate
mortgage loans (1) (2)...................................... $ 199,958 $ 299,193 $ 698,584 $1,343,949 $2,541,684
Other loans (2) (3)............................................ 1,163,619 1,548,164 714,656 77,514 3,503,953
Investments (4)................................................ 107,188 21,450 102,038 103,829 334,505
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets........................................ 1,470,765 1,868,807 1,515,278 1,525,292 6,380,142
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits............................................ 565,603 104,313 187,319 310,240 1,167,475
Other time deposits......................................... 1,017,645 1,353,786 755,610 62,063 3,189,104
Borrowings (5).............................................. 343,063 646,589 740,060 13,124 1,742,836
Impact of interest rate
swap agreements........................................... -- (10,000) 10,000 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities................................ 1,926,311 2,094,688 1,692,989 385,427 6,099,415
- ------------------------------------------------------------------------------------------------------------------------------------
Gap position................................................... (455,546) (225,881) (177,711) 1,139,865 280,727
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative gap................................................. $ (455,546) $ (681,427) $ (859,138) $ 280,727 $ 280,727
- ------------------------------------------------------------------------------------------------------------------------------------
Gap as a percentage of the
Bank's total assets.......................................... (6.89)% (3.42)% (2.69)% 17.25% 4.25%
Cumulative gap as a percentage
of the Bank's total assets................................... (6.89)% (10.31)% (13.00)% 4.25% 4.25%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Such amounts are, as applicable, before deductions for unamortized discounts
and premiums, loans in process, deferred loan fees and allowance for loan
losses.
(3) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed or
adjustable interest rates.
(4) Included in the "Within 90 Days" column are short-term cash investments of
$2.4 million and FHLB stock of $79.1 million.
(5) Includes advances from the FHLB, securities sold under agreements to
repurchase and other borrowings.
- --------------------------------------------------------------------------------
The Bank's one-year cumulative gap is a negative $681.4 million, or 10.31%
of the Bank's total assets of $6.606 billion at June 30, 1996, contrasted to a
negative $161.0 million, or 2.72% of total assets at June 30, 1995. The interest
rate risk policy of the Bank authorizes a liability sensitive one-year
cumulative gap not to exceed 10.0%. Accordingly, subsequent to June 30, 1996,
adjustments have been made so that the one-year cumulative gap falls within such
policy guidelines.
RESULTS OF OPERATIONS
Net income for fiscal year 1996 was $55.3 million, or $3.73 per share.
These results compare to net income for fiscal year 1995 of $31.2 million, or
$2.16 per share, and to net income for fiscal year 1994 of $5.0 million, or $.35
per share, which includes the net cumulative effects of changes in accounting
principles for income taxes and postretirement benefits of $6.6 million, or $.46
per share.
The Corporation's emphasis on single-family residential lending and the
promotion of retail financial services, along with the Corporation's growth
through acquisitions, continues to have positive effects on the Corporation's
core operations. Core earnings for fiscal year 1996 increased 10.2% and 19.7%,
respectively, over fiscal years 1995 and 1994. Core earnings, defined as
operating income before income taxes excluding (i) gains on sales of mortgage-
backed securities and loan servicing rights and (ii) amortization expense and
valuation adjustment of intangible assets, totaled $90.9 million during fiscal
year 1996 compared to $82.5 million and
18 Commercial Federal Corporation Annual Report 1996
<PAGE>
$75.9 million, respectively, during fiscal years 1995 and 1994. This improvement
in core earnings resulted primarily from increases in net interest income, loan
servicing fees and retail fee income.
The increase in net income for fiscal year 1996 compared to fiscal year
1995 is primarily due to the following: a $21.4 million nonrecurring charge for
accelerated amortization of goodwill recorded in fiscal year 1995 and not
incurred in the current fiscal year, an increase of $13.2 million in net
interest income after provision for loan losses, increases of $3.2 million each
in retail fees and charges and loan servicing fees, an increase of $746,000 in
other operating income and a decline of $733,000 in amortization of intangible
assets. These increases to net income were partially offset by an increase of
$12.0 million in general and administrative expenses, an increase of $3.8
million in the provision for income taxes, a decline of $1.3 million in real
estate operations and a decrease of $1.2 million in net gains on the sales of
loans and loan servicing rights.
The increase in net income for fiscal year 1995 compared to fiscal year
1994 is primarily due to the following: a change of $31.3 million in
nonrecurring charges associated with the intangible assets valuation adjustment
and the accelerated amortization of goodwill, an increase of $11.9 million in
net interest income after provision for loan losses, a decline of $3.9 million
in amortization of goodwill and core value of deposits, an improvement of $2.9
million in real estate operations, an increase of $2.5 million in loan servicing
fees, an increase of $392,000 in retail fees and charges and a net increase of
$76,000 in other operating income. These increases to net income were partially
offset by an increase of $8.4 million in total general and administrative
expenses, a net decrease of $6.6 million from the cumulative effects of changes
in accounting principles, an increase of $6.3 million in the provision for
income taxes and a net decrease of $5.5 million in net gains on the sales of
loans and loan servicing rights.
NET INTEREST INCOME AND INTEREST RATE SPREAD
Net interest income was $162.8 million for fiscal year 1996 compared to
$149.8 million for fiscal year 1995, an increase of $12.9 million, or 8.6%; and
compared to $137.8 million for fiscal year 1994. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.48%, 2.21% and 2.33%,
respectively, at June 30, 1996, 1995 and 1994, an increase of 27 basis points
comparing the interest rate spread at June 30, 1996, to the interest rate spread
at June 30, 1995, and a decrease of 12 basis points comparing the spreads at
June 30, 1995, to June 30, 1994. In addition, during the fiscal years 1996, 1995
and 1994, interest rate spreads were 2.34%, 2.26% and 2.43%, respectively,
representing an increase of eight basis points comparing the interest rate
spread during fiscal year 1996 to fiscal year 1995 and a decrease of 17 basis
points comparing the spread during fiscal year 1995 to 1994. The net yield on
interest-earning assets during fiscal years 1996, 1995 and 1994 was 2.58%, 2.46%
and 2.59%, respectively, representing an increase of 12 basis points comparing
fiscal year 1996 to 1995 and a decrease of 13 basis points comparing fiscal year
1995 to 1994.
During fiscal year 1996, in accordance with the one-time reclassification
permitted under a special accounting report, and the reassessment of the
appropriateness of the classifications of all securities held, management of the
Corporation developed an asset/liability management strategy to reclassify
substantially all of its 15- and 30-year fixed rate mortgage-backed securities
approximating $370.4 million and agency investment securities approximating
$49.9 million from held to maturity to available for sale. In addition,
approximately $9.4 million of adjustable-rate mortgage-backed securities were
reclassified from available for sale to held to maturity. The purpose of this
strategy is to sell such securities and use the proceeds to fund Federal Home
Loan Bank of Topeka (FHLB) advances as they become due, and to have the
flexibility, should the opportunity arise, to reinvest proceeds into adjustable-
rate or shorter duration interest-earning assets. During fiscal year 1996,
approximately $230.8 million of such investment and mortgage-backed securities
were sold with the proceeds used primarily to pay maturing FHLB advances.
The sale of approximately $230.8 million of the securities available for
sale and the utilization of such proceeds to repay maturing FHLB advances, the
Corporation's favorable asset liability mix (primarily increased levels of
adjustable-rate mortgage loans, consumer loans and multi-family commercial real
estate loans) and the acquisition of Conservative, have improved the interest
rate spreads and yields. Net interest income increased due primarily to average
interest-earning assets increasing $210.0 million to $6.311 billion for fiscal
year
Commercial Federal Corporation Annual Report 1996 19
<PAGE>
1996 compared to $6.101 billion for fiscal year 1995. This increase in average
interest-earning assets is primarily due to the Conservative acquisition in
February 1996 with a higher net interest rate spread than the Corporation and to
internal growth moderately offset by the sale of the securities available for
sale previously discussed.
However, the future trend in interest rate spreads and net interest income
will be dependent upon such factors as the composition and size of the
Corporation's interest-earning assets and interest-bearing liabilities, the
interest rate risk exposure of the Corporation, and the maturity and repricing
activity of interest-sensitive assets and liabilities, as influenced by changes
in and levels of both short-term and long-term market interest rates.
Net interest income increased during fiscal year 1995 compared to fiscal
year 1994, even though the interest rate spread and the net yield on interest-
earning assets decreased 17 and 13 basis points, respectively, due to average
interest-earning assets increasing $775.5 million to $6.101 billion for fiscal
year 1995 compared to $5.326 billion for fiscal year 1994. This increase in
average interest-earning assets is primarily due to the acquisitions during
fiscal years 1995 and 1994 and to internal growth.
The following table presents certain information concerning yields earned
on interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the fiscal years presented.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
For the Year
Ended June 30, At June 30,
---------------------- -----------------------
1996 1995 1994 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans.......................... 8.29% 8.04% 7.98% 8.19% 8.26% 7.72%
Mortgage-backed securities..... 6.45 6.02 5.68 6.73 6.38 5.73
Investments.................... 6.13 6.14 6.42 6.20 6.18 5.95
- -------------------------------------------------------------------------------
Interest-earning assets...... 7.78 7.45 7.39 7.81 7.71 7.13
- -------------------------------------------------------------------------------
Weighted average rate paid
on:
Savings deposits............... 2.79 3.24 2.16 3.04 3.08 2.74
Other time deposits............ 6.10 5.32 5.12 5.75 5.88 5.00
Advances from FHLB............. 5.79 5.71 5.73 5.66 5.89 5.37
Securities sold under
agreement
to repurchase.................. 7.14 7.59 6.15 6.51 7.08 6.08
Other borrowings............... 10.89 10.89 10.56 11.05 10.67 10.66
- -------------------------------------------------------------------------------
Interest-bearing
liabilities................. 5.44 5.19 4.96 5.33 5.50 4.80
- -------------------------------------------------------------------------------
Net interest rate spread........ 2.34% 2.26% 2.43% 2.48% 2.21% 2.33%
- -------------------------------------------------------------------------------
Net yield on
interest-earning assets........ 2.58% 2.46% 2.59% 2.68% 2.42% 2.49%
- -------------------------------------------------------------------------------
</TABLE>
20 Commercial Federal Corporation Annual Report 1996
<PAGE>
The following table presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the periods indicated. The table below includes
nonaccruing loans averaging $35.5 million, $30.9 million and $31.9 million,
respectively, for fiscal years 1996, 1995 and 1994 as interest-earning assets at
a yield of zero percent.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ --------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans........................ $4,643,401 $384,765 8.29% $4,277,946 $344,109 8.04% $3,843,662 $306,725 7.98%
Mortgage-backed
securities................. 1,284,448 82,830 6.45 1,402,237 84,404 6.02 1,082,507 61,491 5.68
Investments.................. 383,433 23,497 6.13 421,089 25,855 6.14 399,555 25,638 6.42
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets..................... 6,311,282 491,092 7.78 6,101,272 454,368 7.45 5,325,724 393,854 7.39
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits............. 1,189,619 33,177 2.79 1,037,702 33,638 3.24 809,692 17,492 2.16
Other time deposits.......... 2,966,505 180,863 6.10 2,752,501 146,525 5.32 2,441,971 125,065 5.12
Advances from FHLB........... 1,625,950 94,057 5.79 1,913,467 109,314 5.71 1,679,076 96,216 5.73
Securities sold under
agreements to
repurchase................. 189,568 13,525 7.14 103,223 7,837 7.59 155,897 9,592 6.15
Other borrowings............. 61,480 6,695 10.89 66,245 7,212 10.89 73,270 7,737 10.56
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities................ 6,033,122 328,317 5.44 5,873,138 304,526 5.19 5,159,906 256,102 4.96
- --------------------------------------------------------------------------------------------------------------------------
Net earnings balance......... $ 278,160 $ 228,134 $ 165,818
Net interest income.......... $162,775 $149,842 $137,752
Interest rate spread......... 2.34% 2.26% 2.43%
- --------------------------------------------------------------------------------------------------------------------------
Net yield on interest -
earning assets............. 2.58% 2.46% 2.59%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1996, the Corporation's net earnings balance (the
difference between average interest-bearing liabilities and average interest-
earning assets) improved by $50.0 million compared to fiscal year 1995 primarily
from the acquisition of Conservative (which was partially paid for through the
issuance of common stock) and net internal growth with earnings retention. The
percentage of average interest-earning assets to average interest-bearing
liabilities was 104.6% during fiscal year 1996, compared to 103.9% during fiscal
year 1995 and to 103.2% during fiscal year 1994. During fiscal year 1995, the
Corporation experienced higher costs on interest-bearing liabilities and a lower
interest rate spread and yield compared to fiscal year 1994 primarily due to
increases in the interest rates offered on certain types of deposit products
which were raised in order to maintain savings deposits as an attractive
investment vehicle for consumers. The reduced interest rate spread and yield
also reflects the fact that the Corporation's incremental growth of interest-
earning assets during fiscal year 1995 contained comparatively narrower yields
on its interest-earning assets. The net earnings balance improved by $62.3
million for fiscal year 1995 compared to 1994 primarily from internal growth.
Commercial Federal Corporation Annual Report 1996 21
<PAGE>
The following table presents the dollar amount of changes in interest
income and expense for each major component of interest-earning assets and
interest-bearing liabilities, respectively, and the amount of change in each
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate), and (ii) changes in rate (change in rate multiplied by prior year
volume). The net change attributable to change in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate. This table demonstrates the effect of the
increased volume of interest-earning assets and interest-bearing liabilities,
the increasing interest rates and the effect on the interest rate spreads
previously discussed.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, Year Ended June 30,
1996 Compared to 1995 1995 Compared to 1994
------------------------------- --------------------------------------
(In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to
- --------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans........................... $30,052 $10,604 $40,656 $34,914 $ 2,470 $37,384
Mortgage-backed securities...... (7,364) 5,790 (1,574) 19,064 3,849 22,913
Investments..................... (2,308) (50) (2,358) 1,349 (1,132) 217
- --------------------------------------------------------------------------------------------------------------------------
Interest income............... 20,380 16,344 36,724 55,327 5,187 60,514
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits................ 4,574 (5,035) (461) 5,814 10,332 16,146
Other time deposits............. 11,969 22,369 34,338 16,383 5,077 21,460
Advances from FHLB.............. (16,616) 1,359 (15,257) 13,391 (293) 13,098
Securities sold under agreements
to repurchase................. 6,187 (499) 5,688 (3,689) 1,934 (1,755)
Other borrowings................ (519) 2 (517) (759) 234 (525)
- --------------------------------------------------------------------------------------------------------------------------
Interest expense................ 5,595 18,196 23,791 31,140 17,284 48,424
- --------------------------------------------------------------------------------------------------------------------------
Effect on net interest income..... $14,785 $(1,852) $12,933 $24,187 $(12,097) $12,090
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The improvements due to changes in volume between fiscal years 1996 and
1995 reflect the increases in such interest rate spreads and the growth the
Corporation has experienced, both internally and from acquisitions. The
improvements due to changes in volume between fiscal years 1996, 1995 and 1994
in part reflects the increases in the difference between average interest-
bearing liabilities and average interest-earning assets of $50.0 million and
$62.3 million, respectively. The decreases in interest rate spreads between
fiscal years 1995 and 1994 account for the decrease due to rate increases in
fiscal year 1995 over 1994.
22 Commercial Federal Corporation Annual Report 1996
<PAGE>
NON-INTEREST INCOME AND EXPENSE
PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS
The Corporation recorded loan loss provisions of $6.1 million, $6.4 million
and $6.2 million in fiscal years 1996, 1995 and 1994, respectively. The loan
loss provision decreased even though the net loan portfolio increased
approximately $272.5 million at June 30, 1996, compared to June 30, 1995,
indicating the improved credit quality of the loan portfolio and the low level
of nonperforming loans over the respective periods of time. At June 30, 1996,
the Corporation's conventional, FHA and VA loans, including loans held for sale,
totaling approximately $4.3 billion, are secured by single-family residential
properties located primarily in Nebraska (20%), Colorado (17%), Kansas (7%),
Georgia, Oklahoma and Texas (5% each), and the remaining 41% in 44 other states.
The commercial real estate loan portfolio at June 30, 1996, totaling $269.7
million is secured by properties located in Colorado (33%), Nebraska (31%),
Florida (12%) and the remaining 24% in 18 other states. The allowance for loan
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans, which takes into consideration such factors as changes in the
composition of the loan portfolio and economic conditions that may affect the
borrower's ability to pay, regular examinations by the Corporation's credit
review group of specific problem loans and of the overall portfolio quality and
real estate market conditions in the Corporation's lending areas.
The Corporation recorded net income from real estate operations of $172,000
and $1.5 million in fiscal years 1996 and 1995, respectively, and a net loss of
$1.4 million in fiscal year 1994. Real estate operations reflect provisions for
real estate losses, net real estate operating activity and gains and losses on
dispositions of real estate. Fiscal year 1996 reflects a credit to the provision
for real estate operations totaling $479,000 compared to real estate loss
provisions charged to operations of $199,000 and $1.7 million, respectively, for
fiscal years 1995 and 1994. The credit to provision for real estate operations
in fiscal year 1996 was primarily due to excess reserves recaptured into income
upon settlement of a lawsuit. The decrease in real estate operations of $1.3
million for fiscal year 1996 from fiscal year 1995 is primarily due to a pre-tax
gain of $1.2 million recorded in fiscal year 1995 from the sale of an apartment
and assisted-care facility located in Dallas, Texas. The improvement in real
estate operations of $2.9 million for fiscal year 1995 over fiscal year 1994 is
primarily due to the realization of gains on sales of certain commercial
properties, lower operating expenses and lower loss provisions. Management
believes that the positive results from real estate operations are indicative of
the improvements made in the reduction of the Corporation's real estate
portfolio and to the improvement in the real estate markets in general.
Although the Corporation believes that present levels of allowances for
loan losses are adequate to reflect the risks inherent in its portfolios, there
can be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of allowances for losses on loans on a regular
basis as an integral part of their examination process. Such agencies may
require additions to the allowances based on their judgments of information
available to them at the time of their examinations.
Commercial Federal Corporation Annual Report 1996 23
<PAGE>
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and asset workout groups. Nonperforming assets increased
by $3.8 million, or 6.1%, at June 30, 1996, compared to June 30, 1995, primarily
as a result of net increases of $5.6 million in nonperforming loans and $1.3
million in real estate offset by a decrease of $3.1 million in troubled debt
restructurings. Nonperforming assets at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans (1)
Residential real estate........................ $34,660 $30,784 $27,470
Commercial real estate......................... 2,357 773 5,613
Consumer....................................... 888 701 409
- -------------------------------------------------------------------------------
Total........................................ 37,905 32,258 33,492
- -------------------------------------------------------------------------------
Real estate (2)
Commercial..................................... 8,850 8,795 16,869
Residential.................................... 4,986 3,784 4,566
- -------------------------------------------------------------------------------
Total........................................ 13,836 12,579 21,435
- -------------------------------------------------------------------------------
Troubled debt restructurings (3)
Commercial..................................... 13,894 16,566 19,455
Residential.................................... 909 1,294 1,580
- --------------------------------------------------------------------------------
Total........................................ 14,803 17,860 21,035
- -------------------------------------------------------------------------------
Total nonperforming assets....................... $66,544 $62,697 $75,962
- -------------------------------------------------------------------------------
Nonperforming loans to total loans............... .78% .70% .83%
Nonperforming assets to total assets............. 1.01% .95% 1.27%
- -------------------------------------------------------------------------------
Allowance for loan losses:
Other loans (4)................................ $36,513 $33,261 $27,530
Bulk purchased loans (5)....................... 12,765 15,280 17,321
- -------------------------------------------------------------------------------
Total........................................ $49,278 $48,541 $44,851
- -------------------------------------------------------------------------------
Allowance for loan losses to total loans......... 1.01% 1.06% 1.11%
Allowance for loan losses to total nonperforming
assets.......................................... 74.05% 77.42% 59.04%
- --------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more past
due) and accruing loans that are contractually past due 90 days or more. At
June 30, 1996, 1995 or 1994, there were no accruing loans contractually past
due 90 days or more.
(2) Real estate consists of commercial and residential property acquired through
foreclosure or repossession (real estate owned and real estate in judgment)
and real estate from certain subsidiary operations, and does not include
performing real estate held for investment totaling $2.8 million, $4.2
million and $2.9 million, respectively, at June 30, 1996, 1995 and 1994.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994,
in general allowance for losses established primarily to cover risks
associated with borrowers' delinquencies and defaults on loans held for
sale.
(5) Represents the allowance for loan losses for single-family residential whole
loans purchased between January 1991 and June 30, 1992 (bulk purchased
loans), which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans to provide for the credit
risk associated with such bulk purchased loans. These bulk purchased loans
had principal balances of $574.4 million, $701.9 million and $868.0 million,
respectively, at June 30, 1996, 1995 and 1994. These allowances are
available only to absorb losses associated with respective bulk purchased
loans, and are not available to absorb losses from other loans.
- -------------------------------------------------------------------------------
24 Commercial Federal Corporation Annual Report 1996
<PAGE>
The ratio of nonperforming loans to total loans was .78% at June 30, 1996,
based on loan balances of $4.9 billion, compared to .70% and .83%, respectively,
at June 30, 1995 and 1994, which were based on loan balances of $4.6 billion and
$4.0 billion. Management believes that these ratios reflect the quality of the
Corporation's loan portfolio, which consists primarily of loans secured by
single-family residential properties. The ratio of nonperforming assets to total
assets of 1.01%, .95% and 1.27%, respectively, at June 30, 1996, 1995 and 1994,
which management believes are favorable compared to industry standards, is an
indicator of the stabilization of nonperforming assets. The total allowance for
loan losses increased to $49.3 million at June 30, 1996, an improvement of
$737,000 and $4.4 million, respectively, compared to June 30, 1995 and 1994. The
percentage of allowance for loan losses to total loans at June 30, 1996, was
1.01%, compared to the ratios of 1.06% and 1.11%, respectively, at June 30, 1995
and 1994. The total allowance for loan losses to total nonperforming assets of
74.05% and 77.42% at June 30, 1996 and 1995, respectively, compared to 59.04% at
June 30, 1994, indicates improved coverage for potential losses. Ratios for both
nonperforming loans to total loans and nonperforming assets to total assets
increased compared to June 30, 1995, primarily due to a net increase in
nonperforming loans of $5.6 million offset slightly by net increases of $273.2
million in total loans and $38.1 million in total assets compared to June 30,
1995. The asset quality ratios comparing June 30, 1995, to June 30, 1994,
improved due to net decreases in nonperforming loans and nonperforming assets,
primarily from the sale of properties and loan principal payments, combined with
increases in both total loans and total assets over the respective fiscal years.
Nonperforming loans at June 30, 1996, increased $5.6 million compared to
June 30, 1995, primarily due to net increases of $3.9 million, $1.6 million and
$187,000 in delinquent residential real estate loans, commercial real estate
loans and consumer loans, respectively. The increase of $3.9 million in
delinquent residential real estate loans is primarily due to residential
construction real estate loans increasing $1.9 million from a balance of
$603,000 at June 30, 1995, to $2.5 million at June 30, 1996, primarily due to
increased loan volume in residential construction lending.
The net increase of $1.3 million in real estate at June 30, 1996, compared
to June 30, 1995, is substantially attributable to a net increase of $1.2
million in residential real estate. Real estate is primarily located in Colorado
and Nebraska and at June 30, 1996, before allowance for losses, totaled $6.0
million and $5.4 million, respectively, compared to $6.8 million and $5.8
million at June 30, 1995.
Troubled debt restructurings decreased $3.1 million at June 30, 1996,
compared to June 30,1995, primarily attributable to net decreases of $2.7
million in commercial real estate loans and $385,000 in residential real estate
loans with the net decreases due primarily to loan principal repayments.
LOAN SERVICING FEES
Loan servicing fees, which also include miscellaneous loan fees for late
payments and prepayment charges, and assumption and modification fees, totaled
$27.9 million, $24.7 million and $22.2 million for fiscal years 1996, 1995 and
1994, respectively. This current year increase over previous fiscal years is
primarily due to increases in the size of the Corporation's loan servicing
portfolio. Fees from loans serviced for other institutions totaled $22.7
million, $20.9 million and $18.1 million for fiscal years 1996, 1995 and 1994,
respectively. The mortgage loan servicing portfolio totaled $5.870 billion,
$5.151 billion and $4.636 billion at June 30, 1996, 1995 and 1994, respectively.
The value of the Corporation's loan servicing portfolio increases as
mortgage interest rates rise and loan prepayments decrease. It is expected that
income generated from the Corporation's loan servicing portfolio will increase
in such an environment. However, this positive effect on the Corporation's
income is offset, in part, by a decrease in additional servicing fee income
attributable to new loan originations, which historically decrease in periods of
higher, or increasing, mortgage interest rates, and by an increase in expenses
from loan production costs since a portion of such costs cannot be deferred due
to lower loan originations. Conversely, the value of the Bank's loan servicing
portfolio will decrease as mortgage interest rates decline.
RETAIL FEES AND CHARGES
Retail fees and charges totaled $12.7 million, $9.5 million and $9.2
million for fiscal years 1996, 1995 and 1994, respectively. The primary source
of this fee income is customer charges for retail financial services such as
checking account fees and service charges, charges for insufficient funds or
uncollected funds, stop payment fees, overdraft protection fees and transaction
fees for personal
Commercial Federal Corporation Annual Report 1996 25
<PAGE>
checking and automatic teller machine services. The net increase of $3.2 million
from fiscal year 1996 compared to fiscal year 1995 primarily results from
increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges from the Corporation's expanding retail
customer deposit base over the last two fiscal years. As a result of the
Corporation's acquisition activity, combined with aggressive checking account
promotions, the Corporation's customer account deposit base has increased
significantly over the past fiscal year. Such acquisitions account for over $2.5
million of the total retail fees and charges for fiscal year 1996 compared to
$1.4 million for fiscal year 1995, an increase of approximately $1.1 million.
The increase of $392,000 from fiscal year 1994 to fiscal year 1995 is primarily
due to additional fees and charges generated from a larger customer base that
resulted primarily from the acquisition of two financial institutions in fiscal
year 1995.
GAIN (LOSS) ON SALES OF LOANS
During fiscal years 1996, 1995 and 1994, the Corporation sold loans to
third parties through its mortgage banking operations totaling $667.7 million,
$654.4 million and $1.96 billion, respectively, resulting in net pre-tax gains
of $164,000 and $1.4 million, respectively, for fiscal years 1996 and 1994, and
a net pre-tax loss of $1.7 million for fiscal year 1995. Mortgage loans are
generally sold in the secondary market with loan servicing retained and without
recourse to the Corporation. The net gain recorded in fiscal year 1996 is
attributable to the relatively stable interest rate environment and to the
adoption effective July 1, 1995, of the provisions of Statement of Financial
Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for Mortgage
Servicing Rights," which prescribes accounting methods that generally result in
comparatively higher amounts of gains realized from the sales of loans.
SFAS No. 122 requires capitalization of internally originated mortgage
servicing rights as well as purchased mortgage servicing rights. The net effect
of adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre-
tax earnings approximately $4.0 million. At June 30, 1996, mortgage servicing
rights totaled $45.0 million. SFAS No. 122 also requires that mortgage servicing
rights be reported at the lower of cost or fair value. Mortgage servicing rights
are stratified by loan type and interest rate for purposes of impairment
measurement. Impairment losses are recognized to the extent the unamortized
mortgage servicing right for each stratum exceeds the current market value, as
reductions in the carrying value of the asset, through the use of a valuation
allowance, with a corresponding reduction to loan servicing income. No valuation
allowance for capitalized servicing rights was necessary to be established as of
June 30, 1996. The future effect of SFAS No. 122 is dependent, among other
items, upon the volume and type of loans originated, the general levels of
market interest rates and the rate of estimated loan prepayments. Accordingly,
management of the Corporation is unable to predict with any reasonable certainty
what effect this statement will have on the Corporation's future results of
operations or its financial position.
The net gains and losses recorded in fiscal years 1995 and 1994 are
primarily from mortgage banking operations of the former Railroad Savings Bank
which have been combined under the pooling of interests accounting treatment.
Such gains and losses were incurred primarily from the sales of loans which were
originated pursuant to unhedged commitments. The lower sales activity comparing
fiscal year 1995 to 1994 primarily is a result of lower loan originations due to
the relatively higher interest rate environment.
GAIN ON SALES OF LOAN SERVICING RIGHTS
Gain on the sales of loan servicing rights totaled $452,000, $3.5 million
and $5.9 million, respectively, for fiscal years 1996, 1995 and 1994. All such
sales activity of loan servicing rights was from the mortgage banking operations
of the former Railroad Savings Bank which have been combined under the pooling
of interests accounting treatment.
OTHER OPERATING INCOME
Other operating income totaled $8.2 million, $7.5 million and $7.4 million
for fiscal years 1996, 1995 and 1994, respectively. The major components of
other operating income are brokerage and insurance commissions. Brokerage
commission income totaled $3.0 million, $2.6 million and $3.1 million,
respectively, for fiscal years 1996, 1995 and 1994. Management believes that
investment alternatives more attractive to consumers such as certificates of
deposit with higher interest rates have contributed to lower revenues for
brokerage commissions, primarily affecting
26 Commercial Federal Corporation Annual Report 1996
<PAGE>
annuity commissions. Insurance commission income totaled $1.7 million, $2.4
million and $2.1 million, respectively, for fiscal years 1996, 1995 and 1994.
Fiscal year 1996 results are lower than 1995, and management of the Corporation
will continue to emphasize insurance and securities brokerage services; however,
such commissions are affected to a significant degree by the current interest
rate environment in relation to rates on other competing products. Fiscal year
1996 results also include credit life and disability commission income totaling
$1.6 million compared to $1.2 million and $629,000 in fiscal years 1995 and
1994, respectively. Other miscellaneous sundry income totaled approximately $1.9
million, $1.3 million and $1.6 million, respectively, for fiscal years 1996,
1995 and 1994. The increase of $600,000 comparing fiscal year 1996 to 1995 is
primarily attributable to the recognition of $344,000 in fiscal year 1996 on the
disposition of a leasing transaction and $253,000 recorded as net gains on the
sales of securities compared to a loss of $41,000 for fiscal year 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $114.5 million, $102.6 million
and $94.1 million for fiscal years 1996, 1995 and 1994, respectively. The
efficiency ratio, defined as general and administrative expenses divided by the
sum of (i) net interest income before provision for loan losses, (ii) loan
servicing fees, (iii) retail fees and charges and (iv) other operating income,
has remained favorable even though operating expenses have increased, primarily
from acquisitions in each of the last three fiscal years, by approximately $12.0
million during fiscal year 1996 compared to 1995 and approximately $8.4 million
during fiscal year 1995 compared to 1994. The Corporation's efficiency ratio for
fiscal year 1996 is 54.2% compared to 53.5% and 53.3% for fiscal years 1995 and
1994, respectively. The increase in the efficiency ratio for fiscal year 1996
compared to fiscal year 1995 is due to increases in general and administrative
expenses primarily from the acquisitions during the last two fiscal years and
nonrecurring expenses totaling $4.5 million associated with the Railroad merger
and the 1995 proxy contest. Excluding the effects of such nonrecurring expenses
the Corporation's efficiency ratio for fiscal year 1996 is 52.1%.
The increase of approximately $12.0 million in general and administrative
expenses in fiscal year 1996 compared to fiscal year 1995 was due to increases
in compensation and benefits of $1.7 million, occupancy and equipment of $2.6
million, regulatory insurance and assessments of $1.3 million, advertising of
$1.9 million, amortization of mortgage servicing rights of $688,000 and $3.8
million in other operating expenses. The net increase of approximately $12.0
million, or 11.7%, comparing fiscal year 1996 to fiscal year 1995 is in part
attributable to nonrecurring expenses associated with the Railroad merger and
the 1995 proxy contest, expenses associated with loan production, additional
branches and increased marketing costs for deposits and other product and image
promotions. During fiscal year 1996 total nonrecurring costs and expenses
totaled $4.5 million consisting of (i) $3.6 million related to the Railroad
merger for accounting, legal, investment banking, severance benefits,
advertising and miscellaneous transition and conversion expenses and (ii)
$901,000 related to the 1995 proxy contest for consulting services, legal fees,
solicitation fees and printing and mailing costs. Other increases in general and
administrative expenses for fiscal year 1996 are attributable to loan production
costs, primarily compensation and benefits, which exceeded fiscal year 1995
expenses by approximately $3.5 million. Advertising expenditures, up $1.9
million, fluctuate based upon desired levels of product promotion and were
higher compared to fiscal year 1995 due to increased campaigns for checking
accounts and related products, certificates of deposit, consumer and mortgage
lending and image promotion. Amortization of mortgage servicing rights increased
by $688,000 over fiscal year 1995 primarily due to an increase of $14.1 million
in capitalized mortgage servicing rights. In addition, loans serviced for other
institutions increased $718.7 million over fiscal year 1995 resulting in
increased staffing levels and related expenses. Other net increases in general
and administrative expenses directly resulting from the Corporation's recent
acquisitions, excluding Railroad, totaled approximately $400,000 over fiscal
year 1995. Such increases in general and administrative expenses result from
increased personnel wages and benefits, costs of operating additional branches
and higher regulatory insurance assets from deposits acquired. Other expenses
were also incurred on an indirect basis attributable to such acquisitions.
The Corporation paid FDIC insurance premiums and OTS assessments totaling
$10.6 million, $9.3 million and $8.2 million for fiscal years 1996, 1995 and
1994, respectively. The higher levels of such costs recorded during the
respective fiscal years are due to the Corporation's increased deposit base
resulting from acquisitions and internal growth.
Commercial Federal Corporation Annual Report 1996 27
<PAGE>
The increase of $8.4 million in general and administrative expenses in
fiscal year 1995 compared to fiscal year 1994 was due to increases in
compensation and benefits of $6.3 million, occupancy and equipment of $1.8
million, regulatory insurance and assessments of $1.1 million, advertising of
$640,000 and amortization of mortgage servicing rights of $652,000, partially
offset by a decrease of $2.1 million in other operating expenses. Increases in
general and administrative expenses directly resulting from the acquisitions in
fiscal years 1995 and 1994 totaled $4.4 million comparing fiscal year 1995 ($7.5
million) to fiscal year 1994 ($3.1 million). Such increases in general and
administrative expenses result from increased personnel wages and benefits,
costs of operating additional branches and higher regulatory insurance costs
from the deposits acquired. Other increases in general and administrative
expenses in fiscal year 1995 compared to fiscal year 1994 are attributable to
loan production costs, primarily compensation and benefits, which were deferred
in fiscal year 1994 when loan production volume was significantly higher than in
fiscal year 1995. Such increase in loan production costs expensed in fiscal year
1995 over 1994 totaled $3.7 million. Deferred compensation related to restricted
stock totaled $1.2 million and $395,000, respectively, in fiscal years 1995 and
1994, an increase of $778,000 due to additional awards granted. Additionally,
amortization of mortgage servicing rights increased $652,000 in fiscal year 1995
over 1994 primarily from the increase of $10.4 million in servicing rights
acquired through purchases.
GOODWILL AND CORE VALUE OF DEPOSITS
Total amortization expense for goodwill and core value of deposits for
fiscal years 1996, 1995 and 1994 was $9.5 million, $10.3 million and $14.1
million, respectively. Amortization of goodwill and core value of deposits for
fiscal year 1996 was lower than fiscal year 1995 primarily due to a reduction in
amortization expense on core value of deposits which is amortized on an
accelerated basis partially offset by the $725,000 increase in intangible
amortization from the Conservative acquisition as of February 1, 1996.
Amortization of goodwill and core value of deposits for fiscal year 1995 was
lower than fiscal year 1994 primarily due to a $6.2 million decrease in goodwill
amortization comparing the respective fiscal years since the amortization of
goodwill was accelerated and completely amortized to expense over the first six
months of fiscal year 1995. In addition, the amortization expense on core value
of deposits from acquisitions before fiscal year 1994 decreased in the last six
months of fiscal year 1995 due to an adjustment totaling $6.8 million that was
recorded effective January 1, 1995, as a result of the Corporation's recognition
of pre-acquisition tax credits and net operating losses. Such decreases in
amortization expenses comparing fiscal year 1995 to 1994 were partially offset
by the net increase of $2.4 million in amortization of core value of deposits
and goodwill resulting from the acquisitions in fiscal years 1994 and 1995. No
impairment adjustment has been made to the intangible assets resulting from the
Corporation's acquisitions during fiscal years 1996, 1995 or 1994.
Effective June 30, 1994, the Corporation changed its method of valuation of
intangible assets incorporating a fair value concept using a lower of cost or
market methodology. An appraisal performed by an independent third party of
28 Commercial Federal Corporation Annual Report 1996
<PAGE>
the existing intangible assets relating to acquisitions during 1986 through 1988
of five troubled savings institutions located in Colorado, Kansas and Oklahoma
resulted in a fair value estimate of $41.0 million. Such fair value estimate
resulted in the Corporation recognizing an impairment of recorded intangible
assets at June 30, 1994, of $52.7 million. This appraisal of $41.0 million as of
June 30, 1994, was classified by management as core value of deposits totaling
$19.6 million and goodwill totaling $21.4 million. The $21.4 million of goodwill
was completely amortized to expense over the first six months of fiscal year
1995.
PROVISION FOR INCOME TAXES
For fiscal years 1996, 1995 and 1994 the provision for income taxes was
$27.0 million, $23.1 million and $16.9 million, respectively. The effective tax
rates for fiscal years 1996, 1995 and 1994 were 32.8%, 42.6% and 110.7%,
respectively. The provision for income taxes for fiscal year 1996 was reduced by
approximately $1.0 million for an income tax benefit recognized for financial
reporting purposes from a leveraged lease settlement. The provision for income
taxes for fiscal year 1995 was reduced by $2.3 million due to the recognition of
pre-acquisition tax credits and net operating losses that the Corporation was
entitled to from a thrift acquired in 1987 and two leasing companies acquired in
1984 and 1986. For the three fiscal years ended June 30, 1996, the effective tax
rates vary from the applicable statutory rates primarily due to the
nondeductibility of amortization of goodwill and core value of deposits in
relation to the level of taxable income for the respective fiscal years. The
effective tax rate also varied from the statutory rate of 35.0% for fiscal year
1996 due to the nondeductibility of certain Railroad merger and acquisition
costs offset slightly by the aforementioned income tax benefit recognized from
the leveraged lease settlement.
In addition, the effective tax rate varied from the statutory rate for
fiscal years 1995 and 1994 due to the recognition of the pre-acquisition tax
credits and net operating losses of $2.3 million in fiscal year 1995 and, in
fiscal year 1994, to the intangible assets valuation adjustment of $52.7
million. The effective tax rate for fiscal year 1994 includes a change in the
federal tax law enacted in August 1993 that increased the federal corporate
marginal tax rate from 34.0% to 35.0%. The effect of this tax rate change on the
net deferred income tax liability resulted in the recording of additional income
tax expense of $1.2 million in the first quarter of fiscal year 1994.
In August 1996, changes in the federal tax law (i) repealed both the
percentage of taxable income and experience methods effective July 1, 1996,
allowing a bad debt deduction for specific charge-offs only, and (ii) require
recapture into taxable income over a six year period of tax bad debt reserves
which exceed the base year amount, adjusted for any loan portfolio shrinkage.
These changes will result in the recognition of additional deferred tax
liabilities of approximately $103,000 in the first quarter of fiscal year 1997.
The remaining unrecognized deferred tax liability could be recognized in the
future, in whole or in part, if (i) there is a change in federal tax law, (ii)
the Bank fails to meet certain definitional tests and other conditions in the
federal tax law, (iii) certain distributions are made with respect to the stock
of the Bank or (iv) the bad debt reserves are used for any purpose other than
absorbing bad debt losses.
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
Included in fiscal year 1994 results of operations was the adoption of the
provisions of two accounting statements resulting in the Corporation recording a
net $6.6 million in net income, or $.46 per share, from the cumulative effects
of these changes in accounting principles.
The adoption of the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," resulted in recording $6.9
million in net income, or $.48 per share, while the adoption of the provisions
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," resulted in recording a charge
to income of $519,000 (net of a tax benefit of $183,000), or $.02 loss per share
after tax.
Commercial Federal Corporation Annual Report 1996 29
<PAGE>
<TABLE>
<CAPTION>
RATIOS
The table below sets forth certain performance ratios of the Corporation
for the periods indicated.
- -------------------------------------------------------------------------------
Year Ended June 30,
- -------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets:net income
divided by average total assets (1)
(2).................................. .84% .49% .09%
Return on average equity:net income
divided by average equity (1) (2).... 14.74 9.98 1.54
Equity-to-assets ratio:average
stockholders' equity to average total
assets (1)........................... 5.72 4.95 5.74
General and administrative expenses
divided by average assets (1)(2)..... 1.75 1.62 1.67
- --------------------------------------------------------------------------------
</TABLE>
(1) Based on daily average balances during fiscal years 1996, 1995 and 1994.
(2) General and administrative expenses divided by average assets for fiscal
year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000
and $901,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the
after-tax effect of the nonrecurring expenses totaling $2,920,000 and
$585,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the
accelerated amortization of goodwill totaling $21,357,000.
- --------------------------------------------------------------------------------
The increase in the operating ratio for general and administrative expenses
for fiscal year 1996 compared to fiscal year 1995 is attributable to an increase
of approximately $12.0 million in such expenses primarily due to the
nonrecurring expenses totaling $4.5 million associated with the Railroad merger
and the 1995 proxy contest as well as increases in general and administrative
expenses attributable to the Conservative acquisition. The decrease in the
operating ratio for general and administrative expenses for fiscal year 1995
compared to fiscal year 1994 is due to an increase of approximately $685.0
million in the Corporation's average total assets from fiscal year 1994
partially offset by an increase of $8.4 million in such expenses over the same
time span.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
During fiscal year 1996, the Corporation adopted the provisions of two
accounting pronouncements: Statement No. 121 entitled "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and Statement No. 122 entitled "Accounting for Mortgage Servicing Rights." See
Note 1 to the Consolidated Financial Statements for a discussion of the
implementation of the provisions of these new accounting pronouncements and
their effect, if any, on the Corporation's financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's principal asset is its investment in the capital stock of
the Bank, and because it does not generate any significant revenues independent
of the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in risk-
based capital ratio requirement at the beginning of the calendar year. At June
30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to
pay an aggregate amount approximating $92.9 million in dividends under these
regulations. Should the Bank's regulatory capital fall below certain levels,
applicable law would require
30 Commercial Federal Corporation Annual Report 1996
<PAGE>
approval by the OTS of such proposed dividends and, in some cases, would
prohibit the payment of dividends.
At June 30, 1996, the cash of Commercial Federal Corporation (the parent
company) totaled $12.6 million of which $3.5 million is required to be retained
under the terms of the Indenture governing the $40.25 million of subordinated
notes due December 1999. Due to the parent company's limited independent
operations, management believes that the cash balance at June 30, 1996, is
currently sufficient to meet operational needs. However, the parent company's
ability to make future interest and principal payments on the subordinated
notes, and on the $6.9 million of 10.0% senior notes acquired in the Railroad
merger, is dependent upon its receipt of dividends from the Bank. Accordingly,
during fiscal years 1996 and 1995, the parent company received dividends
totaling $9.3 million and $5.7 million, respectively, from the Bank. These
dividends from the Bank were made primarily to cover (i) the interest payments
on the parent company's subordinated debt and senior notes which amount totaled
$4.9 million in the aggregate and (ii) the common stock cash dividends of $4.4
million paid by the parent company to its shareholders through June 30, 1996. On
October 4, 1995, the Board of Directors of the Corporation established a policy
of paying a regular quarterly cash dividend on its common stock. Prior to such
date, the Corporation had never paid dividends. Accordingly, cash dividends
totaling $5.9 million, or $.40 per common share, were declared during fiscal
year 1996 with $4.4 million paid through June 30, 1996. The payment of dividends
on the common stock is subject to the discretion of the Board of Directors of
the Corporation and depends on a variety of factors, including operating results
and financial condition, liquidity, regulatory capital limitations and other
factors. The Bank will continue to pay dividends to the parent company, pursuant
to regulatory restrictions, to cover cash dividends on common stock that the
parent company intends to pay on a quarterly basis. The parent company also
receives cash from the exercise of stock options and the sale of stock under its
employee benefit plans which totaled $2.3 million and $1.3 million,
respectively, during fiscal years 1996 and 1995.
Subsequent to June 30, 1996, the Corporation repurchased on August 21,
1996, 1,250,100 shares of its common stock. Total cash consideration for this
transaction, including certain expenses and costs associated with the seller's
ownership of such stock, approximated $51.2 million. The sources of cash to
consummate this stock repurchase consisted of (i) a short-term note totaling
$28.0 million, (ii) a dividend from the Bank totaling $18.0 million and (iii)
cash totaling $5.2 million paid directly by the parent company.
The Corporation's primary sources of funds are (i) deposits,
(ii) principal repayments on loans, mortgage-backed and investment securities,
(iii) advances from the FHLB of Topeka, (iv) cash generated from operations and
(v) securities sold under agreements to repurchase. As reflected in the
Consolidated Statement of Cash Flows, net cash flows used by operating
activities for fiscal year 1996 totaled $6.3 million, and net cash flows
provided by operating activities for fiscal years 1995 and 1994 totaled $18.9
million and $31.2 million, respectively. Amounts fluctuate from period to period
primarily as a result of mortgage banking activity relating to the purchase and
origination of loans for resale and the subsequent sale of such loans. The
origination of loans for resale totaling $365.5 million for fiscal year 1996 is
comparable to the $332.8 million for fiscal year 1995 but considerably lower
than the $996.5 million for fiscal year 1994 primarily due to the lower volume
of loan refinancing activity attributable to the increase in interest rates over
the past two fiscal years.
Net cash flows provided by investing activities totaled $253.0 million and
$90.7 million for fiscal years 1996 and 1994, respectively, and net cash flows
used by investing activities totaled $264.1 million for fiscal year 1995.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans and mortgage-backed securities. The acquisition of Railroad
had no material effect on liquidity, except for the cash outlay totaling $3.6
million relating to nonrecurring merger related costs, since such transaction
was consummated in an exchange of common stock between companies. The
acquisition of Conservative, however, resulted in a cash payment totaling
approximately $18.3 million, in addition to the issuance of common stock of the
Corporation exchanged for Conservative's common and preferred stock. During
fiscal year 1995 the Corporation acquired the assets and liabilities of two
financial institutions for which it paid cash totaling $16.5 million and
received cash totaling $91.8 million primarily from the acquisition of the
deposits and branches of a Kansas institution. In addition, the large amount of
cash flows provided by investing activities during fiscal year
Commercial Federal Corporation Annual Report 1996 31
<PAGE>
1994 is primarily from the acquisition of deposits of two institutions for which
the Corporation received cash totaling $784.5 million. The proposed acquisition
of Heritage will result in cash paid totaling approximately $3.4 million for
Heritage's common stock as well as the exchange of approximately 462,570 shares
of the Corporation's common stock.
At December 31, 1995, in accordance with the one-time reclassification
permitted under the special report entitled "A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities," and the reassessment of the appropriateness of the classifications
of all securities held, management of the Corporation developed an
asset/liability management strategy to reclassify substantially all of its 15-
and 30-year fixed-rate mortgage-backed securities approximating $370.4 million
and agency investment securities approximating $49.9 million from held to
maturity to available for sale. In addition, approximately $9.4 million of
adjustable-rate mortgage-backed securities were reclassified from available for
sale to held to maturity. The purpose of this strategy is to sell such
securities and use the proceeds to fund FHLB advances as they become due, and to
have the flexibility, should the opportunity arise, to reinvest proceeds into
adjustable-rate or shorter duration interest-earning assets. In addition, on
February 1, 1996, the Corporation acquired mortgage-backed and investment
securities totaling approximately $90.1 million as part of the acquisition of
Conservative and classified such securities as available for sale. During fiscal
year 1996, approximately $230.8 million of such investment and mortgage-backed
securities were sold with the proceeds used primarily to pay maturing FHLB
advances.
Net cash flows used by financing activities totaled $246.1 million and
$129.6 million, respectively, for fiscal years 1996 and 1994 and net cash
provided by financing activities totaled $252.8 million for fiscal year 1995.
Advances from the FHLB and retail deposits have been the primary sources to
balance the Corporation's funding needs during each of the fiscal years
presented. The Corporation experienced net increases of $93.8 million, $103.9
million and $121.1 million, respectively, in deposits for the fiscal years ended
June 30, 1996, 1995, and 1994, excluding deposits acquired in acquisitions. Such
increases in deposits are due to a broadened retail deposit base created from
acquisitions, opening new branches and increasing marketing efforts and product
promotion. In addition, during fiscal years 1996 and 1995 the Corporation
utilized securities sold under agreements to repurchase primarily for liquidity
and asset liability management purposes.
As a result of the final disposition of a subsidiary's interest in a
nuclear generating facility located in Palo Verde, Arizona in February 1996, the
Corporation recognized taxable income totaling approximately $154.9 million.
Accordingly, such income for tax purposes has resulted in federal and state tax
liabilities totaling approximately $51.8 million. These tax payments were paid
in June 1996 for the federal tax liability and will be paid in September and
October 1996 for the state tax liabilities. While these payments affect the
Corporation's cash flow position, they did not and will not have a material
adverse impact on the Corporation's financial condition or results of
operations.
Among the proposals being considered by the FDIC and Congress to eliminate
the deposit insurance premium disparity between BIF-insured and SAIF-insured
institutions is a reduction in premium rates charged to SAIF-insured
institutions as was done for BIF-insured institutions. It is expected that such
a reduction would be accompanied by a one-time assessment of SAIF-insured
institutions up to .68% of insured deposits to increase the SAIF reserve level
to 1.25% of SAIF-insured deposits, which is the same level attained by the BIF
prior to the reduction of BIF premium rates. If a special assessment as
described above were to be required, it would result, on a pro forma basis as
of June 30, 1996, in a one-time after-tax charge to the Corporation of
approximately $18.3 million. If such a special assessment were required and the
SAIF as a result was fully recapitalized, it could have the effect of reducing
the Corporation's deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
The Corporation has considered and will continue to consider possible
mergers with and acquisitions of other selected financial institutions. During
fiscal year 1996 the Corporation consummated the acquisitions of Railroad and
Conservative, and entered into a merger agreement with Heritage. See Notes 2, 3
and 27 to the Consolidated Financial Statements for additional information on
these completed and pending acquisitions. Such acquisitions present the
Corporation with the opportunity to further expand its retail network in its
existing markets; and to increase its earnings potential by increasing its
mortgage and consumer loan volumes funded by deposits which generally bear lower
rates of interest than alternative sources of funds.
The Corporation will continue to grow its five-state franchise through an
ongoing program of selective acquisitions of other financial institutions.
Acquisition candidates will be selected based on the extent to which the
candidate can enhance the Corporation's retail presence in new or existing
markets and complement the Corporation's present retail network.
At June 30, 1996, the Corporation had issued commitments of $173.6 million
to fund and purchase loans as follows: $55.2 million of single-family adjustabl
rate mortgage loans, $94.8 million of single-family fixed-rate mortgage loans,
$6.0 million of commercial real estate loans and $17.6 million of consumer loan
lines of
32 Commercial Federal Corporation Annual Report 1996
<PAGE>
credit. In addition, at June 30, 1996, outstanding commitments from mortgage
banking operations to purchase mortgage loan servicing rights totaled $9,000.
These outstanding loan commitments to extend credit in order to originate loans
or fund consumer loan lines of credit do not necessarily represent future cash
requirements since many of the commitments may expire without being drawn. The
Corporation expects to fund these commitments, as necessary, from the sources of
funds previously described.
The maintenance of an appropriate level of liquid resources to meet not
only regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Corporation is required by
federal regulation to maintain a minimum average daily balance of cash and
certain qualifying liquid investments equal to 5.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 7.07% at June 30, 1996. Liquidity levels will
vary depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The
Corporation does not foresee any difficulty in meeting its liquidity
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial
information have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant effect on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
STOCK PRICES AND DIVIDENDS
The Corporation's common stock is traded on the New York Stock Exchange
under the symbol "CFB." Prior to August 2, 1995, the Corporation's common stock
was traded on the Nasdaq Stock Market and quoted on the Nasdaq National Market
under the symbol "CFCN." The following table sets forth the high and low closing
sales prices for the periods indicated for the common stock of the Corporation.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------- --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock prices:
High.................... $38 7/8 $38 7/8 $37 3/4 $37 $31 1/4 $24 7/8 $24 13/16 $27 7/8
Low..................... 36 7/8 35 32 3/8 27 1/8 24 5/8 20 3/8 18 7/8 23 3/4
Dividends declared...... $.10 $.10 $.20 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1996, there were 15,089,701 shares of common stock issued
and outstanding which were held by more than 2,215 shareholders of record and
395,520 shares subject to outstanding options. On August 21, 1996, after the
repurchase of 1,250,100 shares of common stock from CAI Corporation, a total of
13,844,036 shares remain outstanding. The number of shareholders of record does
not reflect the persons or entities who hold their stock in nominee or "street"
name.
On October 4, 1995, the Board of Directors of the Corporation established
a policy of paying a regular quarterly cash dividend on its common stock.
Accordingly, cash dividends totaling $5.9 million, or $.40 per common share,
were declared during fiscal year 1996. See "Liquidity and Capital Resources" and
Note 19 to the Consolidated Financial Statements regarding the payment of future
dividends and any possible restrictions thereon.
Commercial Federal Corporation Annual Report 1996 33
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Financial Condition
- --------------------------------------------------------------------------------
(Dollars in Thousands) June 30,
ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash (including short-term investments of
$2,400 and $6,345) .......................... $ 35,827 $ 35,145
Investment securities available for sale,
at fair value ............................... 9,898 2,988
Mortgage-backed securities available for sale,
at fair value ............................... 263,206 36,974
Loans held for sale .......................... 89,379 113,385
Investment securities held to maturity (fair
value of $239,141 and $294,805) ............. 243,145 297,493
Mortgage-backed securities held to maturity
(fair value of $905,034 and $1,319,333) ..... 916,840 1,327,933
Loans receivable, net of allowances of
$49,200 and $48,463 ......................... 4,723,785 4,427,307
Federal Home Loan Bank stock ................. 79,113 103,648
Interest receivable, net of reserves of
$388 and $352 ............................... 40,683 42,211
Real estate .................................. 16,669 16,786
Premises and equipment ....................... 73,555 67,204
Prepaid expenses and other assets ............ 74,836 61,242
Goodwill and core value of deposits, net of
accumulated amortization of $73,742 and
$64,213 ..................................... 40,734 37,263
- --------------------------------------------------------------------------------
Total Assets ............................. $6,607,670 $6,569,579
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Deposits ................................... $ 4,304,576 $4,011,323
Advances from Federal Home Loan Bank ....... 1,350,290 1,787,352
Securities sold under agreements to
repurchase ................................ 380,755 208,373
Other borrowings ........................... 58,546 65,303
Interest payable ........................... 24,298 24,223
Other liabilities .......................... 75,928 135,391
- --------------------------------------------------------------------------------
Total Liabilities ........................ 6,194,393 6,231,965
- --------------------------------------------------------------------------------
Commitments and contingencies ................ -- --
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued .............. -- --
Common stock, $.01 par value; 25,000,000
shares authorized; 15,089,701 and
14,272,793 shares issued and outstanding .... 151 143
Additional paid-in capital ................... 175,548 146,530
Retained earnings ............................ 240,281 190,855
Unrealized holding gain (loss) on
securities available for sale, net .......... (2,703) 86
- --------------------------------------------------------------------------------
Total Stockholders' Equity ............... 413,277 337,614
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,607,670 $6,569,579
- --------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Unrealized
Holding Gain
(Loss) on
Additional Securities
Common Paid-in Retained Available
Stock Capital Earnings for Sale, Net Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1993......... $140 $143,189 $154,519 $ -- $297,848
Issuance of 90,836 shares
under certain compensation
and employee plans .......... 1 1,021 -- -- 1,022
Issuance of 16,247 shares of
common stock upon acquisition
of business ................. 1 169 -- -- 170
Restricted stock and deferred
compensation plans, net ..... -- 395 -- -- 395
Purchase and retirement of
2,844 shares of treasury
stock ....................... -- (35) -- -- (35)
Unrealized holding gain on
securities available for
sale, net .................... -- -- -- 198 198
Net income .................... -- -- 4,970 -- 4,970
Railroad Financial Corporation
activity for six months ended
June 30, 1994:
Issuance of 32,473 shares
under certain compensation
and employee plans ......... -- 146 -- -- 146
Purchase and retirement of
39,953 shares of treasury
stock ...................... -- (590) -- -- (590)
Unrealized holding loss on
securities available for
sale, net .................. -- -- -- (728) (728)
Net income .................... -- -- 185 -- 185
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 ....... 142 144,295 159,674 (530) 303,581
Issuance of 111,994 shares
under certain compensation
and employee plans ........... 1 1,333 -- -- 1,334
Restricted stock and deferred
compensation plans, net ...... -- 1,173 -- -- 1,173
Purchase and retirement of
17,759 shares of treasury
stock ........................ -- (271) -- -- (271)
Unrealized holding gain on
securities available for
sale, net .................... -- -- -- 616 616
Net income .................... -- -- 31,181 -- 31,181
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 ......... 143 146,530 190,855 86 337,614
Issuance of 113,456 shares
under certain compensation
and employee plans ........... 1 2,290 -- -- 2,291
Issuance of 707,562 shares of
common stock upon acquisition
of business .................. 7 25,819 -- -- 25,826
Restricted stock and deferred
compensation plans, net ...... -- 909 -- -- 909
Unrealized holding loss on
securities available for
sale, net .................... -- -- -- (2,789) (2,789)
Cash dividends declared ($.40
per share) ................... -- -- (5,880) -- (5,880)
Net income .................... -- -- 55,306 -- 55,306
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $151 $175,548 $240,281 $(2,703) $413,277
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Commercial Federal Corporation Annual Report 1996 35
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans receivable ................................ $384,765 $344,109 $306,725
Mortgage-backed securities ...................... 82,830 84,404 61,491
Investment securities ........................... 23,497 25,855 25,638
- ----------------------------------------------------------------------------------------------
Total interest income ........................ 491,092 454,368 393,854
Interest Expense:
Deposits ........................................ 214,040 180,163 142,557
Advances from Federal Home Loan Bank ............ 94,057 109,314 96,216
Securities sold under agreements to repurchase .. 13,525 7,837 9,592
Other borrowings ................................ 6,695 7,212 7,737
- ----------------------------------------------------------------------------------------------
Total interest expense ....................... 328,317 304,526 256,102
Net Interest Income .............................. 162,775 149,842 137,752
Provision for Loan Losses ........................ (6,107) (6,408) (6,248)
- ----------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses .......................................... 156,668 143,434 131,504
Other Income (Loss):
Loan servicing fees ............................. 27,891 24,731 22,227
Retail fees and charges ......................... 12,747 9,547 9,155
Real estate operations .......................... 172 1,490 (1,449)
Gain (loss) on sales of loans ................... 164 (1,695) 1,433
Gain on sales of loan servicing rights .......... 452 3,519 5,929
Other operating income .......................... 8,220 7,474 7,398
- ----------------------------------------------------------------------------------------------
Total other income ........................... 49,646 45,066 44,693
Other Expense:
General and administrative expenses-
Compensation and benefits ...................... 45,413 43,737 37,407
Occupancy and equipment ........................ 23,572 20,925 19,147
Regulatory insurance and assessments ........... 10,642 9,317 8,217
Advertising .................................... 6,451 4,594 3,954
Other operating expenses ....................... 28,439 23,981 25,390
- ----------------------------------------------------------------------------------------------
Total general and administrative expenses .... 114,517 102,554 94,115
Amortization of goodwill and core value of
deposits ....................................... 9,529 10,262 14,131
Valuation adjustment and accelerated
amortization of goodwill ....................... -- 21,357 52,703
- ----------------------------------------------------------------------------------------------
Total other expense .......................... 124,046 134,173 160,949
- ----------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative Effects
of Changes in Accounting Principles ............. 82,268 54,327 15,248
Provision for Income Taxes ....................... 26,962 23,146 16,875
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effects of
Changes in Accounting Principles ................ 55,306 31,181 (1,627)
Cumulative Effects of Changes in Accounting
Principles, net ................................. -- -- 6,597
- ----------------------------------------------------------------------------------------------
Net Income ....................................... $ 55,306 $ 31,181 $ 4,970
- ----------------------------------------------------------------------------------------------
</TABLE>
36 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Operations (continued)
- --------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Per Common Share:
- --------------------------------------------------------------------------------------------
Income (loss) before cumulative
effects of changes in accounting principles .............. $3.73 $2.16 $(.11)
Cumulative effects of changes in accounting principles .... -- -- .46
- --------------------------------------------------------------------------------------------
Net income ................................................ $3.73 $2.16 $ .35
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Commercial Federal Corporation Annual Report 1996 37
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ............................................................. $ 55,306 $ 31,181 $ 4,970
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of goodwill and core value of deposits ................. 9,529 10,262 14,131
Accelerated amortization of goodwill and valuation adjustment ....... -- 21,357 52,703
Cumulative effects of changes in accounting principles .............. -- -- (6,414)
Provisions for loss on loans and real estate ........................ 5,628 6,607 7,912
Depreciation and amortization ....................................... 6,855 5,613 4,768
Accretion of deferred discounts and fees, net ....................... (4,296) (2,476) (9,983)
Amortization of mortgage servicing rights ........................... 9,011 8,323 7,671
Amortization of deferred compensation on restricted stock
and premiums on other borrowings .................................. 1,365 1,340 948
Deferred tax provision .............................................. (52,591) 14,374 5,078
Gain on sales of real estate, loans and loan servicing rights, net .. (1,574) (4,022) (9,593)
Stock dividends from Federal Home Loan Bank ......................... (4,216) -- --
Proceeds from the sale of loans ..................................... 667,847 652,744 1,959,827
Origination of loans for resale ..................................... (365,484) (332,831) (996,518)
Purchase of loans for resale ........................................ (317,567) (378,886) (977,624)
Increase (decrease) in interest receivable .......................... 3,459 (3,781) (452)
Decrease in interest payable and other liabilities .................. (14,016) (9,452) (9,446)
Other items, net .................................................... (5,532) (1,493) (16,747)
--------- -------- ---------
Total adjustments ................................................. (61,582) (12,321) 26,261
--------- -------- ---------
Net cash (used) provided by operating activities ................ (6,276) 18,860 31,231
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans ..................................................... (576,377) (688,313) (1,117,176)
Repayment of loans, net of originations ................................ 411,420 176,911 375,259
Proceeds from sale of mortgage-backed securities available for sale .... 179,041 40,774 20,821
Principal repayments of mortgage-backed securities available for sale... 20,315 -- --
Principal repayments of mortgage-backed securities held to maturity .... 176,225 137,060 263,599
Purchases of mortgage-backed securities held to maturity ............... (50,197) (11,504) (214,811)
Maturities and repayments of investment securities held to maturity .... 104,458 24,172 119,185
Purchases of investment securities held to maturity .................... (76,266) (25,000) (153,650)
Proceeds from sale of investment securities available for sale ......... 51,770 14,797 --
Maturities and repayments of investment securities available for sale... 2,077 800 460
Purchase of investment securities available for sale ................... -- -- (1,551)
Acquisitions, net of cash (paid) received .............................. (15,234) 75,414 785,140
Purchases of mortgage loan servicing rights ............................ (14,034) (9,386) (7,774)
Proceeds from sale of loan servicing rights ............................ 452 3,519 5,981
Proceeds from sale of Federal Home Loan Bank stock ..................... 41,085 13,548 8,408
Purchases of Federal Home Loan Bank stock .............................. (4,178) (16,236) (8,078)
Proceeds from sale of real estate ...................................... 12,080 12,009 21,568
Payments to acquire real estate ........................................ (1,817) (1,444) (2,773)
Purchases of premises and equipment, net ............................... (8,211) (11,241) (4,403)
Other items, net ....................................................... 413 -- 504
-------- --------- ---------
Net cash provided (used) by investing activities ................ 253,022 (264,120) 90,709
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
38 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Cash Flows (continued)
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits .................................................. $ 93,755 $ 103,936 $ 121,062
Proceeds from Federal Home Loan Bank advances ......................... 1,169,500 617,602 885,290
Repayment of Federal Home Loan Bank advances .......................... (1,672,784) (506,392) (1,128,966)
Proceeds from securities sold under agreements to repurchase .......... 230,000 195,755 2,570
Repayment of securities sold under agreements to repurchase ........... (57,618) (157,432) --
Proceeds from issuance of other borrowings ............................ -- 4,000 --
Repayment of other borrowings ......................................... (6,836) (5,702) (10,579)
Payment of cash dividends on common stock ............................. (4,370) -- --
Issuance of common stock .............................................. 2,291 1,334 1,022
Other items, net ...................................................... (2) (271) (35)
---------- ---------- ------------
Net cash (used) provided by financing activities ............... (246,064) 252,830 (129,636)
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position .............................. 682 7,570 (7,696)
Balance, beginning of year ............................................ 35,145 27,575 35,271
---------- ---------- ------------
Balance, end of year .................................................. $ 35,827 $ 35,145 $ 27,575
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense .................................................. $ 328,861 $ 306,634 $ 259,705
Income taxes, net ................................................. 73,741 4,179 13,193
Non-cash investing and financing activities:
Securities transferred from held to maturity to available for
sale, net ........................................................ 410,930 -- --
Loans exchanged for mortgage-backed securities .................... 63,445 189,031 605,490
Loans transferred to real estate .................................. 9,908 7,853 9,345
Loans to facilitate the sale of real estate ....................... 51 583 12,847
Common stock issued in connection with the acquisition of
business ......................................................... 25,826 -- --
Reduction in core value of deposits on recognition of
pre-acquisition tax credits and net operating losses ............ -- (6,810) --
Increase to assets and liabilities from prior business
combinations ..................................................... -- -- 15,195
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Commercial Federal Corporation Annual Report 1996 39
<PAGE>
Commercial Federal Corporation Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
Note 1. Summary Of Significant Accounting Policies:
BASIS OF CONSOLIDATION - The consolidated financial statements are prepared on
an accrual basis and include the accounts of Commercial Federal Corporation (the
Corporation) and its wholly-owned subsidiary, Commercial Federal Bank, a Federal
Savings Bank (the Bank), and all majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain amounts for
years prior to fiscal year 1996 have been reclassified for comparative purposes.
NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and
loan holding company whose primary asset is the Bank which is a consumer-
oriented financial institution that emphasizes single-family residential real
estate lending, consumer lending, retail deposit activities, mortgage banking
and other retail financial services. The Bank conducts loan origination
activities through its branch office network, loan offices of its wholly-owned
mortgage banking subsidiary and a nationwide correspondent network.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
POOLING OF INTERESTS - On October 2, 1995, the Corporation consummated its
acquisition of Railroad Financial Corporation (Railroad), parent company of
Railroad Savings Bank, fsb. This acquisition was accounted for as a pooling of
interests and, accordingly, the Corporation's historical consolidated financial
statements have been restated for all periods prior to the acquisition to
include the accounts and results of operations of Railroad.
CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and
cash equivalents include cash, restricted cash and federal funds sold.
Generally, federal funds are purchased and sold for a one-day period.
SECURITIES - Securities must be classified in one of three categories and
accounted for as follows: (i) debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as "held-to-
maturity securities" and reported at amortized cost; (ii) debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term are classified as "trading securities" and reported at fair
value, with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as "available-for-sale securities" and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity. The Corporation
did not hold any trading securities at June 30, 1996 or 1995.
Premiums and discounts are amortized over the contractual lives of the
related securities on the level yield method. Unrealized losses on securities,
if any, reflecting a decline in the fair value of such securities to be other
than temporary, are charged against income. Realized gains or losses on
securities available for sale are based on the specific identification method
and are included in results of operations on the trade date.
LOANS - Loans receivable are recorded at the contractual amounts owed by
borrowers less unamortized discounts, net of premiums, undisbursed funds on
loans in process, deferred loan fees and allowance for loan losses. Interest on
loans is accrued to income as earned, except that interest is not accrued on
first mortgage loans contractually delinquent three months or more. Any related
discounts or premiums on loans purchased are amortized into interest income
using the level yield method over the contractual lives of the loans, adjusted
for actual prepayments. Loan origination fees, commitment fees and direct loan
origination costs are deferred and recognized over the estimated average life of
the loan as a yield adjustment. Loans held for sale are carried at the lower of
aggregate cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on an aggregate loan
basis. Valuation adjustments, if necessary, to reflect the lower of aggregate
cost or market value, are recorded in current operations.
40 Commercial Federal Corporation Annual Report 1996
<PAGE>
REAL ESTATE - Real estate includes real estate acquired through foreclosure,
real estate in judgment and real estate held for investment, which includes
equity in unconsolidated joint ventures and investment in real estate
partnerships.
Real estate acquired through foreclosure and in judgment are initially
recorded at the lower of cost or fair value minus estimated costs to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valuation
allowances for estimated losses on real estate are provided when the carrying
value exceeds the fair value minus estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities incurred to date. Joint
venture and partnership investments are carried on the equity method of
accounting and, where applicable, are stated at net realizable value. The
Corporation's ability to recover the carrying value of real estate held for
investment (including capitalized interest) is based upon future sales of land
or projects. The ability to affect such sales is subject to market conditions
and other factors which may be beyond the Corporation's control.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by
charges to income and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, the estimated value of any underlying collateral and current economic
conditions. Impaired loans except large groups of smaller balance homogeneous
loans (such as residential real estate and consumer loans) that are collectively
evaluated for impairment and loans that are measured at fair value or the lower
of cost or market value, are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the observable market price of the loan or the fair
value of the underlying collateral.
ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation previously
purchased single-family residential whole loan packages (bulk purchased loans)
at net discounts. Portions of such discounts are allocated to allowance for
losses (credit allowances) relating to the credit risk associated with each
mortgage loan package purchased. These credit allowances are available to absorb
possible losses on these bulk purchased loans only or are credited to interest
income as actual prepayments of individual loans occur. Collectibility is
evaluated throughout the life of the acquired loans and if the estimate of total
probable collections is increased or decreased, the amount of the allowance on
bulk purchased loans (and the corresponding discount to be amortized) is
adjusted accordingly.
MORTGAGE SERVICING RIGHTS - Mortgage servicing rights represent the cost of
acquiring the right to service mortgage loans. Such costs are initially
capitalized and subsequently amortized in proportion to, and over the period of,
estimated net loan servicing income.
As of July 1, 1995, the Corporation adopted, on a prospective basis, the
provisions of Statement of Financial Accounting Standards No. 122 (SFAS No. 122)
entitled "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that
a mortgage banking enterprise recognize as a separate asset the rights to
service mortgage loans for unrelated third parties that have been acquired
though either the purchase or origination of a loan. Previous to July 1, 1995,
only purchased mortgage servicing rights were capitalized as assets. SFAS No.
122 provides that an institution that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained will allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Additionally,
SFAS No. 122 requires that mortgage servicing rights be reported at the lower of
cost or fair value. The value of mortgage servicing rights is determined based
on the present value of estimated expected future
Commercial Federal Corporation Annual Report 1996 41
<PAGE>
cash flows, using assumptions as to current market discount rates, prepayment
speeds and servicing costs per loan. Mortgage servicing rights are stratified by
loan type and interest rate for purposes of impairment measurement. Loan types
include government, conventional, private, and adjustable-rate mortgage loans.
Impairment losses are recognized to the extent the unamortized mortgage
servicing right for each stratum exceeds the current market value, as reductions
in the carrying value of the asset, through the use of a valuation allowance,
with a corresponding reduction to loan servicing income. No valuation allowance
for capitalized servicing rights was necessary to be established as of June 30,
1996. The net effect of adopting the provisions of SFAS No. 122 was to increase
fiscal year 1996 pre-tax earnings approximately $3,995,000 (after-tax
approximately $2,547,000 or $.17 per common share).
PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building
improvements, leasehold improvements and furniture, fixtures and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings and three to 15
years for furniture, fixtures and equipment. Leasehold improvements are
generally amortized on the straight-line method over the terms of the respective
leases. Maintenance and repairs are charged to expense as incurred.
INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS - Effective June 30, 1994,
the Corporation changed its method of valuation of intangible assets
incorporating a fair value concept using a lower of cost or market methodology.
This accounting change was considered to be a change in accounting principle
inseparable from a change in estimate. Independent valuations of the fair value
of the intangibles were completed for fiscal years 1995 and 1994.
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS No. 121) entitled "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" as of July 1,
1995. SFAS No. 121 establishes accounting standards for the recognition and
measurement of the impairment of long-lived assets, certain identifiable
intangibles and goodwill. This statement does not apply to core deposit
intangibles or mortgage and other servicing rights. The provisions of this
statement require that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In such cases, the
expected future cash flows (undiscounted and without interest charges) resulting
from the use of the asset are estimated and an impairment loss recognized if the
sum of such cash flows is less than the carrying amount of the asset. Should
such an assessment indicate that the value of a long-lived asset or goodwill may
be impaired, an impairment loss is recognized for the difference between the
carrying value of the asset and its estimated fair value. The adoption of the
provisions of this statement had no effect on the Corporation's financial
position or results of operations.
Core value of deposits resulting from acquisitions in fiscal years 1994 and
later is amortized on an accelerated basis over a period not to exceed 10 years
and goodwill is amortized on a straight-line basis over a period not to exceed
20 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Corporation enters into
sales of securities under agreements to repurchase with primary dealers only,
which provide for the repurchase of the same security. Securities sold under
agreements to purchase identical securities are collateralized by assets which
are held in safekeeping in the name of the Corporation by the dealers who
arranged the transaction. Securities sold under agreements to repurchase are
treated as financings and the obligations to repurchase such securities are
reflected as a liability. The securities underlying the agreements remain in the
asset accounts of the Corporation.
HEDGING - The Bank has historically invested in interest-earning assets that
have a longer duration than its interest-bearing liabilities. The shorter
duration of the interest-sensitive liabilities indicates that the Bank is
exposed to interest rate risk. In a rising rate environment, liabilities will
reprice faster than assets, thereby reducing the market value of long-term
interest-earning assets and net interest income.
To mitigate this risk, interest rate swaps and interest rate caps have been
utilized to hedge the interest rate exposure on certain interest-sensitive
liabilities. It has been the general policy of the Bank to move toward a
natural,
42 Commercial Federal Corporation Annual Report 1996
<PAGE>
rather than a synthetic, management of its interest rate risk. Therefore, the
Bank has allowed such hedging instruments to expire upon maturity while
extending the maturities and locking in fixed interest rates on certain
borrowings, primarily advances from the Federal Home Loan Bank, which has helped
to reduce the Bank's one-year cumulative gap mismatch. The Bank reports interest
rate swaps using settlement accounting whereby the net amount on interest rate
swaps is recognized as an adjustment to interest expense.
INCOME TAXES - The Corporation files consolidated federal income tax returns.
The Corporation and its subsidiaries have entered into a tax-sharing agreement
that provides for the allocation and payment of federal and state income taxes.
The provision for income taxes of each corporation is computed on a separate
company basis, subject to certain adjustments.
Effective July 1, 1993, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." Railroad's adoption of the provisions of this statement was changed from
the year ended December 31, 1992, to the year ended December 31, 1993, to
conform to the Corporation's adoption, and therefore is included in the
cumulative effect of changes in accounting principles for the fiscal year ended
June 30, 1994. This statement supersedes both Accounting Principles Board
Opinion No. 11 (APB Opinion No. 11) and the guidance of APB Opinion No. 23 on
the tax treatment of savings and loan bad debt reserves. SFAS No. 109 calculates
income taxes on the liability method, under which the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various assets and liabilities of the Corporation and
gives current recognition to changes in tax rates and laws. The effect of
applying the provisions of SFAS No. 109 was a one-time adjustment that increased
net income for fiscal year 1994 by $6,933,000 ($.48 per share) recorded as a
cumulative effect of a change in accounting principle resulting from increasing
the net deferred tax liability by $8,262,000 offset by additional deferred taxes
totaling $15,195,000 recorded to adjust the assets and liabilities for prior
business combinations from net-of-tax to pre-tax amounts. The principal
temporary difference creating this increase to net income is the Bank's reserve
for losses on loans and real estate. In addition, valuation allowances were
established against certain deferred tax assets recorded for state income tax
purposes.
EARNINGS PER SHARE - Earnings per common share are calculated on the basis of
the weighted average common shares outstanding and those outstanding options and
warrants that are dilutive.
NOTE 2: ACQUISITION OF RAILROAD FINANCIAL CORPORATION:
On October 2, 1995, the Corporation consummated its acquisition of Railroad
and, pursuant to the terms of the merger agreement, 2,156,232 shares of
Railroad's common stock were delivered to the Corporation in exchange for
approximately 1,377,617 shares of the Corporation's common stock (exchange ratio
of .6389 based on an average closing price of $35.063). Railroad operated 18
branches and 71 agency offices throughout the state of Kansas and at September
30, 1995, had assets of approximately $602,900,000, deposits of approximately
$421,400,000 and stockholders' equity of approximately $27,700,000. This
acquisition was accounted for as a pooling of interests and, accordingly, the
Corporation's historical consolidated financial statements have been restated
for all periods prior to the acquisition to include the accounts and results of
operations of Railroad.
Commercial Federal Corporation Annual Report 1996 43
<PAGE>
The following table summarizes results of operations of the Corporation and
Railroad for the three months ended September 30, 1995, as separately reported
prior to the merger, that are included in results of operations for fiscal year
1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Corporation Railroad Combined
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total interest income and other income .............................................. $120,560 $13,531 $134,091
Total interest expense .............................................................. 76,320 8,283 84,603
Net income (loss) ................................................................... 11,859 (615) 11,244
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reconciles revenue and earnings previously reported by the
Corporation to give effect to the merger as currently presented in the
financial statements for fiscal years 1995 and 1994.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Corporation Railroad Combined
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal year 1995:
Total interest income and other income ............................................ $449,526 $49,908 $499,434
Total interest expense ............................................................ 277,806 26,720 304,526
Net income ........................................................................ 27,535 3,646 31,181
Fiscal year 1994:
Total interest income and other income ............................................ $397,814 $40,733 $438,547
Total interest expense ............................................................ 239,950 16,152 256,102
Net income ........................................................................ 158 4,812 4,970
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Railroad's results of operations were reported on a calendar year basis
previous to its merger into the Corporation. However, in restating prior
periods, Railroad's accounts and results of operations were conformed to the
Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years,
Railroad's accounts and results of operations for the six months ended June 30,
1994, including total revenue of $18,129,000 and net income totaling $185,000
were excluded from reported results of operations for the restated combined
companies but are included in the Corporation's Consolidated Statement of
Stockholders' Equity.
NOTE 3. PURCHASE ACQUISITION:
On February 1, 1996, the Corporation consummated its acquisition of
Conservative Savings Corporation (Conservative), parent company of Conservative
Savings Bank, FSB. Under the terms of the Reorganization and Merger Agreement
the Corporation acquired all of the outstanding shares of Conservative's common
stock (1,844,838 shares) and preferred stock (460,000 shares). Each share of
Conservative's common stock was exchanged for $6.34 in cash and .2453 shares of
the Corporation's common stock. Each share of Conservative's preferred stock was
exchanged for $14.33 in cash and .5544 shares of the Corporation's common stock.
Based on the Corporation's closing stock price of $36.50 at February 1, 1996,
the total consideration for this acquisition approximates $44,114,000.
At February 1, 1996, before purchase accounting adjustments, Conservative had
assets of approximately $302,871,000, deposits of approximately $197,940,000 and
stockholders' equity of approximately $35,124,000. The Consolidated Statement of
Operations for fiscal year 1996 includes the operating results of Conservative
beginning February 1, 1996. Conservative operated nine branches with seven
located in Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. Three
of the former Conservative branches and two branches of the Corporation closed
in the consolidation process pursuant to this acquisition.
This acquisition has been accounted for as a purchase. Core value of deposits
resulting from this transaction totaled $6,842,000 and is amortized on an
accelerated basis over 10 years; and goodwill totaling $6,158,000 recorded from
this transaction is amortized on a straight-line basis over 20 years. The effect
of this acquisition on the Corporation's consolidated financial statements as if
this acquisition had occurred at the beginning of the fiscal year is not
material.
44 Commercial Federal Corporation Annual Report 1996
<PAGE>
NOTE 4. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and other Government agency obligations................. $ 6,876 $ 97 $ (63) $ 6,910
Other debt securities................................................. 2,966 22 -- 2,988
- ----------------------------------------------------------------------------------------------------------------------------
$ 9,842 $ 119 $ (63) $ 9,898
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 5.50%
- ----------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations................. $ 213,800 $ 78 $(3,642) $210,236
States and political subdivisions..................................... 18,642 -- (440) 18,202
Other debt securities................................................. 10,703 -- -- 10,703
- ----------------------------------------------------------------------------------------------------------------------------
$243,145 78 $(4,082) $239,141
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.06%
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury and other Government agency obligations................. $ 3,001 $ -- $ (13) $ 2,988
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.64%
- ----------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations................. $296,443 $1,078 $(3,743) $293,778
Other debt securities................................................. 1,050 -- (23) 1,027
- ----------------------------------------------------------------------------------------------------------------------------
$297,493 $1,078 $(3,766) $294,805
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.26%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996 and 1995, investment securities totaling $494,000 and
$659,000, respectively, were pledged to secure public funds.
As of June 30, 1996, the Corporation recorded an unrealized gain on
securities available for sale as an increase to stockholders' equity totaling
$56,000, net of deferred income taxes of $20,000.
Commercial Federal Corporation Annual Report 1996 45
<PAGE>
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 1996, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<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................... $ -- $ -- $ 46,173 $ 46,170
Due after one year through five years..... 9,842 9,898 167,890 164,327
Due after five years through ten years.... -- -- 14,135 13,845
Due after ten years....................... -- -- 14,947 14,799
- -----------------------------------------------------------------------------------------------------------
$9,842 $9,898 $243,145 $239,141
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, pursuant to the issuance of a special report by the
Financial Accounting Standards Board entitled "A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and Equity
Securities," and the reassessment of the appropriateness of the classifications
of all securities held, management of the Corporation reclassified agency-backed
investment securities totaling $49,945,000 from securities held to maturity to
securities available for sale.
Proceeds from the sale of investment securities available for sale totaled
$51,770,000 and $14,797,000, respectively, for the fiscal years ended June 30,
1996 and 1995, resulting in net pre-tax losses of $208,000 for fiscal year 1996,
which are included in other operating income, and in no gain or loss for fiscal
year 1995. During fiscal year 1994 there were no sales of investment securities.
NOTE 5. MORTGAGE-BACKED SECURITIES:
<TABLE>
<CAPTION>
Mortgage-backed securities are summarized as follows:
- -------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation....... $ 17,134 $ 66 $ (376) $ 16,824
Government National Mortgage Association..... 119,424 264 (3,099) 116,589
Federal National Mortgage Association........ 73,456 508 (64) 73,900
Collateralized Mortgage Obligations.......... 57,649 169 (1,925) 55,893
- -------------------------------------------------------------------------------------------------------
$ 267,663 $ 1,007 $ (5,464) $ 263,206
- -------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 7.25%
- -------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation....... $ 221,190 $ 1,478 $ (4,517) $ 218,151
Government National Mortgage Association..... 511,834 965 (7,310) 505,489
Federal National Mortgage Association........ 108,473 1,323 (1,949) 107,847
Collateralized Mortgage Obligations.......... 50,715 21 (1,553) 49,183
Privately Issued Mortgage Pool Securities.... 24,628 -- (264) 24,364
- -------------------------------------------------------------------------------------------------------
$ 916,840 $ 3,787 $ (15,593) $ 905,034
- -------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 6.58%
- -------------------------------------------------------------------------------------------------------
</TABLE>
46 Commercial Federal Corporation Annual Report 1996
<PAGE>
<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%
- --------------------------------------------------------------------------------------------------------
</TABLE>
Mortgage-backed securities held to maturity at June 30 are classified by type of
interest payment and contractual maturity term as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate........................ $707,359 $700,300 6.49% $ 780,311 $ 774,262 6.08%
Fixed-rate, 5-year term................ 63,663 62,654 6.32 16,274 16,028 6.03
Fixed-rate, 7-year term................ 43,746 42,067 5.99 50,399 49,575 6.29
Fixed-rate, 15-year term............... 12,815 12,264 6.35 308,335 305,954 6.76
Fixed-rate, 30-year term............... 38,542 38,566 10.29 114,501 116,724 7.49
- ---------------------------------------------------------------------------------------------------------------------
866,125 855,851 6.62 1,269,820 1,262,543 6.38
Collateralized mortgage obligations.... 50,715 49,183 5.91 58,113 56,790 5.96
- ---------------------------------------------------------------------------------------------------------------------
$916,840 $905,034 6.58% $1,327,933 $1,319,333 6.36%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1996, the Corporation recorded an unrealized loss on
securities available for sale as a decrease to stockholders' equity totaling
$4,276,000, net of a deferred income tax benefit of approximately $1,537,000;
and as of June 30, 1995, recorded an unrealized gain on securities available for
sale as an increase to stockholders' equity totaling $134,000, net of deferred
income taxes of approximately $48,000.
At December 31, 1995, pursuant to the issuance of the aforementioned special
report entitled "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities," and the reassessment of
the appropriateness of the classifications of all securities held, management of
the Corporation reclassified mortgage-backed securities totaling $370,400,000
from securities held to maturity to securities available for sale. Such
reclassification consisted of substantially all existing 15- and 30-year fixed-
rate mortgage-backed securities held by the Corporation. In addition,
approximately $9,415,000 of adjustable-rate mortgage-backed securities were
reclassified from available for sale to held to maturity.
Commercial Federal Corporation Annual Report 1996 47
<PAGE>
Proceeds from the sale of mortgage-backed securities available for sale
totaled $179,041,000, $40,774,000 and $20,821,000, respectively, for the fiscal
years ended June 30, 1996, 1995, and 1994 resulting in net pre-tax gains of
$461,000 and $220,000 for fiscal years 1996 and 1994, respectively, and a pre-
tax loss of $41,000 for fiscal year 1995, all of which are included in other
operating income.
At June 30, 1996 and 1995, the Corporation pledged mortgage-backed securities
totaling $458,666,000 and $317,701,000, respectively, as collateral for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase, interest rate swap agreements and other borrowings.
NOTE 6. LOANS HELD FOR SALE:
Loans held for sale from mortgage banking operations at June 30, 1996 and
1995, totaled $89,379,000 and $113,385,000, respectively, with weighted average
rates of 7.82% and 8.02%, respectively. Loans held for sale are secured by
single-family residential properties consisting of fixed and adjustable rate
mortgage loans totaling $89,294,000 and $85,000, respectively, at June 30, 1996,
and $83,598,000 and $29,787,000, respectively, at June 30, 1995.
NOTE 7. LOANS RECEIVABLE:
<TABLE>
<CAPTION>
Loans receivable at June 30 are summarized as follows:
- ---------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Conventional mortgage loans............................... $3,757,513 $3,583,517
FHA and VA loans.......................................... 291,755 340,864
Commercial real estate loans.............................. 261,046 210,676
Consumer and other loans.................................. 355,777 242,697
Construction loans........................................ 199,088 186,679
- ----------------------------------------------------------------------------------------
4,865,179 4,564,433
Less:
Unamortized premiums (discounts), net..................... 2,794 (5,957)
Loans-in-process.......................................... (91,262) (80,211)
Deferred loan fees, net................................... (3,726) (2,495)
Allowance for loan losses................................. (49,200) (48,463)
- ----------------------------------------------------------------------------------------
$4,723,785 $4,427,307
- ----------------------------------------------------------------------------------------
Weighted average interest rate............................ 8.20% 8.26%
- ----------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, conventional, FHA and VA loans, including loans held for
sale, totaling $4,327,018,000 are secured by single-family residential
properties located as follows: 20% in Nebraska, 17% in Colorado, 7% in Kansas,
5% each in Georgia, Oklahoma and Texas, and the remaining 41% in 44 other
states. At June 30, 1995, conventional, FHA and VA loans, including loans held
for sale, totaling $4,215,956,000 were secured by single-family residential
properties located as follows: 19% each in Nebraska and Colorado, 7% in Kansas,
5% each in Texas, Georgia and Oklahoma, and the remaining 40% in 44 other
states. The commercial real estate portfolio at June 30, 1996, is secured by
properties located as follows: 33% in Colorado, 31% in Nebraska, 12% in Florida
and the remaining 24% in 18 other states. The commercial real estate portfolio
at June 30, 1995, was secured by properties located as follows: 44% in Colorado,
14% in Nebraska, 12% in Kansas, 8% in Florida and the remaining 22% in 16 other
states.
Nonperforming loans at June 30, 1996 and 1995, aggregated $37,905,000 and
$32,258,000, respectively. Of the nonperforming loans at June 30, 1996,
approximately 12% are secured by properties located in California, 9% each in
Georgia and Texas, 7% in Colorado, 6% in
48 Commercial Federal Corporation Annual Report 1996
<PAGE>
Nebraska, 5% each in Kansas and Missouri, 4% each in Maryland and Oklahoma and
the remaining 39% located in 35 other states. Of the nonperforming loans at June
30, 1995, approximately 12% were secured by properties located in California,
11% in Texas, 9% in Colorado, 8% in Georgia, 6% each in Nebraska and Missouri,
and the remaining 48% located in 44 other states.
Also included in loans receivable at June 30, 1996 and 1995, are loans with
carrying values of $14,803,000 and $17,860,000, respectively, the terms of which
have been modified in troubled debt restructurings. During the fiscal years
ended June 30, 1996 and 1995, the Corporation recognized interest income on
these loans aggregating $1,276,000 and $1,677,000, respectively, whereas under
their original terms the Corporation would have recognized interest income of
$1,515,000 and $1,900,000, respectively. At June 30, 1996, the Corporation had
no material commitments to lend additional funds to borrowers whose loans were
subject to troubled debt restructuring.
At June 30, 1996 and 1995, the Corporation had pledged substantially all
single-family residential loans as collateral for Federal Home Loan Bank
advances and other borrowings. In addition, at June 30, 1996, the Corporation
had also pledged a portion of commercial real estate loans for Federal Home Loan
Bank advances.
NOTE 8. REAL ESTATE:
Real estate at June 30 is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned and in judgment,
net of allowance for losses of $3,353 and $4,583.... $ 8,008 $ 7,260
Real estate held for investment, which includes
equity in unconsolidated joint ventures and
investments in real estate partnerships, net of
allowance for losses of $1,090 and $1,391........... 8,661 9,526
- --------------------------------------------------------------------------------
$16,669 $16,786
- --------------------------------------------------------------------------------
</TABLE>
Commercial and residential real estate comprise approximately 70% and 30%,
respectively, of the total amount of real estate at June 30, 1996, and
approximately 77% and 23%, respectively, of the total amount of real estate at
June 30, 1995. Real estate located by states at June 30, 1996, is as follows:
42% in Nebraska, 31% in Colorado, 8% in Texas, and the remaining 19% in 23 other
states. Real estate located by states at June 30, 1995, was as follows: 48% in
Nebraska, 33% in Colorado, 5% in Texas, and the remaining 14% in 18 other
states.
Commercial Federal Corporation Annual Report 1996 49
<PAGE>
NOTE 9. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE:
<TABLE>
<CAPTION>
An analysis of the allowances for losses on loans and real estate is summarized as follows:
- -----------------------------------------------------------------------------------------------
Loans Real Estate Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1993 ...................................... $46,908 $ 5,738 $52,646
- -----------------------------------------------------------------------------------------------
Provision charged to operations ............................. 6,248 1,664 7,912
Charges ..................................................... (4,098) (1,367) (5,465)
Recoveries .................................................. 743 337 1,080
Estimated allowance for purchased loans ..................... 39 -- 39
Change in estimate of allowance for purchased loans ......... (4,357) -- (4,357)
Charge-offs to allowance for purchased loans ................ (632) -- (632)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1994 (1) .................................. 44,851 6,372 51,223
- -----------------------------------------------------------------------------------------------
Provision charged to operations ............................. 6,408 199 6,607
Charges ..................................................... (3,771) (683) (4,454)
Recoveries .................................................. 1,334 152 1,486
Allowances from acquisitions ................................ 1,818 -- 1,818
Railroad activity for the six months ended June 30, 1994, net (58) (66) (124)
Change in estimate of allowance for purchased loans ......... (1,705) -- (1,705)
Charge-offs to allowance for purchased loans ................ (336) -- (336)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1995 (1) .................................. 48,541 5,974 54,515
- -----------------------------------------------------------------------------------------------
Provision charged (credited) to operations .................. 6,107 (479) 5,628
Charges ..................................................... (5,533) (1,211) (6,744)
Recoveries .................................................. 734 159 893
Allowances from acquisitions ................................ 1,944 -- 1,944
Change in estimate of allowance for purchased loans ......... (2,273) -- (2,273)
Charge-offs to allowance for purchased loans ................ (242) -- (242)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1996 (1) .................................. $49,278 $ 4,443 $53,721
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994,
in general allowance for losses established primarily to cover risks associated
with borrowers' delinquencies and defaults on loans held for sale.
- --------------------------------------------------------------------------------
Bulk loan purchases acquired at a discount are allocated an estimated
allowance for bulk purchased loans that will be available for potential losses
in the future on a particular loan package with any excess over the allowance
recorded as a discount. At June 30, 1996, 1995 and 1994, $12,765,000,
$15,280,000 and $17,321,000, respectively, are included in the allowance for
losses on loans presented above.
NOTE 10. LOAN SERVICING:
The Corporation's mortgage banking subsidiary services real estate loans for
investors which are not included in the accompanying consolidated financial
statements. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding advance payments by borrowers for
taxes and insurance, making inspections as required of the mortgage premises,
collecting amounts due from delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults and generally administering the loans for the
investors to whom they have been sold. The amount of loans serviced for other
institutions at June 30, 1996, 1995 and 1994, was $5,869,800,000, $5,151,100,000
and $4,635,945,000, respectively.
The mortgage servicing portfolio is covered by servicing agreements pursuant
to the mortgage-backed securities programs of the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the
50 Commercial Federal Corporation Annual Report 1996
<PAGE>
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. The amount of funds advanced by the Corporation pursuant to
servicing agreements is not material.
Custodial escrow balances maintained in connection with loan servicing
totaled approximately $101,671,000 and $110,714,000, at June 30, 1996 and 1995,
respectively.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "Prepaid expenses and other assets." The
activity of mortgage servicing rights at June 30 is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance....................................... $36,236 $34,128 $34,025
Purchases of mortgage servicing rights.................. 14,034 9,386 7,774
Mortgage servicing rights from purchase acquisitions.... 38 1,045 --
Mortgage servicing rights
capitalized through loan originations.................. 3,673 -- --
Amortization expense.................................... (9,011) (8,323) (7,671)
- -------------------------------------------------------------------------------------------
Ending balance.......................................... $44,970 $36,236 $34,128
- -------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, the fair value of the Corporation's mortgage servicing
rights totaled approximately $77,500,000 and no valuation allowance was
necessary to be established. Outstanding commitments to purchase mortgage loan
servicing rights totaled $9,000 and $521,000, respectively, at June 30, 1996 and
1995. There was no commitment to sell any bulk packages of mortgage servicing
rights at June 30, 1996.
NOTE 11. PREMISES AND EQUIPMENT:
<TABLE>
<CAPTION>
Premises and equipment at June 30 are summarized as follows:
- -------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Land.............................................................. $ 11,998 $ 10,681
Buildings and improvements........................................ 58,307 54,177
Leasehold improvements............................................ 2,875 2,640
Furniture, fixtures and equipment................................. 62,596 56,336
- -------------------------------------------------------------------------------------------
135,776 123,834
Less accumulated depreciation and amortization.................... 62,221 56,630
- -------------------------------------------------------------------------------------------
$ 73,555 $ 67,204
- -------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $6,855,000, $5,613,000 and $4,768,000
for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
The Bank has operating lease commitments on certain premises and equipment.
Rent expense totaled $2,834,000, $2,939,000 and $2,690,000 for the fiscal years
ended June 30, 1996, 1995 and 1994, respectively. Annual minimum operating lease
commitments as of June 30, 1996, are as follows: 1997 - $1,628,000; 1998 -
$1,084,000; 1999 - $892,000; 2000 - $597,000; 2001 - $389,000; 2002 and
thereafter - $4,643,000.
Commercial Federal Corporation Annual Report 1996 51
<PAGE>
NOTE 12. GOODWILL AND CORE VALUE OF DEPOSITS:
<TABLE>
<CAPTION>
An analysis of goodwill and core value of deposits is summarized as follows:
- -------------------------------------------------------------------------------------------
Core Value
Goodwill of Deposits Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1993 .................................. $ 57,725 $ 30,221 $ 87,946
Additions relating to acquisitions ...................... 359 28,674 29,033
Adoption of SFAS No. 109 for prior business combinations. -- 15,692 15,692
Valuation adjustment .................................... (29,267) (20,763) (50,030)
Amortization expense .................................... (6,241) (7,890) (14,131)
Sale of an investment in a subsidiary ................... (849) -- (849)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1994 .................................. 21,727 45,934 67,661
- -------------------------------------------------------------------------------------------
Additions relating to acquisitions, net ................. 1,510 6,521 8,031
Accelerated amortization expense ........................ (21,357) -- (21,357)
Write-off due to recognition of pre-acquisition
tax credits and net operating losses ................... -- (6,810) (6,810)
Amortization expense .................................... (48) (10,214) (10,262)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1995 .................................. 1,832 35,431 37,263
- -------------------------------------------------------------------------------------------
Additions relating to acquisitions ...................... 6,158 6,842 13,000
Amortization expense .................................... (218) (9,311) (9,529)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1996 .................................. $ 7,772 $ 32,962 $ 40,734
- -------------------------------------------------------------------------------------------
</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 was amortized over the first six months
of fiscal year 1995. No impairment adjustment has been made to the intangible
assets resulting from the Corporation's acquisitions during fiscal years 1996,
1995 or 1994.
52 Commercial Federal Corporation Annual Report 1996
<PAGE>
NOTE 13. DEPOSITS:
<TABLE>
<CAPTION>
Deposits at June 30 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------
1996 1995
------------------------ --------------------------
Description and interest rates Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (average of 4.24% and 4.38%) ...... $ 623,505 14.5% $ 549,857 13.7%
NOW accounts (average of .63% and .93%) ............. 332,233 7.7 296,552 7.4
Market rate savings (average of 3.34% and 3.36%) .... 159,672 3.7 190,994 4.8
- ------------------------------------------------------------------------------------------------------------
Total savings (no stated maturities) ................ 1,115,410 25.9 1,037,403 25.9
- ------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00% .................................... 8,848 .2 11,846 .3
3.00% - 3.99% ..................................... 19,978 .5 67,404 1.7
4.00% - 4.99% ..................................... 285,083 6.6 518,061 12.9
5.00% - 5.99% ..................................... 1,948,836 45.3 1,017,841 25.4
6.00% - 6.99% ..................................... 606,704 14.1 1,026,035 25.5
7.00% - 7.99% ..................................... 300,040 7.0 290,950 7.2
8.00% - 8.99% ..................................... 15,090 .3 34,798 .9
9.00% and over .................................... 4,587 .1 6,985 .2
- ------------------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 6.10% and 5.33%) ........................ 3,189,166 74.1 2,973,920 74.1
- ------------------------------------------------------------------------------------------------------------
$4,304,576 100.0% $4,011,323 100.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Interest expense on deposit accounts for the years ended June 30 is summarized as follows:
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts ........................................... $ 24,702 $ 23,696 $ 8,729
NOW accounts ................................................ 2,766 2,586 2,882
Market rate savings ......................................... 5,709 7,356 5,881
Certificates of deposit ..................................... 180,863 146,525 125,065
- ------------------------------------------------------------------------------------------------------------
$214,040 $180,163 $142,557
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit in amounts of $100,000 or more totaled $278,839,000
and $203,077,000, respectively, at June 30, 1996 and 1995. There were no
brokered certificates of deposit at June 30, 1996 or 1995.
Commercial Federal Corporation Annual Report 1996 53
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996, scheduled maturities of certificates of deposit are as follows:
- -------------------------------------------------------------------------------------------------------------------------
Year Ending June 30,
------------------------------------------------------------------------------------
Rate 1997 1998 1999 2000 2001 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.00% .................... $ 6,806 $ 102 $ 82 $ 45 $ 3 $ 1,810 $ 8,848
3.00% - 3.99% ..................... 16,184 2,998 627 148 -- 21 19,978
4.00% - 4.99% ..................... 253,113 28,892 2,321 75 3 679 285,083
5.00% - 5.99% ..................... 1,444,851 344,870 129,100 14,745 10,000 5,270 1,948,836
6.00% - 6.99% ..................... 444,704 113,751 28,486 12,631 3,022 4,110 606,704
7.00% - 7.99% ..................... 201,526 74,116 14,471 8,971 587 369 300,040
8.00% - 8.99% ..................... 4,216 8,421 1,519 767 162 5 15,090
9.00% and over .................... 103 4,320 130 19 -- 15 4,587
- -------------------------------------------------------------------------------------------------------------------------
$2,371,503 $577,470 $176,736 $37,401 $13,777 $12,279 $3,189,166
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996 and 1995, deposits of certain state and municipal agencies
and other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $7,765,000 and $44,132,000, respectively, and
investment securities with carrying values of $494,000 and $659,000,
respectively.
In accordance with regulatory requirements, at June 30, 1996 and 1995, the
Corporation maintained $13,633,000 and $11,197,000, respectively, in cash on
hand and deposits at the Federal Reserve Bank in noninterest earning reserves
against certain transaction checking accounts and nonpersonal certificates of
deposit.
NOTE 14. ADVANCES FROM THE FEDERAL HOME LOAN BANK:
The Corporation was indebted to the Federal Home Loan Bank of Topeka on notes
maturing as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1996 1995
----------------------------------------- ------------------------
Weighted Weighted
Interest Average Average
Scheduled Maturities Due: Rate Range Rate Amount Rate Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within 1 year...................... 4.61% - 9.43% 5.59% $ 825,691 6.15% $ 766,214
Over 1 year to 2 years............. 5.06 - 7.90 5.74 502,844 5.67 721,633
Over 2 years to 3 years............ 5.31 - 6.21 5.54 10,705 5.74 252,797
Over 3 years to 4 years............ 6.78 6.78 10,000 5.70 35,608
Over 4 years to 5 years............ -- -- -- -- 6.79 10,350
Over 5 years....................... 6.55 - 7.19 6.76 1,050 6.55 750
- ----------------------------------------------------------------------------------------------------------
4.61% - 9.43% 5.66% $1,350,290 5.89% $1,787,352
- ----------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996 and 1995, the Corporation had pledged a portion of its real
estate loans and mortgage-backed securities as well as Federal Home Loan Bank
stock as collateral for outstanding advances. At June 30, 1996 and 1995, there
were no commitments for advances from the Federal Home Loan Bank.
54 Commercial Federal Corporation Annual Report 1996
<PAGE>
NOTE 15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
At June 30, 1996 and 1995, securities sold under agreements to repurchase
identical securities totaled $380,755,000 and $208,373,000, respectively, with
weighted average interest rates of 6.51% and 7.08%, respectively. There were no
securities sold under agreements to repurchase substantially identical
securities at June 30, 1996 or 1995. An analysis of securities sold under
agreements to repurchase identical securities for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum month-end balance............................. $380,755 $208,373
- -------------------------------------------------------------------------------
Average balance....................................... $187,563 $103,223
- -------------------------------------------------------------------------------
Weighted average interest rate during the period...... 7.14% 7.59%
Weighted average interest rate at end of period....... 6.51% 7.08%
- -------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, securities sold under agreements to repurchase had
maturities ranging from September 1996 to January 1998 with a weighted average
maturity at June 30, 1996, of 372 days. At June 30, 1996 and 1995, mortgage-
backed securities with carrying values totaling $410,527,000 and $247,413,000,
respectively, and market values totaling $405,521,000 and $244,772,000,
respectively, were pledged as collateral for securities sold under agreements to
repurchase.
It is the Corporation's policy to enter into repurchase agreements only with
major brokerage firms that are primary dealers in government securities. At June
30, 1996, no repurchase agreements were at risk in excess of 10.0% of
stockholders' equity.
NOTE 16. OTHER BORROWINGS:
Other borrowings at June 30 consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Subordinated notes, interest 10.25%, due December 15, 1999.... $40,250 $40,250
Collateralized mortgage obligations........................... 8,867 12,454
Senior notes, interest 10.00%, due January 31, 1999........... 6,900 6,900
Other borrowings.............................................. 2,529 5,699
- -----------------------------------------------------------------------------------
$58,546 $65,303
- -----------------------------------------------------------------------------------
</TABLE>
The subordinated notes pay interest semi-annually on June 15 and December
15. The subordinated notes have been redeemable since December 15, 1995, at the
election of the Corporation, in whole or in part, at par plus accrued interest
to the date of redemption. The subordinated notes have no sinking fund, are
unsecured general obligations of the Corporation, and are subordinated to all
existing and future senior indebtedness of the Corporation. The Note Indenture,
among other provisions, restricts the ability of the Corporation and its
subsidiaries, under certain circumstances, to incur additional indebtedness and
restricts the Corporation's ability to pay cash dividends or to make other
capital distributions. The Corporation is also required to maintain not less
than $3,500,000 in cash and cash equivalents under the terms of the Note
Indenture.
At June 30, 1996, the remaining two notes issued in conjunction with
collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due
in varying amounts contractually through September 1, 2015. The notes are
secured by FNMA mortgage-backed securities
Commercial Federal Corporation Annual Report 1996 55
<PAGE>
with a book value of approximately $14,540,000. As the principal balance on the
collateral on these notes repay, the notes are correspondingly repaid.
The senior notes pay interest monthly and have been redeemable since
February 1, 1995, at the election of the Corporation, in whole or in part, at
par plus accrued interest to the date of redemption. The senior notes have no
sinking fund, are unsecured general obligations of the Corporation, and are
senior to all existing and future indebtedness of the Corporation other than
debt obligations secured by certain liens. Senior noteholders do not have
priority over depositors and other creditors of the Bank. The Note Indenture,
among other provisions, restricts the ability of the Corporation and its
subsidiaries, under certain circumstances, to incur additional indebtedness and
restricts the Corporation's ability to pay cash dividends or to make other
capital distributions.
Other borrowings are collateralized by unencumbered first mortgage loans
with unpaid principal balances of approximately $5,714,000 at June 30, 1996.
Principal maturities of other borrowings as of June 30, 1996, for the next
five fiscal years are as follows: 1997 - $3,326,000; 1998 - $2,899,000; 1999 -
$9,495,000; 2000 - $41,004,000; 2001 - $240,000 and thereafter - $1,582,000.
NOTE 17. INTEREST RATE HEDGING:
<TABLE>
<CAPTION>
The following summarizes the Corporation's interest rate hedging agreements at June 30:
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest rate swap agreements:
Notional principal amount, fixed rate agreements.................... $ 10,000 $ 78,500 $109,500
Weighted average fixed rate paid ................................... 11.10% 10.40% 9.62%
Weighted average variable rate received ............................ 5.97% 5.63% 3.55%
Net interest expense ............................................... $ 2,280 $ 4,345 $ 8,485
Range of remaining terms ........................................... 17 mos. 3-29 mos. 1-41 mos.
- ----------------------------------------------------------------------------------------------------------------
</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, 1996, 1995 and 1994. The
interest rate swap agreements were collateralized at June 30, 1996 and 1995, by
mortgage-backed securities with carrying values of $15,721,000 and $18,817,000,
respectively. The swap agreement totaling $10,000,000 will mature November 1997.
Entering into interest rate swap agreements involves the credit risk of dealing
with intermediary and primary counterparties and their ability to meet the terms
of the respective contracts. The Corporation is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swaps if the
Corporation is in a net interest receivable position at the time of potential
default by the counterparties. However, at June 30, 1996, the Corporation was in
a net interest payable position. The Corporation does not anticipate
nonperformance by the counterparties.
At June 30, 1996 and 1995, the Corporation also had one outstanding interest
rate cap agreement totaling $10,000,000 which pays interest when the three-month
LIBOR exceeds 7.00% and a termination date of March 9, 1997. The Corporation
will receive interest based on a floating rate with interest payments settled
quarterly. Through June 30, 1996 and 1995, the Corporation was not owed any
interest from its counterparts for such quarterly interest settlement. The
premium paid on March 9, 1995 (the effective date of this agreement) totaled
$115,000 with $58,000 and $19,000, respectively, amortized to interest expense
for the fiscal years ended June 30, 1996 and 1995. The unamortized premium
totaled $38,000 at June 30, 1996. This interest rate cap agreement is unsecured.
56 Commercial Federal Corporation Annual Report 1996
<PAGE>
NOTE 18. INCOME TAXES:
<TABLE>
<CAPTION>
The following is a comparative analysis of the provision for federal and state taxes on income:
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ............................................................................ $75,927 $ 7,816 $10,980
State .............................................................................. 3,626 956 817
- --------------------------------------------------------------------------------------------------------------------------------
79,553 8,772 11,797
- --------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal ............................................................................ (45,316) 14,123 4,992
State .............................................................................. (7,275) 251 86
- --------------------------------------------------------------------------------------------------------------------------------
(52,591) 14,374 5,078
- --------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes ..................................................... $26,962 $23,146 $16,875
- --------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate:
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate .................................................... 35.0% 35.0% 35.0%
Amortization of discounts, premiums and
intangible assets from acquisitions ................................................ 0.1 13.8 81.4
Income tax credits ................................................................... (0.7) (3.1) (3.3)
Bad debt deduction ................................................................... (0.2) (2.9) (13.3)
State income taxes, net of federal income tax benefit................................. (2.0) 1.6 4.1
Effect of change in enacted tax rate ................................................. -- -- 7.8
Other items, net ..................................................................... 0.6 (1.8) (1.0)
- --------------------------------------------------------------------------------------------------------------------------------
Effective tax rate ................................................................... 32.8% 42.6% 110.7%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial Federal Corporation Annual Report 1996 57
<PAGE>
<TABLE>
<CAPTION>
The tax effect of temporary differences that gave rise to significant portions of deferred tax assets
and liabilities at June 30 are as follows:
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Finance lease contracts treated as operating leases
for income tax purposes ............................................................... $ -- $55,847
Federal Home Loan Bank stock ............................................................ 9,666 10,779
Differences between book and tax basis of premises and equipment ........................ 6,761 6,444
Core value of acquired deposits ......................................................... 4,595 3,931
Basis differences arising from acquisitions ............................................. 4,134 1,937
Other items ............................................................................. 5,681 3,479
- ---------------------------------------------------------------------------------------------------------------------
30,837 82,417
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible .................. 14,565 14,277
Tax credit carryforwards ................................................................ 136 4,035
Collateralized mortgage obligations ..................................................... 3,046 3,402
State operating loss carryforwards ...................................................... 2,167 2,724
Basis differences between tax and financial reporting
arising from acquisitions ............................................................. 4,620 2,585
Accretion of discount on purchased loans ................................................ 2,301 2,371
Employee benefits ....................................................................... 2,095 1,977
Other items ............................................................................. 2,430 2,022
- ---------------------------------------------------------------------------------------------------------------------
31,360 33,393
Valuation allowance ....................................................................... 2,279 2,659
- ---------------------------------------------------------------------------------------------------------------------
29,081 30,734
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax liability ................................................................ $ 1,756 $51,683
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance of $2,279,000 at June 30, 1996, decreased from
$2,659,000 at June 30, 1995, primarily due to a decrease in state net operating
losses available for income tax purposes.
Savings institutions that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
before such deduction. The deduction percentage is 8.0% for fiscal years ended
June 30, 1996, 1995 and 1994. Alternatively, a qualified savings institution may
compute its bad debt deduction based upon actual loan loss experience (i.e.,
experience method). The bad debt deduction for fiscal years 1996 and 1995 was
computed under the percentage of taxable income method since it yielded a
greater deduction than did the experience method. In fiscal year 1994 the Bank
computed its bad debt deduction utilizing the experience method. In accordance
with provisions of SFAS No. 109, a deferred tax liability has not been
recognized for the bad debt reserves of the Bank created in the tax years which
began prior to December 31, 1987 (the base year). At June 30, 1996, the amount
of these reserves totaled approximately $87,512,000 with an unrecognized
deferred tax liability associated with such reserves totaling approximately
$31,288,000.
In August 1996, changes in the federal tax law (i) repealed both the
percentage of taxable income and experience methods effective July 1, 1996,
allowing a bad debt deduction for specific charge-offs only, and (ii) require
recapture into taxable income over a six year period of tax bad debt reserves
which exceed the base year amount, adjusted for any loan portfolio shrinkage.
These changes will result in the recognition of additional deferred tax
liabilities of approximately $103,000 in the first quarter of fiscal year 1997.
The remaining unrecognized
58 Commercial Federal Corporation Annual Report 1996
<PAGE>
deferred tax liability could be recognized in the future, in whole or in part,
if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain
definitional tests and other conditions in the federal tax law, (iii) certain
distributions are made with respect to the stock of the Bank or (iv) the bad
debt reserves are used for any purpose other than absorbing bad debt losses.
NOTE 19. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS:
On December 19, 1988, the Board of Directors of the Corporation adopted a
Shareholder Rights Plan and declared a dividend of stock purchase rights
consisting of one primary right and one secondary right for each outstanding
share of common stock on December 30, 1988, and with respect to each share of
common stock issued by the Corporation at any time after such date and prior to
the earlier of the occurrence of certain events or expiration of such rights.
These rights are attached to and trade only together with the common stock
shares. The provisions of the Shareholder Rights Plan are designed to protect
the interests of the stockholders of record in the event of an unsolicited or
hostile attempt to acquire the Corporation at a price or on terms that are not
fair to all shareholders. Unless rights are exercised, holders have no rights as
a stockholder of the Corporation (other than rights resulting from such holder's
ownership of common shares), including, without limitation, the right to vote or
to receive dividends. With certain exceptions, the rights expire December 31,
1998, unless earlier redeemed by the Corporation. At June 30, 1996, no such
rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of such shares and the qualifications, limitations and restrictions
thereof. The preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. Under the Office of Thrift Supervision's (OTS) capital distribution
regulations, a savings institution that, immediately prior to, and on a pro
forma basis after giving effect to, a proposed dividend, has total capital that
is at least equal to the amount of its fully phased-in capital requirements (a
"Tier 1 Association") is permitted to pay dividends during a calendar year in an
amount equal to the greater of (i) 75.0% of its net income for the recent four
quarters, or (ii) 100.0% of its net income to date during the calendar year plus
an amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At June 30, 1996, the Bank
qualified as a Tier 1 Association, and would be permitted to pay an aggregate
amount approximating $92,947,000 in dividends under these regulations. Should
the Bank's regulatory capital fall below certain levels, applicable law and
certain other federal regulations would require prior approval of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
On October 4, 1995, the Board of Directors established a quarterly dividend
policy and, on the same day, declared a cash dividend of $.10 per share on the
Corporation's common stock. Accordingly, cash dividends totaling $5,880,000
($.40 per share) were declared during fiscal year 1996 with $4,370,000 paid
through June 30, 1996. The Corporation had not paid cash dividends to its common
stock shareholders before October 4, 1995.
Commercial Federal Corporation Annual Report 1996 59
<PAGE>
NOTE 20. REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Corrective Action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-
based capital ratios as set forth in the following tables. At June 30, 1996 and
1995, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital requirements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
As of June 30, 1996
------------------------------------------------------
Actual Capital Required Capital
------------------------- ---------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS Capital Adequacy:
Tangible capital ............................................. $408,708 6.18% $ 99,137 1.50%
Core capital (Tier 1 capital) ................................ 424,909 6.41 198,760 3.00
Risk-based capital (Total capital)............................ 460,674 13.62 270,629 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital .................................... 424,909 6.41 331,266 5.00
Tier 1 risk-based capital .................................. 424,909 12.56 202,971 6.00
Total risk-based capital ................................... 460,674 13.62 338,286 10.00
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of June 30, 1995
------------------------------------------------------
Actual Capital Required Capital
------------------------- ---------------------------
Amount Ratio (1) Amount (1) Ratio (1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS Capital Adequacy:
Tangible capital ............................................. $337,451 5.16% $ 98,017 1.50%
Core capital (Tier 1 capital) ................................ 358,881 5.47 196,677 3.00
Risk-based capital (Total capital)............................ 391,656 13.12 238,844 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital ...................................... 358,881 5.47 327,796 5.00
Tier 1 risk-based capital .................................... 358,881 12.02 179,133 6.00
Total risk-based capital ..................................... 391,656 13.12 298,555 10.00
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
60 Commercial Federal Corporation Annual Report 1996
<PAGE>
As of June 30, 1996, the most recent notification from the OTS categorized
the Bank as "well-capitalized" under the regulatory framework for Prompt
Corrective Action provisions under FDICIA. There are no conditions or events
since such notification that management believes have changed the Bank's
classification.
NOTE 21. COMMITMENTS AND CONTINGENCIES:
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve elements
of credit and interest rate risk in excess of the amount recognized in the
Consolidated Statement of Financial Condition. The contractual amounts of these
instruments represent the maximum credit risk to the Corporation. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At June 30, 1996, the Corporation had issued commitments, excluding
undisbursed portions of loans in process, of approximately $173,551,000 as
follows: $94,679,000 to originate loans, $61,264,000 to purchase loans and
$17,608,000 to provide consumers unused lines of credit. At June 30, 1995, the
Corporation had issued commitments, excluding undisbursed portions of loans in
process, of approximately $150,651,000 as follows: $76,675,000 to originate
loans, $33,723,000 to purchase loans, $15,000,000 to purchase investment
securities, $8,761,000 to purchase mortgage-backed securities and $16,492,000 to
provide consumers unused lines of credit. In addition, at June 30, 1996 and
1995, outstanding commitments from mortgage banking operations to purchase
mortgage loan servicing rights totaled $9,000 and $521,000, respectively.
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn upon. The Corporation evaluates each customer's credit worthiness on a
separate basis and requires collateral based on this evaluation. Collateral
consists mainly of residential family units and personal property.
At June 30, 1996 and 1995, the Corporation had approximately $126,377,000
and $82,376,000, respectively, in mandatory forward delivery commitments to sell
residential mortgage loans. At June 30, 1996 and 1995, loans sold subject to
recourse provisions totaled approximately $39,340,000 and $49,678,000,
respectively, which represents the total potential credit risk associated with
these particular loans. Such credit risk would, however, be offset by the value
of the single-family residential properties which collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 13, 1994, the Bank commenced litigation against the United
States in the United States Court of Federal Claims seeking to recover monetary
relief for the government's refusal to honor certain contracts between the Bank
and the Federal Savings and Loan Insurance Corporation. The suit alleges that
such governmental action constitutes breach of contract and an unlawful taking
of property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome, and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing and the dollar amount of damages which
may be awarded to the Bank if it finally prevails in this litigation.
NOTE 22. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS:
RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred
savings 401(k) plan covering substantially all employees. The Corporation's
matching contributions are equal to 100.0% of the first 8.0% of participant
contributions (up to 3.0% of participant contributions for the plan sponsored by
Railroad). Participants vest immediately in their own contributions and over a
five-year period for Corporation contributions (over
Commercial Federal Corporation Annual Report 1996 61
<PAGE>
a three-year period for company contributions for the plan sponsored by
Railroad). Contribution expense was $1,653,000, $1,684,000 and $1,434,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
STOCK OPTION AND INCENTIVE PLAN - The Corporation's 1984 Stock Option and
Incentive Plan, as amended (the Plan), permits the granting of stock options,
restricted stock awards and stock appreciation rights. Stock options are
generally 100% exercisable on the date of grant over a period not to exceed 10
years from the date of grant with the option price equal to market value on the
date of grant. However, non-incentive stock options granted to executives on
June 13, 1996, vest one-third on the date of grant (and one-third as of both
June 13, 1997 and 1998) for 35,000 options and vest 60.0% on the date of grant
(and 20.0% as of both June 13, 1997 and 1998) for 45,450 options. Recipients of
restricted stock have the usual rights of a shareholder, including the rights to
receive dividends and to vote the shares; however, the common stock will not be
vested until certain restrictions are satisfied. The term of the Plan extends to
July 31, 2002. Railroad had three stock option and incentive plans for certain
employees and its directors (collectively referred to as "Railroad's Plans")
under which such options generally became exercisable when granted and exercised
within a 10-year period after the date of grant. On October 2, 1995, Railroad's
Plans were terminated with any outstanding options converted into Commercial
Federal Corporation options pursuant to the merger agreement.
<TABLE>
<CAPTION>
The following table presents the activity of the stock options for the fiscal years ended June 30, 1996, 1995 and 1994:
- --------------------------------------------------------------------------------------------------------------------------
Stock Option Option Price Aggregate
Shares Per Share Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at June 30, 1993 ............................................ 432,284 $ 2.50 -- $19.13 $ 2,539
Granted ........................................................... 3,738 13.57 -- 19.69 64
Exercised ......................................................... (64,291) 2.50 -- 15.26 (342)
Canceled .......................................................... (302) 9.31 (3)
Railroad activity for the six months ended June 30, 1994:
Granted ........................................................... 60,951 14.09 -- 15.07 864
Exercised ......................................................... (32,473) 3.80 -- 13.57 (146)
Canceled .......................................................... -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 ............................................ 399,907 2.50 -- 19.69 2,976
Granted ........................................................... 62,612 14.48 -- 27.31 1,696
Exercised ......................................................... (87,740) 2.50 -- 19.69 (505)
Canceled .......................................................... (4,783) 5.67 -- 17.48 (65)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 ............................................ 369,996 2.50 -- 27.31 4,102
Granted ........................................................... 123,093 38.75 4,770
Exercised ......................................................... (95,979) 2.50 -- 27.31 (1,191)
Canceled .......................................................... (1,590) 14.09 -- 27.31 (40)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 ............................................ 395,520 $ 2.50 -- $38.75 $ 7,641
- --------------------------------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1996 ................. 198,127
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
On June 30, 1996 and 1995, stock options for 123,093 shares and 61,462
shares, respectively, of the Corporation's common stock were granted to
executives and managers of the Corporation in accordance with a management
incentive plan pursuant to the attainment of certain operating goals of the
Corporation for the respective fiscal years.
Management incentive plans were initially adopted in fiscal year 1993 with
restricted stock to be granted for awards earned each fiscal year. Accordingly,
on June 30, 1996, 1995 and 1994 (the grant dates), the Corporation issued 1,116
shares, 28,417 shares and 59,660 shares, respectively, of restricted stock with
an aggregate market value of $45,000, $776,000 and $1,525,000, respectively.
62 Commercial Federal Corporation Annual Report 1996
<PAGE>
The awards of restricted stock vest 20.0% on each anniversary of the grant date,
provided that the employee has completed the specified service requirement, or
earlier if the employee dies or is permanently and totally disabled or upon a
change in control. Total deferred compensation on the unvested restricted stock
totaled $1,068,000, $1,951,000 and $2,480,000, at June 30, 1996, 1995 and 1994,
respectively, and is recorded as a reduction of stockholders' equity.
The value of the restricted shares will be amortized to compensation expense
over the five-year vesting period. Compensation expense applicable to the
restricted stock totaled $909,000, $1,173,000 and $395,000 for fiscal years
1996, 1995 and 1994 respectively.
POSTRETIREMENT BENEFITS - Effective July 1, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The provisions of
this statement changed the method of accounting for postretirement benefits
other than pensions from a cash to an accrual basis. Under SFAS No. 106, the
determination of the accrual liability requires a calculation of the accumulated
postretirement benefit obligation (APBO). The APBO represents the actuarial
present value of postretirement benefits other than pensions to be paid out in
the future (such as health care benefits to be paid to retirees) that have been
earned as of the end of the year. The Corporation elected to recognize the
cumulative effect of the initial APBO immediately resulting in an increase in
accrued postretirement health care costs of $519,000 and a decrease in net
income of $336,000 ($.02 per share), net of an income tax benefit of $183,000
which was recorded as a cumulative effect of a change in accounting principle as
of July 1, 1993.
<TABLE>
<CAPTION>
The Corporation's postretirement benefit plan is unfunded. The following table reconciles the status of the
plan with the amounts recognized in the Consolidated Statement of Financial Condition at June 30:
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ...................................................................................... $ 487 $ 260 $177
Fully eligible active plan participants ....................................................... 120 118 51
Other active plan participants ................................................................ 766 581 369
- ------------------------------------------------------------------------------------------------------------------------------
1,373 959 597
Unrecognized net loss ........................................................................... (783) (426) (42)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in other liabilities ............................... $ 590 $ 533 $555
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
The following sets forth the components of the net periodic postretirement benefit cost for the
fiscal years ended June 30:
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the fiscal year ........................................... $ 74 $ 61 $ 56
Interest cost on accumulated postretirement benefit obligation .................................. 69 43 39
Amortization of net loss ........................................................................ 29 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense ................................................... $ 172 $ 104 $ 95
- ------------------------------------------------------------------------------------------------------------------------------
Postretirement benefit claims paid for the year,
net of retiree contributions of $85, $72, and $57 ............................................. $ 115 $ 126 $ 59
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used to determine the APBO was 7.5% for
fiscal years ended June 30, 1996, 1995 and 1994. The assumed health care cost
trend rate used in measuring the APBO as of July 1, 1995, was 8.0% decreasing
gradually until it reaches 5.0% in 2008, when it remains constant. A one-
percentage-point increase in the assumed health care cost trend rate for each
year would increase the APBO as of June 30, 1996, by $134,000 and the aggregate
of the service and interest cost components of the net periodic postretirement
cost for fiscal year 1996 by $28,000.
Commercial Federal Corporation Annual Report 1996 63
<PAGE>
The Corporation also maintains an unfunded postretirement survivor income
plan for certain key executives that provides benefits to beneficiaries based
upon the death of such executives and their employment status at the time of
death (i.e., normal retirement, termination or death prior to retirement). The
Corporation began to recognize these postretirement benefits in fiscal year
1996. At June 30, 1996, the accrued postretirement benefit cost included in
other liabilities and the net postretirement benefit cost charged to operations
totaled $33,000. The weighted average discount rate used to determine the APBO
was 7.5% and the assumed rate of increase for compensation was 3.0% annually.
NOTE 23. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
June 30,
ASSETS 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash ............................................... $ 12,562 $ 10,546
Other assets ....................................... 2,387 3,996
Equity in Commercial Federal Bank .................. 447,817 374,021
- --------------------------------------------------------------------------------
Total Assets ....................................... $462,766 $388,563
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Other liabilities ................................ $ 2,339 $ 799
Note payable ..................................... -- 3,000
Senior notes ..................................... 6,900 6,900
Subordinated notes ............................... 40,250 40,250
- --------------------------------------------------------------------------------
Total liabilities .................................. 49,489 50,949
Total stockholders' equity ......................... 413,277 337,614
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ......... $462,766 $388,563
- --------------------------------------------------------------------------------
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------
Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income from the Bank ...................... $ 9,290 $ 5,660 $ 5,740
Interest income .................................... 691 600 426
Interest expense ................................... (5,384) (5,310) (5,186)
Operating expenses ................................. (1,742) (576) (1,200)
- --------------------------------------------------------------------------------------
Income (loss) before income taxes, cumulative
effect of change in accounting principles and
equity in undistributed earnings of subsidiaries .. 2,855 374 (220)
Income tax benefit ................................. (2,117) (1,882) (2,212)
- --------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principles and equity in undistributed
earnings of subsidiaries ........................... 4,972 2,256 1,992
Cumulative effect of change in accounting principles -- -- (198)
- --------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries ...................................... 4,972 2,256 1,794
Equity in undistributed earnings of subsidiaries ... 50,334 28,925 3,176
- --------------------------------------------------------------------------------------
Net income ......................................... $ 55,306 $ 31,181 $ 4,970
- --------------------------------------------------------------------------------------
</TABLE>
64 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------
Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ......................................... $ 55,306 $ 31,181 $ 4,970
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cumulative effect of change in accounting
principles ................................... -- -- 198
Equity in earnings of subsidiaries ............. (50,334) (28,925) (3,176)
Other items, net ............................... 2,321 1,100 93
-------- -------- -------
Total adjustments ............................ (48,013) (27,825) (2,885)
-------- -------- -------
Net cash provided by operating activities .. 7,293 3,356 2,085
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of stock of and cash distributions into
the Bank .......................................... -- (3,850) (5,098)
Other items, net ................................... -- (245) (244)
-------- -------- -------
Net cash used by investing activities ...... -- (4,095) (5,342)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options and
other employee plans .............................. 2,093 1,334 1,022
Payment of cash dividends on common stock .......... (4,370) -- --
Proceeds from issuance of notes payable ............ -- 4,000 --
Payment of notes payable ........................... (3,000) (1,000) --
Purchase of treasury stock ......................... -- (271) (35)
-------- -------- -------
Net cash (used) provided by financing
activities ............................... (5,277) 4,063 987
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position ........... 2,016 3,324 (2,270)
Balance, beginning of year ......................... 10,546 7,222 9,492
-------- -------- -------
Balance, end of year ............................... $ 12,562 $ 10,546 $ 7,222
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense ................................. $ 4,913 $ 4,816 $ 4,816
Income tax payments (refunds), net ............... 72,972 (3,670) (1,100)
Non-cash investing activities:
Increase to assets and liabilities for prior
business combinations ............................ -- -- 368
- --------------------------------------------------------------------------------------
</TABLE>
Commercial Federal Corporation Annual Report 1996 65
<PAGE>
NOTE 24. SEGMENT INFORMATION:
The Corporation and its subsidiaries operate primarily in the savings and loan
and mortgage banking industries. Savings and loan operations (financial
institution) involve a variety of traditional banking and financial services.
Mortgage banking operations (mortgage banking) involve the origination and
purchase of mortgage loans, sale of mortgage loans in the secondary mortgage
market, servicing of mortgage loans and the purchase and origination of rights
to service mortgage loans.
Segment information at and for the fiscal years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Financial institution ............................. $ 483,888 $ 446,747 $ 381,316
Mortgage banking .................................. 7,204 7,621 12,538
--------- --------- ---------
Total .......................................... 491,092 454,368 393,854
--------- --------- ---------
Intersegment interest income:
Financial institution ............................. (10,115) (6,601) (5,087)
Mortgage banking .................................. 10,201 6,417 5,345
--------- --------- ---------
86 (184) 258
Intersegment elimination .......................... (86) 184 (258)
--------- --------- ---------
Total .......................................... -- -- --
--------- --------- ---------
Total interest income:
Financial institution ............................. 473,773 440,146 376,229
Mortgage banking .................................. 17,405 14,038 17,883
Intersegment elimination .......................... (86) 184 (258)
--------- --------- ---------
Total .......................................... $ 491,092 $ 454,368 $ 393,854
- ------------------------------------------------------------------------------------------------
Other income:
Financial institution - loan servicing fees........ $ 429 $ 146 $ 78
Financial institution - other income .............. 21,918 20,317 21,853
Mortgage banking - loan servicing fees ............ 27,462 24,585 22,149
Mortgage banking - other income (loss) ............ (163) 18 613
--------- --------- ---------
Total .......................................... 49,646 45,066 44,693
--------- --------- ---------
Intersegment other income:
Financial institution - loan servicing fees........ -- -- --
Financial institution - other income .............. -- -- --
Mortgage banking - loan servicing fees ............ 14,516 12,218 11,428
Mortgage banking - other income ................... -- -- --
--------- --------- ---------
14,516 12,218 11,428
Intersegment elimination .......................... (14,516) (12,218) (11,428)
--------- --------- ---------
Total .......................................... -- -- --
--------- --------- ---------
Total other income:
Financial institution - loan servicing fees........ 429 146 78
Financial institution - other income ...... 21,918 20,317 21,853
Mortgage banking - loan servicing fees .... 41,978 36,803 33,577
Mortgage banking - other income (loss) .... (163) 18 613
Intersegment elimination .................. (14,516) (12,218) (11,428)
--------- --------- ---------
Total ..................................... $ 49,646 $ 45,066 $ 44,693
- ------------------------------------------------------------------------------------------------
</TABLE>
66 Commercial Federal Corporation Annual Report 1996
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Operating profit (1):
<S> <C> <C> <C>
Financial institution .............. $63,385 $45,664 $ 6,618
Mortgage banking ................... 26,009 14,518 14,960
------- ------- -------
89,394 60,182 21,578
Less:
General corporate expenses ......... 1,742 545 1,144
Corporate interest expense ......... 5,384 5,310 5,186
------- ------- -------
Total ............................ $82,268 $54,327 $15,248
- --------------------------------------------------------------------------------
<CAPTION>
(1) Operating profit is income before income taxes, extraordinary items and
cumulative effects of changes in accounting principles. Operating profit for
banking operations includes the effect of the intangible assets valuation
adjustment totaling $52.7 million for fiscal year 1994.
- --------------------------------------------------------------------------------
Identifiable assets:
<S> <C> <C> <C>
Financial institution ............ $ 6,591,381 $ 6,478,017 $ 5,831,476
Mortgage banking ................. 171,399 171,415 221,037
Eliminations ..................... (155,110) (79,853) (70,206)
----------- ----------- -----------
Total .......................... $ 6,607,670 $ 6,569,579 $ 5,982,307
- --------------------------------------------------------------------------------
Additions to premises and equipment:
Financial institution ............ $ 6,587 $ 5,863 $ 3,823
Mortgage banking ................. 1,624 5,378 580
----------- ----------- -----------
Total .......................... $ 8,211 $ 11,241 $ 4,403
- --------------------------------------------------------------------------------
Depreciation and amortization:
Financial institution ............ $ 5,404 $ 4,568 $ 4,159
Mortgage banking ................. 1,451 1,045 609
----------- ----------- -----------
Total .......................... $ 6,855 $ 5,613 $ 4,768
- --------------------------------------------------------------------------------
</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 $986,000, $1,236,000 and $5,900,000 were
incurred during fiscal years 1996, 1995 and 1994, respectively. In addition, for
fiscal years 1995 and 1994, Railroad mortgage loans were not assessed charges
for servicing its loans from its mortgage banking operation and, therefore, no
loan servicing fees on such loans are included in the section captioned
intersegment other income.
Commercial Federal Corporation Annual Report 1996 67
<PAGE>
NOTE 25. QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
The following summarizes the unaudited quarterly results of operations for the last three fiscal years ended June 30:
- -------------------------------------------------------------------------------------------------------------
Quarter Ended
June 30 March 31 December 31 September 30
- -------------------------------------------------------------------------------------------------------------
FISCAL 1996:
<S> <C> <C> <C> <C>
Total interest income .................................. $ 123,134 $ 122,899 $ 122,357 $ 122,702
Net interest income .................................... 43,490 42,561 38,625 38,099
Provision for loan losses .............................. (1,508) (1,508) (1,508) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 183 64 318 304
Net income ............................................. 15,844 16,354 11,864 11,244
Earnings per share ..................................... 1.04 1.09 .82 .77
Dividends declared per share ........................... .10 .10 .20 --
- -------------------------------------------------------------------------------------------------------------
FISCAL 1995:
Total interest income .................................. $ 120,330 $ 114,876 $ 111,913 $ 107,249
Net interest income .................................... 37,513 37,671 37,697 36,961
Provision for loan losses .............................. (1,583) (1,584) (1,658) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 426 699 481 177
Accelerated amortization of goodwill ................... -- -- 10,678 10,679
Net income ............................................. 12,699 15,033 2,181 1,268
Earnings per share ..................................... .88 1.04 .15 .09
- -------------------------------------------------------------------------------------------------------------
FISCAL 1994:
Total interest income .................................. $ 100,708 $ 98,370 $ 98,185 $ 96,591
Net interest income .................................... 35,354 35,335 33,457 33,606
Provision for loan losses .............................. (1,508) (1,544) (1,613) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 2,231 1,885 1,817 1,649
Intangible assets valuation adjustment ................. (52,703) -- -- --
Income (loss) before cumulative effects of changes
in accounting principles ............................. (31,919) 10,627 10,318 9,347
Cumulative effects of changes in accounting principles . -- -- -- 6,597
Net income (loss) ...................................... (31,919) 10,627 10,318 15,944
Earnings (loss) per share (fully diluted):
Income (loss) before cumulative effects of changes
in accounting principles ........................... (2.22) .74 .72 .65
Cumulative effects of changes in accounting principles -- -- -- .46
Net income (loss) .................................... (2.22) .74 .72 1.11
- -------------------------------------------------------------------------------------------------------------
</TABLE>
68 Commercial Federal Corporation Annual Report 1996
<PAGE>
NOTE 26. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Corporation disclose estimated fair value amounts of its financial instruments.
It is management's belief that the fair values presented below are reasonable
based on the valuation techniques and data available to the Corporation as of
June 30, 1996 and 1995, as more fully described in the following table. It
should be noted that the operations of the Corporation are managed from a going
concern basis and not a liquidation basis. As a result, the ultimate value
realized for the financial instruments presented could be substantially
different when actually recognized over time through the normal course of
operations. Additionally, a substantial portion of the Corporation's inherent
value is the Bank's capitalization and franchise value. Neither of these
components have been given consideration in the presentation of fair values
which follow.
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation at June 30, 1996 and 1995. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
SELECTED ASSETS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash (including short-term investments)........... $ 35,827 $ 35,827 $ 35,145 $ 35,145
Investment securities............................. 253,043 249,039 300,481 297,793
Mortgage-backed securities........................ 1,180,046 1,168,240 1,364,907 1,356,307
Loans receivable, net............................. 4,813,164 4,833,778 4,540,692 4,574,506
Federal Home Loan Bank stock...................... 79,113 79,113 103,648 103,648
- --------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Deposits
Passbook accounts............................... 623,505 623,505 549,857 549,857
Market rate savings accounts.................... 159,672 159,672 190,994 190,994
NOW checking accounts........................... 332,233 332,233 296,552 296,552
Certificates of deposit......................... 3,189,166 3,182,810 2,973,920 2,979,513
---------- ---------- ---------- ----------
Total deposits................................ 4,304,576 4,298,220 4,011,323 4,016,916
Advances from Federal Home Loan Bank.............. 1,350,290 1,344,122 1,787,352 1,774,577
Securities sold under agreements to repurchase.... 380,755 379,585 208,373 209,390
Other borrowings.................................. 58,546 59,886 65,303 67,212
- --------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
- --------------------------------------------------------------------------------------------------------------
Interest rate swap and cap agreements............. -- (1,646) -- (2,409)
Commitments....................................... -- -- -- --
- --------------------------------------------------------------------------------------------------------------
</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,
1996 and 1995.
Cash and short-term investments:
The book value of cash and short-term investments is assumed to approximate
the fair value of such assets.
Investment securities:
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities.
Mortgage-backed securities:
For mortgage-backed securities available for sale and held to maturity the
Corporation has utilized quotes for similar or identical securities in an
actively traded market,
Commercial Federal Corporation Annual Report 1996 69
<PAGE>
where such a market exists, or has obtained quotes from independent security
brokers to determine the fair value of such assets.
Loans receivable:
The fair value of loans receivable was estimated by discounting the future
cash flows using the current market rates at which similar loans would be made
to borrowers with similar credit ratings and for similar remaining maturities.
When using the discounting method to determine fair value, loans were gathered
by homogeneous groups with similar terms and conditions and discounted at a
target rate at which similar loans would be made to borrowers as of June 30,
1996 and 1995, respectively. The fair value of loans held for sale is determined
by outstanding commitments from investors or current investor yield requirements
calculated on an aggregate loan basis. In addition, when computing the estimated
fair value for all loans, allowances for loan losses have been subtracted from
the calculated fair value for consideration of credit issues.
Federal Home Loan Bank stock:
The fair value of such stock approximates book value since the Corporation
is able to redeem this stock with the Federal Home Loan Bank at par value.
Deposits:
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, market rate savings accounts and NOW checking accounts, since
such deposits are immediately withdrawable, fair value is determined to
approximate the carrying value (the amount payable on demand); (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates as of June 30, 1996
and 1995, offered on certificates of deposit with similar maturities. In
accordance with provisions of SFAS No. 107, no value has been assigned to the
Corporation's long-term relationships with its deposit customers (core value of
deposits intangible) since such intangible is not a financial instrument as
defined under SFAS No. 107.
Advances from Federal Home Loan Bank:
The fair value of such advances was estimated by discounting the expected
future cash flows using current interest rates as of June 30, 1996 and 1995, for
advances with similar terms and remaining maturities.
Securities sold under agreements to repurchase:
The fair value of securities sold under agreements to repurchase was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of June 30, 1996 and 1995, over the contractual
maturity of such borrowings.
Other borrowings:
Subordinated notes and senior notes with carrying values of $40,250,000
and$6,900,000, respectively, are included in other borrowings with the fair
value of such notes based on dealer quoted market prices as of June 30, 1996 and
1995. The fair value of other borrowings, excluding the subordinated and senior
notes, was estimated by discounting the expected future cash flows using derived
interest rates approximating market as of June 30, 1996 and 1995, over the
contractual maturity of such other borrowings.
Commitments:
The commitments to originate and purchase loans have terms that are
consistent with current market terms. Since all outstanding commitments are
short-term or adjustable rate, the fair value of the commitments is not
significant.
Interest rate swap agreements:
The fair value of interest rate swap agreements is the estimated amount
that would be paid to terminate the swap agreements at June 30, 1996 and 1995,
respectively, taking into consideration current interest rates as of June 30,
1996 and 1995.
Limitations:
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, customer relationships and the value of assets and
liabilities that are not considered financial instruments. These estimates do
not reflect any premium or discount that could result from offering the
Corporation's entire holdings of a particular financial instrument for sale at
one time. Furthermore, since no market exists for certain of the Corporation's
financial instruments, fair value estimates may be based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various
70 Commercial Federal Corporation Annual Report 1996
<PAGE>
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of June 30, 1996 and 1995, are not intended to represent
the underlying value of the Corporation, on either a going concern or a
liquidation basis.
NOTE 27. PENDING ACQUISITION:
On May 16, 1996, the Corporation entered into a Reorganization and Merger
Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye
Federal). Under the terms of the Merger Agreement, the Corporation will acquire
all 180,762 of the outstanding shares of Heritage's common stock. As defined in
the Merger Agreement, Heritage's common stock will be exchanged for cash and the
Corporation's common stock based on the average closing price of such stock for
the twenty-fifth through the sixth trading days preceding the effective date of
the proposed merger. Based on the Corporation's closing stock price on June 30,
1996, of $38.25, each share of Heritage common stock would be exchanged for
$18.73 in cash and 2.559 shares of the Corporation's common stock, resulting in
the exchange of approximately 462,570 shares of the Corporation's common stock
with a total aggregate value approximating $21,079,000. Cash will be paid in
lieu of fractional shares. Additional cash consideration up to approximately
$1.2 million may be paid to Heritage shareholders pending the final disposition
of an impaired asset of Hawkeye Federal.
At June 30, 1996, Heritage had assets of approximately $182,099,000,
deposits of approximately $157,898,000 and stockholders' equity of approximately
$12,945,000. Heritage operates six branches located in Iowa. This pending
acquisition, which is subject to the approval of Heritage's shareholders, is
expected to be completed by October 31, 1996. This acquisition will be accounted
for as a purchase with core value of deposits resulting from this transaction to
be amortized on an accelerated basis over a period not to exceed 10 years and
goodwill, if any, to be amortized on a straight line basis over a period not to
exceed 20 years.
NOTE 28. CURRENT ACCOUNTING PRONOUNCEMENTS:
Accounting for Stock-Based Compensation:
In October 1995, Statement of Financial Accounting Standards No. 123
entitled "Accounting for Stock-Based Compensation" (SFAS No. 123) was issued.
SFAS No. 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based upon the entity's common stock price, except for
employee stock ownership plans. SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation arrangements with employees,
rather than the intrinsic value based method that is contained in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). This statement encourages all entities to adopt its method of
accounting for all employee stock compensation plans. However, SFAS No. 123 does
not require an entity to adopt the new fair value based method for purposes of
preparing its basic financial statements. Entities electing to retain the
accounting treatment under APB No. 25 must make pro forma footnote disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in this statement has been applied. The disclosure
requirements of SFAS No. 123 are effective for fiscal years beginning after
December 15, 1995, or effective as of July 1, 1996, for the Corporation.
Management of the Corporation intends to continue to use the APB No. 25 method
of accounting for stock-based compensation and include pro forma disclosures
when presenting complete financial statement footnotes in the future.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities:
In June 1996, Statement of Financial Accounting Standards No. 125, entitled
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (SFAS No. 125) was issued. This statement, among other things,
applies a "financial-components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of
Commercial Federal Corporation Annual Report 1996 71
<PAGE>
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application is
not permitted. Management of the Corporation does not believe that the adoption
of SFAS No. 125 will have a material effect on the Corporation's financial
position, liquidity or results of operations.
NOTE 29. SUBSEQUENT EVENT - REPURCHASE OF COMMON STOCK:
On August 21, 1996, the Corporation consummated the repurchase of 1,250,100
shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately
$48,910,000. Such purchase price, excluding transaction costs incurred by the
Corporation for this repurchase, consisted of cash consideration of
approximately $28,227,000 and surrender of a warrant (valued at approximately
$20,683,000) which would have enabled the Corporation to purchase 99 shares of
non-voting common stock of CAI Corporation. The repurchased shares represented
8.3% of the outstanding shares of the Corporation's common stock prior to the
repurchase. After repurchase, a total of 13,844,036 shares of common stock
remain issued and outstanding as of August 21, 1996. The cash portion of the
repurchase was financed in part by a loan from a financial institution secured
by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As
consideration, the Corporation also reimbursed CAI Corporation for certain
expenses totaling $2,200,000 incurred in connection with its ownership of the
1,250,100 shares, including costs and expenses incurred in connection with the
1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of
the pro rata portion of any dividend CAI Corporation otherwise would have
received for the quarter ended September 30, 1996.
Concurrent with the close of the repurchase, two directors of the
Corporation, who also serve as executive officers of CAI Corporation, resigned
from the Corporation's Board of Directors. In addition, CAI Corporation and each
of its shareholders agreed to a standstill agreement for a period of 60 months
beginning August 21, 1996. CAI Corporation and the Corporation have each agreed
to waive and release all claims against the other and the Corporation has agreed
to indemnify CAI Corporation and its directors, officers and affiliates against
certain derivative claims.
72 Commercial Federal Corporation Annual Report 1996
<PAGE>
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
Management of Commercial Federal Corporation (the Corporation) is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements and all other information presented
in this Annual Report. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, as such,
include amounts based on informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting in conformity with both
generally accepted accounting principles and the Office of Thrift Supervision
instructions for Thrift Financial Reports. The internal control structure
contains monitoring mechanisms and actions are taken to correct any deficiencies
identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statements preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and Thrift Financial Report instructions as of June 30,
1996. This assessment was based on the criteria for effective internal control
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
Management believes that the Corporation maintained an effective internal
control structure over financial reporting as of June 30, 1996.
/s/ Willam A. Fitzgerald /s/ James A. Laphen
William A. Fitzgerald James A. Laphen
Chairman of the Board and President, Chief Operating Officer
Chief Executive Officer and Chief Financial Officer
Commercial Federal Corporation Annual Report 1996 73
<PAGE>
Independent Auditors' Report
To the Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Commercial
Federal Corporation and subsidiaries (the "Corporation") as of June 30, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Commercial Federal Corporation and Railroad
Financial Corporation, which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Federal
Corporation and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122 in fiscal year 1996. As
discussed in Notes 1 and 22 to the consolidated financial statements, in fiscal
year 1994 the Corporation changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109, its method of
accounting for postretirement benefits to conform with Statement of Financial
Accounting Standards No. 106 and its method of accounting for intangible assets.
/s/ Deloitte & Touche LLP
August 23, 1996
Omaha, Nebraska
74 Commercial Federal Corporation Annual Report 1996
<PAGE>
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
Commercial Federal Corporation
Commercial Federal Tower
2120 S. 72nd Street
Omaha, NE 68124
GENERAL COUNSEL
Fitzgerald, Schorr, Barmettler, Brennan
1000 Woodmen Tower
Omaha, NE 68102
WASHINGTON COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W.
Suite 700
Washington, D.C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2000 First National Center
Omaha, NE 68102
SHAREHOLDER SERVICES AND
INVESTOR RELATIONS
Shareholders desiring to change the address or
ownership of stock, report lost certificates or to
consolidate accounts should contact:
Shareholder Communications Team
Harris Trust and Savings Bank
P.O. Box A3504
Chicago, IL 60690-9502
Telephone (312) 360-5100
Analysts, investors and others seeking a copy of the Form 10-K without charge or
other financial information should contact:
Investor Relations Department
Attn: Stan Blakey
Commercial Federal Corporation
2120 S. 72nd Street
Omaha, NE 68124
Telephone (402) 390-6553
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday,
November 19, 1996. The meeting will be held at the Holiday Inn Central
Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C"
Meeting Room. Further information with regard to this meeting can be found in
the proxy statement.
STOCK LISTING
Commercial Federal Corporation's common stock is traded on the New York
Stock Exchange (NYSE) using the common stock symbol "CFB." The Wall Street
Journal publishes daily trading information for the stock under the abbreviation
"Comrcl Fed" in the NYSE listings.
Commercial Federal Corporation Annual Report 1996 75
<PAGE>
EXECUTIVE OFFICERS OF THE CORPORATION
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
JAMES A. LAPHEN
President and
Chief Operating Officer
GARY L. MATTER
Senior Vice President,
Controller and Secretary
JOY J. NARZISI
Senior Vice President and
Treasurer
SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES
<TABLE>
<S> <C>
MARGARET E. ASH MELISSA M. BEUMLER
Senior Vice President First Vice President
Retail Operations Marketing
GARY L. BAUGH MICHAEL C. BRUGGEMAN
Senior Vice President First Vice President
State Director - Kansas Human Resources
ROGER L. LEWIS RONALD P. CHEFFER
Senior Vice President First Vice President
Marketing Credit Administration
JON W. STEPHENSON JOHN J. GRIFFITH
Senior Vice President First Vice President
State Director - Oklahoma Specialized Lending
TERRY A. TAGGART DAVID E. GUNTER, JR.
Senior Vice President First Vice President of the Bank and
State Director - Colorado President of Commercial Federal Service Corp.
GARY D. WHITE KEVIN C. PARKS
Senior Vice President First Vice President
State Director - Nebraska/Iowa Internal Audit
RONALD A. AALSETH THOMAS N. PERKINS
First Vice President of the Bank First Vice President
and President of Commercial Federal Acquisitions and Expansion
Investment Services, Inc. and Commercial
Federal Insurance Corp. DENNIS R. ZIMMERMAN
First Vice President
R. HAL BAILEY Information Systems
First Vice President
Construction Lending
</TABLE>
76 Commercial Federal Corporation Annual Report 1996
<PAGE>
BRANCH LOCATIONS
NEBRASKA (34) KANSAS (24) OKLAHOMA (19)
Omaha (17) Kansas City (3) Oklahoma City (5)
Lincoln (7) Wichita (3) Ada (2)
Beatrice Arkansas City Ponca City (2)
Bellevue Colby Tulsa (2)
Columbus Derby Ardmore
Fremont Fredonia Bartlesville
Grand Island Garden City Bixby
Kearney Greensburg Cushing
LaVista/Papillion Hutchinson Edmond
Norfolk Iola Enid
North Platte Larned Norman
South Sioux City Lawrence Seminole
Lyndon
COLORADO (20) McPherson IOWA (1) *
Denver (6) Newton Harlan
Arapahoe County (2) Oberlin
Lakewood (2) Osage City
Arvada Ottawa
Aurora Wamego
Broomfield Wellington
Englewood
Greeley
Jefferson County
Longmont
Loveland
Northglenn
Wheat Ridge
* Commercial Federal expects to close its previously announced acquisition of
six full-service retail offices from Heritage Financial in October 1996. These
offices are located in Boone, Carrol, Lake City, Madrid, Manning, and Ogden, all
in the state of Iowa.
Commercial Federal Corporation Annual Report 1996 77
<PAGE>
Exhibit 21
Subsidiaries of the Corporation
<PAGE>
EXHIBIT 21. PARENTS AND SUBSIDIARIES
- -------------------------------------
<TABLE>
<CAPTION>
PERCENT STATE OF
PARENT COMPANY SUBSIDIARIES OWNED INCORPORATION
- ---------------------------------- --------------------------- --------- -------------
<S> <C> <C> <C>
COMMERCIAL FEDERAL COMMERCIAL FEDERAL BANK, 100% NEBRASKA
CORPORATION A FEDERAL SAVINGS BANK
COMMERCIAL INVESTMENT 100% NEBRASKA
SUBSIDIARY, INC. (1)
COMMERCIAL FEDERAL COMMERCIAL FEDERAL SERVICE 100% NEBRASKA
BANK, A FEDERAL CORPORATION
SAVINGS BANK
TRAMPE AND ASSOCIATES COMPANY 100% NEBRASKA
COMMERCIAL FEDERAL MORTGAGE 100% NEBRASKA
CORPORATION
COMMERCIAL MARKETING, INC. (1) 100% NEBRASKA
COMMERCIAL FEDERAL INVESTMENT 100% NEBRASKA
CORPORATION
COMMERCIAL FEDERAL INVESTMENT 100% NEBRASKA
SERVICES, INC.
COMMERCIAL FINANCIAL INVESTMENT 100% NEBRASKA
ASSOCIATES, INC. (1)
ESL CORPORATION (1) 100% COLORADO
COMMERCIAL FEDERAL INSURANCE 100% NEBRASKA
CORPORATION
EMPIRE CAPITAL CORPORATION I 100% COLORADO
ROXBOROUGH ACQUISITION CORP. 100% NEBRASKA
CF WOODLANDS PROPERTIES, INC. 100% NEBRASKA
CFT COMPANY 100% NEBRASKA
PROVIDENT INVESTMENT, INC. 100% NEBRASKA
RAILROAD SAVINGS
SERVICE CORPORATION 100% KANSAS
</TABLE>
- --------------------------------------------------------------------------------
(1) SUBSIDIARY WAS LEGALLY DISSOLVED IN JULY 1996.
<PAGE>
EXHIBIT 21. PARENTS AND SUBSIDIARIES
- -------------------------------------
<TABLE>
<CAPTION>
PERCENT STATE OF
PARENT COMPANY SUBSIDIARIES OWNED INCORPORATION
- ---------------------------------- --------------------------- --------- -------------
<S> <C> <C> <C>
COMMERCIAL FEDERAL COMMERCIAL FEDERAL REALTY 100% NEBRASKA
SERVICE CORP. INVESTORS CORPORATION
C.H.E., INC. (1) 100% NEBRASKA
COMMERCIAL FEDERAL AFFORDABLE 100% NEBRASKA
HOUSING, INC.
COMMERCIAL FEDERAL METRO TITLE AND 100% NEBRASKA
MORTGAGE CORP. ESCROW COMPANY, INC.
COMMERCIAL SYSTEMS MARKETING, INC. (1) 100% ARIZONA
MARKETING, INC.
C.H.E., INC. COMMERCIAL HOSPITALITY, INC. (1) 100% TEXAS
COMMERCIAL HOSPITALITY 100% FLORIDA
ENTERPRISES, INC. (1)
SYSTEMS MARKETING, FINANCIAL INVESTMENT 100% ILLINOIS
INC. ASSOCIATES INCORPORATED (1)
COMMERCIAL FEDERAL COMFED INSURANCE SERVICES 100% BRITISH
INSURANCE CORP. COMPANY, LIMITED VIRGIN ISLANDS
</TABLE>
- --------------------------------------------------------------------------------
(1) SUBSIDIARY WAS LEGALLY DISSOLVED IN JULY 1996.
NOTE: ALL OF THE MATERIAL ACCOUNTS OF THE ABOVE LISTED COMPANIES ARE
CONSOLIDATED IN THE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS. ALL
SIGNIFICANT INTERCOMPANY BALANCES AND TRANSACTIONS HAVE BEEN ELIMINATED.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
WE CONSENT TO THE INCORPORATION BY REFERENCE IN REGISTRATION STATEMENT NOS.
33-36708, 33-5616, 33-39762, 33-31685, 33-60448 AND POST-EFFECTIVE AMENDMENT NO.
1 TO REGISTRATION STATEMENT NOS. 33-1333 AND 33-10396 OF COMMERCIAL FEDERAL
CORPORATION ON FORM S-8 OF OUR REPORT DATED AUGUST 23, 1996, INCORPORATED BY
REFERENCE IN THE ANNUAL REPORT ON FORM 10-K OF COMMERCIAL FEDERAL CORPORATION
FOR THE YEAR ENDED JUNE 30, 1996.
/S/ DELOITTE & TOUCHE LLP
OMAHA, NEBRASKA
SEPTEMBER 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 33,427
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 273,104
<INVESTMENTS-CARRYING> 1,159,985
<INVESTMENTS-MARKET> 1,144,175
<LOANS> 4,813,164
<ALLOWANCE> 49,278
<TOTAL-ASSETS> 6,607,670
<DEPOSITS> 4,304,576
<SHORT-TERM> 979,772
<LIABILITIES-OTHER> 100,226
<LONG-TERM> 809,819
0
0
<COMMON> 151
<OTHER-SE> 413,126
<TOTAL-LIABILITIES-AND-EQUITY> 6,607,670
<INTEREST-LOAN> 384,765
<INTEREST-INVEST> 106,327
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 491,092
<INTEREST-DEPOSIT> 214,040
<INTEREST-EXPENSE> 328,317
<INTEREST-INCOME-NET> 162,775
<LOAN-LOSSES> 6,107
<SECURITIES-GAINS> 253
<EXPENSE-OTHER> 124,046
<INCOME-PRETAX> 82,268
<INCOME-PRE-EXTRAORDINARY> 55,306
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,306
<EPS-PRIMARY> 3.73
<EPS-DILUTED> 3.72
<YIELD-ACTUAL> 2.58
<LOANS-NON> 37,905
<LOANS-PAST> 0
<LOANS-TROUBLED> 14,803
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 48,541
<CHARGE-OFFS> 5,533
<RECOVERIES> 734
<ALLOWANCE-CLOSE> 49,278
<ALLOWANCE-DOMESTIC> 12,765
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 36,513
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
RESTATED FINANCIAL STATEMETN FOR THE FISCAL YEAR ENDED jUNE 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 28,800
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,345
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,962
<INVESTMENTS-CARRYING> 1,625,426
<INVESTMENTS-MARKET> 1,614,138
<LOANS> 4,540,692
<ALLOWANCE> 48,541
<TOTAL-ASSETS> 6,569,579
<DEPOSITS> 4,011,323
<SHORT-TERM> 828,901
<LIABILITIES-OTHER> 159,614
<LONG-TERM> 1,232,127
0
0
<COMMON> 143
<OTHER-SE> 337,471
<TOTAL-LIABILITIES-AND-EQUITY> 6,569,579
<INTEREST-LOAN> 344,109
<INTEREST-INVEST> 110,259
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 454,368
<INTEREST-DEPOSIT> 180,163
<INTEREST-EXPENSE> 304,526
<INTEREST-INCOME-NET> 149,842
<LOAN-LOSSES> 6,408
<SECURITIES-GAINS> (41)
<EXPENSE-OTHER> 134,173
<INCOME-PRETAX> 54,327
<INCOME-PRE-EXTRAORDINARY> 31,181
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,181
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.16
<YIELD-ACTUAL> 2.46
<LOANS-NON> 32,258
<LOANS-PAST> 0
<LOANS-TROUBLED> 17,860
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,851
<CHARGE-OFFS> 3,771
<RECOVERIES> 1,334
<ALLOWANCE-CLOSE> 48,541
<ALLOWANCE-DOMESTIC> 15,280
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 33,261
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1995.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 29,438
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,788
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,910
<INVESTMENTS-CARRYING> 1,643,105
<INVESTMENTS-MARKET> 1,587,467
<LOANS> 4,343,628
<ALLOWANCE> 47,596
<TOTAL-ASSETS> 6,385,122
<DEPOSITS> 3,849,537
<SHORT-TERM> 738,947
<LIABILITIES-OTHER> 140,587
<LONG-TERM> 1,332,200
0
0
<COMMON> 143
<OTHER-SE> 323,708
<TOTAL-LIABILITIES-AND-EQUITY> 6,385,122
<INTEREST-LOAN> 252,396
<INTEREST-INVEST> 81,642
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 334,038
<INTEREST-DEPOSIT> 130,159
<INTEREST-EXPENSE> 221,709
<INTEREST-INCOME-NET> 112,329
<LOAN-LOSSES> 4,825
<SECURITIES-GAINS> (37)
<EXPENSE-OTHER> 105,453
<INCOME-PRETAX> 35,830
<INCOME-PRE-EXTRAORDINARY> 35,830
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,482
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 2.36
<LOANS-NON> 31,024
<LOANS-PAST> 0
<LOANS-TROUBLED> 22,055
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 44,851
<CHARGE-OFFS> 2,782
<RECOVERIES> 1,279
<ALLOWANCE-CLOSE> 47,596
<ALLOWANCE-DOMESTIC> 15,747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 31,791
</TABLE>
