<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
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Exchange Act of 1934
For the quarterly period ended June 30, 1996 or
- -------- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number: 0-16918
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 47-0713310
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1004 Farnam Street, Omaha, Nebraska 68102
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(Address of principal executive offices) (Zip Code)
(402) 444-1630
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(Registrant's telephone number, including area code)
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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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
FORM 10-Q
JUNE 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995......................... 1
Consolidated Statements of Operations
For the quarters ended June 30, 1996 and June 30, 1995
and for the six months ended June 30, 1996 and
June 30, 1995............................................... 2
Consolidated Statement of Partners' Capital
For the six months ended June 30, 1996...................... 3
Consolidated Statements of Cash Flows
For the six months ended June 30, 1996 and June 30, 1995.... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 13
Item 6. Exhibits and Reports on Form 8-K............................ 13
SIGNATURES.................................................. 15
</TABLE>
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
<TABLE>
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CONSOLIDATED BALANCE SHEETS
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June 30, 1996 December 31, 1995
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Assets
<S> <C> <C>
Cash and amounts due from depository institutions $ 27,452,137 $ 27,115,665
Federal funds sold 11,000,000 24,700,000
Securities purchased under agreements to resell 5,300,000 20,500,000
Investments held to maturity 39,998,119 39,995,619
Mortgage-backed securities, net
Held to maturity 669,402,076 763,770,159
Available-for-sale 47,108,093 52,031,990
Loans receivable, net 1,413,938,835 1,431,180,207
Loans held for sale 983,350 403,000
Accrued interest receivable 13,014,896 13,500,436
Premises and equipment, net 9,152,357 9,535,178
Federal Home Loan Bank stock, at cost 21,169,300 21,508,600
Real estate held for sale, net 2,462,212 2,385,712
Real estate owned, net 3,669,028 2,542,684
Other assets 9,402,843 7,784,114
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Total Assets $2,274,053,246 $2,416,953,364
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Liabilities and Partners' Capital
Customer deposits $1,795,528,501 $1,704,466,523
Securities sold under agreements to repurchase 91,554,000 206,856,000
Other borrowings 189,055,077 310,087,421
Distributions payable 2,436,724 2,436,725
Other liabilities and accrued expenses 17,642,538 21,433,023
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Total Liabilities 2,096,216,840 2,245,279,692
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Redeemable Preferred Stock; Series A, no par value;
200,000 shares issued; $20 million liquidation value 16,608,373 15,541,988
Partners' Capital:
General Partner 5,805,190 4,883,801
Beneficial Unit Certificate (BUC) Holders
6,010,589 BUCs authorized, issued and outstanding 155,422,843 151,247,883
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Total Partners' Capital 161,228,033 156,131,684
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Total Liabilities and Partners' Capital $ 2,274,053,246 $2,416,953,364
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
1
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
<TABLE>
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CONSOLIDATED STATEMENTS OF OPERATIONS
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For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
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<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $26,535,593 $25,612,698 $53,750,168 $50,414,140
Interest on mortgage-backed securities 12,685,584 13,225,414 26,517,065 25,893,493
Interest and dividends on investment 1,167,539 1,016,781 2,370,438 2,229,359
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Total interest income 40,388,716 39,854,893 82,637,671 78,536,992
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Interest expense
Interest on deposits 20,332,828 18,690,952 40,059,008 36,146,617
Interest on borrowings 4,807,502 7,320,254 11,327,218 14,761,377
Preferred Stock accretion 542,038 482,941 1,066,385 965,881
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Total interest expense 25,682,368 26,494,147 52,452,611 51,873,875
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Net interest income before provision
for loan losses 14,706,348 13,360,746 30,185,060 26,663,117
Provision for loan losses 371,892 187,933 780,213 352,211
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Net interest income after provision
for loan losses 14,334,456 13,172,813 29,404,847 26,310,906
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Non-interest income
Deposit related fees 452,633 513,444 921,739 1,056,794
Loan related fees 386,887 381,071 712,444 770,295
Gain on disposition of loans 107,196 45,939 153,568 44,154
Other income 984,573 1,936,289 1,517,140 3,033,725
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Total non-interest income 1,931,289 2,876,743 3,304,891 4,904,968
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Non-interest expense
Compensation and benefits 5,251,739 4,917,029 10,666,526 9,963,916
Occupancy and equipment 2,088,885 2,234,373 4,313,744 4,465,603
FDIC premiums and special assessments 1,084,930 1,060,536 2,179,946 2,121,073
Professional services 212,396 347,118 538,154 530,247
Advertising and promotion 295,809 398,557 525,957 628,020
Provision for loss(recovery) on interest
rate exchange agreements (100,000) 1,029,000 (569,000) 1,029,000
Other expense 2,103,831 2,601,872 4,214,076 5,499,980
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Total non-interest expense 10,937,590 12,588,485 21,869,403 24,237,839
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Income before income taxes 5,328,155 3,461,071 10,840,335 6,978,035
Provision for income taxes - - - -
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Net income $ 5,328,155 $ 3,461,071 $ 10,840,335 $ 6,978,035
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Net income allocated to:
General Partner $ 561,836 $ 188,418 $ 1,160,474 $ 388,014
BUC Holders 4,766,319 3,272,653 9,679,861 6,590,021
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$ 5,328,155 $ 3,461,071 $ 10,840,335 $ 6,978,035
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Net income per BUC $ .7930 $ .5445 $ 1.6105 $ 1.0964
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
<TABLE>
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CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
For the Six Months Ended June 30, 1996
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General
Partner BUC Holders Total
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<S> <C> <C> <C>
Balance at December 31, 1995 $4,883,801 $151,247,883 $156,131,684
Net income 1,160,474 9,679,861 10,840,335
Cash distributions paid or accrued (64,978) (4,808,472) (4,873,450)
Net unrealized losses on available-for-sale
mortgage-backed securities (174,107) (696,429) (870,536)
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Balance at June 30, 1996 $5,805,190 $155,422,843 $161,228,033
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
<TABLE>
<CAPTION>
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
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Cash flows from operating activities
<S> <C> <C>
Net income $ 10,840,335 $ 6,978,035
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of:
Investments and mortgage-backed securities net premium 1,486,400 145,305
Loan (discount) premium 543,419 (1,083,217)
Intangibles 631,648 669,984
Proceeds from sale of loans originated and held for sale 10,240,990 3,476,254
Originations of loans held for sale (10,667,771) (3,365,600)
Gain on disposition of mortgage loans (153,568) (44,154)
Provision for loan losses 780,213 352,211
Provision for loss (recovery) on interest rate exchange agreements (569,000) 1,029,000
Decrease (increase) in accrued interest receivable 485,540 (1,303,110)
Decrease in accrued interest payable (1,117,177) (526,859)
Depreciation and amortization of premises and equipment 865,617 1,048,853
Increase in other assets (2,250,376) (750,097)
Decrease in other liabilities (2,104,308) (5,038,693)
Other, net 410,630 170,584
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Total adjustments (1,417,743) (5,219,539)
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Net cash provided by operating activities 9,422,592 1,758,496
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Cash flows from investing activities
Loans originated and held for investment (113,330,416) (55,134,398)
Purchases of mortgage-backed securities (14,547,696) (66,882,437)
Purchases of real estate loans (21,930,658) (3,136,168)
Purchases of premises and equipment (511,709) (452,720)
Principal payments on mortgage-backed securities 111,480,237 51,035,589
Principal payments on loans 148,341,954 94,645,782
Proceeds from maturities of securities
purchased under agreements to resell - 3,000,000
Proceeds from sale of Federal Home Loan Bank Stock 911,200 -
Proceeds from sales of real estate owned 1,557,501 4,659,649
Other, net 189,384 992,169
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Net cash provided by investing activities 112,159,797 28,727,466
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Cash flows from financing activities
Net increase (decrease) in checking, money market accounts
and passbook savings 45,325,031 (39,219,483)
Proceeds from issuance of certificates of deposits 144,005,109 141,088,634
Payments for maturing or early withdrawal
of certificates of deposits (98,268,263) (136,346,887)
Net (increase) decrease in short-term repurchase agreements (115,302,000) 6,357,000
Decrease in Federal Home Loan Bank advances (121,032,344) -
Capital distributions (4,873,450) (4,873,449)
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Net cash used by financing activities (150,145,917) (32,994,185)
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Net decrease in cash and cash equivalents (28,563,528) (2,508,223)
Cash and cash equivalents at beginning of period 72,315,665 64,561,654
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Cash and cash equivalents at end of period $ 43,752,137 $ 62,053,431
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Supplemental disclosure of cash flow information:
Non cash investing and financing activities:
Additions to real estate acquired through foreclosure $ 2,909,144 $ 2,489,574
Additions to consumer loan acquired in
settlement of loans $ 26,352 $ 57,561
Cash paid for interest (including interest credited) $ 52,657,563 $ 51,687,025
Cash paid for alternative income and minimum
franchise taxes $ 380,000 $ 185,000
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION
America First Financial Fund 1987-A Limited Partnership (the "Partnership")
was formed on April 14, 1987 under the Delaware Revised Uniform Limited
Partnership Act for the purpose of acquiring one or more federally insured
financial institutions through supervisory assisted acquisitions. The
Partnership formed a subsidiary corporation, America First Eureka Holdings,
Inc. ("AFEH") for the purpose of owning and managing one or more acquired
financial institutions. The Partnership will terminate on December 31, 2036,
unless terminated earlier under the provisions of the Partnership Agreement.
The general partner of the Partnership is America First Capital Associates
Limited Partnership Five ("AFCA-5") whose managing general partner is AFCA-5
Management Corporation.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Partnership include the
accounts of the Partnership, AFEH (its wholly-owned subsidiary) and AFEH's
wholly-owned subsidiary, EurekaBank ("Eureka") and its subsidiaries. All
significant intercompany transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (primarily consisting of normal
recurring accruals) necessary for a fair presentation of the Partnership's
financial condition as of June 30, 1996, and the results of its operations
and its cash flows for the quarters and six months ended June 30, 1996 and
1995.
3. ALLOWANCE FOR LOAN LOSSES
The Partnership recorded loan loss provisions of approximately $372,000 and
$780,000 for the quarter and six months ended June 30, 1996, respectively,
compared to $188,000 and $352,000 for the same periods in 1995. At June 30,
1996 and December 31, 1995, the Partnership maintained loan loss reserves of
approximately $7.2 million and $6.9 million, respectively. Management
believes that reserves are adequate given the composition, credit
characteristics and loss experience of the loan portfolio.
4. INTEREST RATE EXCHANGE AGREEMENTS
The Partnership entered into interest rate exchange agreements arranged
predominately in 1988, 1990 and 1991, to reduce the impact of future
fluctuations in interest rates on fixed rate mortgages funded by variable
rate liabilities. The floating rates to be received by the Partnership under
the terms of the these agreements are reset monthly, quarterly or semi-
annually and are generally indexed to the FHLB Eleventh District Cost of
Funds index or the one or three month London Interbank Offered Rate
("LIBOR").
In 1993, the sustained decline in interest rates in the general economy and
the resulting prepayment of mortgage loans associated with the interest rate
exchange agreements caused Eureka to establish a liability based on the
estimated fair value of interest rate exchange agreements that were no
longer deemed effective as hedges. During the quarter and six months ended
June 30, 1996, Eureka recorded to non-interest expense a recovery of
approximately $100,000 and $569,000, respectively, to reflect the effect of
interest rate increases on the market value of Eureka's related obligations.
During the quarter ended June 30, 1995, Eureka recorded to non-interest
expense a provision for losses on interest rate exchange agreements of
approximately $1.0 million to reflect the effect of interest rate decreases
on the market value of Eureka's related obligations deemed ineffective as
hedges. The recorded liability for the interest rate exchange agreements
totaled approximately $1.7 million and $3.4 million at June 30, 1996 and
December 31, 1995, respectively. Net interest payable on interest rate
exchange agreements was $600,000 and $700,000 at June 30, 1996 and December
31, 1995, respectively, and was included in other liabilities and accrued
expenses.
5
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Net interest expense on interest rate exchange agreements is included as an
adjustment to interest income on loans. For the quarter and six months ended
June 30, 1996, net interest paid or accrued on interest rate exchange agreements
totaled approximately $687,000 and $1.5 million, respectively, as compared to
$1.5 million and $3.8 million for the same periods in 1995. The decrease in net
interest expense and net interest paid or accrued on interest rate exchange
agreements is primarily due to the expiration of some of these agreements. The
notional amount of interest rate exchange agreements outstanding was $100
million and $200 million at June 30, 1996 and 1995, respectively.
6
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FINANCIAL CONDITION
At June 30, 1996, Partnership assets were approximately $2.3 billion, which was
approximately $143 million lower than the level at December 31, 1995, and
consisted primarily of the assets of Eureka. Significant changes in the
composition of the balance sheet included the following:
. Net loans receivable, loans held for sale and net mortgage-backed securities
("MBS") decreased approximately $116.0 million during the six months ended
June 30, 1996. The net decreases in the loan and MBS portfolio were primarily
due to prepayments. During the six months ended June 30, 1996, Eureka
originated (net of sales) $34.1 million and $78.9 million in retail and
wholesale loans, respectively. Management believes that wholesale loan
originations will continue to be a significant percentage of total loan
originations through 1996. Wholesale loan originations enable Eureka to add
assets which meet its credit quality guidelines within its market area.
Purchases of loans and MBS for the six months ended June 30, 1996 totaled
$21.2 million and $14.3 million, respectively. Repayments of $147.0 million
and $111.5 million were recorded in the mortgage loan and MBS portfolios,
respectively, during the six months ended June 30, 1996.
. Retail deposits increased approximately $91.1 million since December 31, 1995
and totaled $1.8 billion at June 30, 1996. This increase is primarily due to
deposit promotions in 1996.
. Securities sold under agreements to repurchase and other borrowings decreased
approximately $236.3 million during the first six months of 1996 from $516.9
million at December 31, 1995 to $280.6 million at June 30, 1996. This
decrease was primarily due to asset shrinkage in net loans receivable, loans
held for sale and net MBS, and the growth in retail customer deposits during
the six months ended June 30, 1996. As of June 30, 1996, other liabilities
decreased by $3.8 million from December 31, 1995, primarily due to reductions
of approximately $1.7 million in the interest rate exchange agreements
liability and $1.1 million for accrued interest on borrowings and deposits.
At June 30, 1996 and December 31, 1995, the loan-to-deposit ratios were 79% and
84%, respectively. Loans, MBS, federal funds sold, securities purchased under
agreements to resell and investments comprised approximately 96% and 97% of
Partnership assets at June 30, 1996 and December 31, 1995, respectively.
Cash distributions paid or accrued during the quarter ended June 30, 1996
totaled $.40 per BUC. Future distributions are expected to be made principally
from dividends paid to the Partnership by AFEH. AFEH funds these dividends by
receipt of dividends from Eureka, the payment of which is subject to regulatory
limitation. Accordingly, it is not possible to estimate the level of cash
distributions to BUC Holders in the future.
ASSET QUALITY
The allowance for loan losses was $7.2 million and $6.9 million, or .50% and
.48% of gross loans outstanding at June 30, 1996 and December 31, 1995,
respectively. Non-performing assets (loans which were 90 or more days
delinquent and real estate acquired through foreclosure) were approximately $9.4
million and $8.9 million, or .42% and .37% of total assets at June 30, 1996 and
December 31, 1995, respectively. This compares favorably to 1.05% for non-
performing assets as of December 31, 1995, for thrifts located in California as
reported by the Office of Thrift Supervision ("OTS"). The ratio of loan loss
reserves to non-performing loans was 123.91% at June 30, 1996 compared to
107.66% at December 31, 1995. Management believes that reserves are adequate
given the composition, credit characteristics and loss experience of the loan
portfolio.
7
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
The level of loans 30 days or more delinquent remained low at approximately
$10.8 million or .76% of loans at June 30, 1996, compared to approximately $12.1
million or .84% of loans at December 31, 1995. This compares favorably to 1.70%
for loans 30 days or more delinquent as of December 31, 1995, for thrifts
located in California as reported by the OTS. Loans 30 days or more delinquent
at June 30, 1996 included $9.5 million in mortgage loans collateralized by 1-4
family residences.
RESULTS OF OPERATIONS
Net income for the quarter and six months ended June 30, 1996 was approximately
$5.3 million and $10.8 million, respectively, as compared to $3.5 million and
$7.0 million for the same periods in 1995. Net income per BUC for the quarter
and six months ended June 30, 1996 was $.7930 and $1.6105, respectively, as
compared to $.5445 and $1.0964 for the same periods in 1995. The increase in
net income and net income per BUC for the quarter and six months ended June 30,
1996 as compared to the same period in 1995 is primarily due to increases in the
net interest margin.
NET INTEREST INCOME
Net interest income before the provision for loan losses for the quarter and six
months ended June 30, 1996 was approximately $14.7 million and $30.2 million,
respectively, as compared to $13.4 million and $26.7 million for the same
periods in 1995. Net interest income is the Partnership's principal income
component and is determined by the relative levels of, and interest rates paid
on, interest earning assets and interest bearing liabilities. Average interest
earning assets were approximately $2.2 billion and $2.3 billion for the quarter
and six months ended June 30, 1996, respectively, compared to approximately $2.3
billion for the quarter and six months ended June 30, 1995.
The net interest margin, the net yield on average assets, for the quarter and
six months ended June 30, 1996 was 2.51% and 2.57%, respectively, as compared to
2.30% and 2.26% for the same periods in 1995. The net interest margin improved
in the second quarter of 1996 as compared to the second quarter of 1995, as
earnings on adjustable rate mortgage loans remained stable and the cost of funds
was lower. The notional amount of interest rate exchange agreements decreased
from $200 million at June 30, 1995 to $100 million at June 30, 1996, which along
with increases in interest rates, decreased the net interest expense on interest
rate exchange agreements to $258,000 and $400,000 for the quarter and six months
ended June 30, 1996, respectively, as compared to $897,000 and $1.9 million for
the same periods in 1995. The reduction in net interest expense on interest
rate exchange agreements contributed to a higher net interest margin for the
second quarter of 1996 as compared to the same period in 1995. The net interest
received or paid on these contracts is reflected as an adjustment to interest
income on loans receivable (see Note 4 of Notes to Consolidated Financial
Statements).
PROVISION FOR LOAN LOSSES
The Partnership recorded loan loss provisions of approximately $372,000 and
$780,000 for the quarter and six months ended June 30, 1996, respectively, as
compared to $188,000 and $352,000 for the same periods in 1995. Net loan
charge-offs were $260,000 and $364,000 for the quarter and six months ended June
30, 1996, respectively, as compared to $326,000 and $736,000 for the same
periods in 1995. Of the total net charge-offs (recoveries) recorded during the
quarter and six months ended June 30, 1996, ($7,400) and $5,600 , respectively,
were for Eureka's consumer loan portfolio, as compared to charge-offs of
$226,000 and $483,000 for the same periods in 1995. Future provisions and
charge-offs for the consumer loan portfolio are expected to continue to decline
due to the sale of the credit card portfolio, which occurred during the third
quarter of 1995. Mortgage loan charge-offs totaled $267,000 and $358,000,
respectively, for the quarter and six months ended June 30, 1996, as compared to
$99,000 and $253,000 for the same periods in 1995.
Eureka's determination of loan loss reserves and the resulting provision for
loan losses are based upon judgments and assumptions regarding various factors
including general economic conditions, internal asset review findings,
composition of the loan portfolio, historical loss experience and estimates of
potential future losses. Management believes that it has
8
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
provided adequate loan loss reserves to cover potential losses, particularly
considering the low level of delinquencies and charge-offs experienced by Eureka
over the past five years and continued adherence to strict credit quality
control guidelines. The future loss experience related to changes in the economy
and interest rate environment, however, cannot be predicted.
NON-INTEREST INCOME
The principal components of non-interest income are deposit and loan related fee
income, gains on the disposition of loans and other income. Non-interest income
totaled approximately $1.9 million and $3.3 million for the quarter and six
months ended June 30, 1996, respectively, compared to $2.9 million and $4.9
million for the same periods in 1995.
Deposit and loan related fees for the quarter and six months ended June 30, 1996
were approximately $840,000 and $1.6 million, respectively, compared to $895,000
and $1.8 million for the same periods in 1995.
Fixed rate loans which meet the FHLMC lending requirements, "conforming loans,"
are originated by Eureka for sale in the secondary mortgage market. The net
gain from Eureka's loan sale activities was approximately $107,000 and $154,000
for the quarter and six months ended June 30, 1996, respectively, on loan sales
of approximately $7.5 million and $10.1 million, respectively. During the
comparable periods a year earlier, Eureka sold conforming loans with principal
balances which totaled $2.4 million and $3.4 million at a net gain of
approximately $46,000 and $44,000, respectively. The net gain from loan sale
activities of $154,000 for the six months ended June 30, 1996 includes $88,000
of capitalized originated mortgage servicing rights retained by Eureka and
recorded in accordance with SFAS No. 122. In addition, the increase in loan
sale transactions and related income was also due, in part, to the
securitization and attractive interest rate pricing on conforming loans.
Other non-interest income for the quarter and six months ended June 30, 1996 was
approximately $985,000, and $1.5 million, respectively, compared to $1.9 million
and $3.0 million for same periods in 1995. This variance is primarily due to
the fact that other non-interest income includes $1.1 million and $1.4 million
for the quarter and six months ended June 30, 1995 for the reduction of
previously established reserves no longer deemed necessary. Other non-interest
income included rental income, fee income from Eureka Financial Services Inc.,
(a Eureka subsidiary licensed to sell mutual funds and insurance annuities),
income from real estate held for investment, gain on sale of real estate
foreclosed, and other non-operating income items. Net gain (loss) on the sale
of REO for the quarter and six months ended June 30, 1996 was $39,000 and
($32,000), compared to $74,000 and $237,000 for the same periods in 1995.
NON-INTEREST EXPENSE
The principal components of non-interest expense are compensation and benefits
expenses, occupancy and equipment expenses, FDIC insurance premiums,
professional and advertising expenses, provision for loss (recovery) on interest
rate exchange agreements and other administrative expenses. Non-interest
expense for the quarter and six months ended June 30, 1996 was approximately
$10.9 million and $21.9 million, compared to $12.6 million and $24.2 million for
the same periods in 1995.
Compensation and benefits expenses were approximately $5.3 million and $10.7
million for the quarter and six months ended June 30, 1996, compared to
approximately $4.9 million and $10.0 million for the quarter and six months
ended June 30, 1995. The increase in 1996 expenses is primarily due to
increases in base compensation and adjustments to accruals for bonuses and
incentive awards.
Non-interest expense for the quarter and six months ended June 30, 1996 included
adjustments to the interest rate exchange agreements liability established in
1993. During the quarter and six months ended June 30, 1996, recoveries of
approximately $100,000 and $569,000, respectively, were recorded to reduce the
interest rate exchange agreements liability to reflect the effect of interest
rate increases on the market value of Eureka's obligations under the interest
rate
9
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
exchange agreements. During the quarter ended June 30, 1995, provisions of
approximately $1.0 million were recorded to increase the interest rate exchange
agreements liability to reflect the effect of interest rate decreases on the
market value of Eureka's obligations under the interest rate exchange agreements
deemed ineffective as hedges.
Occupancy and equipment expenses totaled $2.1 million and $4.3 million for the
quarter and six months ended June 30, 1996, respectively, as compared to $2.2
million and $4.5 million for the same periods in 1995. FDIC insurance premiums,
professional and advertising expenses, and other expenses were approximately
$3.7 million and $7.5 million for the quarter and six months ended June 30,
1996, compared to $4.4 million and $8.8 million for the same periods in 1995.
Other expenses for the six months ended June 30, 1995 included a nonrecurring
adjustment of $400,000.
PROVISION FOR INCOME TAXES
Due to the net operating loss carryforwards available to AFEH arising from the
acquisition of Eureka, AFEH does not expect to pay any regular income taxes in
1996. AFEH's alternative minimum taxes totaled $170,000 and $380,000 for the
quarter and six months ended June 30, 1996, respectively, as compared to $90,000
and $185,000 for the same periods in 1995. Alternative minimum taxes paid by
AFEH are recorded as a component of the deferred tax asset which is included in
other assets as they result in tax credits with an indefinite life that will be
used to offset future tax liabilities.
ASSET/LIABILITY MANAGEMENT
Eureka's Asset and Liability Committee ("ALCO") has responsibility for managing
Eureka's assets and liabilities in a manner which balances profitability and
risk (including interest rate risk). ALCO operates within policies and risk
limits prescribed by the Board of Directors. ALCO's principal activities
include:
. Measuring and monitoring the expected impact of changes in market interest
rates on Eureka's net income.
. Establishing target pricing, volume, and business mix of loans and deposits.
. Emphasizing adjustable rate mortgages ("ARMs") and retail deposits as opposed
to fixed rate mortgages and other borrowings.
. Utilizing financial models to project, measure and evaluate
profitability/risk decisions.
INTEREST RATE RISK
Financial institutions (such as Eureka) are subject to interest rate risk when
interest-bearing liabilities "reprice" or mature at different times or with
different indices than do interest-earning assets. Eureka's objective and
strategy in this regard is to balance the effective maturities (or repricing
bases) of assets and liabilities such that Eureka's capital base is protected in
the event of significant changes in interest rates and/or market conditions.
Eureka utilizes a comprehensive simulation of projected interest income and
expense under alternative market scenarios to assess its interest rate risk
exposure. This analysis incorporates expectations about how borrowers and
depositors will increase or pay down their balances as a result of simulated
rate changes, and reflects the impact of those rate changes on the market value
of securities and other investments.
An additional measure of Eureka's interest rate risk exposure is the interest
rate gap (the difference between the amount of assets and liabilities which
reprice or mature within a specified time period, e.g., one year). At June 30,
1995, Eureka's cumulative one-year and three-year interest rate gaps were a
negative 5% and negative 3%, respectively, as the amount of liability repricing
exceeded the amount of asset repricing during those periods. These gaps
suggested margins would be reduced if overall interest rates were to move
upwards. At June 30, 1996, Eureka's cumulative one-year and three-year interest
rate gaps were a positive 2% and negative 4%, respectively. At June 30, 1996,
Eureka had more ARMs as a percentage of total loans and a higher concentration
of retail deposits as compared to securities sold under agreements to repurchase
and other borrowings, however, the notional amount of interest rate exchange
agreements (paying fixed rates, receiving adjustable rates) was lower.
10
<PAGE>
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
LIQUIDITY
Eureka derives its liquidity primarily from loan repayments, customer deposits,
FHLB advances and securities sold under agreements to repurchase. Eureka
manages its liquidity through the coordination of the relative maturities of
assets and liabilities. The sources of liquidity are influenced by various
uncertainties, primarily market interest rates. Eureka continually evaluates
its sources of funds, and a decline in any one source of funds generally can be
offset by an alternate source, although potentially at a different cost. At
June 30, 1996, Eureka had no significant outstanding loan funding commitments.
Management believes that existing liquidity and other capital resources are
adequate to fund existing and anticipated commitments at June 30, 1996.
Regulations require a savings institution to maintain a liquidity ratio of at
least five percent of cash and specified securities to net withdrawable accounts
and borrowings due in one year. For the month of June 1996, Eureka's liquidity
ratio was 6.16% compared to 5.38% for the month of December 1995.
CAPITAL REQUIREMENTS
Federal regulations require that savings institutions meet three separate
capital tests: a risk-based capital standard, a core capital standard and a
tangible capital standard. At June 30, 1996, Eureka maintained regulatory
capital as follows:
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
-------------------- -------------------- ----------------------
% of
% % Risk-Based
Amount of Assets Amount of Assets Amount Assets
--------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital $154,754 $154,754 $154,754
Non-allowable assets:
Intangible assets (3,785) (3,785) (3,785)
Non-includable Subsidiaries (2,621) (2,621) (2,621)
Net unrealized loss on securities
available for sale 759 759 759
Allowance for loan losses - - 4,593
-------- ---- -------- ---- -------- -----
Computed regulatory capital 149,107 6.60% 149,107 6.60% 153,700 15.57%
Minimum capital requirement 33,897 1.50% 67,793 3.00% 78,997 8.00%
-------- ---- -------- ----- -------- -----
Excess regulatory capital $115,210 5.10% $ 81,314 3.60% $ 74,703 7.57%
======== ==== ======== ==== ======== =====
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENT
During 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), Accounting for
Stock-Based Compensation. This Statement establishes a new fair value based
accounting method for stock-based compensation plans and encourages (but does
not require) employers to adopt the new method in place of the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees. In accordance with SFAS No. 123, the Partnership has
decided to continue to apply the accounting provisions of APB 25 in determining
net income; however, it will apply the disclosure requirements of SFAS No. 123
in the 1996 Annual Report.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125 ("SFAS No. 125"), Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This statement establishes standards under
which, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities
11
<PAGE>
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125 shall
be effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and shall be applied
prospectively. Management does not expect the adoption of SFAS No. 125 to be
material to the Partnership's financial statements.
DEPOSIT INSURANCE AND OTHER MATTERS
Eureka's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to the maximum amount provided by law through the Savings
Association Insurance Fund ("SAIF"). For the quarter and six months ended June
30, 1996, Eureka paid deposit insurance premiums to the SAIF of $971,000 and
$1.9 million, respectively, based on an annual assessment rate of .23% of
covered deposits. In contrast, the FDIC lowered the deposit assessment rate for
well capitalized Bank Insurance Fund ("BIF") insured institutions to 0% of
covered deposits, effective January 1, 1996. These reductions could provide
most commercial banks competitive advantages over institutions with deposits
that are primarily SAIF-insured (such as Eureka).
Although SAIF recapitalization provisions were included in initial drafts of
both House and Senate versions of the 1996 federal budget bills, the final bills
passed by both houses in April did not include any such recapitalization
provisions. Under previous versions of these bills, the SAIF would have been
recapitalized through a combined approach of imposing a one-time special
assessment on SAIF-insured institutions, and an incremental pro-rata charge on
SAIF-insured institutions, and commercial banks insured under the BIF, to be
used to pay the interest on Financing Corporation ("FICO") bonds issued as part
of the 1989 savings association rescue package adopted under FIRREA. The SAIF
recapitalization provisions would have imposed a one-time special assessment of
approximately 80 basis points on deposits held by SAIF-insured institutions as
of March 31, 1995, payable not later than 60 days after the enactment of the
legislation. These provisions also would have provided for a merger of BIF and
SAIF by no later than January 1998, provided that no insured savings
associations are in existence on that date.
Because President Clinton is seeking to enact SAIF recapitalization legislation
by year-end, it is possible that these provisions, or provisions which are
similar, may be added to pending bills, although the prospect of SAIF
recapitalization legislation is uncertain. If these provisions or substantially
similar provisions are enacted this year, Eureka would be subject to the special
assessments levied on SAIF-insured institutions and would be required to pay
approximately $13.4 million (assuming an 80 basis point deposit assessment),
which would be a charge to income. The special assessment might be offset by
future insurance premium reductions.
Pending health insurance reform legislation passed by the House and Senate in
March and July 1996, respectively, includes provisions that would repeal the
thrift bad debt reserve method of calculation under the Internal Revenue Code,
effective for tax years beginning after December 31, 1995. If enacted, most
large savings associations (including Eureka) would be required to change to the
specific charge-off method of accounting for bad debts and would be required to
recapture statutory "excess reserves" as provided in the bills. A House-Senate
conference committee has included the bad debt recapture provisions as part of a
small business relief/minimum wage increase bill, on which final House and
Senate action, and presidential approval, is expected shortly. While enactment
of this legislation this year, therefore, appears highly likely, enactment of
such provisions would have a negligible impact on Eureka.
In addition, Congress is considering broader legislative measures which would
effectively combine the federal thrift and national bank charters by eliminating
the federal thrift charter, and abolishing the OTS. Although the prospects for
such legislation this year are uncertain, Congress is expected to continue
considering such measures in future legislative sessions. While Eureka again
cannot predict whether, when or in what form any such legislation will be
enacted, Eureka would be required to give up its federal savings bank charter
and convert either to a national bank, or a state bank or savings association if
this legislation is adopted. Further, AFEH and the Partnership would be subject
to regulation as bank holding companies under federal law. The financial impact
on Eureka, AFEH or the Partnership of any such measures enacted cannot be
determined at this time, although such impact could be material.
12
<PAGE>
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material pending legal proceedings to which the Partnership or
AFEH is a party or to which any property of the Partnership or AFEH is subject.
Eureka, however, is a party to various lawsuits arising in the normal course of
its business. Management does not believe that any of the legal proceedings to
which Eureka is a party will have a material impact on the financial condition
of the Partnership.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
4(a) Amended and Restated Limited Partnership Agreement dated June
30, 1987 (incorporated herein by reference to Form 10-K dated
December 31, 1987 filed pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 by America First Financial Fund
1 987-A Limited Partnership (Commission File No. 0-16918)).
4(b) Form of Certificate of Beneficial Unit Certificate (incorporated
herein by reference to Amendment No. 3 to the Registration
Statement on Form S-1 filed March 31, 1987 with the Securities
and Exchange Commission by America First Financial Fund 1987-A
Limited Partnership (Commission File No. 33-10286)).
10(a). Custody Agreement dated August 3, 1987 (incorporated herein by
reference to Form 10-K dated December 31, 1987 filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
10(b). Agreement between America First Capital Associates Limited
Partnership Five and Stephen McLin (incorporated herein by
reference to Amendment No. 3 to the Registration Statement on
Form S-1 filed March 31, 1987 with the Securities and Exchange
Commission by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 33-10286)).
10(c). Assistance Agreement dated May 27, 1988 (incorporated herein by
reference to Form 8 filed September 15, 1988 pursuant to Section
13 or 15(d) of the Securities Exchange Act by America First
Financial Fund 1987-A Limited Partnership (Commission File
No. 0-16918)).
10(d). Assignment Agreement dated May 27, 1988 (incorporated herein by
reference to Form 10-K dated December 31, 1988, filed pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
10(e). Capital Maintenance Agreement dated May 27, 1988 (incorporated
herein by reference to Form 10-K dated December 31, 1988, filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 0-16918)).
10(f). Asset Purchase Agreement dated May 27, 1988 (incorporated herein
by reference to Form 10-K dated December 31, 1988, filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 0-16918)).
13
<PAGE>
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
10(g). Employment Agreement between America First Holdings, Inc. (now
America First Eureka Holdings, Inc.) and Stephen T. McLin dated
January 24, 1989 (incorporated herein by reference to Form 10-K
dated December 31, 1988, filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 by America First
Financial Fund 1987-A Limited Partnership (Commission File
No. 0-16918)).
10(h). Long-Term Incentive Compensation Plan of EurekaBank (as amended
and restated effective January 1, 1991) (incorporated herein by
reference to Form 10-Q dated August 13, 1991, filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
27. Financial Data Schedule.
(b) The Partnership did not file any Current Reports on Form 8-K during the
second quarter of 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICA FIRST FINANCIAL FUND
1987-A LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Five, General
Partner of the Registrant
By AFCA-5 Management Corporation,
General Partner of America First
Capital Associates Limited Partnership Five
Date: August 5, 1996 By /s/ George H. Krauss
------------------------------------------
George H. Krauss
Chairman of the Board of Directors
and Secretary (Principal Executive Officer)
Date: August 5, 1996 By /s/ J. Paul Bagley
------------------------------------------
J. Paul Bagley
Director, President and Treasurer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,941,087
<INT-BEARING-DEPOSITS> 3,511,050
<FED-FUNDS-SOLD> 16,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 47,108,093
<INVESTMENTS-CARRYING> 709,400,195
<INVESTMENTS-MARKET> 706,504,786
<LOANS> 1,422,080,833
<ALLOWANCE> 7,158,648
<TOTAL-ASSETS> 2,274,053,246
<DEPOSITS> 1,795,528,501
<SHORT-TERM> 260,709,077
<LIABILITIES-OTHER> 20,079,261
<LONG-TERM> 19,900,000
16,608,373
0
<COMMON> 0
<OTHER-SE> 161,228,033
<TOTAL-LIABILITIES-AND-EQUITY> 2,274,053,246
<INTEREST-LOAN> 53,750,168
<INTEREST-INVEST> 28,887,503
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 82,637,671
<INTEREST-DEPOSIT> 40,059,008
<INTEREST-EXPENSE> 52,452,611
<INTEREST-INCOME-NET> 30,185,060
<LOAN-LOSSES> 780,213
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,869,403
<INCOME-PRETAX> 10,840,335
<INCOME-PRE-EXTRAORDINARY> 10,840,335
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,840,335
<EPS-PRIMARY> 1.611
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 9,867,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,789,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,878,072
<CHARGE-OFFS> 414,794
<RECOVERIES> 51,157
<ALLOWANCE-CLOSE> 7,158,648
<ALLOWANCE-DOMESTIC> 7,158,648
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
