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.
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.
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Actual Capital Required Capital
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(Dollars In Thousands) Amount Ratio Amount Ratio
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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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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
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
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:
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
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%
---------- ===== ---------- ===== ---------- ===== ---------- ===== ---------- =====
(Continued on next page)
10
Composition of Loan Portfolio (continued):
- ------------------------------------------
June 30,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
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
========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------
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
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:
June 30,
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ---------------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------------
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%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
12
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:
Residential Multi- Land Sub Commercial % of
State 1-4 Units Family Loans FHA/VA Total Loans Total Total
------------ ---------- -------- ------- --------- ---------- ----------- ------ -----
(Dollars in Thousands)
--------------------------------------------------------------------------------------------
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%
========== ======= ======= ======== ========== ======== ==========
13
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.
- --------------------------------------------------------------------------------
Due During the Year Ended June 30,
--------------------------------------------
- --------------------------------------------------------------------------------
1998- After
1997 2001 2001 Total
-------- ---------- ---------- ----------
Principal Repayments (In Thousands)
- --------------------
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
======== ========== ========== ==========
- --------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans.
14
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.
- --------------------------------------------------------------------------------
Adjustable
Fixed-Rate Rate Total
---------- ---------- ----------
(In Thousands)
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
========== ========== ==========
- --------------------------------------------------------------------------------
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
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
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
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
Set forth below is a table showing the Corporation's loan and mortgage-backed
securities activity for the fiscal years indicated:
- ----------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
(In Thousands)
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
========== ========== ==========
- -------------------------------------------------------------------------------
(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
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
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
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
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
- --------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------
(Dollars in Thousands)
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%
- --------------------------------------------------------------------------------------------
(Continued on next page)
23
(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
The geographic concentration of nonperforming loans at June 30 was as follows:
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(In Thousands)
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
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
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
The geographic concentration of nonperforming real estate at June 30 was as
follows:
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
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
======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
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
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
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:
- --------------------------------------------------------------------------------
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
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
- --------------------------------------------------------------------------------
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
The following table sets forth the activity in the Bank's allowance for loan
losses for the fiscal years ended June 30 as indicated:
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ---------
(Dollars in Thousands)
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%
- ----------------------------------------------------------------------------------------
(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
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:
- -----------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
(Dollars in Thousands)
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
======== ======== ========
- -----------------------------------------------------------------------
30
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:
- --------------------------------------------------------------------------------
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)
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%
======= ==== ======== ==== ======= ==== ======= ==== ======== ======== ====
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
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
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:
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)
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%
========== ===== ======== ========== ===== ======== ========== =====
33
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated.
- -----------------------------------------------------------------------------------
Year Ended June 30,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
---------- ----- ---------- ----- ---------- -----
(Dollars in Thousands)
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%
========== ==== ========== ==== ========== ====
- -----------------------------------------------------------------------------------
The following table sets forth the Corporation's certificates of deposit (fixed
maturities) classified by rates as of the dates indicated.
- -----------------------------------------------------------------------------------
June 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(In Thousands)
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
========== ========== ==========
- -----------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------
Maturity Period June 30,
- --------------- ----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
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
======== ======== ========
- -----------------------------------------------------------------------------------
For further information regarding the Corporation's deposits, see Note 13 to the
Notes to Consolidated Financial Statements in the Annual Report.
34
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:
- --------------------------------------------------------------------------------
Year Ended June 30,
-----------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
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%
- --------------------------------------------------------------------------------
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
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
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
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:
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Actual Requirement Excess
- --------------------------------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------------------------------
(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
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.
- --------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- -----------------------------------------------------------------------------------------
Percentage of adjusted assets...... 6.41% 12.56% 13.62%
Minimum requirements to be
classified well-capitalized..... 5.00% 6.00% 10.00%
- --------------------------------------------------------------------------------
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."
39
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
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
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
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
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
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
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
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
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
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
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
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
(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
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
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:
Age at
Name June 30, 1996 Current Position(s) as of June 30, 1996
- --------------------------- ------------- ---------------------------------------
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
(Continued on next page)
54
Age at
Name June 30, 1996 Current Position(s) as of June 30, 1996
- --------------------------- ------------- ---------------------------------------
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
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
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
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
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
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
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
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
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- --------
2.1 Reorganization and Merger Agreement by and between Commercial Federal
Corporation and Commercial Federal Bank, a Federal Savings Bank and
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)