FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Annual report pursuant to Section 13 or 15(d) of the
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Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
or
Transition report pursuant to Section 13 or 15(d) of the
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Securities Exchange Act of 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER: 0-16918
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0713310
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1004 Farnam Street, Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
(402) 444-1630
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Beneficial Unit Certificates ("BUC") representing assignments of limited
partnership interests in America First Financial Fund 1987-A Limited
Partnership
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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The aggregate market value of the BUCs held by non-affiliates on March 18, 1997,
based upon the final sales price per BUC of $32 1/2 reported in The Wall Street
---------------
Journal on March 19, 1997, was $191,926,410.
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DOCUMENTS INCORPORATED BY REFERENCE
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of the chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. X
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AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business............................................... 1
Item 2. Properties............................................. 24
Item 3. Legal Proceedings...................................... 27
Item 4. Submission of Matters to a Vote of Security Holders.... 27
PART II
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Item 5. Market for Registrant's Common Equity and Related
BUC Holders Matters.................................... 27
Item 6. Selected Financial Data................................ 28
Item 7. Management's Discussion and Analysis of Financial
Conditionand Results of Operations..................... 29
Item 8. Financial Statements and Supplementary Data............ 39
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure................. 39
PART III
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Item 10. Directors and Executive Officers of the Registrant..... 40
Item 11. Executive Compensation................................. 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 49
Item 13. Certain Relationships and Related Transactions......... 50
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 51
SIGNATURES ....................................................... 53
PART I
ITEM 1. BUSINESS.
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America First Financial Fund 1987-A Limited Partnership (the "Partnership") was
formed on April 14, 1987, under the Delaware Revised Uniform Limited Partnership
Act for purposes of acquiring one or more federally-insured financial
institutions through supervisory-assisted acquisitions. The general partner of
the Partnership is America First Capital Associates Limited Partnership Five
("AFCA-5"). The Partnership began operations with the first escrow closing on
July 1, 1987. The Partnership will terminate on December 31, 2036, unless
terminated earlier under provisions of the Partnership Agreement.
The Partnership sold a total of 6,010,589 Beneficial Unit Certificates ("BUCs")
at $20 per BUC for a total net capital contribution of $107,950,178 after
deducting sales commissions and organization and offering costs. BUCs represent
assigned limited partnership interests in the Partnership.
The Partnership formed a subsidiary corporation, America First Eureka Holdings,
Inc. ("AFEH"), formerly America First Holdings, for purposes of acquiring,
owning and managing one or more financial institutions. On May 27, 1988, AFEH
acquired EurekaBank ("Eureka" or the "Bank") under an Assistance Agreement with
the Federal Savings and Loan Insurance Corporation ("FSLIC") (the
"Acquisition"), whose obligations were assumed by the FSLIC Resolution Fund
("Resolution Fund") with the passage of the Financial Institutions Reform,
Recovery, and Enforcement Act ("FIRREA") in August 1989 and subsequently passed
to the Federal Deposit Insurance Corporation ("FDIC"). Prior to the
Acquisition, Eureka was an insolvent mutual association which had been operated
since 1985 by the Federal Home Loan Bank Board, the predecessor to the Office of
Thrift Supervision ("OTS"), under its management consignment program. As a
result of the Acquisition, Eureka was recapitalized and received various types
of assistance from the FSLIC. On June 24, 1988, Eureka acquired the assets and
liabilities of Stanford Savings and Loan Association ("Stanford") from the
FSLIC. The Partnership and AFEH are unitary savings and loan holding companies
and are subject to regulation, examination, supervision and reporting
requirements of the OTS. See "Regulation" and "Assistance and Related
Agreements."
Substantially all of the Partnership's business is conducted through Eureka,
which has 36 branch offices located in the greater San Francisco Bay Area. At
December 31, 1996, Eureka had total assets of approximately $2.2 billion and
customer deposits of approximately $1.8 billion. Eureka's executive offices are
located at 950 Tower Lane, Foster City, California 94404. The Partnership's
offices are located at 1004 Farnam Street, Omaha, Nebraska 68102.
Eureka's business consists primarily of attracting retail savings deposits from
the general public and, together with other borrowings, investing these funds in
residential mortgage loans, mortgage-backed securities and investments.
Eureka's income is derived primarily from interest on residential mortgage
loans, mortgage-backed securities and other real estate loans and, to a lesser
extent, interest on investments and fees received in connection with loans,
deposits and other services. Eureka's major expense is interest paid on
customer deposits and other borrowings. Eureka's operations, like those of
other savings institutions, are significantly influenced by national, regional
and local economic conditions, the interest rate environment, the related
monetary, fiscal and regulatory policies of the federal government, and the
policies of regulatory authorities. Deposit flows and costs of funds are
influenced by interest rates on competing investments, changes in the interest
rate environment and general economic conditions. Lending activities are
affected by the demand for residential mortgage financing and other types of
financing, which are primarily affected by the interest rates at which such
financing may be offered, and the availability of funds.
Eureka is a member of the Federal Home Loan Bank System and owns stock in the
Federal Home Loan Bank (the "FHLB") of San Francisco. Eureka is also subject to
regulations of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board") with respect to cash reserves required to be maintained against
deposits and certain other matters.
Eureka's deposits are insured by the FDIC up to the maximum amounts provided by
law through the Savings Association Insurance Fund ("SAIF"). See "Insurance of
Deposits."
1
PORTFOLIO REPRICING AND RATE SENSITIVITY
- ----------------------------------------
The composition of Eureka's interest earning assets consists principally of
mortgage loans, mortgage-backed securities and investments. These assets are
funded principally by retail savings deposits and supplemented with other
borrowings. Net interest income, the difference between the amounts earned on
interest earning assets and amounts paid on interest bearing liabilities, is
affected by the relative levels of interest earning assets and interest bearing
liabilities and the difference between rates of interest earned on interest
earning assets and rates paid on interest bearing liabilities. Eureka's net
interest income can fluctuate as interest rates paid on retail deposits and
other borrowings reprice at a more rapid rate than interest rates on adjustable
rate mortgage loans and other investments. See "Interest Rate Risk" under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion of how Eureka manages interest rate risk.
Eureka's Asset and Liability Management Committee ("ALCO") is a board of
directors committee responsible for managing Eureka's assets and liabilities in
a manner which balances profitability and risks, including interest rate risk
("IRR"). ALCO operates within policies and risk limits prescribed and reviewed
regularly by the board of directors. ALCO's principal activities include: (i)
identifying and maintaining the most appropriate capital structure in light of
Eureka's business operations, IRR exposure and projected economic and financial
condition; (ii) understanding market conditions to assess the value of products
and services; (iii) identifying and maintaining an appropriate mix of assets and
liabilities; (iv) measuring and managing credit, liquidity, interest rate, and
operational risks which are implicit in Eureka's business; and (v) reviewing the
profitability of new and existing business and product types.
2
The following table sets forth the projected repricing periods for the major
interest earning asset categories (adjusted for estimates of prepayments) and
interest bearing liability categories as of December 31, 1996 (before
adjustments for allowances for loan losses and discounts and premiums). The
interest rate gap represents the excess or shortfall of interest earning assets
over interest bearing liabilities repricing during future periods, and is
adjusted for hedging transactions consisting of interest rate exchange
agreements. See Note 16 "Interest Rate Exchange Agreements," of Notes to
Consolidated Financial Statements.
AMERICA FIRST FINANCIAL FUND 1987-A
Portfolio Repricing Amounts
(dollars in thousands)
WITHIN 1-3 3-5 5-10 OVER 10
1 YEAR YEARS YEARS YEARS YEARS TOTAL
------ ------ ----- ----- ------- -----
Interest earning assets:
Federal funds sold (1) $ 20,000 $ - $ - $ - $ - $ 20,000
Investments (1) 5,300 - - - - 5,300
Loans receivable:(2)
Adjustable rate mortgage (3) 764,986 27,583 2,497 2,360 1,433 798,859
Convertible mortgage 154,151 171,086 75,784 29,840 5 430,866
Fixed rate mortgage 41,877 47,727 26,246 29,681 5,733 151,264
Second mortgage 12,595 11,742 321 42 - 24,700
Consumer 2,381 2,104 13 - - 4,498
Mortgage-backed
securities (2) (3) 518,732 72,019 51,686 18,575 6,827 667,839
FHLB stock 21,827 - - - - 21,827
---------- -------- -------- -------- -------- ----------
Total $1,541,849 $332,261 $156,547 $ 80,498 $ 13,998 $2,125,153
========== ======== ======== ======== ======== ==========
Interest bearing liabilities:
Deposits:
Term certificates of deposit (1) $ 939,356 $259,602 $ 22,758 $ 1,290 $ - $1,223,006
Money market accounts 426,757 - - - - 426,757
Checking accounts 113,547 - - 37,849 - 151,396
Passbook accounts 19,675 - - 19,651 - 39,326
Borrowings (1) 93,651 37,000 19,825 875 - 151,351
Redeemable preferred stock (1) 9,462 8,286 - - - 17,748
---------- -------- -------- -------- -------- ----------
Total $1,602,448 $304,888 $ 42,583 $ 59,665 $ - $2,009,584
========== ======== ======== ======== ======== ==========
Interest earning assets over
(under) interest bearing
liabilities (primary gap) $ (60,599) $ 27,373 $113,964 $ 20,833 $ 13,998
Effect of hedging activities (4) 40,000 (40,000) - - -
---------- -------- -------- -------- --------
Hedged gap $ (20,599) $(12,627) $113,964 $ 20,833 $ 13,998
========== ======== ======== ======== ========
Cumulative hedged gap $ (20,599) $(33,226) $ 80,738 $101,571 $115,569
========== ======== ======== ======== ========
As a percent of interest
earning assets -0.97% -1.56% 3.80% 4.78% 5.44%
As a percent of total assets -0.93% -1.50% 3.65% 4.60% 5.23%
- ---------------
(1) Based upon contractual maturities of instruments.
(2) Maturity/repricing amount is based upon contract maturity taking into
consideration projected repayments and prepayments of principal.
(3) The interest rate on adjustable rate loans and mortgage-backed securities
generally adjusts every six to twelve month period depending on contract
terms.
(4) Hedging activities consist of interest rate exchange agreements.
3
At December 31, 1996, approximately 73% of Eureka's interest earning assets were
rate sensitive (i.e., reprice within one year). In evaluating its exposure to
interest rate risk, Eureka takes into account certain limitations to the gap
measure. For example, certain assets and liabilities may have similar
maturities or repricing periods, but react in differing degrees to changes in
market interest rates. In addition, some assets such as adjustable rate and
convertible mortgages have product features which limit changes in interest
rates on a short-term basis and over the life of the asset. Further, the gap
measure includes assumptions about mortgage prepayments. Major shifts in
interest rates can cause assumptions regarding anticipated mortgage prepayment
levels to vary significantly from actual results. Eureka considers the
anticipated effects of these factors in managing its interest rate risk
position. See "Interest Rate Risk" under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of how Eureka manages interest rate risk.
The table below sets forth certain information regarding changes in interest
income and interest expense of the Partnership for the periods indicated. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in average balances multiplied by the old rate) and (2) changes in
rates (changes in rate multiplied by current year average balances).
AMERICA FIRST FINANCIAL FUND 1987-A
Rate Volume Analysis
(dollars in thousands)
Year Ended December 31, Year Ended December 31,
--------------------------------- ----------------------------------
1996 versus 1995 1995 versus 1994
changes due to changes due to
--------------------------------- ---------------------------------
Rate/Volume Rate/Volume
Volume Rate Total Volume Rate Total
-------- -------- ----------- --------- -------- -----------
Interest income:
Loans and MBS (1) $ (4,969) $3,270 $ (1,699) $3,166 $23,641 $26,807
Investments 67 (10) 57 (30) 794 764
-------- ------ -------- ------ ------- -------
Total interest
income (4,902) 3,260 (1,642) 3,136 24,435 27,571
-------- ------ -------- ------ ------- -------
Interest expense:
Deposits 4,313 1,897 6,210 (480) 12,452 11,972
Borrowings (11,312) (829) (12,141) 3,196 8,241 11,437
-------- ------ -------- ------ ------- -------
Total interest
expense (6,999) 1,068 (5,931) 2,716 20,693 23,409
-------- ------ -------- ------ ------- -------
Net interest
income $ 2,097 $2,192 $ 4,289 $ 420 $ 3,742 $ 4,162
======== ====== ======== ====== ======= =======
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Notes:
(1) Net loan origination fee (expense) amortization of ($481,000), ($239,000)
and $11,000 is included in interest income for 1996, 1995 and 1994,
respectively.
4
The following table sets forth at December 31, 1996 the total of all loans with
stated maturity dates after December 31, 1997 (before adjustments for allowances
for loan losses, unearned loan fees, unearned income, discounts and premiums and
certain purchase accounting adjustments) which have fixed, convertible and
adjustable interest rates. Mortgage-backed securities and loans held for sale
are not included.
AMERICA FIRST FINANCIAL FUND 1987-A
Loans with a Stated Maturity After
December 31, 1997
(dollars in thousands)
Fixed Rate Convertible Adjustable Rate Total
Loans Loans Loans Loans
---------- ----------- --------------- ----------
Real estate loans
Residential 1 - 4 family $106,414 $421,440 $726,173 $1,254,027
Multi-family residential loans 31,969 7,679 26,039 65,687
Commercial property and land loans 12,517 904 46,015 59,436
Second mortgage loans 3,033 - 21,620 24,653
-------- -------- -------- ----------
Total real estate loans 153,933 430,023 819,847 1,403,803
Revolving credit 492 - 4 496
Other installment loans 1,792 - 390 2,182
Other consumer loans 620 - - 620
-------- -------- -------- ----------
Total consumer loans 2,904 - 394 3,298
-------- -------- -------- ----------
Total loans due after
December 31, 1997 $156,837 $430,023 $820,241 $1,407,101
======== ======== ======== ==========
5
YIELDS EARNED AND RATES PAID
- ----------------------------
Yield/Interest on Earning Assets/Cost of Funds
- ----------------------------------------------
The following table sets forth, including the effects of discounts or premiums,
the average interest earning assets and interest bearing liabilities, interest
income and expense and the resultant average interest rate during the years
ended December 31, 1996, 1995 and 1994:
AMERICA FIRST FINANCIAL FUND 1987-A
Average Monthly Balances, Rates, and Yields
(dollars in thousands)
For Years Ended
------------------------------------------ ------------------------------------------
1996 1995
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AVERAGE AVERAGE
BALANCE (3) INTEREST (2) RATE BALANCE (3) INTEREST (2) RATE
------------ ------------ ------------ ------------ ------------ ------------
Interest earning assets:
Loans:
Real estate $1,412,020 $106,549 7.54% $1,404,604 $102,897 7.33%
Consumer 5,147 608 11.83% 15,960 2,303 14.43%
Mortgage-backed securities 718,841 50,161 6.98% 776,008 53,818 6.94%
Investments:
Federal funds sold and
securities
purchased under
agreements to resell 68,273 3,266 4.78% 68,937 3,419 4.96%
Investment in FHLB stock 21,375 1,282 6.00% 21,038 1,105 5.25%
Other taxable
short-term investments 2,609 132 5.06% 2,053 98 4.78%
---------- -------- -------- ---------- -------- -----
Total interest earning assets 2,228,265 161,998 7.27% 2,288,600 163,640 7.15%
Non-earning assets (1) 66,680 74,616
---------- ----------
Total average assets $2,294,945 $2,363,216
========== ==========
Interest bearing liabilities:
Deposits:
Checking $ 132,278 $ 1,599 1.21% $ 124,096 $ 1,302 1.05%
Money market/passbook 413,764 14,298 3.46% 342,749 10,131 2.96%
Time certificates 1,234,890 66,085 5.35% 1,217,707 64,339 5.28%
Short-term borrowings 299,946 17,485 5.83% 489,401 29,898 6.11%
FDIC preferred stock 16,535 2,204 13.33% 14,561 1,932 13.27%
---------- -------- -------- ---------- -------- -----
Total interest bearing
liabilities 2,097,413 101,671 4.85% 2,188,514 107,602 4.92%
---------- -------- -------- ---------- -------- -----
Non-interest bearing
liabilities and
Partnership equity 197,532 174,702
---------- ----------
Total average liabilities $2,294,945 $2,363,216
and Partnership equity ========== ==========
Interest earning assets less
interest bearing
liabilities and interest
rate spread $ 130,852 2.42% $100,086 2.23%
========== ======== ========== =====
Net interest income/
Net interest margin $ 60,327 2.62% $ 56,038 2.37%
========= ======== ========== =====
For Years Ended
------------------------------------------
1994
------------------------------------------
AVERAGE
BALANCE (3) INTEREST (2) RATE
------------ ------------ ------------
Interest earning assets:
Loans:
Real estate $1,446,206 $ 89,855 6.21%
Consumer 24,946 3,534 14.17%
Mortgage-backed securities 654,512 38,820 5.93%
Investments:
Federal funds sold and
securities
purchased under
agreements to resell 63,987 2,747 4.29%
Investment in FHLB stock 20,263 983 4.85%
Other taxable
short-term investments 4,399 130 2.96%
---------- -------- -----
Total interest earning assets 2,214,313 136,069 6.14%
Non-earning assets (1) 90,695
----------
Total average assets $2,305,008
==========
Interest bearing liabilities:
Deposits:
Checking $ 136,713 $ 1,435 1.05%
Money market/passbook 390,054 9,228 2.37%
Time certificates 1,172,552 53,136 4.53%
Short-term borrowings 422,522 18,804 4.45%
FDIC preferred stock 12,792 1,590 12.43%
---------- -------- -----
Total interest bearing
liabilities 2,134,633 84,193 3.94%
---------- -------- -----
Non-interest bearing
liabilities and
Partnership equity 170,375
----------
Total average liabilities $2,305,008
and Partnership equity ==========
Interest earning assets less
interest bearing
liabilities and interest
rate spread $ 79,680 2.20%
========== =====
Net interest income/
Net interest margin $ 51,876 2.25%
======== =====
Notes:
(1) Non-accrual loans are included with non-interest earning assets in 1996,
1995 and 1994. The principal balances of such loans at December 31, 1996,
1995 and 1994 totaled approximately $4.4 million, $6.4 million and $8.3
million, respectively.
(2) Net loan origination fee (expense) amortization of ($481,000), ($239,000)
and $11,000 is included in interest income for 1996, 1995 and 1994,
respectively. Interest income reflects the effect of discount accretion
and premium amortization. Net interest expense on interest rate exchange
agreements is included as an adjustment to interest income on real estate
loans.
(3) Average balances are net of purchase accounting adjustments.
6
ASSISTANCE AND RELATED AGREEMENTS
- ---------------------------------
Under the terms of the Assistance Agreement entered into in 1988 in connection
with the assisted acquisition of the assets and liabilities of Eureka Federal
Savings and Loan Association, $50 million in preferred stock was issued to the
FDIC. In 1990, $30 million of the preferred stock was redeemed by the FDIC.
The $20 million in non-voting Series A Preferred Stock which remains outstanding
is mandatorily redeemable in 1997 and 1998 in the amount of $10 million each
year, and has a liquidation value of $100 per share. The holder of this
preferred stock is not entitled to dividends. The preferred stock is being
accreted through the redemption dates of 1997 and 1998, and the accretion is
recorded as interest expense on other borrowings. The accretion for 1996, 1995
and 1994 totaled $2.2 million, $1.9 million and $1.6 million, respectively.
Amounts accrued by Eureka and payable to the FDIC prior to the redemption dates
in accordance with the Assistance Agreement may be deducted from the $10 million
redemption amounts, as appropriate.
Under the terms of the Assistance Agreement, the FDIC may be entitled to an
additional payment after the final redemption of $10 million in preferred stock
is made in May 1998. Specifically, the FDIC may be able to share in the
benefits from utilization of pre-acquisition and post-acquisition net operating
loss and tax credit carryforwards associated with the acquisitions, or any cash
distributions which have been made to AFCA-5. In addition, the FDIC may be
entitled to receive from Eureka a percentage of the fair value of Eureka
allocable to AFCA-5 calculated based on the greater of: (i) the average
price/earnings ratio for comparable financial institutions or (ii) the average
sales price/book value for recent sales transactions involving comparable
financial institutions. If, however, (1) 50% of tax benefits utilized by AFEH
since the Acquisition and (2) the fair value of Eureka allocable to AFCA-5 plus
cash distributions to AFCA-5, both exceed the fully accreted value of the
remaining preferred stock of $20 million, the FDIC's participation or additional
payment in such amount is limited to the lesser of the allowable tax benefits,
or the fair value plus distributions. Based on the information available as of
December 31, 1996, the Partnership's liability for any payments in May 1998 and
thereafter in addition to the $20 million in remaining preferred stock cannot be
reasonably estimated at this time, and therefore no reserve or charge to income
for such liability has been recorded. The Partnership intends to review on a
quarterly basis, however, the need for any such reserve or charge. Any
additional payments required to be made to the FDIC pursuant to the Assistance
Agreement could have an adverse effect on the per-BUC value of the Partnership.
Under the Capital Maintenance Agreement, dated May 27, 1988, the FDIC may take
control of Eureka in the event there is a breach of this agreement, including
the failure to maintain minimum capital. The Partnership is not aware of any
other arrangement which may, at any subsequent date, result in a change in
control of the Partnership, AFEH or Eureka.
LENDING ACTIVITIES
- ------------------
GENERAL. The primary source of revenue to the Partnership is interest and fee
- --------
income from the lending activities of Eureka. Eureka's lending activities have
been focused principally on loans secured by first liens on 1-4 family
residential properties located primarily in Northern California. Eureka
purchases from third parties fixed, convertible and adjustable rate residential
mortgage loans which meet Eureka's credit and underwriting standards. These
purchases supplement Eureka's internal loan production and provide Eureka with
more attractive long-term yields than are available from alternative sources.
Wholesale loan originations were implemented during 1995. Management believes
that wholesale loan originations will continue to be a significant percentage of
total loan originations through 1997. Wholesale loan originations enable Eureka
to add assets that meet its credit and underwriting standards within its market.
In addition to interest earned on loans, Eureka receives fees related to loan
originations, loan prepayments, loan modifications, late payments, transfers of
loans due to changes in property ownership, loans serviced for others and other
miscellaneous services. All non-refundable loan origination fees, net of
certain direct loan origination costs, are deferred and accreted or amortized,
using a method that approximates the interest method over the term of the loan
or until the loan is sold. Interest is not accrued on loans which are 90 days
or more delinquent.
Eureka originates retail loans primarily in the San Francisco Bay area through
its 36 branches. All loan applications are forwarded to Eureka's central
processing offices in Foster City. Eureka's loan approval process is intended
to assess both the borrower's ability to repay the loan and the adequacy of the
proposed collateral. As part of the lending process, qualified staff appraisers
or outside independent appraisers inspect and appraise the real estate property.
When an appraisal is
7
performed by an outside independent appraiser, it is subsequently reviewed by a
staff appraiser. In addition, information is obtained concerning the financial
condition, income, employment and credit history of the borrower. Loans are
approved at various levels of authority depending on the amount of the loan.
Wholesale loans are originated through a number of approved mortgage brokers
located primarily in the San Francisco Bay Area. Loan application information
is submitted by the brokers to Eureka for reverification of certain data,
depending on the loan application credit risk, including customer income and
credit history, as well as independent appraisals of the properties. The
appraisal and funding policies and procedures for wholesale loans are generally
the same as the policies and procedures for retail loans.
ONE-TO-FOUR FAMILY RESIDENTIAL LENDING. Eureka currently offers several 1-4
- ---------------------------------------
family residential loan products with various fees, interest rates, maximum
dollar amounts and loan terms. Eureka offers conventional fixed, convertible
and adjustable rate loans secured by first deeds of trust.
Approximately 93% of the mortgage loans originated in 1996 were adjustable or
convertible rate loans for Eureka's own portfolio. The adjustable rate mortgage
loans currently offered are primarily indexed to the London Inter-Bank Offered
Rate ("LIBOR"), constant maturity Treasury or FHLB Eleventh District cost of
funds. The margin varies by type of loan, but is generally between 2.50% and
2.75% above the index. These adjustable rate mortgages are often made with
"teaser rates" which are 1.00% to 2.75% below the fully adjusted rate during the
initial "teaser period," and often have penalties for prepayment. Most of these
adjustable rate mortgages have a six-month adjustment period with periodic rate
changes capped at 1.00% per adjustment and a maximum lifetime rate of 5.00% to
7.00% above the initial rate. The convertible rate mortgage loans currently
offered have fixed rates for three to seven years, then change to adjustable
rate loans which are indexed to Treasury rates. Fixed rate loans conforming to
the Federal Home Loan Mortgage Corporation ("FHLMC") lending limits and
underwriting standards are originated by Eureka and generally sold to investors,
principally the FHLMC, shortly after they are funded as part of Eureka's overall
asset/liability strategy.
Loans secured by 1-4 family residential properties generally have a maximum loan
to value ratio ("LTV") of 95%. Eureka generally requires private mortgage
insurance for all loans with LTVs above 80%. In addition, title insurance is
required on all mortgage loans. Fire and casualty insurance is required to be
maintained on all improved properties which are security for Eureka's loans.
The original contract loan payment period for residential loans is a maximum of
40 years.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL PROPERTY REAL ESTATE LENDING. The
- ---------------------------------------------------------------------
majority of the multi-family residential and commercial property loan portfolio
was originated prior to the Acquisition. During 1996 and 1995, Eureka
originated $3.9 million and $4.6 million, respectively, in multi-family and
commercial loans. In addition, during 1996 and 1995, Eureka purchased $4.1
million and $2.2 million, respectively, in multi-family loans. These loans
generally bear interest at a higher rate than loans on 1-4 family residential
properties.
MORTGAGE-BACKED SECURITIES. Eureka maintains a portfolio of mortgage-backed
- ---------------------------
securities in addition to its real estate loan portfolio. As of December 31,
1996, this portfolio (held to maturity and available for sale) totaled
approximately $675 million. See Note 5 of Notes to Consolidated Financial
Statements.
SALES, PURCHASES AND SERVICING OF REAL ESTATE LOANS. It is generally
- ----------------------------------------------------
management's intention to hold originated adjustable and convertible rate
loans, purchased loans and mortgage-backed securities for investment. Eureka
originates and sells fixed rate loans, the majority of which conform to FHLMC
standards. Loans which have been classified as held for sale are recorded at
the lower of amortized cost or market value. The principal balances of these
loans approximated $370,000 at December 31, 1996. Generally, Eureka retains
the responsibility for servicing the loans it sells and receives a fee for
performing this service. At December 31, 1996, Eureka was servicing mortgage
loans for others with outstanding principal balances totaling approximately $246
million.
Eureka purchases from third parties fixed, convertible and adjustable rate
residential mortgage loans which meet Eureka's credit and underwriting
standards. These purchases supplement Eureka's internal loan production and
provide Eureka with attractive long-term yields.
8
Certain loans were sold with recourse by Eureka prior to Acquisition. The
remaining principal balances of these loans, which are secured by 1-4 family
residential mortgages, totaled approximately $10.2 million at December 31, 1996.
Repurchases of loans sold with recourse amounted to less than $25,000 for each
of the years ended December 31, 1996, 1995 and 1994.
The following table summarizes loans receivable at December 31, 1996, 1995,
1994, 1993 and 1992 by type of collateral. These balances are before
adjustments for discounts and premiums, unearned loan fees, unearned income, and
allowances for loan losses and certain purchase accounting adjustments. The
classifications are net of participation interests sold and loans serviced for
others. This table does not include mortgage-backed securities held at December
31, 1996, 1995, 1994, 1993 and 1992 of approximately $675 million, $816 million,
$791 million, $630 million and $568 million, respectively.
AMERICA FIRST FINANCIAL FUND 1987-A
Loan Composition
(dollars in thousands)
1996 1995 1994
------------------------- ------------------------- -------------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
---------- ----------- ---------- ----------- ---------- -----------
Real estate loans:
Residential 1-4 family $1,254,293 88.95% $1,284,282 89.33% $1,269,970 87.93%
Second mortgage 24,700 1.75% 17,983 1.25% 14,825 1.03%
Multi-family residential
loans 67,122 4.76% 54,595 3.80% 57,786 4.00%
Commercial property and
land loans 59,574 4.22% 75,022 5.22% 78,432 5.43%
---------- ---------- ---------- ------ ---------- ------
Total real estate loans 1,405,689 99.68% 1,431,882 99.60% 1,421,013 98.39%
Consumer loans:
Revolving credit 744 .06% 781 .05% 16,286 1.13%
Other installment loans 2,522 .18% 3,205 .22% 4,033 .28%
Loans secured by savings
accounts 599 .04% 615 .04% 682 .05%
Timeshare 633 .04% 1,254 .09% 2,210 .15%
---------- ---------- ---------- ------ ---------- ------
Total consumer loans 4,498 .32% 5,855 .40% 23,211 1.61%
---------- ---------- ---------- ------ ---------- ------
Total loans 1,410,187 100.00% 1,437,737 100.00% 1,444,224 100.00%
---------- ---------- ---------- ------ ---------- ------
Less:
Loans held for sale 370 403 152
---------- ---------- ----------
Loans receivable $1,409,817 $1,437,334 $1,444,072
========== ========== ==========
1993 1992
------------------------- -------------------------
Percentage Percentage
Amount of Total Amount of Total
---------- ----------- ---------- -----------
Real estate loans:
Residential 1-4 family $1,401,897 89.76% $1,413,363 87.55%
Second mortgage 18,456 1.18% 40,052 2.48%
Multi-family residential
loans 41,850 2.68% 53,839 3.34%
Commercial property and
land loans 71,207 4.56% 71,697 4.44%
---------- ------ ---------- ------
Total real estate loans 1,533,410 98.18% 1,578,951 97.81%
Consumer loans:
Revolving credit 18,558 1.19% 20,983 1.30%
Other installment loans 5,288 .34% 8,151 .51%
Loans secured by savings
accounts 931 .06% 1,280 .08%
Timeshare 3,625 .23% 4,922 .30%
---------- ------ ---------- ------
Total consumer loans 28,402 1.82% 35,336 2.19%
---------- ------ ---------- ------
Total loans 1,561,812 100.00% 1,614,287 100.00%
---------- ------ ---------- ------
Less:
Loans held for sale 4,993 6,169
---------- ----------
Loans receivable $1,556,819 $1,608,118
========== ==========
9
The following table profiles net loan and mortgage-backed security origination,
purchase and sale activity of Eureka during the years ended December 31, 1996,
1995 and 1994.
AMERICA FIRST FINANCIAL FUND 1987-A
Loan and Mortgage-Backed Security Activity
(dollars in thousands)
1996 1995 1994
---------- ---------- ----------
Real estate and consumer loan activity:
Real estate mortgage loans originated:
Residential 1-4 family mortgage loans $ 230,419 $ 163,761 $ 202,684
Commercial mortgage and land loans 6,211 4,034 5,592
Multi-family mortgage loans 558 610 2,695
Second mortgage 15,146 10,149 2,453
Consumer loans originated 2,792 2,197 2,074
--------- --------- ---------
Total real estate and consumer loans
originated 255,126 180,751 215,498
Loans and participations purchased,
including mortgage-backed securities 76,751 253,874 361,768
Loans and participations sold (17,176) (6,596) (26,637)
Loan and mortgage-backed security
principal repayments, including
prepayments (473,655) (393,790) (498,806)
Transfer to foreclosed real estate (5,029) (5,019) (8,559)
Other increases (decreases) (4,954) (5,885) 4,088
--------- --------- ---------
Net loan and mortgage-backed security activity $(168,937) $ 23,335 $ 47,352
========= ========= =========
10
The following table summarizes the contractual maturities of loans in Eureka's
loan portfolio at December 31, 1996. This schedule does not reflect normal
principal reductions or potential prepayments. Mortgage-backed securities of
approximately $675 million and loans held for sale of approximately $370,000 are
not included.
AMERICA FIRST FINANCIAL FUND 1987-A
Loan Maturities
at December 31, 1996
(dollars in thousands)
R e a l E s t a t e M o r t g a g e L o a n s
------------------------------------------------------
First Mortgage
------------------------------------------
Commercial
1 - 4 family mortgage Multi-family Second
mortgage and land mortgage mortgage Consumer Total
----------- ----------- ------------ -------- ------- -------
Periods during which loans mature:
Within 1 year $ 266 $ 138 $ 1,435 $ 47 $1,200 $ 3,086
After 1 through 2 years 60 69 4 30 619 782
After 2 through 3 years 1,014 211 - 4 598 1,827
After 3 through 5 years 738 633 60 1,623 665 3,719
After 5 through 10 years 7,484 10,454 17,879 2,762 1,057 39,636
After 10 through 15 years 52,770 8,634 10,006 237 359 72,006
After 15 years 1,191,591 39,435 37,738 19,997 - 1,288,761
---------- ------- ------- ------- ------ ----------
$1,253,923 $59,574 $67,122 $24,700 $4,498 $1,409,817
========== ======= ======= ======= ====== ==========
Less:
Discounts and (premiums), net (1,672) 973 931 335 - 567
Deferred loan (costs) (1,284) - - - - (1,284)
Allowance for loan losses 5,012 735 691 183 430 7,051
---------- ------- ------- ------- ------ ----------
Total loans, net $1,251,867 $57,866 $65,500 $24,182 $4,068 $1,403,483
========== ======= ======= ======= ====== ==========
11
The following table summarizes loan delinquencies at December 31:
LOAN TYPE 1996
- --------------------------------- -------------------------------------------------------
31-60 DAYS 61-90 DAYS 90+DAYS TOTAL
----------- ----------- ------------ ------------
Real estate:
Residential 1-4 mortgage $2,087,850 $ 879,939 $ 4,429,268 $ 7,397,057
Multi-family mortgage - - - -
Commercial mortgage and land - - - -
Consumer 26,961 6,192 3,913 37,066
---------- ---------- ----------- -----------
Total delinquencies $2,114,811 $ 886,131 $ 4,433,181 $ 7,434,123
========== ========== =========== ===========
Percentage of loans .15% .06% .32% .53%
========== ========== =========== ===========
1995
------------------------------------------------------
31-60 DAYS 61-90 DAYS 90+DAYS TOTAL
---------- ---------- ----------- -----------
Real estate:
Residential 1-4 mortgage $3,164,047 $2,024,260 $ 4,151,759 $ 9,340,066
Multi-family mortgage - - - -
Commercial mortgage and land - 440,641 2,225,469 2,666,110
Consumer 32,636 10,722 11,226 54,584
---------- ---------- ----------- -----------
Total delinquencies $3,196,683 $2,475,623 $ 6,388,454 $12,060,760
========== ========== =========== ===========
Percentage of loans .22% .17% .45% .84%
========== ========== =========== ===========
1994
------------------------------------------------------
31-60 DAYS 61-90 DAYS 90+DAYS TOTAL
---------- ---------- ----------- -----------
Real estate:
Residential 1-4 mortgage $3,978,869 $3,763,421 $ 6,290,446 $14,032,736
Multi-family mortgage - - - -
Commercial mortgage and land 487,376 - 1,791,888 2,279,264
Consumer 349,572 178,579 206,884 735,035
---------- ---------- ----------- -----------
Total delinquencies $4,815,817 $3,942,000 $ 8,289,218 $17,047,035
========== ========== =========== ===========
Percentage of loans .34% .27% .57% 1.18%
========== ========== =========== ===========
1993
------------------------------------------------------
31-60 DAYS 61-90 DAYS 90+ DAYS TOTAL
---------- ---------- ----------- -----------
Real estate:
Residential 1-4 mortgage $1,293,083 $1,147,337 $10,094,996 $12,535,416
Multi-family mortgage - - 400,000 400,000
Commercial mortgage and land - - 2,526,995 2,526,995
Consumer 535,392 222,643 282,526 1,040,561
---------- ---------- ----------- -----------
Total delinquencies $1,828,475 $1,369,980 $13,304,517 $16,502,972
========== ========== =========== ===========
Percentage of loans .12% .09% .85% 1.06%
========== ========== =========== ===========
1992
------------------------------------------------------
31-60 DAYS 61-90 DAYS 90+DAYS TOTAL
---------- ---------- ----------- -----------
Real estate:
Residential 1-4 mortgage $1,298,068 $3,932,007 $ 6,421,269 $11,651,344
Multi-family mortgage - - - -
Commercial mortgage and land 605,192 - 1,992,343 2,597,535
Consumer 686,556 248,759 221,176 1,156,491
---------- ---------- ----------- -----------
Total delinquencies $2,589,816 $4,180,766 $ 8,634,788 $15,405,370
========== ========== =========== ===========
Percentage of loans .16% .26% .53% .95%
========== ========== =========== ===========
12
The following table summarizes the activity in the allowance for losses on loans
(dollars in thousands):
Real Estate Loans Timeshare Loans Consumer Loans Total Loans
------------------------- -------------------- --------------------- ------------------
% of % of % of
Amount % of Total Amount Total Amount Total Amount Total
----------- ------------ ----------- ------- ------------ ------- --------- -------
December 31, 1991 $ 4,068 .28% $2,647 42.76% $ 1,563 3.84% $ 8,278 .55%
Provision for losses 900 - 1,792 2,692
Charge-offs (86) (234) (1,884) (2,204)
Recoveries - 48 206 254
Transfers 225 187 - 412
Reductions/(1)/ - (443) - (443)
------- ------ ----- --------
December 31, 1992 5,107 .32% 2,205 44.80% 1,677 5.54% 8,989 .56%
Provision for losses 540 165 1,804 2,509
Charge-offs (263) (67) (1,809) (2,139)
Recoveries - - 170 170
Transfers 560 - 17 577
Reductions/(1)/ - (650) - (650)
------- ------ ----- --------
December 31, 1993 5,944 .39% 1,653 45.60% 1,859 7.50% 9,456 .61%
Provision for losses 540 60 646 1,246
Charge-offs (1,029) (151) (1,395) (2,575)
Recoveries 30 64 272 366
Transfers (133) - (25) (158)
Reductions/(1)/ - (515) - (515)
------- ------ ----- --------
December 31, 1994 5,352 .38% 1,111 50.29% 1,357 6.46% 7,820 .54%
Provision for losses 370 5 418 793
Charge-offs (312) (100) (1,331) (1,743)
Recoveries 6 91 500 597
Transfers 690 - (811) (121)
Reductions/(1)/ - (468) - (468)
------- ------ ----- --------
December 31, 1995 6,106 .43% 639 50.94% 133 2.93% 6,878 .48%
Provision for losses 962 3 - 965
Charge-offs (518) (46) (57) (621)
Recoveries - 33 52 85
Transfers 71 (3) (68) -
Reductions/(1)/ - (256) - (256)
------- ------ ----- --------
December 31, 1996 $ 6,621 .47% $ 370 58.49% $ 60 1.56% $ 7,051 .50%
======= ====== =========== ========
Ratio of net
charge-offs
to average gross
loans
during 1996 .04% 1.33% .11% .04%
(1) Reductions are due to principal payoffs and remittances of pre-
acquisition originated loans.
CLASSIFIED ASSETS
- -----------------
Loans, real estate owned, investments, debt securities and other assets are
classified as Substandard, Doubtful or Loss. Assets designated as Special
Mention possess minor risks but do not justify a Substandard classification.
The Special Mention category promotes, through self-classification, the
identification and monitoring of those assets that have potential weaknesses
which may, if not checked or corrected, weaken the asset or inadequately protect
the institution's position at some future date. Generally, assets classified as
Substandard are those assets inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged and have a well-
defined weakness or weaknesses. Assets classified as Doubtful have all of the
weaknesses inherent in those classified as Substandard, with the added
characteristic that the weaknesses make collection or liquidation in full highly
questionable and improbable. Assets classified as Loss are considered
uncollectible and of such little value that their continuance as assets without
establishment of a specific allowance for losses is not warranted. General and
specific allowances for losses are established in accordance with Generally
Accepted Accounting Principles. Assets are charged-off in the period when they
are no longer deemed collectible.
Typically, loans have been classified because of the following reasons: (i)
inadequate cash flow from underlying collateral property on commercial and
multi-family real estate loans, (ii) non-current 1-4 family residential loans
that are 90 days or more delinquent, and (iii) other loans for which the paying
capacity of the borrower is in question due to either bankruptcy filings,
initiation of foreclosure action, or recurring short-term delinquencies. In
management's view, these loans do not represent or reflect trends or
uncertainties which management reasonably expects will materially impact future
operating
13
results, liquidity, or capital resources.
The following table summarizes Eureka's Special Mention and classified assets
net of specific valuation allowances, in accordance with the reporting
requirements of the OTS at December 31, 1996:
SPECIAL
MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL
---------- ----------- -------- ---- -----------
Real estate mortgage loans:
1-4 family $ - $ 9,229,045 $ - $ - $ 9,229,045
Multi-family 804,814 - - - 804,814
Commercial 2,593,937 918,808 - - 3,512,745
Real estate owned - 1,438,436 - - 1,438,436
Other - 24,000 3,000 - 27,000
---------- ----------- -------- ---- -----------
Special Mention/
Classified Assets $3,398,751 $11,610,289 $3,000 $ - $15,012,040
========== =========== ======== ==== ===========
CREDIT RISK AND LOAN CONCENTRATION
- ----------------------------------
Eureka strives to minimize its credit risk exposure by maintaining its loan
portfolio principally with first mortgage loans secured by 1-4 family
residential properties located primarily in northern California. In addition,
Eureka's internal loan review procedures allow management to assess the credit
risks associated with potential loan portfolio additions. See "Lending
Activities," and Note 6 of Notes to Consolidated Financial Statements.
NON-ACCRUAL, PAST-DUE AND RESTRUCTURED LOANS: The following table shows
- ---------------------------------------------
Eureka's non-accrual, past-due and restructured loans as of December 31:
1996 1995 1994
---------------------- ---------------------- ----------------------
PRINCIPAL FOREGONE PRINCIPAL FOREGONE PRINCIPAL FOREGONE
BALANCE INTEREST BALANCE INTEREST BALANCE INTEREST
---------- -------- ----------- -------- ----------- --------
Non-accrual $4,433,181 $216,284 $ 6,388,454 $393,629 $ 8,289,218 $790,074
Accruing loans
contractually
past-due 90
days or more - - - - - -
Restructured loans 3,872,014 52,921 5,040,138 70,221 6,055,020 95,490
---------- -------- ----------- -------- ----------- --------
$8,305,195 $269,205 $11,428,592 $463,850 $14,344,238 $885,564
========== ======== =========== ======== =========== ========
1993 1992
---------------------- ----------------------
PRINCIPAL FOREGONE PRINCIPAL FOREGONE
BALANCE INTEREST BALANCE INTEREST
----------- -------- ----------- --------
Non-accrual $13,304,518 $822,356 $ 2,395,301 $123,294
Accruing loans
contractually
past-due 90
days or more - - 6,239,487 -
Restructured loans 6,200,064 115,863 5,357,029 58,855
----------- -------- ----------- --------
$19,504,582 $938,219 $13,991,817 $182,149
=========== ======== =========== ========
Interest recognized on non-accrual loans was immaterial for all years reported
in the above table. Interest income recognized on restructured loans was
$317,000, $423,000 and $475,000 for the years ending December 31, 1996, 1995 and
1994, respectively.
INVESTMENT ACTIVITIES
- ---------------------
Income on investments is the Partnership's second most significant source of
interest income after interest on loans and mortgage-backed securities. At
December 31, 1996, funds were invested in federal funds sold and securities
purchased under agreements to resell. Federal funds sold represent short-term
instruments which are generally held overnight. See Note 4 of Notes to
Consolidated Financial Statements for information on investments.
14
Securities purchased under agreement to resell identical securities are carried
at cost which approximates market value and are as follows:
1996 1995 1994
-------------- -------------- --------------
Balance at December 31, 5.3 million 20.5 million 5.7 million
Average balance during year 13.7 million 12.8 million 9.7 million
Maximum balance at any month-end 44.4 million 22.5 million 30.0 million
Weighted average days to maturity at December 31, 27 days 9 days 25 days
Weighted average interest rate 5.41% 5.92% 3.99%
SOURCES OF FUNDS
- ----------------
GENERAL. Customer deposits are the principal source of Eureka's funds for use
- --------
in lending and other purposes. In addition to deposits, Eureka derives funds
from cash flows generated from operations, loan and MBS repayments and loan
sales. Funds are also available through various types of borrowings, including
advances from the FHLB and securities sold under agreements to repurchase.
DEPOSITS. Eureka offers an assortment of accounts with varying interest rates
- ---------
and maturities including passbook accounts, checking accounts, money market
accounts, fixed rate certificates of deposit and individual retirement accounts.
Deposit flows are affected by various factors, including competition among
depository institutions, changes in the interest rate environment, general
economic conditions and the yields on other investment opportunities. Eureka
believes that its retail branch office network enables it to offer a high level
of customer convenience and attract a relatively stable base of deposits.
Eureka does not actively solicit jumbo deposits or utilize brokerage firms to
obtain such funds. At the end of 1996, Eureka had approximately $1.84 billion
in deposits, comprising approximately 120,436 accounts.
The following table shows the maturity of Eureka's customer deposits with
balances over $100,000 as of December 31, (dollars in thousands):
1996 1995 1994
--------- --------- ---------
Maturing:
Within three months $ 82,459 $ 56,830 $ 46,231
Three months to six months 62,302 61,882 67,680
Six months to twelve months 73,066 57,119 70,872
After twelve months 55,364 74,208 47,868
-------- -------- --------
$273,191 $250,039 $232,651
======== ======== ========
15
The table below shows the maturity of deposits at December 31, 1996, by various
interest rate ranges.
AMERICA FIRST FINANCIAL FUND 1987-A
Maturity of Deposits
Year in which deposits mature
------------------------------------------------------------------------------------
Rate 1997 1998 1999 2000 2001
- ------------------- -------------- ------------ ----------- ----------- -----------
Less than 4.01% $ 702,420,618 $ 60,324 $ - $ - $ 4,303
4.01% - 6.00% 762,585,192 196,351,602 30,416,134 2,984,354 4,440,004
6.01% - 8.00% 86,183,088 22,410,008 4,573,864 4,234,331 7,225,371
8.01% - 10.00% 769,230 3,878,831 6,435,604 3,830,182 -
10.01% - 12.00% 7,554 - - - -
12.01% - 14.00% - - 338,600 42,459 -
-------------- ------------ ----------- ----------- -----------
$1,551,965,682 $222,700,765 $41,764,202 $11,091,326 $11,669,678
============== ============ =========== =========== ===========
Year in which deposits mature
----------------------------------
2002 and
Rate Thereafter Total
- ------------------- ---------- --------------
Less than 4.01% $ 30,575 $ 702,515,820
4.01% - 6.00% 609,230 997,386,516
6.01% - 8.00% 654,342 125,281,004
8.01% - 10.00% - 14,913,847
10.01% - 12.00% - 7,554
12.01% - 14.00% - 381,059
---------- --------------
$1,294,147 $1,840,485,800
========== ==============
BORROWINGS.
- -----------
At December 31, 1996, 1995 and 1994, borrowings consisted of securities sold
under agreements to repurchase and FHLB advances. The principal purpose of
borrowings was to provide additional liquidity.
Securities sold under agreements to repurchase identical securities are as
follows at December 31,:
1996 1995 1994
---------------- -------------- --------------
Balance at December 31, $ 44.4 million $206.9 million $462.5 million
Market value at December 31, $ 44.4 million $206.9 million $462.5 million
Average balance during year $109.7 million $404.4 million $413.0 million
Maximum balance at any month-end $164.5 million $484.1 million $462.5 million
Weighted average days to maturity at December 31, 36 days 36 days 57 days
Weighted average interest rate at December 31, 5.50% 5.74% 5.93%
Weighted average interest rate for the year 5.41% 6.04% 4.35%
The following table summarizes FHLB advances at December 31,
(dollars in thousands):
Interest Interest Interest
1996 Rate 1995 Rate 1994 Rate
-------- -------- -------- ------- ------- --------
Short-term fixed rate advances
(maturing within one year) $ 49,298 5.61% $277,706 5.73% $ 50,278 5.70%
Long-term fixed rate advances
(maturing through 2002) $ 57,700 5.73% $ 32,381 5.99% $ - -
Average balance during year $201,775 $ 85,117 $ 9,509
Maximum balance at any month-end $305,878 $340,500 $ 50,278
Mortgage-backed securities pledged as
collateral for other borrowings $ 85,000 $280,000 $347,000
Weighted average interest rate at December 31, 5.67% 5.76% 5.70%
Weighted average interest rate for the year 5.60% 5.97% 5.73%
COMPETITION
- -----------
Eureka faces strong competition in both attracting savings accounts and
originating real estate loans. The competition between commercial banks and
thrift institutions has intensified in recent years due to federal regulations
eliminating many of the distinctions between these two types of institutions.
The most direct competition for deposits comes from other savings institutions,
commercial banks, credit unions, issuers of corporate and government debt
securities, and money market mutual funds. Low interest rates can result in
competition for deposits from non-deposit investment products such as stocks and
bonds, mutual funds and other investments. The primary basis of competition for
funds is the rate of interest paid. Methods used by Eureka to attract deposits
include advertising, having convenient branch office locations and quality
customer service.
Competition for real estate loans comes principally from other savings
institutions, commercial banks, and mortgage banking companies. Consumer loan
competition is primarily from commercial banks, savings and loans, consumer
finance
16
companies, and credit unions. Eureka competes for loans principally
through innovative products, pricing and quality services.
As a result of recent changes in federal law, including changes which will
facilitate the ability of banking organizations to conduct interstate banking
and branching operations, Eureka may face increased competition from other
depository institutions in the future. See "Insurance of Deposits."
EMPLOYEES
- ---------
At December 31, 1996, Eureka had 399 full-time-equivalent employees. The
Partnership does not have any employees. Eureka provides its employees with a
comprehensive benefit program including basic and major medical coverage, dental
plan, life insurance, accident insurance, long-term disability coverage,
retirement benefits and a 401(k) plan. Eureka also offers loans with reduced
origination fees to its employees who qualify. None of Eureka's employees are
represented by a collective bargaining group. Management considers its
relations with its employees to be satisfactory.
REGULATION
- ----------
GENERAL. Eureka is a federally-chartered savings bank, and, as such, is subject
- --------
to broad federal regulation and oversight extending to all of its operations.
As unitary savings and loan holding companies, the Partnership and AFEH also are
subject to federal and state regulation and oversight.
The OTS has primary regulatory authority over Eureka and its holding company.
In addition, Eureka is a member of SAIF through which customers' deposits are
insured up to maximum levels provided by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over Eureka. See "Insurance of
Deposits."
The OTS has primary enforcement responsibility over savings associations, and
has broad enforcement powers allowing the OTS to take various types of
regulatory actions against savings institutions and their affiliated persons for
unsafe and unsound banking practices, or violations of laws, regulations,
written supervisory agreements or directives, or commitments given in writing by
the institution. Such actions can include the imposition of cease-and-desist
orders which may require affirmative corrective actions (such as restitution or
other significant remedial acts), removing or suspending officers and directors,
or imposing civil money penalties. Civil penalties cover a wide range of
violations and actions and range from $5,000 to $1 million a day. In cases
where the OTS determines not to take regulatory action against a savings
association, the FDIC has authority to recommend and, in some circumstances to
compel, enforcement action by the OTS. In addition, regulators have broad
discretion to take enforcement action against an institution that fails to
comply with financial regulatory requirements, including but not limited to
regulatory capital requirements. Possible enforcement action ranges from the
imposition of a capital plan to the termination of deposit insurance, or the
appointment of a conservator or receiver.
In the appropriations bill signed by the President in September 1996, Congress
enacted a provision to eliminate the thrift charter if no savings associations
existed on January 1, 1999. It is uncertain what effect, if any, this provision
will have on Eureka and its operations.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System is the central credit facility
- ------------------------------
for savings institutions. Eureka is a member of the FHLB System and therefore
is required to purchase and hold stock in the FHLB of San Francisco in an amount
equal to the greater of: (i) 1% of its aggregate unpaid residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or (ii) 5% of its FHLB advances outstanding. Eureka was in compliance
with this requirement at December 31, 1996.
The FHLB of San Francisco serves as a reserve or central bank for member
institutions within its assigned region. Advances from the FHLB of San Francisco
are secured by a member's shares of stock in the FHLB of San Francisco, certain
types of mortgages and other assets. Interest rates charged for advances vary
depending upon maturity, the cost of funds to the FHLB of San Francisco and the
purpose of the borrowing. At December 31, 1996, Eureka had advances totaling
approximately $107 million from the FHLB of San Francisco. All long-term
advances must be used by Eureka to provide funds for residential mortgage loans.
In addition, the FHLB has issued regulations that establish community service or
investment standards (including complying with the Community Reinvestment Act)
for FHLB members to follow as a condition to continued access to long-term
advances.
17
LIQUIDITY REQUIREMENTS. Eureka is currently required to maintain an average
- -----------------------
daily balance of liquid assets (including cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to at least 5% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. Eureka is also required to maintain, for each calendar month, an average
daily balance of short-term liquid assets (generally those having maturities of
six months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts plus short-term borrowings during the preceding calendar
month. Monetary penalties may be imposed for failure to meet liquidity ratio
requirements. The liquidity ratio of Eureka at December 31, 1996 was 5.57%,
exceeding the applicable requirements.
INSURANCE OF DEPOSITS. Eureka's deposits are insured up to $100,000 per insured
- ----------------------
deposit account (as defined by law and regulation) by SAIF. This insurance is
backed by the full faith and credit of the United States Government. SAIF is
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by SAIF-insured institutions.
It also may prohibit any SAIF-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious threat to SAIF.
SAIF members are required to pay an annual premium for deposit insurance in an
amount related to each institution's perceived risk to the deposit insurance
fund, based on the types and concentrations of its assets and liabilities and
other factors deemed relevant by the FDIC. Institutions are placed in one of
three capital groups, then further categorized into one of three supervisory
subgroups within the assigned capital group. In turn, an institution's "risk-
based" deposit insurance assessment is based upon the institution's capital
group and supervisory subgroup classifications.
On September 30, 1996, the President signed an appropriations bill which
included provisions to recapitalize the SAIF. Under the provisions of the bill,
the SAIF was recapitalized through a combined approach of imposing a one-time
special assessment on SAIF-insured institutions, and an incremental pro-rata
charge on SAIF-insured institutions and commercial banks insured under the Bank
Insurance Fund ("BIF"), to be used to pay the interest on Financing Corporation
("FICO") bonds issued as part of the 1989 savings association rescue package
adopted under the FIRREA. The SAIF recapitalization provisions imposed a one-
time special assessment of 65.7 basis points (approximately $11 million for
Eureka) on deposits held by SAIF-insured institutions as of March 31, 1995,
payable not later than 60 days after the enactment of the legislation, and
reduced the annual assessment rate for SAIF-insured institutions from 23 basis
points to 6.4 basis points (a reduction of approximately $3 million annually
based upon Eureka's insured deposits at September 30, 1996) beginning in 1997.
Although deposit premiums for thrifts will continue to be higher than the
banking industry's through the year 2000, the premium reduction significantly
reduces the inequity of Eureka paying a deposit premium significantly higher
than that of a similarly sized commercial bank. Thereafter, beginning January
1, 2000, SAIF-insured and BIF-insured deposits alike will be assessed on a pro-
rata basis (expected to be at a rate of approximately 2.4 basis points) to repay
the FICO bonds until the year 2017, and thereafter phased out, with the phase
out being completed in 2019.
Eureka's deposit assessment rate for 1996 was .23% for the first three quarters
of 1996 and .18% for the fourth quarter of 1996. In addition, Eureka paid a
one-time special assessment of approximately $11 million in the third quarter of
1996 to recapitalize the SAIF insurance fund. Current law provides no statutory
cap on SAIF premium rates. See "Deposit Insurance and Other Matters" under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law, regulation,
order or any condition imposed by or an agreement with the FDIC. Management
does not know of any current practice, condition or violation that might lead to
termination of Eureka's FDIC insurance.
REGULATORY CAPITAL REQUIREMENTS. Savings institutions must satisfy three
- --------------------------------
separate tests of capital adequacy: A leverage standard, a tangible capital
standard and a risk-based capital standard.
The OTS leverage limit requires savings associations to maintain "core capital"
in an amount equal to at least 3% of adjusted total assets. Core capital is
defined as common stockholders' equity (including retained earnings, excluding
the net unrealized gains or losses on securities available-for-sale),
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less intangible assets, other than
qualifying mortgage servicing rights, qualifying purchased credit card
relationships and qualifying identifiable intangible assets.
18
The tangible capital requirement adopted by the OTS requires a savings
institution to maintain tangible capital in an amount equal to at least 1.5% of
adjusted total assets. Tangible capital is defined as core capital less
intangible assets (including supervisory goodwill), other than mortgage
servicing rights valued at the lower of the maximum percentage established by
the FDIC or the amount includable in core capital.
Under the OTS risk-based capital requirement, a savings association must
maintain risk-based capital equal to at least 8% of risk-weighted assets. A
savings association must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors, which range from 0%
for cash and securities issued by the U.S. Government or its agencies to 100%
for commercial loans and real estate owned. Total capital is defined as core
capital (as defined above) plus supplementary capital, which may include, among
other items, cumulative perpetual preferred stock, perpetual subordinated debt,
mandatory convertible subordinated debt, intermediate-term preferred stock and a
certain portion of the allowance for loan losses. Supplementary capital may not
exceed 100% of core capital.
In meeting the leverage limit, tangible capital and risk-based capital
standards, a savings institution must deduct from capital, subject to certain
limited exceptions, its entire investment in and loans to a subsidiary engaged
in activities not permissible for a national bank. Eureka has one such
subsidiary whose primary purpose is to hold real estate acquired by Eureka
during the acquisition of Stanford from the FSLIC in 1988.
On August 31, 1993, the OTS issued final rules to add an IRR component to risk-
based capital standards. Under these rules, a savings association with a
greater than normal level of interest rate risk exposure will be subject to a
deduction from total capital for purposes of calculating its risk-based capital.
The IRR deduction will equal one-half the difference between an institution's
"measured interest rate risk" and a "normal" level of interest rate exposure.
The measured interest rate risk is calculated by determining the decline that
would occur in the thrift's net portfolio value due to a 200 basis point
increase or decrease in market interest rates (whichever would produce the
lowest net portfolio value). When the three-month Treasury bond equivalent
yield falls below 4%, the hypothetical decline in rates will be one-half the
Treasury rate (at year-end, 1.5%). Any decline in net portfolio value of up to
2% of an institution's assets will be considered a "normal" level. The
effectiveness of the IRR capital requirement, which was to go into effect as of
June 30, 1995, has been temporarily suspended. When a decision is reached by
the OTS on the effective date of the IRR capital requirement, institutions will
be appropriately notified.
Effective November 1994, the OTS no longer required savings institutions to
include unrealized gains and losses on available-for-sale debt securities
established under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in regulatory capital. Under the revised OTS policy,
institutions must value available-for-sale debt securities at amortized cost for
regulatory capital purposes. Adoption of this uniform interagency policy is
responsive to the general goal of regulatory uniformity set forth in Section 303
of the Riegle Community Development and Regulatory Improvement Act of 1994.
This decision reversed the interim OTS policy issued in August 1993 under which
institutions computed their regulatory capital in accordance with SFAS No. 115.
A savings institution which fails to maintain minimum levels of required capital
may be required to take certain corrective actions specified in OTS regulations,
including reducing the rate of interest that may be paid on savings accounts,
limiting its receipt of deposits and issuance of new accounts, and restricting
its lending and investment activities. The OTS may also require the institution
to reduce its operational expenditures and increase its regulatory capital or
liquid assets to specified levels. If a savings association fails to comply
with the capital standards, the Director of the OTS will restrict asset growth
and either issue a capital directive or require the institution to submit a
capital plan. At December 31, 1996, Eureka was in compliance with all regulatory
capital requirements.
In addition to the corrective actions available under these OTS regulations, the
FDIC Improvement Act of 1991 ("FDICIA") established a statutory framework for
capital-based corrective action. The law sets out five categories for
depository institutions and imposes increasingly strict regulatory restrictions
and supervisory actions at each successive level. As implemented by OTS
regulations, a well-capitalized institution under this framework must have a
total risk-based capital ratio of at least 10%, a core capital ratio of at least
6%, a leverage ratio of at least 5% and not be subject to any agreement, order,
capital directive, or prompt corrective action. At December 31, 1996, Eureka
was classified as a "well-capitalized" institution; this classification,
however, is a regulatory capital classification used for internal regulatory
purposes and is not
19
necessarily indicative of Eureka's condition and operations.
QUALIFIED THRIFT LENDER TEST. Eureka is required to meet a Qualified Thrift
- -----------------------------
Lender (QTL) test for continued eligibility for FHLB advances and other
purposes. To pass this test, an institution must have at least 65% of its
portfolio assets invested in residential mortgage loans or other qualifying
assets, and must maintain this level of qualifying investments as measured on a
monthly average basis in 9 out of every 12 months. For purposes of the QTL
test, portfolio assets are total assets less intangibles, properties used to
conduct business and liquid assets (up to 20% of total assets).
The definition of qualified investments includes domestic residential housing or
manufactured housing loans, home equity loans and mortgage-backed securities
backed by residential housing or manufactured loans, shares of stock issued by
any FHLB, certain obligations of the FDIC and other related entities, and
certain other assets. At December 31, 1996, Eureka's ratio of QTL qualifying
assets to total assets was 98%.
If the holding company of a savings association is a unitary savings and loan
holding company, as the Partnership and AFEH are, among other things, it becomes
subject to the activity restrictions imposed on a multiple savings and loan
holding company if its savings and loan subsidiary fails to pass the QTL test,
and may be required to register and be regulated as a bank holding company if
the subsidiary savings association fails to requalify under the QTL test within
one year.
INVESTMENT PORTFOLIO POLICY AND ACCOUNTING. The Statement of Policy on
- -------------------------------------------
Investment Portfolio Policy and Accounting Guidelines issued by the OTS requires
that the board of directors of a savings institution adopt a written investment
policy that addresses investment policies and strategies for each category of
investments in the savings institution's portfolio and requires extensive
documentation to justify such strategies. The Partnership's and Eureka's
present investment policy, as adopted by the Partnership and Eureka Board of
Directors, provides that assets be designated as available for sale or held to
maturity at purchase date. Present investment policies prohibit the
establishment of a trading portfolio.
CAPITAL DISTRIBUTIONS. The OTS regulations impose limitations upon all "capital
- ----------------------
distributions" by savings institutions, including cash dividends, payments by a
savings institution to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other distributions
charged against capital. The regulations establish a three-tiered system of
regulation, with the greatest flexibility being afforded to well-capitalized
institutions ("Tier 1 Institution").
A Tier 1 Institution can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year up to the higher of: 100%
of its net income to date during the calendar year, plus the amount that would
reduce its "surplus capital ratio" (the percentage by which the ratio of its
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets) to not less than one-half of its surplus capital ratio at the
beginning of the calendar year; or 75% of its net income over the most recent
four-quarter period. Any additional amount of capital distributions would
require prior regulatory approval. Capital distributions are generally
prohibited, if after the distribution, the institution would be
undercapitalized. At December 31, 1996, Eureka was a Tier 1 Institution.
Dividend payments by Eureka are subject to the limitations under the FDIC
capital maintenance agreement. See "Capital Resources" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion.
The OTS has proposed for comment changes to its capital distribution regulations
to replace the current three-tier system with a requirement tied to the FDICIA
framework for capital based corrective action, discussed above. Under this
proposal, a savings association, other than one which is in a troubled
condition, generally would be permitted to make capital distributions, provided
that these capital distributions would not cause the association's capital to
drop below the level required to remain adequately capitalized for OTS purposes.
TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions between a savings
- -----------------------------------------
institution and its affiliates are subject to Sections 23A and 23B of the
Federal Reserve Act. Generally, these sections restrict certain types of
transactions between affiliates to a percentage of a savings institution's
capital, require certain types of covered transactions to be collateralized,
and require all such transactions to be on terms at least as favorable to a
savings institution as are available in transactions with non-affiliates. In
addition, savings institutions are prohibited from lending to any affiliate
engaged in activities not permissible for a bank holding company and from
acquiring shares of most affiliates. Savings institutions are further
20
prohibited from paying management fees to an affiliate if the institution would
be undercapitalized after making the payment.
These provisions apply to transactions between Eureka and the Partnership or
Eureka and the Partnership's non-savings association subsidiaries. Under OTS
regulations, Eureka's non-bank subsidiaries are not deemed affiliates unless the
OTS determines to treat such subsidiaries as affiliates. Therefore,
transactions with such non-bank subsidiaries are not subject to the prohibitions
under Section 22A and 22B.
Savings institutions are also subject to Section 22(h) of the Federal Reserve
Act, which restricts the aggregate loans by a savings institution to its
executive officers, directors or principal shareholders or any related interest
of such persons. In addition, savings institutions are subject to Section 22(g)
of the Federal Reserve Act, which places additional restrictions on loans by a
savings institution to an executive officer.
LENDING RESTRICTIONS. Savings institutions are required to follow the national
- --------------------
bank loans-to-one-borrower restrictions, subject to certain exceptions. For
loans not fully secured, the total loans and extensions of credit to any one
borrower or group of borrowers outstanding at one time may not exceed 15% of the
unimpaired capital and unimpaired surplus of the institution. In addition, a
savings institution separately may have outstanding total loans and extensions
of credit not to exceed 10% of the unimpaired capital and unimpaired surplus of
the institution to any one borrower or group of borrowers which are fully
secured by readily marketable collateral having a market value, as determined by
reliable and continuously available price quotations, at least equal to the
amount of the funds outstanding.
Federal law and regulations provide certain exceptions to these national bank
requirements for savings institutions. A savings institution may make loans to
one borrower of up to $500,000 for any purpose. A savings institution may make
loans to one borrower of up to the lesser of $30 million or 30% of unimpaired
capital and unimpaired surplus to develop domestic residential housing units
provided the purchase price per single family unit is $500,000 or less, the
Director of the OTS approves the making of the loans, the institution is and
continues to be in compliance with its fully phased-in capital standards, the
loans comply with applicable loan-to-value requirements, and loans to all
borrowers made under this higher limit do not in the aggregate exceed 150% of
the institution's unimpaired capital and unimpaired surplus.
Beginning March 19, 1993, savings associations were subject to OTS regulations
regarding real estate lending standards. Under these regulations, Eureka adopted
real estate lending policies addressing issues such as loan-to-value limits,
loan administration procedures, portfolio diversification standards, and
documentation, approval and reporting requirements. Eureka is also subject to
OTS regulations requiring independent appraisals in connection with certain real
estate related transactions. In addition, a rule phased in between December 19,
1992 and June 19, 1995 placed restrictions on extensions of credit by Eureka to
correspondent depository institutions.
FEDERAL RESERVE SYSTEM. Savings institutions are subject to Federal Reserve
- -----------------------
Board regulations requiring reserves to be maintained against transaction
accounts (primarily NOW accounts) and non-personal time deposits. Prior to
January 2, 1997, the regulations generally required that no reserves were
required on the first $4.3 million of transaction accounts, reserves of 3% must
be maintained against the next $47.7 million of transaction accounts and
reserves of 10% must be maintained against that portion of aggregate transaction
accounts in excess of $52.0 million. Effective January 2, 1997, the reserve
requirements were revised so that the first $4.4 million of transaction accounts
require no reserves, the next $44.9 million require 3% reserves and the
aggregate portion over $49.3 million require 10% reserves. Reserve requirements
for non-personal time deposits that have maturities of less than 18 months
currently are at zero percent. Thrift institutions also have authority to borrow
from the appropriate Federal Reserve Bank under certain circumstances, but
Federal Reserve System policy generally requires thrift institutions to exhaust
all other sources before borrowing from the Federal Reserve System. At December
31, 1996, 1995 and 1994, Eureka met its reserve requirements, and had no
borrowings from the Federal Reserve System.
SAVINGS AND LOAN HOLDING COMPANY REGULATION. AFEH and the Partnership
- --------------------------------------------
(references to the Partnership in this section shall be deemed to include AFEH)
are non-diversified unitary savings and loan holding companies subject to
regulatory oversight of the OTS. As such, the Partnership is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Partnership and its non-savings institution subsidiaries. Among other things,
this authority permits the OTS to restrict or prohibit activities that
21
are determined to be a serious risk to the subsidiary savings institution.
Eureka must notify the OTS at least 30 days before declaring any dividend to
AFEH.
As a unitary savings and loan holding company, the Partnership generally is not
subject to regulatory limitations on the scope of its permissible activities so
long as Eureka continues to meet the QTL test. If the Partnership acquires
control of another savings institution as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of the
Partnership and any of its subsidiaries (other than Eureka or any other SAIF-
insured savings institution) would be restricted by law.
The Partnership must obtain approval from the OTS before acquiring control of
any other SAIF-insured institution. Such acquisitions generally may be
prohibited if they result in a multiple savings and loan holding company
controlling savings institutions in more than one state. However, such
interstate acquisitions may be permitted based on specific state authorization
or in a supervisory acquisition of a failing savings institution.
Pursuant to the holding company regulations of the OTS, Eureka is subject to
certain restrictions in its dealings with the Partnership and with other
companies affiliated with the Partnership. See "Transactions with Affiliates
and Insiders."
FEDERAL TAXATION
- ----------------
THE PARTNERSHIP. The Partnership is classified as a partnership for federal
- ----------------
income tax purposes and, as a result, is not subject to federal income taxes.
Instead, each holder of BUCs, who is treated as a partner of the Partnership, is
required to include his allocable share of the income, gain, loss and other
items of the Partnership in computing his income for federal income tax
purposes. The Partnership's primary sources of income were periodic dividends
with respect to the stock of AFEH owned by the Partnership and interest income
on temporary investments.
AFEH. AFEH and Eureka file a consolidated federal income tax return on a
- -----
calendar year basis and report their income on an accrual basis.
Eureka is the principal contributor to the consolidated group's taxable income.
As discussed below, for years beginning after December 31, 1995, a special
federal bad debt deduction provision previously available to Eureka which may
have lowered its effective tax rate as compared to other corporations generally
has been repealed. Eureka's net operating loss carryovers as of December 31,
1996 and their expiration dates and effective tax rates are set forth in Note 17
of Notes to Consolidated Financial Statements.
EUREKA. For years preceding the year ended December 31, 1996, thrift
- -------
institutions were permitted to establish a reserve for bad debts and to make
annual additions thereto with such additions generally being deductible for
federal tax purposes. This reserve method was repealed for tax years beginning
after December 31, 1995. Large thrifts such as Eureka (for these purposes, a
large thrift is one with assets in excess of $500 million) are required to
change their tax method of accounting for bad debts to a specific charge-off
method for years beginning after December 31, 1995. Under the specific charge-
off method, a thrift is allowed to take a tax deduction for that portion of its
loan portfolio which was charged-off as wholly or partially worthless during a
given year. To the extent that a large thrift had established a tax bad debt
reserve under the previously permitted reserve method of accounting, such a
thrift must generally recapture the excess of its tax bad debt reserves over its
base year reserves (for these purposes, the base year reserve is that portion of
the reserve accumulated prior to December 31, 1987). In Eureka's case,
substantially all of its bad debt reserve was accumulated in the post base year
period and is thus subject to recapture.
The change in a thrift's method of accounting for the bad debt reserve will
generally be taken into taxable income ratably (on a straight line basis) over a
six-year period. If, however, a thrift meets a "residential loan requirement"
for a taxable year beginning in 1996 or 1997, the recapture of the reserve will
be suspended for such tax year. Thus, recapture can potentially be deferred for
up to two years. The "residential loan requirement" is met if the principal
amount of housing loans made by a thrift during 1996 or 1997 is not less than
the average of the principal amount of loans made during the six most recent
taxable years prior to 1996. Refinancings and home equity loans are excluded.
The residential loan test is applied on a combined entity basis. Because Eureka
met the residential loan test for the year ended December 31, 1996, recapture of
its
22
federal tax bad debt reserve will not commence until the year ending
December 31, 1997, or, if the residential loan test is met in that year as well,
recapture will commence in the year ending December 31, 1998.
For the years ended December 31, 1994 and 1995, Eureka took deductions for
additions to its federal tax bad debt reserve determined on the basis of actual
loss experience. Under this so called experience method, thrifts were allowed
to determine the amount of their required tax bad debt reserves on the basis of
actual loan loss experience for the current year and the preceding five taxable
years.
In connection with the Acquisition of Eureka by AFEH, AFEH entered into an
Assistance Agreement with the FDIC. Under the Assistance Agreement, FDIC may be
entitled to participate in certain of the tax benefits utilized by Eureka. The
Assistance Agreement and the FDIC's rights to participate in the benefits
utilized by Eureka are defined in "Assistance Agreement" of Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Depending on the composition of its items of income and expense, a thrift
institution may be subject to the alternative minimum tax. A corporation's
alternative minimum taxable income ("AMTI") generally consists of its taxable
income plus certain adjustments and "items of tax preference." A corporate
taxpayer's AMTI in excess of the exemption amount ($40,000, subject to phasing
out as AMTI increases) generally is subject to the 20% corporate alternative
minimum tax ("AMT") to the extent that the AMT exceeds the regular corporate
income tax. For taxable years beginning after 1989, AMTI is increased by 75% of
the amount by which adjusted current earnings (an amount based on earnings and
profits as calculated for federal income tax purposes) exceed AMTI, computed
without regard to such adjustment and the alternative tax net operating loss
deduction. AMTI may be reduced by net operating loss carryovers only up to 90%
of AMTI, but AMTI attributable to most preferences can be credited against
regular tax due in later years.
STATE TAXATION. AFEH and Eureka are subject to the California franchise tax
- ---------------
with respect to income apportioned to California, and file a combined unitary
California return, which has the effect of eliminating intercompany
distributions, including dividends, in the computation of combined taxable
income. Savings and loan associations are subject to tax on their net income at
a rate of approximately 11.3%, which rate is subject to adjustment in subsequent
years to a maximum rate of 11.7%. "Net income" for this purpose generally means
federal taxable income, subject to certain adjustments. Under current
California law, 50% of any losses incurred during the years ending December 31,
1988 through 1996 may be carried forward 5 years. California permits a bad debt
deduction based on a method similar to the federal experience method, but does
not allow use of the percentage method. California also has an alternative
minimum tax at a rate of 9.0% for financial institutions which is computed
similarly to the Federal AMT. In addition, California has a de minimus minimum
-- -------
tax.
AUDITS. The Internal Revenue Service has examined Eureka's federal income tax
- -------
returns for previous fiscal years through June 30, 1985. There have been no
audits of state income tax returns of Eureka or any of its subsidiaries.
SUBSIDIARIES. Eureka has subsidiaries which were formed primarily for the
- -------------
purpose of investing in real estate. In addition, Eureka maintains a
subsidiary, Eureka Financial Services, Inc., that is engaged in the sale of non-
deposit investments, and recorded net income of approximately $350,000 in 1996.
23
ITEM 2. PROPERTIES.
-----------
The following table sets forth information with respect to Eureka's offices as
of December 31, 1996. In addition, the Partnership leases office space of 4,385
square feet at 555 California Street, San Francisco, under a lease arrangement
which expires in 1998.
EUREKABANK
OFFICES OWNED OR LEASED
Owned Lease Date Square
or Expiration Facility Footage
Location Leased Date Opened Occupied
- --------------------------------- ------------ ----------- ------------ ----------
Main Office:
- ---------------------------------
950 Tower Lane Leased 2000 1990 48,908
Foster City, CA
Administrative Offices:
- ---------------------------------
2600 So. El Camino Real Land Lease/ 2040 1975 19,000
San Mateo, CA Own Building
815 Willow Street Leased 2000 1980 42,000
2225 Spring Street
Redwood City, CA
Branch Offices:
- ---------------------------------
783 Rio Del Mar Boulevard Leased 1998 1976 3,500
Aptos, CA
750 W. Hamilton Avenue Leased 2003 1974 3,725
Campbell, CA
1965 Diamond Boulevard Land Lease/ 2003 1978 4,000
Concord, CA Own Building
10050 N. Wolfe Road Leased 1997 1993 3,606
Cupertino, CA
720 San Ramon Valley Boulevard Land Lease/ 2004 1974 4,000
Danville, CA Own Building
39390 Fremont Boulevard Leased 2002 1963 7,500
Fremont, CA
24
EUREKABANK
OFFICES OWNED OR LEASED
Owned Lease Date Square
or Expiration Facility Footage
Location Leased Date Opened Occupied
- ---------------------------- ------ ---------- -------- --------
50 N. Cabrillo Hwy #1 Leased 2000 1975 2,500
Half Moon Bay, CA
3492 Mt. Diablo Boulevard Leased 1998 1979 2,490
Lafayette, CA
300 Main Street Own N/A 1980 3,201
Los Altos, CA
127 N. Santa Cruz Avenue Own N/A 1992 3,885
Los Gatos, CA
659 Main Street Leased 2006 1996 2,150
Martinez, CA
825 Santa Cruz Avenue Leased 2001 1978 2,075
Menlo Park, CA
368 Ignacio Boulevard Leased 1997 1974 2,500
Novato, CA
1655 Oceana Boulevard Leased 2000 1959 6,429
Pacifica, CA
301 University Avenue Leased 1997 1988 6,815
Palo Alto, CA
5870 Stoneridge Mall Leased 2001 1991 3,887
Pleasanton, CA
400 San Mateo Avenue Leased 2004 1953 4,650
San Bruno, CA
1200 San Carlos Avenue Leased 1999 1953 14,903
San Carlos, CA
1371 E. 14th Street Leased 2000 1980 6,765
San Leandro, CA
915 Ralston Avenue Leased 2004 1995 3,500
Belmont, CA
400 S. El Camino Real Leased 1999 1991 3,617
San Mateo, CA
25
EUREKABANK
OFFICES OWNED OR LEASED
Owned Lease Date Square
or Expiration Facility Footage
Location Leased Date Opened Occupied
- ----------------------------- ------------ ---------- -------- --------
443 Castro Street Own N/A 1961 2,036
San Francisco, CA
1200 Irving Street Leased 2003 1982 1,406
San Francisco, CA
4610 Mission Street Leased 2000 1958 8,900
San Francisco, CA
201 Montgomery Street Leased 2003 1991 10,000
San Francisco, CA
1435 Stockton Street Leased 2001 1978 4,697
San Francisco, CA
5670 Almaden Expressway Land Lease/ 2008 1972 6000
San Jose, CA Own Building
1099 Lincoln Avenue Land Lease/ 1999 1991 6,053
San Jose, CA Own Building
1780 Saratoga Avenue Leased 2007 1993 3,700
San Jose, CA
3200 Northgate Drive Leased 2003 1972 3,215
San Rafael, CA
110 N. Morrissey Boulevard Leased 2003 1975 4,000
Santa Cruz, CA
50 Old Courthouse Square Leased 2000 1963 5,405
Santa Rosa, CA
2308 Magowan Drive Leased 1997 1996 1669
Santa Rosa, CA
40 Chestnut Avenue Leased 2003 1973 4,049
South San Francisco, CA
1307 S. Mary Avenue Leased 1999 1992 5,800
Sunnyvale, CA
801 Alamo Drive Land Lease/ 2003 1973 4,000
Vacaville, CA Own Building
The aggregate net carrying value of premises owned by Eureka and leasehold
improvements of leased offices at December 31, 1996 was $6.7 million. See Note
9 of Notes to Consolidated Financial Statements.
26
ITEM 3. LEGAL PROCEEDINGS.
------------------
There are no material pending legal proceedings to which the Partnership or AFEH
is a party or to which any property of the Partnership or AFEH is subject.
Eureka, however, is a party to various lawsuits arising in the normal course of
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted to a vote of the Partnership's BUC Holders during the
fourth quarter of the fiscal year ending December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED BUC HOLDERS MATTERS.
----------------------------------------------------------------------
(a) MARKET INFORMATION. Prior to their listing on the NASDAQ System on May 22,
------------------
1989, there was no established trading market for BUCs. On June 6, 1989,
the BUCs were included in the NASDAQ National Market System and began
trading on the NASDAQ Stock Market under the trading symbol "AFFFZ." The
following table sets forth the high and low sale prices for the BUCs for
each quarterly period during 1996 and 1995. Quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Bid Prices
-------------------
1996 High Low
----------- ------ ----------
1st Quarter $29.75 $27.75
2nd Quarter $29.00 $25.25
3rd Quarter $31.13 $25.50
4th Quarter $30.75 $28.00
1995
-----------
1st Quarter $24.50 $19.50
2nd Quarter $27.25 $23.25
3rd Quarter $28.38 $24.50
4th Quarter $30.25 $27.00
(b) BUC HOLDERS. The approximate number of BUC holders on December 31, 1996
------------
was 9,539.
(c) DISTRIBUTIONS. Total cash distributions paid or accrued for the fiscal
--------------
years ended December 31, 1996 and 1995 to BUC Holders equaled $9,616,944
for each year. Cash distributions were paid quarterly, and totaled $1.60
per BUC for the fiscal years ended December 31, 1996 and 1995. See
"Capital Distributions" under Item 1, "Business" for further discussion.
See "Capital Resources" under Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," for information
regarding the sources of funds used for cash distributions and for a
discussion of factors, if any, which may adversely affect the Partnership's
ability to make cash distributions at the same levels in 1997 and
thereafter.
27
America First Financial Fund 1987-A Limited Partnership and Subsidiary
Selected Financial Data
ITEM 6. SELECTED FINANCIAL DATA. Set forth below is selected financial data
------------------------
for the Partnership. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto filed in
response to Item 8 hereof.
December 31,
----------------------------------------------------------------------------------------
Selected Financial Condition Information 1996 1995 1994 1993 1992
- ---------------------------------------- --------------- --------------- --------------- ---------------- ----------------
Total assets $2,209,051,348 $2,416,953,364 $2,393,577,257 $2,348,382,187 $2,361,199,866
Loans receivable, net(1) 1,403,853,521 1,431,583,207 1,433,148,528 1,547,159,130 1,591,524,631
Mortgage-backed securities 674,594,547 815,802,149 790,900,746 629,538,711 567,653,979
Investments(1) 25,300,000 85,195,619 83,690,607 64,374,853 86,281,358
Due from FDIC (2) - - - - 10,592,307
Customer deposits 1,840,485,800 1,704,466,523 1,696,291,789 1,713,207,365 1,735,433,974
Other borrowings(1) 151,351,331 516,943,421 512,763,000 441,865,000 450,368,376
Redeemable preferred stock (2) 17,747,928 15,541,988 13,610,226 12,020,040 -
Partners' capital 177,446,742 156,131,684 144,595,341 143,249,047 152,633,917
For the Year Ended December 31,
----------------------------------------------------------------------------------------
Selected Operations Information 1996 1995 1994 1993 1992
- ------------------------------- -------------- -------------- -------------- -------------- --------------
Interest income $ 161,997,898 $ 163,639,692 $ 136,068,738 $ 142,855,763 $ 156,570,963
FDIC assistance, net - - - (267,610) 379,648
-------------- -------------- -------------- -------------- --------------
Total interest income 161,997,898 163,639,692 136,068,738 142,588,153 156,950,611
Interest expense (101,671,047) (107,602,066) (84,193,124) (86,169,894) (94,933,410)
-------------- -------------- -------------- -------------- --------------
Net interest income before
provision for loan losses 60,326,851 56,037,626 51,875,614 56,418,259 62,017,201
Provision for loan losses (964,562) (792,167) (1,245,426) (2,508,610) (2,691,896)
-------------- -------------- -------------- -------------- --------------
Net interest income after
provision for loan losses 59,362,289 55,245,459 50,630,188 53,909,649 59,325,305
-------------- -------------- -------------- -------------- --------------
Non-interest income 8,400,778 9,423,050 9,991,002 14,420,801 10,201,740
Non-interest expense (57,221,753) (47,433,391) (45,428,868) (68,122,588) (48,402,265)
-------------- -------------- -------------- -------------- --------------
Net non-interest expense (48,820,975) (38,010,341) (35,437,866) (53,701,787) (38,200,525)
-------------- -------------- -------------- -------------- --------------
Income before income taxes 10,541,314 17,235,118 15,192,322 207,862 21,124,780
Income tax (benefit) expense (20,870,551) - - - 9,400
-------------- -------------- -------------- -------------- --------------
Net income $ 31,411,865 $ 17,235,118 $ 15,192,322 $ 207,862 $ 21,115,380
============== ============== ============== ============== ==============
Net income per BUC $4.48 $2.63 $2.36 $.36 $3.15
Total cash distributions paid or
accrued per BUC $1.60 $1.60 $1.60 $1.60 $1.575
(1) Loans receivable includes loans held for sale; investments include federal
funds sold and securities purchased under agreements to resell; and other
borrowings include securities sold under agreements to repurchase.
(2) In 1992, preferred stock of $10,644,040 is a reduction to covered assets
receivable which is included in Due from FDIC.
28
Selected Other Information
- --------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Return on investment(1) 22.40% 13.15% 11.79% 1.81% 15.75%
Return on average assets(2) 1.37% .73% .66% .01% .99%
Average equity/average
earning assets(3) 7.24% 6.57% 6.46% 6.62% 7.24%
Dividend payout ratio(4) 35.72% 60.85% 67.87% 442.00% 50.00%
Return on average equity(5) 19.45% 11.46% 10.62% .14% 14.34%
Loans to deposits ratio(6) 76.28% 83.99% 84.49% 90.31% 91.71%
Loan loss reserves $7,050,940 $6,878,072 $7,820,406 $9,455,778 $8,989,020
(1) Annualized return on investment is calculated based on earnings allocable to
the BUC holders divided by their original investment of $120,211,780, which
equals the total number of BUCs times $20.
(2) Net earnings divided by average consolidated assets.
(3) Average consolidated equity divided by average earning assets.
(4) Total dividends paid to BUC holders divided by net earnings allocated to BUC
holders.
(5) Net earnings divided by average consolidated equity.
(6) Consolidated loans receivable divided by total consolidated deposits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
----------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
FORWARD-LOOKING STATEMENTS
- --------------------------
In addition to the historical information contained in this Management's
Discussion and Analysis section, the following discussion contains forward-
looking statements that involve risks and uncertainties. A number of important
factors could cause the actual results of operations and other information to
differ materially from those results of operations and other information
discussed in those forward-looking statements. Those factors include
fluctuations in interest rates, inflation, the impact of federal government
legislation and regulations (including changes in legislation and regulation),
and economic conditions and competition in the geographic and business area in
which the Partnership conducts its operations. Forward-looking statements in
the Management's Discussion and Analysis include: (I) in "Results of
Operations," the discussion regarding future changes in the interest rate
environment; (ii) in "Net Interest Income," the discussion regarding future
changes in the funding sources; (iii) in "Provision for Loan Losses," the
discussion regarding loan loss provision requirements for 1997; (iv) in
"Provision for Loss on Interest Rate Exchange Agreements," the discussion
regarding future changes in interest rates; (v) in "Credit Risk," the discussion
regarding future loss experiences; (vi) in "Interest Rate Risk," the discussion
regarding future potential impacts on the industry and Eureka's earnings; (vii)
in "Deposit Insurance and Other Matters," the discussion regarding the future
effects on Eureka of the 1996 deposit insurance legislation and other federal
regulatory developments; and (viii) in "Assistance Agreement," the discussion
regarding certain entitlements of the FDIC. The forward-looking statements are
made as of the date of this annual report on Form 10-K and the Partnership
undertakes no obligation to publicly update such forwarding-looking statements
to reflect subsequent events or circumstances.
RESULTS OF OPERATIONS
- ---------------------
The Partnership recorded earnings of approximately $31.4 million or $4.48 per
BUC for the year ended December 31, 1996, compared to earnings of approximately
$17.2 million or $2.63 per BUC for the year ended December 31, 1995, and
approximately $15.2 million or $2.36 per BUC in 1994. The Partnership's income
for 1996, 1995 and 1994 consisted primarily of the earnings of Eureka. Eureka's
principal income component is net interest income which is the difference
between interest income on earning assets and interest expense on interest
bearing liabilities. Earning assets primarily consist of mortgage loans and
mortgage-backed securities ("MBS"), and are financed by customer deposits,
reverse repurchase agreements and other borrowings. Eureka's earning assets are
obtained through retail and wholesale loan originations, and are supplemented
with purchased loans and MBS. At December 31, 1996, the Partnership had total
assets of approximately $2.2 billion, which consisted primarily of the assets of
Eureka and its subsidiaries.
29
The business strategy for 1996 was focused on managing interest rate risk and
credit risk, and controlling non-interest expense. The increase in earnings in
1996 resulted primarily from the following:
. The interest rate environment was fairly stable during 1996, which allowed
the yields on adjustable rate loans to index to their contractual rates,
and kept loan prepayments relatively low. Interest expense for the
interest rate exchange agreements, which was an adjustment to the yield on
loans, decreased during 1996 as compared to 1995 due to the maturing of
approximately $45 million in swap agreements during 1996, and a favorable
rate environment. In addition, increases in customer deposits during 1996
allowed for a reduction in higher costing other borrowings. The above
factors resulted in an increase in the net interest margin from 2.37% in
1995 to 2.62% in 1996. The net interest margin in 1994 was 2.25%.
. The valuation allowance for deferred tax assets was reduced by $26.2
million at December 31, 1996, and was recognized as an income tax benefit
offsetting the tax expense in 1996 of $5.3 million. The valuation
allowance adjustment, net of the current year's taxes, contributed $20.9
million to net income for the year ended 1996. The adjustment to the
deferred tax assets is discussed in "Income Taxes," below. During the
third quarter of 1996, legislation was enacted to recapitalize the Savings
Association Insurance Fund ("SAIF"), and as a result, Eureka paid a one-
time assessment of approximately $11.0 million which was charged to
income. A similar assessment was imposed upon all institutions with SAIF-
insured deposits, and was based upon SAIF-insured deposits held as of
March 31, 1995. The SAIF charge in 1996 is discussed in "Deposit Insurance
and Other Matters," below.
Future changes in the interest rate environment could impact the above factors,
and the current year's earnings may not be indicative of any future period's
earnings.
Eureka's business approach is characterized by maintaining strong capital ratios
and continued low exposure to credit losses, primarily through focusing on high
quality assets. Eureka's tangible and risk-based capital ratios were 6.96% and
15.95%, respectively, at December 31, 1996, as compared to 5.95% and 14.41%,
respectively, at December 31, 1995 and 5.52% and 13.50%, respectively, at
December 31, 1994. Net non-performing assets declined to approximately .26% of
total assets at December 31, 1996, as compared to .36% and .53% at December 31,
1995 and 1994, respectively. Eureka's ratio of non-performing assets is well
below the December 31, 1996 average of 1.43% reported by the Office of Thrift
Supervision ("OTS") for thrifts located in California.
The Partnership's earning assets totaled $2.13 billion, $2.30 billion and $2.33
billion at December 31, 1996, 1995 and 1994, respectively. Eureka's earning
assets to total assets ratio was 97% at each of December 31, 1996, 1995 and
1994. During 1996, Eureka originated $235 million of mortgage loans (net of
loan sales of $17 million) primarily in 1-4 family residential properties, and
purchased $23 million of mortgage loans and $54 million of MBS for a total of
$312 million in additions to mortgage loans and MBS. Of the $235 million
originated net of loan sales during 1996, $160 million were wholesale
originations and $75 million were retail originations. The wholesale loan
origination system was established during 1995, in conjunction with a limited
number of qualified mortgage brokers, to originate high quality portfolio loan
assets. Management believes that the wholesale loan originations will continue
to produce a significant percentage of future total loan originations.
Wholesale loan originations enable Eureka to add assets that meet its credit
quality guidelines within its market area. These additions to earning assets
were offset by mortgage loan and MBS paydowns of $470 million. Mortgage loan
prepayments were 17% for 1996, as compared to 16% for 1995 and 21% for 1994.
Adjustable rate loans and MBS held by Eureka totaled $1.2 billion at December
31, 1996 and $1.5 billion at each of December 31, 1995 and 1994, and
approximately $.7 billion consisted of loans indexed to LIBOR or Treasury rates
at December 31, 1996 and approximately $1.0 billion at each of December 31, 1995
and 1994. Fixed rate loans and MBS totaled $344 million, $364 million and $412
million at December 31, 1996, 1995 and 1994, respectively. Convertible loans
totaled $505 million, $351 million and $257 million at December 31, 1996, 1995
and 1994, respectively. During 1995 and 1996, customer preferences shifted from
adjustable rate loans to convertible loan products which have fixed rates for
three to seven years, then change to adjustable rate loans which are indexed to
Treasury rates. Convertible loan additions to the portfolio totaled $197
million for 1996, as compared to $120 million for 1995 and $45 million for 1994.
As part of its asset/liability management strategy, Eureka typically sells
originated fixed rate loans and retains originated variable and convertible rate
loans for its portfolio.
30
Customer deposits are Eureka's primary source of funds for lending and
investing. Customer deposits totaled $1.8 billion at December 31, 1996, as
compared to $1.7 billion at each of December 31, 1995 and 1994. Other
borrowings at December 31, 1996 consisted of short-term securities sold under
agreements to repurchase and Federal Home Loan Bank ("FHLB") advances. As a
result of the increases in customer deposits and the decrease in loans and MBS,
other borrowings were reduced to approximately $151 million at December 31,
1996, as compared to $517 million and $513 million at December 31, 1995 and
1994, respectively. Other borrowings supplement retail deposits as a funding
source for the origination or purchase of earning assets.
NET INTEREST INCOME
- -------------------
Net interest income from Eureka is the Partnership's principal income component
and is the difference between interest income from interest earning assets and
interest expense on interest bearing liabilities. Net interest income before
the provision for loan losses was approximately $60.3 million in 1996, compared
to approximately $56.0 million in 1995, and $51.9 million in 1994. The net
interest margin was 2.62%, 2.37% and 2.25% for 1996, 1995 and 1994,
respectively.
Loan prepayments were 17% for 1996, as compared to 16% and 21% for 1995 and
1994, respectively. The stable interest rate environment produced the slowdown
in prepayments during 1996 and 1995, and allowed the interest rates on
adjustable rate loans to increase towards their fully indexed rates, increasing
the yield on the loan portfolio. Net interest expense for interest rate
exchange agreements was $830,000 for 1996, as compared to $2.4 million and $6.3
million for 1995 and 1994, respectively. The decrease from 1995 to 1996 was due
to the expiration of $45 million (notional amount) of interest rate exchange
agreements and the favorable rate environment. See "Provision for Loss on
Interest Rate Exchange Agreements" below for further discussion.
During 1996, repayments of mortgage loans and MBS totaled $470 million, and
originations and purchases totaled $312 million. Repayments for 1995 and 1994
totaled $390 million and $489, respectively, and originations and purchases
totaled $426 million and $547 million for 1995 and 1994, respectively.
Originations and purchases of adjustable rate loans and MBS during 1996 totaled
$56 million, of which $38 million were indexed to LIBOR or Treasury rates. Of
the $301 million in adjustable rate loans and MBS purchased or originated in
1995, $186 million were indexed to LIBOR or Treasury rates. Of the $491 million
in adjustable rate loans and MBS purchased or originated in 1994, $442 million
were indexed to LIBOR or Treasury rates. Originations and purchases of fixed
rate loans and MBS totaled $59 million, $5 million and $11 million during 1996,
1995 and 1994, respectively. Originations of convertible loans for the loan
portfolio totaled $197 million for 1996, as compared to $120 million for 1995
and $45 million for 1994. During 1995 and 1996, customer preferences shifted
from adjustable rate loans to convertible loan products which have fixed rates
for three to seven years, then change to adjustable rate loans which are indexed
to Treasury rates.
Eureka maintained its customer deposit base generally by providing attractive
deposit products and promotions. Customer deposits as a percentage of total
interest bearing liabilities were 85% at December 31, 1996, compared to 77% and
76% at December 31, 1995 and 1994, respectively. Securities sold under
agreements to repurchase and FHLB advances made up the remaining 15% of interest
bearing liabilities for 1996 (23% for 1995 and 24% for 1994). The balance of
FHLB advances was $107 million, $310 million and $50 million, and securities
sold under agreements to repurchase totaled $44 million, $207 million and $462
million, at December 31, 1996, 1995 and 1994, respectively. The reduction in
other borrowings during 1996 was primarily due to the increase in customer
deposits and the decrease in loans and MBS. The shift in other borrowings from
securities sold under agreements to repurchase to FHLB advances in 1995 was due
to a FHLB program that provided more effective leverage and attractive pricing
than securities sold under agreements to repurchase. Future changes in the
nature, source and cost of funding sources may have an impact on the net
interest margin.
PROVISION FOR LOAN LOSSES
- -------------------------
Eureka recorded loan loss provisions of $1.0 million, $.8 million and $1.2
million during 1996, 1995 and 1994, respectively. Net loan charge-offs were $.5
million in 1996, $1.1 million in 1995 and $2.2 million in 1994. Of the total
net charge-offs recorded during 1996, $18,000 was for Eureka's consumer loan
portfolio, as compared to $840,000 in 1995 and $1.2 million in 1994. Eureka
sold its BankCard receivables in the third quarter of 1995. Future provisions
and charge-offs for the consumer loan portfolio are expected to remain low due
to the sale of the BankCard receivable portfolio.
31
Mortgage loan charge-offs were $519,000 (.04% of total mortgage loans), $306,000
(.02% of total mortgage loans) and $1.0 million (.07% of total mortgage loans)
for the years ended December 31, 1996, 1995 and 1994, respectively.
Even though the asset quality ratios have improved from 1995 to 1996, there was
a slight increase of $.2 million in the provision for loan losses during 1996.
Wholesale loan originations increased from $80 million for 1995 to $160 million
in 1996, an increase of 100%. Eureka's wholesale loan portfolio has not
experienced a higher charge-off ratio than the retail portfolio, but industry
loan loss information generally indicates that these loans may contain slightly
higher credit risk than retail loans. Management has considered the potential
for credit risk and adjusted the provision accordingly. The requirements for the
loan loss provision related to wholesale loans for 1997 will depend on the level
of growth and performance of the wholesale loan portfolio and economic
conditions affecting customers' abilities to repay loans. Net non-performing
loans at December 31, 1996 totaled $4.3 million as compared to $6.1 million and
$7.7 million at December 31, 1995 and 1994, respectively. Consequently, the
allowance for loan losses as a percentage of non-performing loans improved from
94% at December 31, 1994, to 108% at December 31, 1995, and to 159% at December
31, 1996. In addition, the ratio of delinquent loans to total loans was .53% at
December 31, 1996, as compared to .84% and 1.18% at December 31, 1995 and 1994,
respectively.
The requirements for the loan loss provision for 1997 will depend on the loan
portfolio performance and economic conditions affecting customers' abilities to
repay loans, in particular mortgage loans. See "Credit Risk" below for
additional information.
NON-INTEREST INCOME
- -------------------
Non-interest income totaled approximately $8.4 million for the year ended
December 31, 1996, compared to $9.4 million in 1995, and $10.0 million in 1994.
The principal components of non-interest income are deposit and loan related
fees, net gains on the disposition of loans and other non-interest income.
Deposit and loan related fees were approximately $3.3 million in 1996, as
compared to $3.8 million for 1995, and $4.1 million for 1994. Although customer
deposits have increased from $1.7 billion at the end of 1994 and 1995, to $1.8
billion at the end of 1996, the competition for these funds has reduced the
opportunity to collect deposit related fees. In addition, even though loan
originations increased from 1995 to 1996, loan fees decreased from 1995 to 1996
due to the sale of the BankCard portfolio which contributed $366,000 to loan
fees in 1995. Retail and wholesale mortgage loan originations for 1996 were
$252 million, as compared to $179 million and $213 million for 1995 and 1994,
respectively.
During 1996, Eureka originated and sold fixed rate loans which conformed to
Federal Home Loan Mortgage Corporation ("FHLMC") standards with principal
balances totaling $17 million, compared to $7 million and $27 million in 1995
and 1994, respectively. SFAS No. 122 was implemented effective January 1, 1996,
and required the recognition of assets for servicing rights related to loans
serviced for others. The loan sales resulted in net gains of $307,000 which
included $150,000 of capitalized originated mortgage servicing rights retained
in accordance with SFAS No. 122 in 1996. Net gains on sales of loans were
$67,000 and $117,000 in 1995 and 1994, respectively. During 1995 and 1996,
customer preferences shifted from adjustable rate loans to convertible loan
products which have fixed rates for three to seven years, then change to
adjustable rate loans. Eureka currently retains these loans for its portfolio.
Originations of loans held for sale totaled $19 million in 1996, as compared to
$11 million for 1995, and $34 million for 1994.
Other non-interest income totaled $4.8 million, $5.6 million and $5.8 million
for 1996, 1995 and 1994, respectively. Other income included rental income from
properties held for sale, revenue from the sale of non-deposit investment
products, gain on sale of real estate owned ("REO"), servicing fee income from
loans serviced for others and other non-operating income items. The net gain on
the sales of REO totaled $152,000, $786,000 and $1.3 million in 1996, 1995 and
1994, respectively. The volume of foreclosures on mortgage loans and gains or
losses from the disposition of these properties cannot be predicted, and
transactions for 1996 and prior years may not be indicative of 1997 results.
Income from the sale of non-deposit investment products approximated $1.3
million, $1 million and $1.3 million in 1996, 1995 and 1994, respectively. The
33% increase in non-deposit investment sales from $24 million in 1995 to $32
million in 1996 was due to a focus on providing other investment opportunities
to customers with non-deposit investment needs through a subsidiary of Eureka.
Income from real estate investments totaled $293,000 and $1.2 million in 1995
and 1994, respectively. During the third
32
quarter of 1995, real estate held for sale or investment with a recorded value
of $2.3 million was sold for a net gain of $100,000, which was net of valuation
adjustments or write-downs of $700,000 recorded during 1995. The property which
was sold in 1995 accounted for $292,000 and $214,000 in other non-interest
income in 1995 and 1994, respectively. There was no income recorded in 1996 for
real estate held for sale or investment since the remaining real estate property
is undeveloped lots and does not produce income. Servicing fee income from loans
serviced for others totaled $613,000, $663,000 and $659,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Loans serviced for others
totaled $246 million, $263 million and $253 million at December 31, 1996, 1995
and 1994, respectively.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense includes the provision (recovery) for the interest rate
exchange agreements, and the one-time SAIF assessment which are discussed below.
Non-interest expense excluding these special items is as follow (dollars in
millions):
1996 1995 1994
---- ---- ----
Total non-interest expense $57.2 $47.4 $45.4
Less: SAIF assessment 11.0 - -
Provision (recovery) for interest
rate exchange agreements ( .3) 1.9 (4.3)
----- ----- -----
Total $46.5 $45.5 $49.7
===== ===== =====
The increase from 1995 to 1996 in non-interest expense, exclusive of the
adjustment for the interest rate exchange agreements and the one-time SAIF
assessment, is primarily due to an increase in compensation expense.
Compensation expense totaled $21.8 million in 1996, compared to $19.9 million
and $21.4 million for 1995 and 1994, respectively. At December 31, 1996, the
Partnership had two incentive compensation plans: the Long Term Incentive Plan
("LTIP" or "Plan") and the Equity Appreciation Plan ("EAP"). The LTIP, as
described in the Plan agreement, provides current and deferred compensation to
full-time or part-time employees or directors, as approved by the board of
directors of Eureka. The compensation is determined annually based on Eureka's
return on average equity for the year. The compensation is paid over three
subsequent years of which one-half is cash and one-half is BUCs. Calculation of
the awards, the form and timing of payments and forfeitures are described in the
Plan. The compensation expense for the LTIP amounted to $686,000 for 1996, and
$784,000 and $1 million for 1995 and 1994, respectively. Based on the
provisions of the EAP and Eureka's equity appreciation, compensation for 1996
related to the EAP was $983,141. Eligible participants include Eureka officers,
directors and select employees of Eureka and AFEH as approved by the board of
directors of Eureka. Participants receive cash compensation based on the
appreciation in Eureka's equity from April 1, 1996 through March 31, 1999. Only
participants that remain as employees or directors as of March 31, 1999 are
eligible to receive awards. The cash awards may be paid between March 31, 1999
and March 31, 2006. The remainder of the increase in compensation expense is
due to management positions that were filled in 1996.
The decrease from 1994 to 1995 in non-interest expense included a reduction in
occupancy expense of $1.3 million largely due to the sale of real estate held
for sale or investment, and a reduction in professional and advertising expenses
of $.5 million and a reduction of $.9 million in other non-interest expense,
which was generally related to management's efforts to reduce various
controllable costs.
PROVISION FOR LOSS ON INTEREST RATE EXCHANGE AGREEMENTS
- -------------------------------------------------------
During 1988, 1990 and 1991, interest rate exchange agreements were arranged that
were intended to reduce the impact of future interest rate fluctuations on fixed
rate loans funded by variable rate liabilities. The decline in interest rates,
and the prepayment of mortgage loans associated with interest rate exchange
agreements, caused Eureka to establish a liability in 1993 based on the
estimated fair value of exchange agreements that were no longer deemed effective
as hedges. During 1996, 1995 and 1994, Eureka recorded provisions (recoveries)
to non-interest expense totaling ($332,000), $1.9 million and ($4.3 million),
respectively. The provisions (recoveries) reflect the effect of interest rate
changes on the market value of Eureka's obligations under interest rate exchange
agreements deemed ineffective as hedges. Net interest expense on interest rate
exchange agreements of approximately $830,000 was included as an adjustment to
interest income on loans during 1996, as compared to $2.4 million and $6.3
million in 1995 and 1994, respectively. No additional interest rate
33
exchange agreements were undertaken in 1996, 1995 and 1994. During 1996 and
1995, $45 million and $228 million (notional amount), respectively, of interest
rate exchange agreements expired, reducing the total notional amount from $373
million at January 1, 1995, to $100 million at the end of 1996. By the end of
1997, an additional $60 million of these agreements will expire. Future changes
in interest rates could impact the fair market value of the interest rate
exchange agreements. Such changes in interest rates may result in future
recoveries or provisions, depending upon the direction of movement in interest
rates.
INCOME TAXES
- ------------
At the Partnership level, items of income, expense and gain or loss are reported
in the tax returns of the BUC holders and the general partner according to
their proportionate interests in the Partnership. The consolidated provision
(benefit) for income taxes contained in the financial statements is related to
the Partnership's subsidiary, AFEH and its subsidiaries. AFEH and its
subsidiaries file calendar year consolidated federal income and combined
California franchise tax returns.
As required by Statement of Financial Accounting Standard No. 109, management
periodically reevaluates the realizability of the deferred tax assets and
adjusts the valuation allowance so that the resulting level of the net deferred
tax assets will, more likely than not, be realized. As of December 31, 1996, an
adjustment of $26.2 million was recorded to reduce the valuation allowance for
net deferred tax assets primarily for the recognition of estimated benefits from
net operating loss carryforwards. Federal net operating loss carryforwards were
approximately $209 million as of December 31, 1996, with various expiration
dates through 2007. State net operating loss carryforwards were approximately
$29 million as of December 31, 1996, with expiration dates through 1997. To the
extent such carryforwards are used by AFEH, the FDIC may be entitled to share in
the benefit of the utilization. See "Assistance Agreement" below for further
discussion.
The reevaluation and resulting adjustment of the deferred tax asset valuation
allowance occurred due to a number of factors which arose during the latter
portion of 1996. With the enactment in August 1996 of legislation which
repealed the tax deduction for bad debt reserves, and the later enactment of the
SAIF recapitalization legislation which resulted in the special one-time
assessment paid by Eureka (and all other SAIF-insured institutions), Eureka
determined that it may be able to utilize net operating loss carryforward
benefits that had previously been reserved against in the valuation allowance.
Further, Eureka's strong financial results in 1996 and its consistent financial
performance during the preceding two fiscal years, coupled with the forecast of
a stable interest rate environment in the short term, separately indicated the
possibility that Eureka might be able to utilize additional net operating loss
carryforward benefits against net pre-tax income generated in future financial
reporting periods. Accordingly, Eureka reassessed the recoverability of the net
deferred tax assets in the fourth quarter of 1996 and concluded that a downward
adjustment in the valuation allowance for net operating loss carryforwards, as
of the end of 1996, was appropriate.
Adjustments made to the valuation allowance for deferred tax assets have a
corresponding effect on the amount of income tax expense or benefit recognized
by AFEH and its subsidiaries for the year in which such an adjustment is made.
Accordingly, the reduction in the valuation allowance in 1996 contributed to the
overall tax benefit recognized of $20.9 million or $2.74 per BUC, as described
in Note 17 of Notes to Consolidated Financial Statements. Management will
continue to reevaluate the appropriate level of the deferred tax valuation
allowance, and expects that such adjustments will reduce the book income tax
provision for several years in the future. A number of important factors such
as interest rate changes and changes in tax law, could cause actual after-tax
results of operations and other information to differ materially from results of
operations and other information referred to above.
Alternative minimum taxes paid by AFEH were $545,000, $496,000 and $149,000 for
1996, 1995 and 1994, respectively. The alternative minimum taxes paid generate
alternative minimum tax credit carryforwards and are recorded as deferred tax
assets with an indefinite life, and may be used to offset future regular tax
liabilities.
CREDIT RISK
- -----------
Eureka's loan portfolio, which consists primarily of loans collateralized by 1-4
family residential properties located in California, reflects a high level of
credit quality. The strong credit quality is evidenced by a .26% ratio of net
non-performing assets to total assets at December 31, 1996, and is the result of
two factors: the prudent lending practices followed since
34
AFEH's acquisition of Eureka, and the seasoning of the pre-acquisition loan
portfolio. Eureka's lending activities subsequent to the Acquisition have been
focused principally on loans secured by 1-4 family residential properties
primarily located in northern California. Multi-family, commercial and land
mortgage loans constituted 9% of Eureka's mortgage portfolio at each of December
31, 1996 and 1995 and 10% at December 31, 1994. Eureka does not have any
construction loans or construction loan commitments outstanding.
Delinquent loans totaled $7.4 million, $12.1 million and $17.0 million at
December 31, 1996, 1995 and 1994, respectively. Net non-performing loans were
$4.3 million, $6.1 million and $7.7 million at December 31, 1996, 1995 and 1994,
respectively. The allowance for loan losses was $7.1 million, $6.9 million and
$7.8 million at December 31, 1996, 1995 and 1994, respectively.
The ratio of loans which are thirty or more days delinquent to total loans
outstanding was .53% as of December 31, 1996, compared to .84% and 1.18% as of
December 31, 1995 and 1994, respectively. Eureka's delinquency ratio is well
below the 2.55% average as of December 31, 1996, reported by the OTS for
California savings institutions. Eureka's ratio of net non-performing assets
(loans which were ninety or more days delinquent and real estate acquired
through foreclosure) to total assets was .26% at December 31, 1996, compared to
.36% and .53% at the end of 1995 and 1994, respectively. Eureka's net non-
performing asset ratio was also well below the 1.43% average as of December 31,
1996, reported by the OTS for California savings institutions. Eureka's ratio
of loan loss reserves to non-performing loans was 159%, 108% and 94% at December
31, 1996, 1995 and 1994, respectively. Loan loss reserves were .50%, .48% and
.54% of total loans outstanding at December 31, 1996, 1995 and 1994,
respectively.
Eureka's determination of loan loss reserves and the resulting provision for
loan losses are based upon judgments and assumptions regarding various factors
including general economic conditions, internal asset review findings,
composition of the loan portfolio, historical loss experience and estimates of
potential future losses. Management believes that it has provided adequate loan
loss reserves to cover potential losses, particularly considering the low level
of delinquencies and charge-offs experienced by Eureka over the past five years
and continued adherence to strict credit quality guidelines. The future loss
experience related to changes in the economy and interest rate environment,
however, cannot be predicted.
INTEREST RATE RISK
- ------------------
Eureka's Asset and Liability Management Committee ("ALCO") is a board of
directors committee responsible for managing Eureka's assets and liabilities in
a manner which balances profitability and risks, including interest rate risk
("IRR"). ALCO operates within policies and risk limits prescribed and reviewed
regularly by the board of directors. IRR is the impact of market interest rates
on Eureka's net income, both in the short-term and long-term. Interest rate
changes impact earnings in several ways including an effect upon the yields on
variable rate loans, and the cost of deposits and other sources of funds. In
addition, borrowers are more motivated to repay and refinance loans when rates
decline, and the market values of securities and other investments fluctuate
based on interest rate changes.
Eureka manages interest rate fluctuations by simulating (modeling) the impact of
a variety of potential interest rate movements, customer behaviors, and market
conditions to identify conditions under which profitability would be adversely
affected. The simulation of various interest rate movements is used in
determining loan pricing and terms, and also to estimate prepayments of loans in
a declining rate environment. Various scenarios are simulated to determine an
appropriate asset and liability mix which protects capital funds even under
stress from unexpected changes in interest rates.
A common measure by financial institution IRR is the interest rate "gap." This
is the difference between the amount of assets and liabilities which are
expected to mature or reprice within a specific time period (such as one or
three years). A gap is considered positive when the amount of interest-rate
sensitive assets exceeds the amount of interest-rate sensitive liabilities, and
is considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets maturing or repricing
within a given period. At December 31, 1996, Eureka's cumulative one-year and
three-year interest rate gaps were a negative one percent and two percent of
total assets. This "gap" suggests that the interest margin would be reduced if
interest rates were to rise. The comparable gap figures for December 31, 1995
were positive six percent and a negative one percent.
35
Management is of the opinion that simulating various interest rate scenarios is
a more effective measure of IRR because it incorporates specific assumptions not
considered in the "gap" analyses. The assumptions which are excluded from the
"gap" analyses include: (a) how rate movements affect important borrower
prepayment behavior, (b) that all loans and deposits will not reprice to the
same degree or by the same magnitude, (c) that rate changes for assets and
liabilities in the over one-year category have a greater earnings impact than
those assets and liabilities "under one year," and (d) some liabilities (such as
checking accounts) do not have "repricing" maturities but are significantly
affected by interest rate movements.
Eureka's management believes that the exposure to IRR as of December 31, 1996 is
within the limits established by the board of directors, and that the level of
IRR is acceptable in view of the expected market conditions and the potentially
adverse developments in interest rate levels.
Future potential impacts on the industry and Eureka's earnings can result from
various factors that might cause net interest margins to compress from current
levels. These include: 1) competitive pressures on the pricing of mortgage and
deposit products; 2) the shift in mortgage portfolios from adjustable rate
mortgages that reprice approximately every six months to convertible rate
mortgages that have initial fixed rates for periods up to three, five and seven
years, or fixed rate mortgages which could adversely affect asset and liability
matching; 3) an abrupt and unanticipated rise in the level of interest rates,
that results in deposit and short-term borrowing costs rising faster than
adjustable rate mortgage coupon rates, the latter constrained by periodic and
life-time rate caps; and 4) an abrupt and unanticipated decline in the level of
interest rates, combined with a steeper yield curve, that could result in faster
prepayments of higher yielding assets, causing mortgage portfolio returns to
decline as assets are reinvested in lower yielding assets.
LIQUIDITY MANAGEMENT
- --------------------
Liquidity risk is the potential risk of having to draw upon sources of funds at
unfavorable rates or terms which results from unanticipated loan demand and/or
deposit withdrawals. Eureka manages liquidity risk in three ways: (a)
maintaining quality assets which can be sold or pledged to acquire cash, (b)
scheduling loan terms and investment and deposit maturities to provide a
significant, continuous cash flow, and (c) projecting and simulating adverse
conditions and the effect of these conditions upon cash balances. A significant
portion of Eureka's assets are liquid and could provide funds through sales or
by pledging assets as collateral for borrowed funds. In addition, collateral is
maintained so that same-day borrowings can be effected as needed. Eureka's
funding sources are almost entirely customer deposits, and a significant portion
(approximately 34%) of those deposits are "core" checking and savings accounts.
The retention of these deposits as they mature is an important focus of Eureka's
marketing efforts, and retention has been strong even when interest rates have
been volatile.
Eureka meets OTS regulations which require a savings institution to maintain a
"liquidity ratio" of cash and specified securities to net withdrawable accounts
and borrowings due within one year of five percent. At December 31, 1996,
EurekaBank had a liquidity ratio of 5.57%.
CAPITAL RESOURCES
- -----------------
At December 31, 1996, Partnership equity totaled approximately $177 million,
compared to $156 million and $145 million at December 31, 1995 and 1994,
respectively. The Partnership made distributions to BUC holders at an
annualized rate of $1.60 per BUC in each of 1996, 1995 and 1994. The return on
average Partnership total equity was 19.45% for the year ended December 31, 1996
compared to 11.46% in 1995 and 10.62% in 1994. The primary sources of the
Partnership's distributions are dividends received from AFEH and interest earned
on short-term investments. Management expects that the present level of
distributions will continue through 1997. Future distributions will depend
primarily on the levels of dividends paid to the Partnership from AFEH, which
depend on the profitability of Eureka. Dividend payments by Eureka are subject
to the following limitations under the FDIC Capital Maintenance Agreement:
- - No dividends may be paid if regulatory capital is less than required levels.
- - Aggregate dividends paid subsequent to the Acquisition may not exceed 50% of
the capital contributed upon and after the Acquisition, plus 50% of aggregate
net income earned subsequent to the Acquisition.
- - Dividends in any calendar year may not exceed the greater of $12 million or
50% of net income for the year.
36
OTS regulations require that savings institutions meet three separate capital
tests: a tangible capital standard, a core capital standard and a risk-based
capital standard. At December 31, 1996, Eureka maintained regulatory capital as
follows (dollars in thousands):
Tangible Core Risk-Based
Capital Capital Capital
--------------------- ------------------------ -----------------------
% of
% % Risk-Based
Amount of Assets Amount of Assets Amount Assets
-------- ---------- ----------- ---------- --------- -----------
GAAP capital $170,723 $170,723 $170,723
Non-allowable assets:
Excess deferred tax assets (13,577) (13,577) (13,577)
Intangible and other assets (3,252) (3,252) (3,252)
Non-includable subsidiaries (2,384) (2,384) (2,384)
Unrealized losses on securities
available for sale 239 239 239
Additional capital item:
General valuation allowances - - 4,601
------- -------- ---------
Computed regulatory capital 151,749 6.96% 151,749 6.96% 156,350 15.95%
Minimum capital requirement 32,716 1.50% 65,431 3.00% 78,398 8.00%
-------- ------- -------- --------- -------- ----------
Excess regulatory capital $119,033 5.46% $ 86,318 3.96% $ 77,952 7.95%
======== ======= ======== ========= ======== ==========
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
See Note 2 of Notes to Consolidated Financial Statements for a further
discussion of SFAS No. 125. This statement establishes standards under which,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and shall be applied prospectively. However, in December 1996, the FASB
issued Statement of Financial Accounting Standards No. 127 ("SFAS No. 127"),
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125," which defers the effective date of certain provisions of SFAS No. 125 for
one year. Management does not expect the adoptions of SFAS No. 125 and SFAS No.
127 to have a material effect on the Partnership's financial statements.
DEPOSIT INSURANCE AND OTHER MATTERS
- -----------------------------------
Eureka's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") up to the maximum amount provided by law through the SAIF. For the
year ended December 31, 1996, Eureka paid deposit insurance premiums to the
SAIF, in addition to the $11 million one-time assessment in the third quarter of
1996 discussed below, of $3.7 million, based on an annual assessment rate of
.23% of covered deposits.
On September 30, 1996, the President signed an appropriations bill which
includes provisions to recapitalize the SAIF. Under the provisions of the bill,
the SAIF will be recapitalized through a combined approach of imposing a one-
time special assessment on SAIF-insured institutions, and an incremental pro-
rata charge on SAIF-insured institutions and commercial banks insured under the
Bank Insurance Fund ("BIF"), to be used to pay the interest on Financing
Corporation ("FICO") bonds issued as part of the 1989 savings association rescue
package adopted under the Financial Institutions Reform, Recovery, and
Enforcement Act ("FIRREA"). The SAIF recapitalization provisions impose a one-
time special assessment of 65.7 basis points (approximately $11 million for
Eureka) on deposits held by SAIF-insured institutions as of March 31, 1995,
payable not later than 60 days after the enactment of the legislation, and
reduce the annual assessment rate for SAIF-
37
insured institutions from 23 basis points to 6.4 basis points (a reduction of
approximately $3 million annually based upon Eureka's insured deposits at
September 30, 1996) beginning in 1997. Although deposit premiums for thrifts
will continue to be higher than the banking industry's through the year 2000,
the premium reduction significantly reduces the inequity of Eureka paying a
deposit premium significantly higher than that of a similarly sized commercial
bank. Thereafter, beginning January 1, 2000, SAIF-insured and BIF-insured
deposits alike will be assessed on a pro-rata basis (expected to be at a rate of
approximately 2.4 basis points) to repay the FICO bonds until the year 2017, and
thereafter phased out, with the phase-out being completed in 2019.
The BIF/SAIF recapitalization legislation also provides for a merger of the BIF
and SAIF on January 1, 1999, if no SAIF-insured institutions exist on that date.
This provision therefore will not become effective unless Congress enacts
additional legislation abolishing the savings association charter effective
prior to January 1, 1999. In this regard, Congress is expected to consider
additional reform measures involving the merger of the BIF and SAIF, and
abolition of the thrift charter, beginning in early 1997.
Other provisions of the 1996 legislation: (I) authorize the bank regulatory
agencies to take action to prevent depository institutions from taking advantage
of the BIF/SAIF premium disparity by "deposit-shifting" from the SAIF to the
BIF; (ii) strengthen existing prohibitions on the FDIC's increasing the risk-
based premiums for deposit insurance which would result in the statutory
Designated Reserve Ratio for the two federal deposit insurance funds (calculated
as a percentage of insured deposits for each fund) exceeding 1.25%; (iii)
authorize the FDIC to refund assessments paid in excess of amounts due; and (iv)
prohibit the FDIC, prior to January 1, 1999, from setting SAIF premiums at
levels less than BIF premiums.
In August 1996, the President signed legislation which includes provisions that
repeal the thrift bad debt reserve method of calculation under the Internal
Revenue Code, effective for tax years beginning after December 31, 1995. Most
large savings associations (including Eureka) will be required to change to the
specific charge-off method of accounting for bad debts and will be required to
recapture statutory "excess reserves" as provided in the legislation. In the
case of an institution that meets certain residential lending requirements of
the legislation, recapture of statutory "excess reserves" can be deferred for up
to two years. Eureka's management expects to meet the residential lending
requirements of the legislation and to defer the recapture of the statutory
"excess reserves" for up to two years. Management expects that enactment of
such provisions will not have a significant impact on Eureka due to the
substantial amount of net operating loss carryforwards which are available.
ASSISTANCE AGREEMENT
- --------------------
Under the terms of the Assistance Agreement entered into in 1988 in connection
with the assisted acquisition of the assets and liabilities of Eureka Federal
Savings and Loan Association, $50 million in preferred stock was issued to the
FDIC. In 1990, $30 million of the preferred stock was redeemed by the FDIC.
The $20 million in non-voting Series A Preferred Stock which remains outstanding
is mandatorily redeemable in 1997 and 1998 in the amount of $10 million each
year, and has a liquidation value of $100 per share. The holder of this
preferred stock is not entitled to dividends. The preferred stock is being
accreted through the redemption dates of 1997 and 1998, and the accretion is
recorded as interest expense on other borrowings. The accretion for 1996, 1995
and 1994 totaled $2.2 million, $1.9 million and $1.6 million, respectively.
Amounts accrued by Eureka and payable to the FDIC prior to the redemption dates
in accordance with the Assistance Agreement may be deducted from the $10 million
redemption amounts, as appropriate.
Under the terms of the Assistance Agreement, the FDIC may be entitled to an
additional payment after the final redemption of $10 million in preferred stock
is made in May 1998. Specifically, the FDIC may be able to share in the
benefits from utilization of pre-acquisition and post-acquisition net operating
loss and tax credit carryforwards associated with the acquisitions, or any cash
distributions which have been made to AFCA-5. In addition, the FDIC may be
entitled to receive from Eureka a percentage of the fair value of Eureka
allocable to AFCA-5 calculated based on the greater of: (I) the average
price/earnings ratio for comparable financial institutions or (ii) the average
sales price/book value for recent sales transactions involving comparable
financial institutions. If, however, (1) 50% of tax benefits utilized by AFEH
since the Acquisition and (2) the fair value of Eureka allocable to AFCA-5 plus
cash distributions to AFCA-5, both exceed the fully accreted value of the
remaining preferred stock of $20 million, the FDIC's participation or additional
payment in such amount is limited to the lesser of the allowable tax benefits,
and the fair value and distributions. Based on the information
38
available as of December 31, 1996, the Partnership's liability for any payments
in May 1998 and thereafter in addition to the $20 million in remaining preferred
stock cannot be reasonably estimated at this time, and therefore no reserve or
charge to income for such liability has been recorded. The Partnership intends
to review on a quarterly basis, however, the need for any such reserve or
charge. Any additional payments required to be made to the FDIC pursuant to the
Assistance Agreement could have an adverse effect on the per-BUC value of the
Partnership.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The Consolidated Financial Statements of the Partnership and its subsidiaries
are set forth in Item 14 hereof and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
There were no changes in and disagreements with the Partnership's independent
accountants on accounting principles and practices or financial disclosure
during the fiscal years ended December 31, 1996 and 1995.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The Partnership has no directors or officers. Management of the Partnership
consists of the general partner of the Partnership, AFCA-5, and its corporate
general partner, AFCA-5 Management Corporation. In addition, AFEH and Eureka
each have its own board of directors and executive officers. The executive
officers and directors of AFCA-5 Management Corporation, AFEH and Eureka are set
forth below. All executive officers and directors serve for terms of one year.
All information is as of March 1, 1997.
AFCA-5 Management Corporation
-----------------------------
Directors
---------
Name Position Held Position Held Since
- --------------------- ------------------------------- -------------------
George H. Krauss Director/Chairman of the Board 1994
J. Paul Bagley Director 1987
Michael T. Dobel Director (1) 1997
Thompson H. Rogers Director 1994
Officers
--------
Name Position Held Position Held Since
- ------------------- ------------------------------- -------------------
George H. Krauss Chairman of the Board/Secretary 1995
J. Paul Bagley President/Treasurer 1995
America First Eureka Holdings, Inc.
-----------------------------------
Directors
---------
Name Position Held Position Held Since
- --------------------- ------------------------------- -------------------
George H. Krauss Director/Chairman of the Board 1993
J. Paul Bagley Director 1988
Michael T. Dobel Director (1) 1997
Gregory D. Erwin Director 1988
Stephen T. McLin Director 1988
Thompson H. Rogers Director 1994
Officers
--------
Name Position Held Position Held Since
- ------------------- ---------------------------------- -------------------
Stephen T. McLin Chief Executive Officer/President 1993/1988
Wm Mack Terry Executive Vice President/Chief 1996
Financial Officer
(1) Mr. Dobel was appointed a director effective March 1, 1997.
40
EurekaBank
----------
Directors
---------
Name Position Held Position Held Since
- ---------------------- ------------------------------ -------------------
Stephen T. McLin Director/Chairman of the Board 1988/1993
J. Paul Bagley Director 1988
David B. Baker Director 1992
George E. Bull, III Director 1996
Mariann Byerwalter Director 1988
Gregory D. Erwin Director 1988
John Lee Guillory Director 1996
George H. Krauss Director 1993
Byron A. Scordelis Director 1988
Wm Mack Terry Director 1992
Michael Thesing Director 1989
Officers
--------
Name Position Held Position Held Since
- --------------------- ------------------------------------- -------------------
Byron A. Scordelis President and Chief Executive Officer 1988
Peggy Hiraoka Executive Vice President/ 1991/1988
Director of Human Resources
Paul Holmes Executive Vice President/ 1991
Chief Operating Officer
Wm Mack Terry Executive Vice President/ 1996
Chief Financial Officer
Grant Harmon Senior Vice President/Secretary 1988
J. Paul Bagley, 54, is a founding partner of Stone Pine Capital LLC (1994), and
is Chairman of FCM Fiduciary Management Company LLC (1989 to date), the advisor
to a mezzanine and private equity fund. For more than twenty years prior to
October 1988, Mr. Bagley was engaged in investment banking activities with
Shearson Lehman Hutton Inc. and its predecessor, E.F. Hutton & Company Inc.,
where he was responsible for the creation and management of over $5 billion of
direct investment activities. Mr. Bagley has served on the boards of a number
of public and private companies. Currently he is on the boards of American
National Security, Fiduciary Capital, EurekaBank, Hollis-Eden Pharmaceuticals,
Lithium Technology, Consolidated Capital, Logan Machinery Corp., Pacific
Consumer Funding, and Silver Screen Management.
David B. Baker, 43, is Managing Partner of Moore & Baker, Certified Public
Accountants in Walnut Creek, California, serving in that capacity since 1982.
Previously, he was an accountant with KPMG Peat Marwick from 1979 to 1982.
George E. Bull, III, 48, is Chairman and Chief Executive Officer of Redwood
Trust, Inc. of Mill Valley, California (RWTI-NASDAQ), serving in such capacity
since April, 1994. Mr. Bull is also the President of GB Capital, and has served
in such capacity since he founded the predecessor of GB Capital in 1983. From
1991 through 1993, Mr. Bull oversaw the management of the $350 million portfolio
of commercial real estate investments and the $8 billion securities portfolio of
Executive Life Insurance Company on behalf of the California Department of
Insurance.
Mariann Byerwalter, 36, is Vice President of Business Affairs and Chief
Financial Officer of Stanford University. Ms. Byerwalter was Executive Vice
President of AFEH and EurekaBank from 1988 to January 1996. Ms. Byerwalter was
Chief Financial Officer and Chief Operating Officer of AFEH, and Chief Financial
Officer of EurekaBank from 1993 to January 1996. She was an officer of
BankAmerica Corporation and its venture capital subsidiary from 1984 to 1987.
She served as Vice President and Executive Assistant to the President of Bank of
America and was a Vice President in the bank's Corporate Planning and
Development Department, managing several acquisitions and divestitures. During
1986,
41
Ms. Byerwalter managed five divestitures, representing a total purchase
price of over $100 million with assets aggregating more than $5.0 billion.
Michael T. Dobel, 44, is President and Chief Executive Officer of Great American
Distributing, Inc., of Omaha, Nebraska. The company is a wholesaler of vending
machines and amusement games. Prior to purchasing this company in September
1996, Mr. Dobel spent 21 years in the banking industry. This includes serving
as President and Chief Executive Officer of Cornerstone Bank Group of Council
Bluffs, Iowa and earlier in the same capacity for Management Resources, Inc., a
bank management and consulting firm.
Gregory D. Erwin, 56, is one of the founders and organizers of America First
Companies and has been instrumental in the structuring and development of the
public investment funds sponsored by affiliates of AFCA-5. Mr. Erwin is a
partner of Stone Pine Companies, which is engaged in investment banking
activities in Denver. Mr. Erwin is an attorney and private investor. He serves
as President of Corporation One, a personal holding company which is a limited
partner of AFCA-5. Mr. Erwin is the President of Big Red Companies, which has
the contract for the Omaha and Lincoln, Nebraska municipal lotteries. From 1974
until 1985, he was a partner of Kutak Rock in Omaha, Nebraska, and previously
practiced law with Dewey, Ballantine in New York.
John Lee Guillory, 51, is Chairman and Chief Executive Officer of Northbridge
Group, Inc. of San Francisco, a commercial real estate advisory and management
firm, serving in that capacity since 1992. Previously, he held a variety of
senior management positions with Grubb & Ellis Company, a real estate management
and brokerage company from 1970 to 1991.
Grant S. Harmon, 43, has been Senior Vice President, Chief Counsel and Corporate
Secretary of Eureka since October 1985. Prior thereto, he was an attorney with
the law firm of Collette & Erickson in San Francisco, California from 1979 to
1985.
Peggy Hiraoka, 42, has been employed at Eureka since September 1988. In March
1991, she was promoted to Executive Vice President and in December 1995 was
appointed Chief Administrative Officer of Eureka. Previously, she was Vice
President and Director of Human Resources of Bank of America from 1973 to 1988.
Paul Holmes, 47, has been Executive Vice President, Chief Operating Officer of
Eureka since March 1991. Previously, he was Executive Vice President and
Director of Loan Administration of BancBoston Mortgage Company from December
1987 to March 1991. Prior thereto, he was Senior Manager in charge of the
Financial Institutions Operations consulting practice of KPMG Peat Marwick, San
Francisco, California from April 1985 to December 1987. Mr. Holmes resigned
effective March 7, 1997 to become President and Chief Executive Officer of
Mellon Mortgage Corporation in Houston, Texas.
George H. Krauss, 55, is acting general counsel of EurekaBank and is of counsel
to Kutak Rock, which acts as general counsel for various America First entities.
Mr. Krauss has practiced law for approximately 20 years, primarily with respect
to federal and state regulation of financial institutions. Mr. Krauss is or has
been a principal shareholder of a number of privately owned banks and is a
director of Gateway 2000, Inc. Mr. Krauss holds an MBA degree, in addition to
his law and undergraduate degrees.
Stephen T. McLin, 50, was an officer of BankAmerica Corporation and various
subsidiaries, including Bank of America, from 1974 to 1987. In addition to
other positions, he served as Executive Vice President in charge of strategic
planning, acquisitions and divestitures and as Chairman of the Board of three
venture capital subsidiaries. Mr. McLin was the officer principally responsible
for arranging BankAmerica's acquisition of a variety of financial institutions
with assets aggregating over $10 billion, as well as for negotiating the sale of
different financial institutions with assets aggregating over $7 billion.
During his more than 12 years at BankAmerica, Mr. McLin was engaged in a wide
variety of other types of executive activities relating to financial institution
management and operations. Mr. McLin serves as a director of the Charles Schwab
Corporation.
Thompson H. Rogers, 43, is a General Partner of Stone Pine Capital LLC and
Chairman of Affiliated Holdings, Inc. From 1984 through 1987 Mr. Rogers was with
FirsTier Banks, a $3.5 billion financial institution based in Omaha, Nebraska.
Mr. Rogers organized and managed the bank's Loan Analysis Department. He
subsequently became a First Vice President of Corporate Banking. In 1981, Mr.
Rogers joined First Commerce Bancshares, Inc., a $1.8 billion bank holding
company
42
based in Lincoln, Nebraska. At First Commerce, Mr. Rogers assumed audit and
credit analysis responsibilities for First Commerce's seven financial
institutions. Mr. Rogers joined The Philadelphia Company, a regional wholesale
distributor of consumer and commercial products, as Administrative Manager in
1977, advancing to General Manager until his departure in 1981. Mr. Rogers
serves on the Board of Directors of Bank of Papillion, a $100 million financial
institution in Papillion, Nebraska and Havelock Bank, a $120 million financial
institution in Lincoln, Nebraska.
Byron A. Scordelis, 47, has been President and Chief Executive Officer of Eureka
since August 1988. Prior to August 1988, he was with Bank of America from 1974.
In 1979, he was appointed as Director of Strategic Planning for Bank of
America's Retail Financial Services of San Francisco. From 1984 to 1986 he was
Senior Vice President and Area Manager for the San Jose group. In 1986, he
became Senior Vice President and Manager of Bank of America's San Jose-Central
Coast Region, and assumed expanded responsibilities for the 240-branch Bay Area
Region one year later.
Wm Mack Terry, 53, assumed the duties of Executive Vice President and Chief
Financial Officer of EurekaBank and of AFEH in January 1996. He is Managing
Principal of the Monterey Group and of Intercept, which entities have consulted
since 1991 on strategy and re-engineering projects for financial service firms.
From 1990 to 1991 he was a Senior Manager in the San Francisco consulting
offices of Deloitte & Touche. From 1986 to 1990, Mr. Terry was a principal of
Tavistock Capital Corporation (a management consulting and merchant banking firm
in San Francisco), and was President of Diversified Corporate Loans (an
investment banking organization in San Francisco). From 1968 to 1986, Mr. Terry
served as Senior Vice President in various BankAmerica operations, including
Financial Analysis & Planning, Retail New Product Development, and the Capital
Markets Group.
Michael Thesing, 42, has been Vice President and Chief Financial Officer of
AFCA-5 since July 1984, and was Vice President and Treasurer of AFEH from 1990
to February 1996. From January 1984 until July 1984 he was employed by various
America First entities. Mr. Thesing was a certified public accountant with
Coopers & Lybrand from 1977 through 1983.
Section 16(a) of the Securities Exchange Act of 1934 requires the Partnership's
directors, executive officers, and persons who own more than 10 percent of the
Partnership's BUCs, to file with the Securities and Exchange Commission ("SEC")
initial reports of ownership and reports of changes in ownership of the
Partnership. Executive officers, directors and greater than 10 percent BUC
holders are required by SEC regulation to furnish the Partnership with copies of
all Section 16(a) reports they file. The Partnership believes to the best of its
knowledge for the year ended December 31, 1996, its executive officers,
directors and greater than 10 percent beneficial owners complied with all
applicable Section 16(a) filing requirements.
43
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The Partnership is organized as a limited partnership and, accordingly, has no
directors and officers. Remuneration paid to AFCA-5 (the general partner of the
Partnership) pursuant to the terms of the Partnership's limited partnership
agreement during the year ended December 31, 1996, is described in Note 22 of
Notes to Consolidated Financial Statements filed in response to Item 8 hereof.
The directors and executive officers of AFCA-5 Management Corporation (the
corporate general partner of AFCA-5) did not receive any remuneration from the
Partnership, and neither AFCA-5 nor AFCA-5 Management Corporation receive any
reimbursement from the Partnership for any portion of the salaries of the
directors and executive officers of AFCA-5 Management Corporation. Accordingly,
no presentation of the compensation of the executive officers and directors of
AFCA-5 Management Corporation is included in this report.
The Compensation Committee ("Committee") of EurekaBank's Board of Directors is
comprised of two outside directors who are not employees of the Partnership,
AFCA-5 Management Corporation, EurekaBank or any of its subsidiaries. The
Committee has overall responsibility for EurekaBank's executive compensation
policies and practices. The Committee recommends compensation plans and levels
for the five senior officers of EurekaBank to the full Board of Directors; it
independently reviews and approves other executive officers' compensation plans
and levels, including salary and any payments under bonus plans.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for fiscal years ending December 31, 1996, 1995, and
1994, certain compensation including salary, bonuses, long-term incentive
payments, and certain other compensation paid by AFEH and EurekaBank to the
Chief Executive Officer and the four other most highly compensated executive
officers of AFEH and EurekaBank at December 31, 1996.
LONG TERM
ANNUAL COMPENSATION COMPENSATION/(1)/
------------------------------------ -----------------------
OTHER
ANNUAL LTIP
COMPEN- PAYOUTS ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY($) BONUS($)/(2)/ SATION($) ($)/(4)/ COMP($)/(5)/
- ----------------------------------------- ---- --------- ------------- ---------- -------- ------------
STEPHEN T. MCLIN......................... 1996 445,000 704,873 /(3)/ 7,821 122,485 26,136
President & Chief Executive 1995 385,870 231,588 8,469 29,281 24,457
Officer-America First Eureka 1994 385,000 29,281 14,493 126,127 12,000
Holdings; Chairman-EurekaBank
BYRON A. SCORDELIS....................... 1996 391,667 619,506 /(3)/ 17,345 131,236 16,538
President & Chief Executive Officer 1995 300,000 191,880 13,650 31,374 16,161
EurekaBank 1994 298,333 31,373 22,892 189,190 15,851
WM. MACK TERRY /(6)/.................... 1996 248,438 214,859 -0- -0- 6,564
Executive Vice President and 1995 N/A
Chief Financial Officer EurekaBank 1994 N/A
PAUL HOLMES.............................. 1996 188,750 63,183 1,984 28,828 12,000
Executive Vice President and 1995 175,000 53,960 1,511 5,229 12,000
Chief Operating Officer EurekaBank 1994 175,000 40,229 2,455 22,518 10,500
PEGGY HIRAOKA............................ 1996 163,750 68,182 4,654 43,726 31,955
Executive Vice President and 1995 147,923 53,960 3,931 10,458 11,884
Chief Administrative Officer EurekaBank 1994 143,446 40,457 4,179 22,518 11,390
- ------------------------
1 No stock options, restricted stock grants or stock appreciation rights
(SARs) have been made to the listed officers.
2 For all of the executives listed, the amounts disclosed in this column for
1996 include the 25% cash payment made for 1996 performance pursuant to the
EurekaBank Long Term Incentive Plan (LTIP) and 1996 performance bonuses of
$225,000, $200,000, $100,000, $40,000 and $45,000 for Mr. McLin, Mr.
Scordelis, Mr. Terry, Mr. Holmes and Ms. Hiraoka, respectively. The amount
shown for Mr. Terry also includes a one-time signing bonus paid to Mr. Terry
upon hire.
3 The total bonus amount in this column for Messrs. McLin and Scordelis
include future bonus payments of $415,000 and $350,000, respectively,
conditioned upon Messrs. McLin and Scordelis being employed through March
31, 1999. The Board, in its sole discretion, can accelerate the time of
payment of the bonuses and waive any conditions applicable thereto. In the
event of termination of employment of Messrs. McLin and/or Scordelis due to
death or permanent disability, the bonuses shall be paid to their designated
beneficiaries. In the event of a change in control of EurekaBank, payment of
such bonuses will be accelerated, subject to shareholder approval, if
necessary, and Messrs. McLin and Scordelis shall also receive a payment
equal to the excise tax, if any, imposed as a result of such payment.
44
4 The amounts disclosed as LTIP Payouts are in connection with EurekaBank's
Long Term Incentive Plan (LTIP). The amount shown for fiscal 1996 includes
the second cash installment paid from the 1995 LTIP and Beneficial Unit
Certificates (BUCs) distributed at a price of $29.50 per BUC in connection
with 1996 earnings for the 1994 LTIP as follows: $83,397, $89,356, $14,868,
and $29,766 to Messrs. McLin, Scordelis, Holmes and Ms. Hiraoka,
respectively. The BUCs reflected in this column were originally awarded at a
price of $20.71 per BUC representing appreciation of 42.4%.
5 The amounts disclosed in this column include employer matching contributions
to the officer's 401(k) Savings Plan and the EurekaBank Service Investment
Plan, both of which are defined contribution plans, and payment by
EurekaBank for supplemental term life insurance premiums for Mr. McLin
($14,136), Mr. Scordelis ($4,538) and Mr. Terry ($3,082). The value of
future premiums for this supplemental insurance are contingent upon
continued employment and is therefore not included. Mr. Terry also received
a lump sum payment as reimbursement for 3 months of outside medical premiums
upon hire. EurekaBank did not pay for supplemental term life or supplemental
disability insurance for Mr. Holmes or Ms. Hiraoka. In addition, Ms. Hiraoka
received a one-time payment of $20,000 for consulting services provided to
AFEH in 1996.
6 Wm. Mack Terry was appointed Executive Vice President and Chief Financial
Officer on 1/24/96.
LONG-TERM INCENTIVE COMPENSATION
EXECUTIVE COMPENSATION PROGRAM
The executive cash compensation program for AFEH and EurekaBank contains three
elements: base salary, the annual bonus plan and the LTIP. Base salaries are
established at levels which, based on an independent study conducted by an
outside consultant, are between the 50th and 75th percentile for a peer group of
similar banks and thrifts. The EurekaBank LTIP was implemented in 1989,
modified in 1991 and amended in 1996. The purpose of the LTIP is to ensure a
consistent focus on maximizing the Bank's LONGER-TERM financial performance by
linking annual payments to one-year, two-year, and three-year performance
results. LTIP units are granted each year and performance is measured after one
year, at which time 25% of the earned award is paid, with the remainder
deferred. These deferred awards are subject to forfeiture if EurekaBank's
financial performance does not meet minimum ROE thresholds established in the
LTIP. The Committee reviews the effects of the executive compensation program
including the LTIP, LTIP grants and annual bonuses in light of the Bank's
performance and the LTIP objectives to ensure the program continues to meet the
Committee's compensation philosophy. Based on the overall results achieved for
fiscal 1996, all five executives participated in the LTIP and all five executive
officers received annual performance bonuses of 21% to 50% of 1996 base salary.
LONG TERM INCENTIVE PLAN
Ten eligible EurekaBank senior officers receive payment under the Eureka Long
Term Incentive Plan ("LTIP") based on net revenue above an ROE threshold. The
LTIP requires minimum Return on Equity ("ROE") thresholds to be met on a one,
two and three-year basis for full payment to be received. 50% of the payment is
made in deferred Beneficial Unit Certificates. The Committee believes that this
risk/reward design is ultimately in the best interest of the shareholders,
assuring that executive pay will be closely correlated with both share price and
EurekaBank's financial results over time.
Each year, the prior year's LTIP award is earned based on the extent to which
the Bank's net income exceeds a pre-established ROE threshold. Earned awards
represent a percentage of net income in excess of the pre-established threshold.
No award is earned if the Bank's ROE is below the pre-established threshold.
Twenty-five percent of the earned award is paid in cash following the release of
audited financial statements for the subject year. An additional 25% is paid in
cash one year later, but only if the Bank's ROE for the immediately preceding
year exceeds a pre-established level. The remaining 50% of the total LTIP award
is paid in the form of deferred Beneficial Unit Certificates ("BUCs") which link
executives directly to share price, and which are paid free of restrictions two
years after the end of the plan year, only if the Bank's average ROE exceeds a
pre-established ROE level.
45
During 1996, EurekaBank entered into supplemental agreements with certain
officers and directors who are currently employed with the Bank or serve on its
board of directors relating to the LTIP. The agreements are intended to
reduce the impact on the LTIP caused by extraordinary events which are not
reflective of the overall performance of the Bank, including a special deposit
insurance assessment (such as the September 30, 1996 assessment payable to the
Savings Association Insurance Fund), the deferred tax asset accounting
adjustment attributable to unexpired net operating losses as of 1988 and other
similar events. In addition, the agreements provide for additional payments to
reimburse the participant for any excise taxes imposed by Section 4999 of the
Internal Revenue Code resulting from a change in control of EurekaBank.
Executives participating in the LTIP are paid dividends on deferred BUCs. In
addition, the LTIP contains a provision which allows for participants to share
in the excess of the sales price over the book value in the event of a sale of
EurekaBank. The amount of each participant's share in such excess will be
determined in accordance with the LTIP.
LTIP AWARDS FOR 1996 PERFORMANCE
Based on the ROE minimum threshold established in the LTIP, executives earned
LTIP awards in connection with 1996 performance. This included 25% of the 1996
award, 25% of the 1995 award and the full amount of the BUCs distributed in
connection with the 1994 LTIP award. Given the financial performance of
EurekaBank for 1996, the Committee concluded that the payouts under the LTIP
appropriately compensated the top five executives.
EQUITY APPRECIATION PLAN
In 1996, an additional long term incentive component was added to the mix of
total compensation for key persons of the Bank. The new plan, The EurekaBank
Equity Appreciation Plan ("EAP") is intended to incent, recognize and reward
long term contribution and exceptional performance which contributes to
increased shareholder value and the Bank's equity appreciation. Under the EAP,
the Board of Directors, at its discretion, may grant rights to certain key
officers, directors and employees of the Bank. The EAP limits the aggregate
number of rights which may be granted under the plan to 320,000 rights plus the
number of rights that are granted and expire unexercised. The rights granted by
the Board in 1996 are vested and may be exercised by participants during the
period beginning March 31, 1999 and ending March 31, 2006; provided that if a
change in control (as defined under the EAP) occurs, all rights become
immediately vested and are exercisable only during the period commencing on the
change in control and ending 90 days thereafter. Upon the exercise of a right,
participants receive cash compensation equal to the number of rights exercised
multiplied by the "book" value of America First Eureka Holdings, Inc. on the
date the rights are exercised divided by $10,000,000, less the Equity Right at
Grant Date. For rights granted on April 1, 1996, the Equity Per Right on the
Grant Date was $14.00.
All rights granted under the EAP terminate immediately upon termination of a
participant's employment or service as a director for any reason other than
death or disability. In the event of death or disability of the participant,
such participant or his or her representative may exercise his or her rights in
accordance with the terms of the EAP. In the event of a change in control of
EurekaBank, a participant will be entitled to receive an amount of cash
determined as a function of the aggregate sales price of EurekaBank pursuant to
a formula provided in the EAP.
In the event that it is determined that any payment or distribution to a
participant under the EAP would subject such participant to the excise tax
imposed by Section 4999 of the Internal Revenue Code or any interest or
penalties with respect to such tax, the participant will be entitled to receive
an additional payment ("Gross-Up Payment") in an amount such that after payment
by the participant of all taxes, the participant retains an amount of the Gross-
Up Payment equal to the excise tax imposed.
46
The following information is furnished for the year ended December 31, 1996,
with respect to the Chief Executive Officer of America First Eureka Holdings
(AFEH) and each of the four other most highly compensated executive officers of
AFEH and EurekaBank for awards under the LTIP and the EAP. The first line for
each executive officer denotes awards granted under the LTIP for 1996. The
second line on the Table for each executive officer denotes the 1996 rights
granted under the EAP.
ESTIMATED FUTURE PAYOUTS UNDER
LONG TERM INCENTIVE PLANS
-------------------------------------------------
NO. OF SHARES,
UNITS OR PERIOD UNTIL
NAME OTHER RIGHTS /(1)/ MATURATION /(2)/ THRESHOLD /(3)/ TARGET /(4)/ MAXIMUM /(5)/
- ---- ------------------ ---------------- --------------- ------------ -------------
Stephen T. McLin....... 14 12-31-98 -0- 259,434
40,000 03-31-99 -0- N/A
Byron A. Scordelis..... 15 12-31-98 -0- 277,965
40,000 03-31-99 -0- N/A
Wm. Mack Terry......... 14 12-31-98 -0- 259,434
20,000 03-31-99 -0- N/A
Paul Holmes............ 5 12-31-98 -0- 92,655
10,000 03-31-99 -0- N/A
Peggy Hiraoka.......... 5 12-31-98 -0- 92,655
20,000 03-31-99 -0- N/A
- -------------
(1) The first row in this column reflects the LTIP units granted for 1996 in
accordance with the Plan, which is included as an exhibit to the
Partnership's annual report on Form 10-K for the year ended December 31,
1991. The second row in this column reflects EAP rights granted in 1996 in
accordance with the EAP, which is included as an exhibit to the
Partnership's annual report on Form 10-K for the year ended December 31,
1996.
(2) The dates in the first row of this column reflect the point at which the
last of the 1996 LTIP payments is made. The first installment of the 1996
LTIP (1/4 of the total award) was made in cash and is reflected in the
Summary Compensation Table. The remainder of the award is deferred and
subject to forfeiture, in whole or in part, under the terms of the LTIP if
certain performance thresholds are not achieved during the two year period
following 1996. The dates in the second row of this column reflect the
earliest date at which the 1996 EAP Rights may be exercised.
(3) Under the provisions of both the LTIP and EAP, depending upon the
performance of the Bank or other vesting requirements, the payments under
each plan may be zero.
(4) The amount shown in the first row under "Target" represents the total LTIP
award for 1996. The first installment of the 1996 LTIP (1/4 of the total
award) was made in cash and is reflected in the Summary Compensation Table.
The remainder of the award is deferred and subject to forfeiture, in whole
or in part, if certain performance thresholds established under the LTIP
are not achieved during the two year period following 1996. 50% of the
deferred award is paid in BUCs, the value of which may increase or decrease
depending upon the price of BUCs at the time they are awarded. The
"target" for the EAP Rights would be the value of the Rights as of the date
the executive exercises the Rights as calculated by taking the then "equity
(book) value" of AFEH divided by 10,000,000, less $14.00, multiplied by the
number of Rights which are exercised.
(5) This column is not applicable to the EurekaBank LTIP or EAP.
47
EUREKABANK RETIREMENT PLAN
As of December 31, 1993, the EurekaBank Retirement Plan, EurekaBank's pension
plan, was frozen. As of the date of the freeze, all benefits earned through
that date were 100% vested on behalf of the named executive. The pension
benefits were based on gross annual compensation up to the $200,000 compensation
limit (indexed annually pursuant to IRC sections 401(a)(17), 404(l), 408(k))
including base salary, certain cash bonuses and cash payments from the LTIP.
For Mr. McLin, the vested benefit only considers such amounts paid by EurekaBank
and excludes any amounts paid by AFEH.
The annual benefits payable upon retirement at age 65, based on a single life
annuity under the vested and frozen benefits under the EurekaBank Retirement
Plan as of December 31, 1996 for each of the named executives were as follows:
Stephen T. McLin $17,648; Byron A. Scordelis $21,705; Paul Holmes $10,852; and
Peggy Hiraoka $14,125. Mr. Terry was not eligible to earn benefits under the
frozen pension plan.
EMPLOYMENT SEVERANCE AGREEMENTS
In the event of an involuntary termination for other than cause, Messrs. McLin,
Scordelis and Terry would receive severance payments equal to their annual base
salary. These severance payments will not be payable in the event of a sale of
EurekaBank or AFEH, regardless of whether the executives are terminated by the
buyer other than for cause. No other employment agreements or severance
arrangements exist for the executive officers included in the compensation
table.
DIRECTORS' COMPENSATION
In 1996, Messrs. Baker, Krauss, Bull and Guillory, and Ms. Byerwalter each
received an annual Board retainer of $15,000 and a $1,000 per meeting fee. In
addition, Mr. Baker as Audit Committee Chairman and Mr. Guillory as an Audit
Committee member received a quarterly retainer of $1,000 and $750, respectively,
and a $1,000 per meeting fee in connection with the Audit Committee. Mr. Bull
and Ms. Byerwalter each received a quarterly retainer of $3,000 as members of
the Asset & Liability Committee. Messrs. Baker, Krauss, Guillory and Bull and
Ms. Byerwalter also received an annual grant of 100 BUCs each for service in
1996. On January 24, 1996, Mr. Terry was appointed Executive Vice President and
Chief Financial Officer of EurekaBank and as of that date no longer received
remuneration specific to his services on the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee (the "Committee") of the Board of Directors includes
Mr. Bagley and Mr. Krauss. Mr. Krauss is an officer of America First Eureka
Holdings, Inc. (AFEH). AFEH and America First Service Corp., an affiliate of
AFCA-5, have entered into a licensing agreement through which America First
Service Corp. provides services to AFEH and EurekaBank, including: earnings
improvement studies, management enhancement programs, development of marketing
programs, product development and similar business, economic and financial
advice and consultation. Pursuant to the licensing agreement, AFEH is committed
to pay America First Service Corp. an annual fee equal to 0.5% of the total of
Eureka's interest income and other income without deduction for interest and
other expenses. During 1996, 1995 and 1994, $850,112, $863,793, and $761,963,
respectively, of the annual fee had been paid or accrued. AFEH may also
reimburse America First Service Corp. for certain accountable expenses. However,
no reimbursements were made in 1996, 1995 or 1994.
Mr. McLin, executive officer and director of AFEH and Eureka, and Ms.
Byerwalter, a former executive officer and director of AFEH and a current
director of EurekaBank, were paid compensation of $81,523 and $8,152,
respectively, based upon the profit performance of AFCA-5 and America First
Service Corp. Messrs. Bagley, McLin and Erwin are shareholders of America First
Service Corp. and Mr. McLin is a director of America First Service Corp.
The Committee determines Mr. McLin's compensation and, upon recommendation of
the Chief Executive Officer, reviews and approves all executive officers'
compensation.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
(a) The following table sets forth any person who is known by the Partnership
to be the beneficial owner of more than five percent of its BUCs as of
March 12, 1997:
Amount and Nature Percent
Name of Beneficial Ownership/(1)/ of Class
---- ---------------------------- --------
Cramer Partners, L. P. 436,100 BUCs 7.26%
100 Wall Street,
8th Floor
New York, NY 10005
(b) The following table sets forth the number of BUCs beneficially owned by
directors and executive officers, individual and as a group, of AFEH and
Eureka as of February 28, 1997, unless otherwise indicated:
Amount and Nature Percent
Name of Beneficial Ownership/(1)/ of Class
---- ---------------------------- --------
J. Paul Bagley 100 BUCs *
David B. Baker 500 BUCs/(7)/ *
George E. Bull, III 100 BUCs/(2)/ *
Mariann Byerwalter 13,391 BUCs/(4)/ *
Gregory D. Erwin -- *
Peggy Hiraoka 2,142 BUCs/(3)/ *
John Lee Guillory 100 BUCs/(2)/ *
Paul Holmes 1,637 BUCs/(3)/ *
George H. Krauss 5,300 BUCs/(8)/ *
Stephen T. McLin 22,265 BUCs/(5)/ *
Thompson H. Rogers -- *
Byron A. Scordelis 32,111 BUCs/(6)/ *
Wm Mack Terry 400 BUCs/(10)/ *
Michael Thesing 573.8964 BUCs/(9)/ *
All directors and executive
officers as a group
(14 persons) 78,619.8964 BUCs 1.31%
(C) Under the Capital Maintenance Agreement, dated May 27, 1988, among the
FDIC, the Partnership, AFEH, Eureka and certain of their affiliates, FDIC may
take control of Eureka in the event there is a breach of such agreement,
including the failure to maintain minimum capital. The Partnership is not
aware of any other arrangement the operation of which may, at any subsequent
date, result in a change in control of the Partnership, AFEH or Eureka.
* Less than 1% of class.
(1) Each of the named persons owns BUCs directly and has sole voting
and investment power with respect to the BUCs unless otherwise
indicated.
(2) 100 shares issued as director's compensation in 1997.
(3) Excludes BUCs credited under the Long Term Incentive Plan ("Plan")
of 981 and 1,522 to be distributed in 1998 and 1999, respectively.
(4) Excludes BUCs credited under the Plan of 2,748 to be distributed in
1998.
(5) Excludes BUCs credited under the Plan of 2,748 and 4,263 to be
distributed in 1998 and 1999, respectively.
(6) Excludes BUCs credited under the Plan of 2,945 and 4,568 to be
distributed in 1998 and 1999, respectively.
(7) 100 BUCs issued as director's compensation in each of 1993, 1994,
1995, 1996 and 1997.
(8) Includes 100 BUCs issued as director's compensation in each of
1995, 1996 and 1997.
(9) Mr. Thesing shares voting power with his wife with respect to all
BUCs.
(10) Includes 100 BUCs issued as director's compensation in each of
1993, 1994, 1995 and 1996. Excludes BUCs credited under the Plan of
4,263 to be distributed in 1999.
49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The general partners of AFCA-5 are Michael Yanney and AFCA-5 Management
Corporation whose sole shareholder is Mr. Yanney. The limited partners of AFCA-
5 include Paul Bagley, Gregory Erwin, Corporation One, whose sole shareholder is
Mr. Erwin and Yanney Holdings-Wyoming Inc., whose sole shareholder is Mr.
Yanney. Messrs. Erwin and Bagley also serve as directors of Eureka and AFEH.
Except as described herein, neither the Partnership, AFEH nor Eureka is a party
to any transaction or proposed transaction with any person who is (I) a director
or executive officer of AFCA-5 Management Corporation, AFEH or Eureka or any
general partner of AFCA-5, (ii) a nominee for election as a director of AFCA-5
Management Corporation, AFEH or Eureka, (iii) an owner of more than 5% of the
BUCs or (iv) a member of the immediate family of any of the foregoing persons.
During 1996, the Partnership or AFEH paid or reimbursed AFCA-5 for certain costs
and expenses incurred in connection with the operation of the Partnership,
including legal and accounting fees and investor communication costs, such as
printing and mailing charges. See Note 22 of Notes to Consolidated Financial
Statements filed in response to Item 8 hereof for a description of these costs
and expenses. In addition, during 1996, the Partnership or Eureka paid legal
fees to Kutak Rock, a law firm in which Mr. Krauss is a partner.
AFEH and America First Service Corporation, an affiliate of AFCA-5 Management
Corporation, have entered into a licensing agreement through which America First
Service Corporation provides services to AFEH and Eureka, including: earnings
improvement studies, management enhancement programs, development of marketing
programs, product development and similar business, economic and financial
advice and consultation. Pursuant to the licensing agreement, AFEH is committed
to pay America First Service Corporation an annual fee equal to 0.5% of the
total of Eureka's interest income and other income without deduction for
interest and other expenses. During 1996, 1995 and 1994, $850,112, $863,793 and
$761,963, respectively, of the annual fee had been paid or accrued. AFEH may
also reimburse America First Service Corporation for certain accountable
expenses. However, no reimbursements were made in 1996, 1995 or 1994.
Mr. Stephen T. McLin, executive officer and director of AFEH and Eureka, and
Mariann Byerwalter, a former executive officer and director of AFEH and current
director of Eureka, were paid compensation based upon the profit performance of
AFCA-5 Management Corporation and America First Service Corporation. Messrs.
McLin, Erwin and Bagley are shareholders of America First Service Corporation,
and Mr. McLin is a director of America First Service Corporation.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS. The following consolidated financial statements
--------------------
of the Partnership and subsidiaries are included in response to Item 8
of this report:
Report of Independent Certified Public Accountants dated January 27,
1997.
Consolidated Balance Sheets at December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Partners' Capital for the years ended
December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES. All financial information required by
-----------------------------
Regulation S-X, with regard to financial statement schedules, is
included in the financial statements discussed in Item 14(a)(1).
3. EXHIBITS. The following exhibits were filed as required by Regulation
--------
S-K:
3. Articles of Incorporation and Bylaws of America First Fiduciary
Corporation Number Nine (incorporated herein by reference to
Amendment No. 3 to the Registration Statement on Form S-1 filed
March 31, 1987 with the Securities and Exchange Commission by
America First Financial Funds (Commission File No. 33-10286)).
4(a). Amended and Restated Limited Partnership Agreement dated June
30, 1987 (incorporated herein by reference to Form 10-K dated
December 31, 1987 filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 by America First Financial Fund
1987-A Limited Partnership (Commission File No. 0-16918)).
4(b). Form of Certificate of Beneficial Unit Certificate (incorporated
herein by reference to Amendment No. 3 to the Registration
Statement on Form S-1 filed March 31, 1987 with the Securities
and Exchange Commission by America First Financial Fund 1987-A
Limited Partnership (Commission File No. 33-10286)).
10(a). Custody Agreement dated August 3, 1987 (incorporated herein by
reference to Form 10-K dated December 31, 1987 filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
10(b). Agreement between America First Capital Associates Limited
Partnership Five and Stephen McLin (incorporated herein by
reference to Amendment No. 3 to the Registration Statement on
Form S-1 filed March 31, 1987 with the Securities and Exchange
Commission by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 33-10286)).
10(c). Assistance Agreement dated May 27, 1988 (incorporated herein by
reference to Form 8 filed September 15, 1988 pursuant to Section
51
13 or 15(d) of the Securities Exchange Act by America First
Financial Fund 1987-A Limited Partnership (Commission File
No. 0-16918)).
10(d). Assignment Agreement dated May 27, 1988 (incorporated herein by
reference to Form 10-K dated December 31, 1988, filed pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
10(e). Capital Maintenance Agreement dated May 27, 1988 (incorporated
herein by reference to Form 10-K dated December 31, 1988, filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 0-16918)).
10(f). Asset Purchase Agreement dated May 27, 1988 (incorporated herein
by reference to Form 10-K dated December 31, 1988, filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 by America First Financial Fund 1987-A Limited
Partnership (Commission File No. 0-16918)).
10(g). Employment Agreement between America First Holdings, Inc. (now
America First Eureka Holdings, Inc.) and Stephen T. McLin dated
January 24, 1989 (incorporated herein by reference to Form 10-K
dated December 31, 1988, filed pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 by America First
Financial Fund 1987-A Limited Partnership (Commission File No.
0-16918)).
10(h). Employment Agreement between America First Holdings, Inc. (now
America First Eureka Holdings, Inc.) and Mariann Byerwalter
dated January 24, 1989 (incorporated herein by reference to Form
10-K dated December 31, 1988, filed pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 by America First
Financial Fund 1987-A Limited Partnership (Commission File No.
0-16918)). Ms. Byerwalter resigned as an executive officer of
America First Eureka Holdings, Inc. in January 1996.
10(i). Long-Term Incentive Compensation Plan of EurekaBank (as amended
and restated effective January 1, 1991) (incorporated herein by
reference to Form 10-Q dated August 13, 1991, filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Financial Fund 1987-A Limited Partnership
(Commission File No. 0-16918)).
10(j). Form of Agreement between EurekaBank and certain executive
officers and directors which amends certain provisions of the
Long Term Incentive Compensation Plan (LTIP) (filed hereto).
10(k). Form of Supplemental Agreement between EurekaBank and certain
executive officers and directors which amends certain provisions
of the Long Term Incentive Compensation Plan (LTIP) (filed
hereto).
10(l). EurekaBank Equity Appreciation Plan Effective April 1, 1996,
for the benefit of certain officers, directors and employees of
EurekaBank and America First Eureka Holdings, Inc. (filed
hereto.)
24. Power of Attorney
27. Financial Data Schedule
(b) The Partnership did not file any Current Reports on Form 8-K during the
fourth quarter of 1996.
52
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, thereunto duly authorized.
AMERICA FIRST FINANCIAL FUND
1987-A LIMITED PARTNERSHIP
By America First Capital
Associates Limited
Partnership Five, General
Partner of the Registrant
By AFCA-5 Management Corporation,
General Partner of America
First Capital Associates
Limited Partnership Five
By /s/ George H. Krauss
------------------------
Date: March 24, 1997 George H. Krauss,
-------------------------- Chairman of the Board
of Directors and Secretary
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.
Date: March 24, 1997 By /s/ George H. Krauss
-------------------------- -----------------------
George H. Krauss, Chairman of the Board
of Directors and Secretary (Principal
Executive Officer)
Date: March 24, 1997 By /s/ J. Paul Bagley*
-------------------------- ------------------------
J. Paul Bagley, Director, President
and Treasurer
(Principal Financial Officer)
Date: March 24, 1997 By /s/ Thompson H. Rogers*
-------------------------- ---------------------------
Thompson H. Rogers, Director
*By: George H. Krauss
Attorney-in-Fact
By /s/ George H. Krauss
--------------------
George H. Krauss
53
Independent Auditors' Report
----------------------------
To the General Partner
America First Financial Fund 1987-A Limited Partnership:
We have audited the accompanying consolidated balance sheets of America First
Financial Fund 1987-A Limited Partnership and Subsidiary (the "Partnership") as
of December 31, 1996 and 1995, and the related consolidated statements of
income, partners' capital and cash flows for each of the years in the three year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of America First
Financial Fund 1987-A Limited Partnership and Subsidiary as of December 31, 1996
and 1995 and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick, LLP
- ---------------------------
San Francisco, California
January 27, 1997
F-1
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
(dollars in thousands)
1996 1995
----------- -----------
ASSETS
Cash and amounts due from depository institutions $ 30,827 $ 27,116
Federal funds sold 20,000 24,700
Securities purchased under agreements to resell 5,300 20,500
Investments held to maturity - 39,996
Mortgage-backed securities, net
Held to maturity 630,106 763,770
Available for sale 44,489 52,032
Loans receivable, net 1,403,483 1,431,179
Loans held for sale 370 403
Accrued interest receivable 12,217 13,500
Premises and equipment, net 8,888 9,535
Federal Home Loan Bank stock, at cost 21,827 21,509
Real estate held for sale or investment, net 1,328 2,386
Real estate owned, net 1,438 2,543
Deferred tax assets, net 22,643 1,277
Other assets 6,135 6,507
---------- ----------
Total Assets $2,209,051 $2,416,953
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Customer deposits $1,840,485 $1,704,466
Securities sold under agreements to repurchase 44,353 206,856
Other borrowings 106,998 310,087
Distributions payable 2,437 2,437
Other liabilities and accrued expenses 19,583 21,433
---------- ----------
Total Liabilities 2,013,856 2,245,279
Redeemable Preferred Stock; Series A, no par value:
200,000 shares issued; $20 million liquidation value 17,748 15,542
Partners' Capital
General Partner 9,155 4,884
Beneficial Unit Certificate (BUC) Holders;
6,010,589 BUCs authorized, issued and outstanding 168,292 151,248
---------- ----------
Total Partners' Capital 177,447 156,132
---------- ----------
Total Liabilities and Partners' Capital $2,209,051 $2,416,953
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands except per BUC amounts)
1996 1995 1994
--------- -------- ---------
INTEREST INCOME:
Interest and fees on loans $107,157 $105,199 $ 93,390
Interest on mortgage-backed securities 50,161 53,818 38,820
Interest and dividends on investments 4,680 4,623 3,859
-------- -------- --------
Total interest income 161,998 163,640 136,069
-------- -------- --------
INTEREST EXPENSE:
Interest on customer deposits 81,982 75,772 63,799
Interest on other borrowings 19,689 31,830 20,394
-------- -------- --------
Total interest expense 101,671 107,602 84,193
-------- -------- --------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 60,327 56,038 51,876
Provision for loan losses 965 793 1,246
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 59,362 55,245 50,630
-------- -------- --------
NON-INTEREST INCOME:
Deposit related fees 1,900 2,157 2,148
Loan related fees 1,379 1,601 1,929
Gain on disposition of loans, net 307 67 117
Other 4,814 5,598 5,797
-------- -------- --------
Total non-interest income 8,400 9,423 9,991
-------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 21,767 19,867 21,382
Occupancy and equipment 8,349 8,918 10,203
FDIC premiums and special assessments 15,089 4,210 4,288
Professional services 1,385 893 1,092
Advertising and promotion 1,107 1,285 1,569
Provision for loss (recovery) on interest rate
exchange agreements (332) 1,934 (4,274)
Other 9,855 10,326 11,169
-------- -------- --------
Total non-interest expense 57,220 47,433 45,429
-------- -------- --------
INCOME BEFORE INCOME TAXES 10,542 17,235 15,192
Income tax benefit 20,870 - -
-------- -------- --------
NET INCOME $ 31,412 $ 17,235 $ 15,192
======== ======== ========
NET INCOME ALLOCATED TO:
General Partner $ 4,488 $ 1,432 $ 1,022
BUC Holders 26,924 15,803 14,170
-------- -------- --------
$ 31,412 $ 17,235 $ 15,192
======== ======== ========
NET INCOME PER BENEFICIAL UNIT CERTIFICATE $4.48 $2.63 $2.36
======== ======== ========
DIVIDEND PER BENEFICIAL UNIT CERTIFICATE $1.60 $1.60 $1.60
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
AMERICA FIRST FINANCIAL FUND L987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Statements of Partners' Capital
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands)
Beneficial Unit
General Certificate
Partner Holders Total
-------- --------------- ---------
Balance at December 31, 1993 $ 2,699 $140,550 $143,249
Net income 1,022 14,170 15,192
Cash distributions paid or accrued (130) (9,617) (9,747)
Direct credits (charges):
Net unrealized losses on mortgage-backed
securities available for sale (1,018) (4,074) (5,092)
Reduction in pension plan additional
minimum liability 199 794 993
------- -------- --------
Balance at December 31, 1994 2,772 141,823 144,595
Net income 1,432 15,803 17,235
Cash distributions paid or accrued (130) (9,617) (9,747)
Direct credits:
Net unrealized gains on mortgage-backed
securities available for sale 810 3,239 4,049
------- -------- --------
Balance at December 31, 1995 4,884 151,248 156,132
Net income 4,488 26,924 31,412
Cash distributions paid or accrued (130) (9,617) (9,747)
Direct charges:
Net unrealized losses on mortgage-backed
securities available for sale (87) (263) (350)
------- -------- --------
Balance at December 31, 1996 $ 9,155 $168,292 $177,447
======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(dollars in thousands)
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,412 $ 17,235 $ 15,192
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of:
Investments and mortgage-backed securities net premium 2,455 751 1,681
Loan premium (discount) 686 (1,562) (571)
Intangibles 1,213 1,340 1,340
Proceeds from sales of loans originated and held for sale 18,567 6,663 26,753
Originations of loans held for sale (18,227) (6,847) (21,795)
Gain on disposition of mortgage loans held for sale (307) (67) (117)
Provision for loan losses 965 793 1,246
Provision for loss (recovery) on interest rate exchange agreements (332) 1,934 (4,274)
Decrease (increase) in accrued interest receivable 1,283 (1,875) (749)
Increase (decrease) in accrued interest payable (1,875) 36 836
Depreciation and amortization of premises and equipment 1,699 1,992 2,268
Decrease (increase) in other assets (1,336) (8) 777
Increase (decrease) in other liabilities 357 (4,417) (7,251)
Income tax expense 5,328 7,655 7,085
Deferred tax asset valuation adjustment (26,198) (7,655) (7,085)
Other, net 1,837 169 96
--------- --------- ---------
Net cash provided by operating activities 17,527 16,137 15,432
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated and held for investment (236,900) (173,904) (193,703)
Purchases of investment securities held to maturity - - (42,986)
Purchases of mortgage-backed securities held to maturity (53,118) (164,910) (308,059)
Purchases of real estate loans (23,527) (92,709) (59,086)
Purchases of premises and equipment (1,082) (888) (647)
Principal payments on mortgage-backed securities 191,516 143,301 139,994
Principal payments on loans 280,966 252,001 354,018
Proceeds from the maturities of investment securities 40,000 3,000 10,000
Proceeds from sales of Federal Home Loan Bank stock 911 - 1,781
Proceeds from sales of real estate held for sale - 1,684 6,579
Proceeds from sales of real estate owned 5,593 7,437 9,614
Proceeds from sale of consumer loans - 12,959 -
Other, net 1,245 1,038 11
--------- --------- ---------
Net cash provided by (used in) investing activities 205,604 (10,991) (82,484)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in checking and savings accounts 132,385 3,058 (62,699)
Proceeds from issuance of certificates of deposit 225,553 249,060 253,850
Payments for maturing or early withdrawal of certificates of deposit (221,919) (243,943) (208,067)
Net increase (decrease) in short-term repurchase agreements (162,503) (255,629) 45,898
Increase (decrease) in Federal Home Loan Bank advances (203,089) 259,809 25,000
Capital distributions (9,747) (9,747) (9,747)
--------- --------- ---------
Net cash provided by (used in) financing activities (239,320) 2,608 44,235
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (16,189) 7,754 (22,817)
Cash and cash equivalents at beginning of period 72,316 64,562 87,379
--------- --------- ---------
Cash and cash equivalents at end of period $ 56,127 $ 72,316 $ 64,562
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non cash investing and financing activities:
Additions to real estate acquired through foreclosure $ 4,803 $ 4,768 $ 8,050
Loans made to facilitate the sale of real estate $ 6,822 $ 11,900 $ 7,466
Cash paid for interest (including interest credited) $ 103,546 $ 106,056 $ 82,125
Cash paid for alternative income and minimum franchise taxes $ 545 $ 445 $ 149
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
AMERICA FIRST FINANCIAL FUND 1987-A LIMITED PARTNERSHIP AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
1. Organization
------------
(A) Partnership Formation
---------------------
America First Financial Fund 1987-A Limited Partnership (the
"Partnership") was formed on April 14, 1987 under the Delaware Revised
Uniform Limited Partnership Act for the purpose of acquiring one or
more federally insured financial institutions through supervisory
assisted acquisitions. The Partnership formed a subsidiary
corporation, America First Eureka Holdings, Inc. ("AFEH") for the
purpose of owning and managing one or more acquired financial
institutions. AFEH acquired EurekaBank ("Eureka") on May 27, 1988
(the "Acquisition"). The Partnership will terminate on December 31,
2036, unless terminated earlier under the provisions of the
Partnership Agreement. The general partner of the Partnership is
America First Capital Associates Limited Partnership Five ("AFCA-5")
whose managing general partner is AFCA-5 Management Corporation.
(B) Partnership Income, Expenses and Cash Distributions
---------------------------------------------------
The Partnership Agreement contains provisions for the distribution of
Distributable Cash and Net Sales Proceeds, as defined by the
Partnership Agreement, and for the allocation of income and loss from
operations for tax purposes among AFCA-5 and the BUC holders.
Cash distributions are presently made on a quarterly basis but
may be made monthly or semiannually if AFCA-5 so elects. The cash
distributions included in the consolidated financial statements
represent the actual cash distributions made or accrued as of December
31, 1996. Effective April 1992, the Partnership elected to pay
quarterly distributions at an annualized rate of $1.60 per BUC.
2. Summary of Significant Accounting Policies
------------------------------------------
(A) Principles of Accounting and Consolidation
------------------------------------------
The consolidated financial statements of the Partnership include the
accounts of the Partnership, AFEH (its wholly owned subsidiary) and
AFEH's wholly owned subsidiary, Eureka and its subsidiaries. The
consolidated financial statements are prepared on the accrual method
of accounting in accordance with generally accepted accounting
principles ("GAAP") and industry practices applicable to savings and
loan associations. The preparation of financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and income and expenses during
the reporting period. Actual results could differ from those
estimates. All significant intercompany transactions have been
eliminated. Certain amounts in the consolidated financial statements
for prior years have been reclassified to conform to the current
consolidated financial statement presentation.
(B) Cash and Cash Equivalents
-------------------------
The Partnership considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. These
include cash and amounts due from depository institutions, federal
funds sold and securities purchased under agreements to resell.
(C) Investments and Mortgage-Backed Securities
------------------------------------------
Investments and mortgage-backed securities, other than securities
available for sale, are carried at amortized cost. Premiums and
discounts are amortized or accreted as an adjustment of yield using
the interest method over the term of each security, adjusted for
actual and anticipated prepayments. These investments are carried at
cost because management intends and has the ability to hold them to
maturity. Gains or losses on sales of securities available for sale
are recognized at the time of sale using the specific identification
method. Interest and dividends on investments include interest on
investments, the amortization and accretion of related premiums and
discounts, and dividends on Federal Home Loan Bank ("FHLB") stock.
(D) Loans Receivable
----------------
Loans receivable originated subsequent to Eureka's acquisition by AFEH
are stated at the unpaid principal balance. Loans receivable held by
Eureka at Acquisition were stated at unpaid principal balance
discounted to the fair market value at the date of Acquisition. The
Acquisition fair market value discount is being accreted as an
adjustment of yield using the interest method over the expected lives
of the underlying mortgage loans adjusted for actual and anticipated
prepayments. Loans receivable is shown net of deferred loan
origination fees, premiums, unearned discounts and the allowance for
losses. Management intends and has the ability to hold until
F-6
maturity all loans which are not designated as held for sale. If a
decision is made to dispose of loans designated as held to maturity,
or should the Partnership become unable to hold loans until maturity,
the loans would be reclassified to held for sale at the lower of
amortized cost or market value.
All non-refundable loan origination fees, net of certain direct
loan origination costs, are deferred and accreted or amortized using a
method that approximates the interest method over the term of the loan
or until the loan is sold. Interest is not accrued on loans which are
90 days or more delinquent.
The Partnership adopted SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan," in 1993. SFAS No. 114 was amended during
1994 by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," and was adopted by the
Partnership on December 31, 1994. The adoptions of SFAS No. 114 and
SFAS No. 118 did not have a material effect on the Partnership's
financial statements. A loan is impaired when it is probable that the
Partnership will be unable to collect all amounts due according to the
original contractual terms of the loan agreement. Impairment is
measured based on the present value of expected future cash flows
discounted at the loan's original effective interest rate, or the fair
value of the collateral less estimated selling costs if the impaired
loan is collateral dependent. If the present value of expected future
cash flows, or the fair value of the collateral less estimated selling
costs, is less than the recorded investment, a valuation allowance is
created by a charge to the provision for loan losses or by adjusting
an existing valuation allowance. Interest income on impaired loans 90
days or more delinquent was recorded on a cash basis. Interest income
was recognized on the cash basis for restructured loans performing
under the terms of the restructured agreement.
(E) Loans Held for Sale
-------------------
Loans held for sale are recorded at the lower of amortized cost or
market value. Gains or losses from sales of mortgage loans are
recognized at the time of sale by comparing the net sales proceeds to
the net carrying value of the asset sold. For loans sold with
servicing retained, normal servicing fees are included in non-interest
income.
On January 1, 1996, the Partnership adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which requires that
enterprises such as commercial banks and thrift institutions that
conduct operations that are substantially similar to the primary
operations of a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those
servicing rights are acquired. The total cost of originating or
purchasing mortgage loans is allocated between the loan and the
servicing rights, based on their relative fair values. The recorded
value of mortgage servicing rights is amortized over the estimated
life of the loans, based on market factors. The carrying value of
mortgage servicing rights is periodically measured based on the actual
prepayment experience and market factors; an allowance is booked when
an impairment is indicated. The adoption did not have a material
effect on the Partnership's financial statements.
(F) Provisions for Possible Loan Losses
-----------------------------------
Provisions for losses are charged to operations based upon
management's periodic evaluation of potential losses in the loan
portfolio. In addition to providing valuation allowances on specific
assets, Eureka establishes a general valuation allowance and evaluates
the adequacy of the allowance based on Eureka's past loan loss
experience, known and inherent risks in the portfolio, estimated value
of any underlying collateral and current and prospective economic
conditions. However, the allowance for losses is subjective and may
be adjusted in the future depending upon economic conditions.
Additionally, various regulatory agencies, as an integral part of
their examination process, periodically review Eureka's allowance for
losses on loans. Such agencies may require Eureka to recognize
additions to the allowance based on their judgment and information
available to them at the time of their examination. Management
believes that the allowance for losses on loans is adequate.
(G) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation of premises and equipment
is generally computed using the straight-line method over the
estimated useful lives of the assets except for leasehold improvements
which is computed using the shorter of the straight-line method over
the remaining terms of the leases or the estimated useful life of the
asset. The estimated useful life is 32 years or less for premises and
leasehold improvements, and seven years or less for equipment.
Improvements are capitalized and maintenance and repairs are charged
to expense.
(H) Real Estate
-----------
Real estate held for investment is recorded at the lower of cost or
net realizable value. Real estate acquired through foreclosure and
real estate held for sale are recorded at the lower of cost or
estimated fair market value, less estimated disposition costs. Costs
related to the development and improvement of the properties are
capitalized. Valuations, based on market information, are performed
periodically by management and an allowance for losses is established
by a charge to operations, if determined necessary.
F-7
(I) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
Of
--
On January 1, 1996, the Partnership adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. The adoption did not have a material
effect on the Partnership's financial statements.
(J) Income Taxes
------------
The Partnership is a limited partnership for federal income and state
franchise tax purposes. Accordingly, the Partnership is not subject
to federal income and state franchise taxes. Instead, the Partners
are required to report their allocable share of the taxable income,
gain, loss and other Partnership items in their individual tax
returns.
The consolidated financial statement provision (benefit) for
income taxes relates to the Partnership's subsidiary, AFEH and its
subsidiaries. AFEH and its subsidiaries file calendar year
consolidated federal income and combined California franchise tax
returns. Deferred tax assets and liabilities are recorded for
estimated future tax consequences attributable to temporary
differences between financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the year in which the
temporary differences giving rise to such assets and liabilities are
expected to be realized or settled. A valuation allowance is recorded
if it is more likely than not that some portion or all of the deferred
tax assets will not be realized based on a review of available
evidence. The allowance is subject to ongoing adjustments based on
changes in circumstances that affect management's assessment of the
realizability of the deferred tax assets. Adjustments to increase or
decrease the valuation allowance are charged or credited,
respectively, to income tax expense (benefit).
(K) Interest Rate Exchange Agreements
---------------------------------
The Partnership adopted SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," on
December 31, 1994. The adoption of SFAS No. 119 did not have a
material effect on the Partnership's financial statements. Eureka uses
interest rate exchange agreements ("swaps") for purposes other than
trading, which are intended to reduce the impact of future
fluctuations in interest rates on fixed rate loans funded by variable
rate liabilities. A swap is an agreement between two parties in which
one party exchanges cash payments based on a floating rate of interest
for a counterparty's cash payment based on a fixed rate or a different
indexed floating rate of interest calculated on a notional principal
amount. The net interest received or paid on these contracts is
reflected as an adjustment to interest income on loans receivable.
(L) Goodwill
--------
The cost in excess of net assets from branch acquisitions is recorded
as goodwill and amortized using the straight-line method over a period
of seven years, which represents the estimated period of benefit.
(M) Recent Accounting Pronouncements
--------------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 (SFAS No. 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement establishes standards
under which, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and shall be applied prospectively. However, in
December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127 (SFAS No. 127) "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125," which defers the
effective date of certain provisions of SFAS No. 125 for one year.
Management does not expect the adoptions of SFAS No. 125 and SFAS No.
127 to have a material effect on the Partnership's financial
statements.
3. Assistance Agreement
--------------------
Under the terms of the Assistance Agreement between Eureka and the Federal
Deposit Insurance Corporation ("FDIC") entered into in 1988 in connection
with the assisted acquisition of the assets and liabilities of Eureka
Federal Savings and Loan Association, $50 million in preferred stock was
issued to the FDIC. In 1993, $30 million of the preferred stock was
redeemed by the FDIC. The $20 million in non-voting Series A Preferred
Stock which remains outstanding is mandatorily redeemable in 1997 and 1998
in the amount of $10 million each year, and has a liquidation value of $100
per share. The holder of this preferred stock is not entitled to
dividends. The preferred stock is being accreted
F-8
through the redemption dates of 1997 and 1998, and the accretion is
recorded as interest expense on other borrowings. The accretion for the
years ended December 31, 1996, 1995 and 1994 totaled $2.2 million, $1.9
million and $1.6 million, respectively, and is included in interest
expense.
Under the terms of the Assistance Agreement, after May 27, 1998, the
FDIC may engage an independent appraiser to perform a fair value valuation
of Eureka to determine if a final participation payment is due to the FDIC.
Management believes that a liability for the final participation payment
due under the terms of the Assistance Agreement is not required as of
December 31, 1996. The Assistance Agreement also contains provisions for
the distribution of any net sales proceeds among AFCA-5, BUC holders and
the FDIC.
4. Cash and Investments
--------------------
The Partnership is not required to maintain compensating cash balances for
agreements with other financial institutions. Federal funds sold represent
short-term instruments which are generally held overnight. At December 31,
1996, cash and amounts due from depository institutions included $1.0
million which is held on behalf of the FDIC according to the terms of the
Assistance Agreement.
Securities purchased under agreements to resell identical securities are
carried at cost which approximates market value and are as follows:
1996 1995
-------------- --------------
Balance at December 31, 5.3 million 20.5 million
Average balance during year 13.7 million 12.8 million
Maximum balance at any month-end 44.4 million 22.5 million
Weighted average days to maturity at December 31, 27 days 9 days
Weighted average interest rate 5.41% 5.92%
As of December 31, 1996, all of these repurchase agreements had original
maturities of three months or less and were considered cash and cash
equivalents. The underlying collateral for these agreements, which is held
by a third party custodian, consisted of U. S. Treasury Notes and mortgage-
backed securities.
Investments held to maturity are as follows at December 31, 1995 (dollars in
thousands):
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
--------- ---------- ---------- ------
U.S. Treasury Notes $39,996 $ - $ 283 $ 39,713
======= ======== ====== ========
5. Mortgage-Backed Securities
----------
The following table summarizes mortgage-backed securities held at December
31, (dollars in thousands):
1996 1995
---------------------------------------------- ------------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Market Amortized unrealized unrealized Market
cost gains losses value cost gains losses value
--------- ---------- ---------- ------- --------- ---------- ---------- --------
HELD TO MATURITY
- ----------------
FHLMC $112,868 $ 897 $ 80 $113,685 $ 93,546 $ 378 $ 15 $ 93,909
FNMA 139,422 1,965 1,951 139,436 162,599 3,536 1,195 164,940
Collateralized mortgage
obligations 42,209 12 309 41,912 61,430 69 485 61,014
Other non-agency 335,607 1,395 1,645 335,357 446,195 3,050 1,115 448,130
-------- ------ ------ -------- -------- ------ ------ --------
$630,106 $4,269 $3,985 $630,390 $763,770 $7,033 $2,810 $767,993
======== ====== ====== ======== ======== ====== ====== ========
Weighted average yield 7.02% 7.15%
===== ======
AVAILABLE FOR SALE
- -------------------
GNMA $ 30,157 $ 510 $ - $ 30,667 $ 37,103 $ 634 $ - $ 37,737
Collateralized mortgage
obligations 14,570 - 748 13,822 14,818 - 523 14,295
-------- ------ ------ -------- -------- ------ ------ --------
$ 44,727 $ 510 $ 748 $ 44,489 $ 51,921 $ 634 $ 523 $ 52,032
======== ====== ====== ======== ======== ====== ====== ========
Weighted average yield 6.81% 6.77%
==== ====
F-9
The following table sets forth the contractual maturities, amortized costs,
market values and weighted average yields for the Partnership's mortgage-
backed securities at December 31, 1996 (dollars in thousands):
Held to Maturity Available for Sale
------------------------------- ------------------------------
Weighted Weighted
Amortized Market average Amortized Market average
cost value yield cost value yield
--------- -------- -------- --------- ------- --------
Due within one year through five years $ 65,781 $ 65,780 6.53% $ - $ - -%
Due after five years through ten years 5,868 5,970 7.50% - - -%
Due after ten years through twenty years 68,178 67,741 6.80% 14,570 13,822 6.22%
Due after twenty years 490,279 490,899 7.75% 30,157 30,667 7.10%
-------- -------- ------- -------
$630,106 $630,390 7.02% $44,727 $44,489 6.81%
======== ======== ======= =======
The following table summarizes mortgage-backed securities pledged as
collateral at December 31, (dollars in thousands):
1996 1995
----------------------- ----------------------
Amortized Market Amortized Market
cost value cost value
---------- -------- --------- --------
Mortgage-backed securities pledged for:
Securities sold under agreements to repurchase $ 47,839 $ 46,472 $ 215,459 $217,338
Interest rate exchange agreements 11,578 12,143 15,902 16,653
FHLB advances 84,297 83,818 277,948 278,145
-------- -------- --------- --------
$143,714 $142,433 $ 509,309 $512,136
======== ======== ========= ========
6. Loans Receivable
----------------
The following table summarizes loans receivable at December 31, (dollars in
thousands):
1996 1995
---------- ----------
Real estate loans:
1-4 family residential $1,254,293 $1,284,282
Second mortgage 24,700 17,983
Multi-family residential 67,122 54,595
Commercial property and land loans 59,574 75,022
---------- ----------
Total real estate loans 1,405,689 1,431,882
---------- ----------
Consumer loans:
Revolving credit and overdrafts 744 781
Other installment loans 2,522 3,205
Loans secured by savings accounts 599 615
Timeshare 633 1,254
---------- ----------
Total consumer loans 4,498 5,855
---------- ----------
Total loans 1,410,187 1,437,737
Less: Unearned loan fees (deferred costs) (1,284) (1,231)
Discounts and premiums, net 567 508
Allowance for losses 7,051 6,878
---------- ----------
Total loans, net 1,403,853 1,431,582
Less: Loans held for sale 370 403
---------- ----------
Loans receivable, net $1,403,483 $1,431,179
========== ==========
Weighted average interest rate 7.78% 7.70%
==== ====
The above classifications are net of participation interests sold and loans
serviced for others. Eureka was servicing mortgage loans for others with
principal balances totaling approximately $246 million, $263 million and
$253 million at December 31, 1996, 1995 and 1994, respectively. Servicing
fee income from loans serviced for others totaled $613,000, $663,000 and
$659,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, mortgage loans with principal balances
approximating $318 million were pledged to the FHLB of San Francisco as
collateral for other borrowings with the FHLB and as collateral for future
additional borrowings.
Credit Risk and Concentration
-----------------------------
Eureka's loan portfolio consists principally of mortgage loans secured by
residential property in California and consumer loans extended to Eureka's
retail customers within Northern California. Eureka's lending activities
are focused primarily on loans secured by 1-4 family residential properties
located primarily in Northern California. Beginning in 1990, Eureka
purchased fixed and adjustable rate residential mortgage loans which met
Eureka's credit and underwriting standards from mortgage banks and savings
institutions. These purchases supplemented Eureka's internal loan
production. Eureka's wholesale loan origination system was established
during 1995, and enables Eureka to add assets that meet its credit quality
guidelines within its market area.
As of December 31, 1996, Eureka's portfolios of multi-family and commercial
real estate loans are highly seasoned and have a very low delinquency rate.
Concentration risk is also limited as the average loan size is
approximately $282,000 for multi-family and $359,000 for commercial loans.
F-10
The following table shows Eureka's investment in loans for which impairment
has been recognized or restructured in accordance with SFAS No. 114 and SFAS
No. 118 at December 31, (dollars in thousands):
1996 1995
---------------------------------- ----------------------------------
Recorded Average Interest Recorded Average Interest
Investment Investment Recognized Investment Investment Recognized
---------- ---------- ---------- ---------- ---------- ----------
Impaired loans without
valuation allowances:
1-4 family $2,410 $1,692 $38 $3,388 $2,400 $ 18
Multi-family - - - - - -
Commercial real estate - 271 - 1,767 1,880 92
------ ------ --- ------ ------ ----
2,410 1,963 38 5,155 4,280 110
Impaired loans with
valuation allowances:
1-4 family 586 393 - 45 125 -
Commercial real estate - 1,028 - 1,145 574 -
Allowance for credit loss (115) (199) - (311) (246) -
------ ------ --- ------ ------ ----
471 1,222 - 879 453 -
------ ------ --- ------ ------ ----
Total $2,881 $3,185 $38 $6,034 $4,733 $110
====== ====== === ====== ====== ====
1994
------------------------------------
Recorded Average Interest
Investment Investment Recognized
---------- ----------- ----------
Impaired loans without
valuation allowances:
1-4 family $5,239 $4,183 $ 51
Multi-family - 67 -
Commercial real estate 2,377 1,445 6
------ ------ ----------
7,616 5,695 57
Impaired loans with
valuation allowances:
1-4 family 390 195 -
Commercial real estate - - -
Allowance for credit loss (125) (79) -
------ ------ ----------
265 116 -
------ ------ ----------
Total $7,881 $5,811 $ 57
====== ====== ==========
The allowance for credit losses for impaired loans was included in the
total allowance for loan losses at December 31, 1996, 1995 and 1994. Non-
accrual loans were $4.4 million, $6.4 million and $8.3 million at December
31, 1996, 1995 and 1994, respectively. Interest income which was not
recognized on non-accrual loans totaled $216,000, $394,000 and $790,000 for
1996, 1995 and 1994, respectively.
7. Allowance for Loan Losses
-------------------------
The following table summarizes the activity in the allowance for losses on
loans (dollars in thousands):
Real Estate Loans Timeshare Loans
--------------------- ---------------------
Amount % of Total Amount % of Total
------- ---------- ------- ----------
December 31, 1993 $ 5,944 .39% $ 1,653 45.60%
=== =====
Provision for losses 540 60
Charge-offs (1,029) (151)
Recoveries 30 64
Transfers (133) -
Reductions/(1)/ - (515)
------- -------
December 31, 1994 5,352 .38% 1,111 50.29%
=== =====
Provision for losses 370 5
Charge-offs (312) (100)
Recoveries 6 91
Transfers 690 -
Reductions/(1)/ - (468)
------- -------
December 31, 1995 6,106 .43% 639 50.94%
=== =====
Provision for losses 962 3
Charge-offs (518) (46)
Recoveries - 33
Transfers 71 (3)
Reductions/(1)/ - (256)
------- -------
December 31, 1996 $ 6,621 .47% $ 370 58.49%
======= === ======= =====
Ratio of net charge-offs
to average gross loans
during 1996 .04% 1.33%
=== ====
Consumer Loans Total Loans
--------------------- ---------------------
Amount % of Total Amount % of Total
------- ---------- ------- ----------
December 31, 1993 $ 1,859 7.50% $ 9,456 .61%
==== ====
Provision for losses 646 1,246
Charge-offs (1,395) (2,575)
Recoveries 272 366
Transfers (25) (158)
Reductions/(1)/ - (515)
------- -------
December 31, 1994 1,357 6.46% 7,820 .54%
==== ====
Provision for losses 418 793
Charge-offs (1,331) (1,743)
Recoveries 500 597
Transfers (811) (121)
Reductions/(1)/ - (468)
------- -------
December 31, 1995 133 2.93% 6,878 .48%
==== ====
Provision for losses - 965
Charge-offs (57) (621)
Recoveries 52 85
Transfers (68) -
Reductions/(1)/ - (256)
------- -------
December 31, 1996 $ 60 1.56% $ 7,051 .50%
======= ==== ======= ====
Ratio of net charge-offs
to average gross loans
during 1996 11% .04%
==== ====
8. Accrued Interest Receivable
---------------------------
The following table summarizes accrued interest receivable at December 31,
(dollars in thousands):
1996 1995
------- -------
Investments $ 41 $ 331
Mortgage-backed securities 4,511 5,464
Loans 7,665 7,705
------- -------
$12,217 $13,500
======= =======
- -----------------------------
(1) Reductions are due to principal payoffs and remittances of pre-
acquisition originated loans.
F-11
9. Premises and Equipment
----------------------
Premises and equipment are summarized as follows at December 31, (dollars in
thousands):
1996 1995
--------- ---------
Land $ 1,444 $ 1,444
Buildings and improvements 6,563 6,556
Leasehold improvements 4,463 4,366
Furniture and equipment 9,664 9,505
-------- --------
22,134 21,871
Less accumulated depreciation and amortization (13,246) (12,336)
-------- --------
$ 8,888 $ 9,535
======== ========
10. Federal Home Loan Bank Stock
----------------------------
Eureka is required to own capital stock in the FHLB of San Francisco in an
amount at least equal to the greater of 1% of the aggregate principal
amount of its unpaid single family mortgage loans and similar obligations
at the end of each calendar year, or 5% of its advances (borrowings) from
the FHLB of San Francisco. Eureka was in compliance with this requirement
at December 31, 1996 and 1995, respectively.
11. Real Estate Held for Sale or Investment
---------------------------------------
Real estate held for sale or investment includes the following at December
31, (dollars in thousands):
1996 1995
------ -------
Real estate held for sale or investment $1,628 $2,686
Allowance for loss on real estate held
for sale or investment (300) (300)
------ ------
$1,328 $2,386
====== ======
The operating income (loss) for real estate held for sale or investment was
($245,416), ($812,471) and $246,942 in 1996, 1995 and 1994, respectively.
Activity in the allowance for losses on real estate held for sale or
investment is as follows for the years ended December 31, (dollars in
thousands):
1996 1995 1994
----- -------- ------
Balance at January 1, $ 300 $ 1,005 $ 880
Provision for losses - 700 125
Charge-offs - (1,405) -
----- ------- ------
Balance at December 31, $ 300 $ 300 $1,005
===== ======= ======
12. Real Estate Owned
-----------------
At December 31, 1996 and 1995, net real estate owned through foreclosure
amounted to $1.4 million and $2.5 million, respectively. Activity in the
allowance for losses on real estate owned is as follows for the years ended
December 31, (dollars in thousands):
1996 1995 1994
----- ----- -------
Balance at January 1, $ 198 $ 745 $ 1,031
Provision for losses 282 90 742
Net charge-offs (363) (637) (1,028)
----- ----- -------
Balance at December 31, $ 117 $ 198 $ 745
===== ===== =======
F-12
13. Customer Deposits
-----------------
Customer deposits were comprised of the following at December 31, (dollars
in thousands):
1996 1995
-------------------------------------- ---------------------------------------
Weighted Weighted
% of Average % of Average
Amount Total Interest Rate Amount Total Interest Rate
---------- --------- ------------- ---------- --------- --------------
Interest checking
accounts 1.00% to 4.00% $ 145,591 7.91% 1.67% $ 119,480 7.01% 1.12%
Non-interest checking
accounts 5,805 0.32 - 4,249 0.25 -
Money market accounts
2.05% to 4.27% 426,757 23.19 3.87% 321,159 18.84 3.40%
Passbook accounts 2.00% 39,326 2.13 2.00% 40,206 2.36 2.00%
---------- ------ ---------- ------
617,479 33.55 485,094 28.46
---------- ------ ---------- ------
Time certificates:
4.00% or less 84,669 132,088
4.01 to 6.00% 997,753 814,442
6.01 to 8.00% 125,281 257,054
8.01 to 10.00% 14,914 15,438
10.01 to 12.00% 8 7
12.01 to 14.00% 202 181
14.01 to 16.00% 179 162
---------- ------ ---------- ------
Total time certificates 1,223,006 66.45 5.35% 1,219,372 71.54 5.40%
---------- ------ ---------- ------
$1,840,485 100.00% 4.63% $1,704,466 100.00% 4.63%
========== ====== ========== ======
There were no brokered deposits at December 31, 1996 and 1995. The aggregate
amounts of time certificates of $100,000 or more were $273.2 million and
$250.0 million at December 31, 1996 and 1995, respectively. Accrued interest
on deposits at December 31, 1996 and 1995 amounted to $1.1 million and $1.3
million, respectively.
The following table summarizes customer deposits by remaining maturity at
December 31, (dollars in thousands):
1996 1995
----------- -----------
No contractual maturity $ 617,479 $ 485,094
Maturity within one year 934,486 853,558
1 to 2 years 222,701 278,141
2 to 3 years 41,764 59,591
3 to 4 years 11,091 16,229
4 to 5 years 11,670 10,491
Thereafter 1,294 1,362
---------- ----------
$1,840,485 $1,704,466
========== ==========
Interest expense is summarized as follows for the period ending December 31, (dollars in
thousands):
1996 1995 1994
---------- ---------- ----------
Checking $ 1,599 $ 1,302 $ 1,435
Money market/passbook 14,293 10,122 9,228
Time certificate 66,090 64,348 53,136
---------- ---------- ----------
$ 81,982 $ 75,772 $63,799
========== ========== ==========
14. Securities Sold Under Agreements to Repurchase
----------------------------------------------
Securities sold under agreements to repurchase identical securities are as follows:
1996 1995
------------- --------------
Balance at December 31, 44.4 million 206.9 million
Market value at December 31, 44.4 million 206.9 million
Average balance during year 109.7 million 404.4 million
Maximum balance at any month-end 164.5 million 484.1 million
Weighted average days to maturity at December 31, 36 days 36 days
Weighted average interest rate at December 31, 5.50% 5.74%
Weighted average interest rate for the year 5.41% 6.04%
The collateral for these agreements, which is held with a third party
custodian, consisted of mortgage-backed securities with carrying values of
$48.1 million and $217.1 million (including accrued interest of $0.3 million
and $1.6 million) and market values of $46.5 million and $217.3 million at
December 31, 1996 and 1995, respectively.
Securities sold under agreements to repurchase had the following maturities
at December 31, 1996: $19.3 million in 0 to 30 days; and $25.1 million in 31
to 60 days.
F-13
15. Other Borrowings
----------------
The unused borrowing capacity with the FHLB of San Francisco at December 31,
1996 and 1995 was $226 million and $274 million, respectively. The following
table summarizes FHLB advances at December 31, (dollars in thousands):
Interest Interest
1996 Rate 1995 Rate
-------- --------- -------- ---------
Short-term fixed rate advances
(maturing within one year) $ 49,298 5.61% $277,706 5.73%
Long-term fixed rate advances
(maturing through 2002) $ 57,700 5.73% $ 32,381 5.99%
Average balance during year $201,775 $ 85,117
Maximum balance at any month-end $305,878 $340,500
Mortgage-backed securities pledged as collateral
for other borrowings $ 85,000 $280,000
Weighted average interest rate at December 31, 5.67% 5.76%
Weighted average interest rate for the year 5.60% 5.97%
16. Interest Rate Exchange Agreements
---------------------------------
The Partnership has entered into interest rate exchange agreements to reduce
the impact of future fluctuations in interest rates on fixed rate loans funded
by variable rate liabilities. The floating rates to be received by the
Partnership under the terms of the above agreements are reset monthly,
quarterly or semi-annually and are indexed to the FHLB Eleventh District cost
of funds index or the three or six month London Interbank Offered Rate
("LIBOR"). Interest rate exchange agreements outstanding per contractual
terms are as follows at December 31, (dollars in thousands):
1996 1995
-------------------------------------------- -----------------------------------------
Weighted Average Interest Rate Weighted Average Interest Rate
------------------------------ ------------------------------
Notional Pay Receive Notional Pay Receive
Year of Maturity Amount (Fixed) (Floating) Amount (Fixed) (Floating)
---------- -------- ---------- ------- -------- ----------
1996 $ - - % - % $45,000 8.12% 5.72%
1997 40,000 8.87% 5.21% 40,000 8.87% 5.58%
1998 10,000 8.57% 5.56% 10,000 8.57% 5.83%
1999 30,000 7.89% 5.56% 30,000 7.89% 5.90%
------- ------
80,000 8.47% 5.39% 125,000 8.34% 5.73%
Pay Receive Pay Receive
(Floating) (Floating) (Floating) (Floating)
------- --------- --------- ---------
1997 20,000 5.52% 5.39% 20,000 5.91% 5.66%
------- -------
20,000 5.52% 5.39% 20,000 5.91% 5.66%
-------- -------
$100,000 7.86% 5.39% $145,000 8.00% 5.72%
======== ========
In 1993, Eureka established a liability and recorded a charge to earnings of
$20.4 million related to interest rate exchange agreements that were no longer
deemed effective as hedges. During the year ended December 31, 1996, a net
credit of $0.3 million to non-interest expense was recorded to decrease the
interest rate exchange agreements liability for the effect of interest rate
fluctuations throughout the year on the market value of obligations deemed
ineffective as hedges. During the year ended December 31, 1995, Eureka
recorded a provision of $1.9 million to increase the interest rate exchange
agreements liability to reflect the effect of interest rate decreases on the
market value of obligations. The exchange agreements liability totaled $1.2
million and $3.4 million at December 31, 1996 and 1995, respectively. Net
interest payable on exchange agreements was $0.6 million and $0.7 million at
December 31, 1996 and 1995, respectively, and was included in other
liabilities and accrued expenses.
Net interest paid or accrued on interest rate exchange agreements of
approximately $0.8 million, $2.4 million and $6.3 million was included as an
adjustment to interest income on loans for the years ended December 31, 1996,
1995, and 1994, respectively.
The Partnership's credit exposure associated with non-performance of
counterparties is controlled by the Partnership's credit policies. All
agreements are with primary government securities dealers. The Partnership
does not require collateral to support the credit exposure related to these
financial instruments.
17. Income Taxes
------------
The Partnership files calendar year federal and state Partnership information
returns, reporting its operations on an accrual basis. The consolidated
financial statement provisions for income tax for the years ended December 31,
1996, 1995 and 1994 relate to the Partnership's subsidiary, AFEH and its
subsidiaries. AFEH and its subsidiaries file calendar year consolidated
federal income and combined California franchise tax returns.
Eureka determined its bad debt deduction using the experience method in 1995
and 1994. Effective 1996, Eureka is allowed a bad debt deduction equal to
actual net charge-offs for federal tax purposes and continues to use the
experience method for California tax purposes.
F-14
The income tax provisions for the years ended December 31, 1996, 1995 and 1994
consist of (dollars in thousands):
1996 1995 1994
-------------------------------- -------------------------- -------------------------
Federal State Total Federal State Total Federal State Total
--------- -------- --------- -------- ------ ------ -------- ------ ------
Current $ 364 $ 131 $ 495 $ 353 $ 143 $ 496 $ 77 $ 72 $ 149
Deferred (19,649) (1,716) (21,365) (353) (143) (496) (77) (72) (149)
-------- ------- -------- ----- ----- ----- ---- ----- -----
$(19,285) $(1,585) $(20,870) $ - $ - $ - $ - $ - $ -
======== ======= ======== ===== ===== ===== ==== ===== =====
AFEH's expected income tax rate for 1996, 1995 and 1994 differs from the
actual effective income tax rate as a result of the following:
1996 1995 1994
--------- ------- -------
Tax at statutory rate 34.00% 35.00% 35.00%
State tax net of federal benefits 8.30 7.50 7.50
Increases (reductions)
Non-deductible amortization 4.00 2.30 2.50
Change in valuation allowance (248.40) (44.40) (46.60)
Other, net 4.10 (0.40) 1.60
------- ------ ------
Effective income tax rate (198.00%) 0.00% 0.00%
======= ====== ======
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statements carrying
amount and the tax bases of assets and liabilities which will result in future
deduction amounts. A valuation allowance is established to reduce the
deferred tax assets to the level at which it is more likely than not that the
tax benefits will be recognized.
Components of net deferred tax assets at December 31, (dollars in thousands):
1996 1995
--------- ---------
Deferred tax assets:
Purchase accounting adjustments $ 2,165 $ 2,654
Excess book accumulated depreciation and amortization 937 697
Unrecognized built-in losses 168 30
Alternative minimum tax credit 1,382 1,277
Investment tax credit 667 667
Net operating loss carryovers 72,425 77,614
Other accrued expenses not deducted for tax purposes 1,976 1,614
Provision for loss on interest rate exchange agreements 508 1,407
-------- --------
Total gross deferred tax assets 80,228 85,960
Less valuation allowance (48,850) (75,048)
-------- --------
Deferred tax assets 31,378 10,912
-------- --------
Deferred tax liabilities:
Tax bad debt reserves in excess of book 4,022 4,490
Deferred income 4,713 5,145
-------- --------
Deferred tax liabilities 8,735 9,635
-------- --------
Net deferred tax assets $ 22,643 $ 1,277
======== ========
Net operating loss carryforwards and investment tax credits generated by
Eureka and its subsidiaries through the date Eureka was acquired by AFEH are
available to offset future taxable income or income taxes of Eureka and its
subsidiaries, but may not be used to offset future taxable income or income
taxes of any other new member of the consolidated group. At December 31, 1996,
pre-acquisition net operating loss carryforwards for federal income tax
purposes amounted to $102 million and will expire in various years through
2002. At December 31, 1996, post-acquisition net operating loss carryforwards
for federal income and state franchise tax purposes amounted to approximately
$107 million and approximately $29 million, respectively, and will expire in
various years through 2007 and 1997, respectively.
At December 31, 1996, the Partnership has alternative minimum tax credit
carryovers of $1.4 million and investment tax credit carryovers aggregating
approximately $667,000 which expire in years 1998 through 2000. Such
investment tax credit carryovers are subject to a 35% reduction under the Tax
Reform Act of 1986.
18. Benefit and Compensation Plans
------------------------------
Benefit Plans
-------------
Eureka has a qualified, noncontributory defined benefit retirement plan (the
"Plan") covering substantially all of its employees. Eureka "froze" the Plan
effective January 1, 1994. Prior to that date, the benefits were based on the
average of the highest five consecutive annual salaries of the ten years
preceding age 65. An employee became fully vested upon completion of five
years of qualifying service. It is the policy of Eureka to fund the minimum
amount required.
Due to the Plan's frozen status, no additional benefits will accrue in the
Plan after January 1, 1994. All Plan participants became fully vested in
their accrued benefits on this date. Eureka may elect to terminate the frozen
Plan
F-15
at some point in the future according to its rights under the Plan. The Plan
assets consist primarily of a well-diversified portfolio of equities and fixed
income securities.
The following table sets forth the Plan's funded status and amounts recognized
in Eureka's consolidated balance sheet at December 31, (dollars in thousands):
1996 1995
------- ------
Actuarial present value of accumulated benefit obligation (all vested) $6,093 $6,260
Fair value of Plan assets at December 31, 6,387 6,261
------- ------
Plan assets in excess of projected benefit obligation 294 1
Unrecognized net loss from past experience different
from that assumed, and effects of changes in assumptions 664 954
Unrecognized prior service cost (189) (209)
Unrecognized net transition asset (7) (10)
------ ------
Total pension prepayment $ 762 $ 736
====== ======
Weighted average discount rate 7.5% 7%
Expected long-term rate of return on assets 8% 8%
The components of net pension expense (recovery) for the years ended December 31, (dollars in
thousands):
1996 1995 1994
------ ------ --------
Interest cost on projected benefit obligation $ 439 $ 497 $ 511
Actual return on Plan assets (676) (918) 63
Net amortization and deferral 211 425 (524)
------ ------ --------
Total pension expense (recovery) $ (26) $ 4 $ 50
====== ====== ========
Beginning January 1, 1994, Eureka introduced a new retirement plan, the
EurekaBank Service Investment Plan ("ESIP"), which covers substantially all of
its employees. Through this plan, Eureka makes an annual retirement
contribution to an ESIP account based on the participant's length of service
which equals one percent of eligible pay per year up to a maximum contribution
of four percent for four or more years of service provided that the
participant must be employed on the last day of the year. Participants become
100% vested in their account after five years of service. The amount recorded
as contribution expense for the ESIP totaled $478,200, $505,000 and $487,000
for 1996, 1995 and 1994, respectively, and was included in other liabilities
at December 31, 1996 and 1995.
Eureka also has a qualified 401(k) plan effective as of July 1, 1989,
covering substantially all employees. Eureka's matching contributions to the
401(k) plan for the years ended December 31, 1996, 1995 and 1994 amounted to
$433,484, $415,415 and $438,454, respectively. In addition, Eureka has a post
retirement medical plan, and the expense totaled approximately $65,000,
$59,500 and $45,000 for 1996, 1995 and 1994, respectively.
Compensation Plans
------------------
At December 31, 1996, the Partnership had two incentive compensation plans:
the Long Term Incentive Plan ("LTIP" or, "Plan") and the Equity Appreciation
Plan ("EAP").
The LTIP as described in the Plan agreement, provides current and deferred
compensation to full-time or part-time employees or directors, as approved by
the board of directors of Eureka. The compensation is determined annually
based on Eureka's return on average equity for the year. The compensation is
paid over three subsequent years of which one-half is cash and one-half is
BUCs. Calculation of the awards, the form and timing of payments and
forfeitures are described in the Plan.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," which
established the accounting and reporting requirements for stock-based employee
compensation plans. SFAS No. 123 specifies that stock-based compensation
awards be recognized using the fair value of the equity instrument issued.
SFAS No. 123 also permits an enterprise to continue to account for its stock-
base compensation awards under the provisions of Accounting Principles Board
Opinion No. 25 ("APBO No. 25"), "Accounting for Stock Issued to Employees."
The Partnership has elected to continue to account for its LTIP under APBO
No. 25. Compensation expense related to the LTIP amounted to $686,000,
$784,000 and $591,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The compensation expense recorded in accordance with APBO No.
25 approximates the amount which would have been recorded in accordance with
SFAS No. 123, therefore no pro forma information is presented.
F-16
At December 31, 1996, there were 45,827 BUCs awarded under the LTIP that
were not fully vested. There were no forfeitures for the 1996 and 1995
awards. A summary of cash and BUCs awards under the LTIP for 1996 and 1995 is
as follows:
1996 1995
------------------------------ ----------------------------
BUCs BUCs
------------------ -------------------
Cash Number Avg. Price Cash Number Avg. Price
-------- ------ ---------- -------- ------ ----------
Awards granted $662,497 21,769 $30.425 $365,750 12,854 $28.44
Weighted average price of BUCs
granted during the year $30.425 $28.44
========== ==========
During 1996, the EAP was implemented and eligible participants include
Eureka officers, directors and select employees of Eureka and AFEH, as
approved by the board of directors of Eureka. Participants receive cash
compensation based on the appreciation in Eureka's equity from April 1, 1996
through March 31, 1999. Only participants that remain as employees or
directors as of March 31, 1999 are eligible to receive awards. The cash
awards may be paid between March 31, 1999 and March 31, 2006. Based on the
provisions of the EAP and Eureka's equity appreciation, compensation expense
for 1996 for the EAP was $983,141.
19. Capital
-------
Capital Requirements
--------------------
The Office of Thrift Supervision ("OTS") requires that savings institutions
satisfy three separate capital requirements: a leverage ratio of core capital
to total adjusted assets of 3%, a tangible capital to total adjusted assets
ratio of 1.5% and a risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1996, Eureka's regulatory capital ratios exceeded the
requirements and were as follows: 6.96% leverage ratio, 6.96% tangible
capital ratio and 15.95% risk-based ratio.
The most recent notification from the OTS categorized Eureka as well
capitalized under the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") regulatory framework for prompt corrective action. This capital
classification is solely for purposes of federal regulatory capital adequacy
purposes, and the administration of federal "prompt corrective action"
requirements, and is not necessarily indicative of Eureka's actual financial
condition. To be categorized as well capitalized, the institution must
maintain the following: a leverage ratio of core capital to total adjusted
assets of 5%, a Tier 1 risk-based capital to risk-weighted assets ratio of 6%
and a risk-based capital to risk-weighted assets ratio of 10%. There are no
conditions or events since that notification that management believes have
changed Eureka's capital category.
Dividend Restrictions
---------------------
The Capital Maintenance Agreement, which expires when the FDIC Preferred Stock
is redeemed, also contains certain restrictions on disposition of the
ownership of Eureka and AFEH and dividend payments by Eureka. The
Partnership's primary source of funds is dividends paid by (or accrued from)
Eureka. These dividends provide the funds for distributions to the BUC
Holders. Dividend payments by Eureka are subject to the following limitations
under the Capital Maintenance Agreement:
- No dividends may be paid if regulatory capital is less than required
levels.
- Aggregate dividends paid subsequent to the Acquisition may not exceed
50% of the capital contributed upon and after the Acquisition, plus 50%
of aggregate net income earned subsequent to the Acquisition.
- Dividends in any calendar year may not exceed the greater of $12 million
or 50% of net income for that year.
The payment of dividends to AFEH from Eureka is subject to OTS regulations
requiring thirty days prior notice of the intent to declare dividends.
Additionally, the OTS has the authority to preclude the declaration of any
dividends.
20. Commitments and Contingencies
-----------------------------
The following lending and investment commitments were outstanding at
December 31, (dollars in thousands):
1996 1995
------- -------
Commitments to originate fixed rate mortgage loans $ 4,159 $ 2,857
Commitments to originate adjustable rate mortgage loans $43,368 $27,548
Commitments to purchase mortgage loans $ 6,145 $21,300
Commitments to sell mortgage loans $ 500 $ 1,328
There were no other outstanding commitments to purchase or sell securities at
December 31, 1996 and 1995.
Eureka is involved in various legal actions arising in the normal course of
business. It is the opinion of management, after consultation with counsel,
that resolution of these matters would not have a material adverse effect on
the Partnership's consolidated financial condition or operations.
F-17
Certain branch and office locations are leased by AFEH or Eureka under
operating type leases expiring at various dates through the year 2008, except
for one lease which expires in the year 2040. Related rental expense during
1996, 1995 and 1994 amounted to $4.8 million, $4.7 million and $4.9 million,
respectively. Future minimum lease payments under terms of existing
operating leases at December 31, 1996 are $4.8 million in 1997, $4.3 million
in 1998, $3.7 million in 1999, $1.8 million in 2000, $1.2 million in 2001 and
$7.2 million thereafter.
At December 31, 1996, loans of approximately $10.2 million had been sold
with recourse to repurchase if loans become 120 days delinquent or upon
completion of the foreclosure process. These loans, which are secured by 1-4
family residential mortgages, are seasoned and were sold by Eureka prior to
its acquisition by AFEH. Repurchases of loans sold with recourse amounted to
less than $25,000 for the years ended December 31, 1996, 1995 and 1994. There
were no foreclosures of these loans.
21. Parent Company Only Financial Information (dollars in thousands)
----------------------------------------------------------------
CONDENSED BALANCE SHEETS CONDENSED STATEMENTS OF INCOME
------------------------ ------------------------------
December 31, Years Ended December 31,
------------------------ ----------------------------
1996 1995 1996 1995 1994
Assets: Income:
Cash and cash
equivalents $ 2,560 $ 1,829 Dividends from subsidiary $10,800 $10,800 $ 8,100
Investment in subsidiary Income from short-term
at cost plus equity in investments 115 85 64
undistributed ------ ------ ------
earnings
174,715 154,148 10,915 10,885 8,164
Other assets 2,727 2,721 Expenses:
-------- --------
Operating and admin-
Total assets $180,002 $158,698 istrative 420 420 408
======== ======== ------- ------- -------
Liabilities and partners'
capital: Earnings before
Accounts payable $ 118 $ 129 undistributed income
Partners' of subsidiary 10,495 10,465 7,756
distributions
payable 2,437 2,437
-------- --------
Total
liabilities 2,555 2,566 Undistributed income
Partners' capital 177,447 156,132 of subsidiary 20,917 6,770 7,436
-------- -------- ------- ------- -------
Total
liabilities Net income $31,412 $17,235 $15,192
and partners' ======= ======= =======
capital $180,002 $158,698
======== ========
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
Years Ended December 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,412 $ 17,235 $ 15,192
Adjustments to reconcile net income to net
cash used in operating activities:
Equity in earnings of subsidiary (31,717) (17,570) (15,537)
Other adjustments (17) 14 (81)
-------- -------- --------
Net cash used in operating activities (322) (321) (426)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from subsidiary 10,800 10,800 8,100
-------- -------- --------
Net cash provided by investing activities 10,800 10,800 8,100
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (9,747) (9,747) (9,747)
-------- -------- --------
Net cash used in financing activities (9,747) (9,747) (9,747)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 731 732 (2,073)
Cash and cash equivalents at beginning of period 1,829 1,097 3,170
-------- -------- --------
Cash and cash equivalents at end of period $ 2,560 $ 1,829 $ 1,097
======== ======== ========
22. Transactions with Related Parties
---------------------------------
The Partnership and AFEH paid or reimbursed AFCA-5 for certain costs and
expenses incurred in connection with the operation of the Partnership
including legal and accounting fees and other administrative costs. The
amount of such expenses incurred by AFCA-5 and reimbursed by the Partnership
or AFEH, was $446,370, $435,416 and $624,705 for the years ended 1996, 1995
and 1994, respectively.
AFEH, Eureka and an affiliate of AFCA-5, America First Service Corporation
("AFSC"), have entered into a licensing agreement through which AFSC provides
services to AFEH and Eureka which include economic and financial advice and
consultation services. AFEH is committed to pay an annual fee equal to 0.5%
of Eureka's interest income and other income without deduction for interest
expense and other expenses. During 1996, 1995 and 1994, $850,112, $863,793
and $761,963, respectively, of the annual fees had been paid or accrued.
F-18
23. Summary of Unaudited Quarterly Results of Operations
----------------------------------------------------
Summary of Unaudited Quarterly Results of Operations
Year ended December 31, 1996
(dollars in thousands except per BUC amounts)
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ------------ ------------
Interest income $ 42,249 $ 40,389 $ 39,789 $ 39,571
Interest expense (26,770) (25,682) (24,883) (24,336)
-------- -------- -------- --------
Net interest income 15,479 14,707 14,906 15,235
Provision for loan losses (408) (372) (71) (114)
Non-interest income 1,419 1,931 1,708 3,342
Non-interest expense (10,978) (10,938) (22,122) (13,182)
-------- -------- -------- --------
Net income (loss) before income taxes 5,512 5,328 (5,579) 5,281
Income tax benefit - - - (20,870)
-------- -------- -------- --------
Net income (loss) $ 5,512 $ 5,328 $ (5,579) $ 26,151
======== ======== ======== ========
Net income (loss) per BUC $.82 $.79 $(.66) $3.53
======== ======== ======== ========
Summary of Unaudited Quarterly Results of Operations
Year ended December 31, 1995
(dollars in thousands except per BUC amounts)
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ----------- ------------ ------------
Interest income $ 38,682 $ 39,855 $ 42,675 $ 42,428
Interest expense (25,380) (26,494) (28,208) (27,520)
-------- -------- -------- --------
Net interest income 13,302 13,361 14,467 14,908
Provision for loan losses (164) (188) (235) (206)
Non-interest income 2,028 2,877 2,307 2,211
Non-interest expense (11,649) (12,589) (11,428) (11,767)
-------- -------- -------- --------
Net income before income taxes 3,517 3,461 5,111 5,146
Provision for income taxes - - - -
-------- -------- -------- --------
Net income $ 3,517 $ 3,461 $ 5,111 $ 5,146
======== ======== ======== ========
Net income per BUC $.55 $.54 $.76 $.78
======== ======== ======== ========
24. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of estimated fair values for financial instruments. Such
estimates are subjective in nature, involving significant judgment regarding
the risk characteristics of various financial instruments at a discrete point
in time. Therefore, such estimates could vary significantly if assumptions
regarding uncertain matters were changed. Major assumptions, methods, and
fair value estimates for Eureka's financial instruments for 1996 and 1995 are
set forth below.
Cash and Short-Term Investments - The carrying amount was a reasonable
-------------------------------
estimate of fair value.
Mortgage-Backed Securities - The fair value estimates for mortgage-backed
--------------------------
securities were based on quoted market prices or dealer quotes, and included
the carrying value of accrued interest receivable which was a reasonable
estimate of fair value.
Loans Receivable - Fair value of real estate mortgage loans was estimated
----------------
using a discounted cash flow method, adjusted for differences in credit risk
and liquidity. Fair value estimates for real estate mortgage loans included
the carrying value of accrued interest receivable which was a reasonable
estimate of fair value.
Other Financial Instrument Assets - Other financial instrument assets
---------------------------------
consisted of an investment in FHLB stock, the carrying value of which was
deemed a reasonable estimate of fair value.
Deposit Liabilities - The carrying amount of deposits with no stated maturity
-------------------
date was a reasonable estimate of fair value. The fair value of time deposits
(certificates of deposit) was estimated using a discounted cash flow
methodology based on current market rates for wholesale borrowing
alternatives, and included the carrying value of accrued interest payable
which was a reasonable estimate of fair value.
Borrowings - Borrowings consisted of securities sold under agreements to
----------
repurchase and FHLB advances. The fair value was estimated using a discounted
cash flow method based on current market rates for similar debt and
maturities, and included the carrying value of accrued interest payable which
was a reasonable estimate of fair value.
F-19
Other Financial Instrument Liabilities - Other financial instrument
--------------------------------------
liabilities consisted of preferred stock and other financial liabilities, the
carrying values of which were deemed a reasonable estimate of fair value.
Interest Rate Exchange Agreements - The fair value of interest rate exchange
---------------------------------
agreements was estimated using the average of current bid and ask rates for
agreements of similar remaining terms, after considering the creditworthiness
of the exchange agreements' counterparties. The carrying amount included the
liability established based on the estimated fair value of the exchange
agreements that were no longer deemed effective as hedges.
Commitments to Extend Credit - In 1996 and 1995, commitments to extend credit
----------------------------
were related to origination of residential and commercial mortgage loans. The
fair value of such commitments was estimated using current market rates for
loans with similar characteristics versus the committed rates.
Franchise Value and Intangible Assets - The estimated value of Eureka's
-------------------------------------
financial instruments did not include certain material intangible assets.
Management believes that the value of the deposit franchise and customer base
was significant. In addition, the estimated fair values did not include the
value of the portfolio of loans serviced for others.
Estimated fair values of financial instruments at December 31, (dollars in
thousands):
1996 1995
----------------------------- ------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
---------------- ----------- ---------------- -----------
Financial assets:
Cash and short-term investments $ 56,130 $ 56,130 $ 72,605 $ 72,605
Mortgage-backed securities 679,106 679,859 861,262 867,010
Loans receivable 1,411,519 1,416,826 1,439,290 1,451,495
Other 21,828 21,828 21,509 21,509
Financial liabilities:
Demand deposits 618,091 618,091 485,662 485,662
Time deposits 1,223,464 1,225,196 1,220,707 1,223,090
Borrowings 153,851 153,870 521,052 521,586
Other 18,377 18,377 16,245 16,245
Off-balance sheet financial instruments:
Interest rate exchange agreements liability (1,234) (2,246) (3,385) (5,455)
Commitments to extend credit - 8 - 13
F-20