The acquisition of Family Federal in 1985 provided additional net operaung losses of approximately $4.5 million to offset future taxable income. If utilized the carryforwards attributable to Family Federal, expiring in 1988-1990, will reduce the excess of cost over net tangible assets acquired on a retroactive basis. The net operating loss carryforward for consolidated financial statement purposes is greater than the tax return net operating loss carryforward by $763.000 as a result of timing differences. In addition, the Association has investment tax credit carryforwards of approximately $191,000, which will expire at various dates through 1999. Rental expense, net of sublease income, under all operating leases by year was approximately $718,000, $377,000 and $317.000 for the years ended September 30, 1985, 1984 and 1983, respectively. (14) Loan Commitments At September 30, 1985, the Association had outstanding commitments to originate and purchase loans at variable interest rates aggregating approximately $63,498,000 and at fixed interest rates aggregating approximately $55.742.500. Fixed interest rate commitments are at market rates as of the commitment date and generally expire within 60 days. (15) Stock Conversion On November 27, 1985, the Association converted from a mutual to a capital stock savings and loan association. In the conversion, the Association sold 2.446,625 shares of common stock at $10 per share, realizing proceeds of approximately $22.500.000, which are net of approximate costs of $2.000.000 associated with the conversion. At the ume of the conversion the Association established a liquidation account in an amount equal to its retained earnings as of September 30, 1985. The liquidation account will be maintained for the benefit of depositors as of the eligibility record dates who conunue to maintain their depos its in the Association after conversion. In the event of a complete liquidation (and only in such an event), each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportion. ate amount of the then current adjusted balance for deposits then held, before any liquidation distribution may be made with respect to the stockholders. Except for the repurchase of stock and payment of dividends by the Association, the existence of the liquidation account will not restrict the use or application of such retained earnings. The Association may not declare or pay a cash dividend on. or repurchase any of, its capital stock if the effect thereof would cause the retained earnings of the Association to be reduced below either the amount required for the liquidation account or the net worth requirement imposed by the FSLIC. or for a period of three years may not declare or pay a cash dividend on or repurchase any of its stock in an amount in excess of 50% of the greater of the Association's net income for the fiscal year in which the dividend is declared or the repurchase is made, or the average of the Association's net income for the current fiscal year and no more than two immediately preceding fiscal vears without prior approval of the FSLIC Mr. WYDEN. Do you believe this $15 million income capital certificate is a material item on Columbia's balance sheet? Mr. SAMPSON. Yes, I do. Mr. WYDEN. Is this income capital certificate permitted to be included in their net worth under GAAP? Mr. SAMPSON. At the time this report was published, there was no specific rule with respect to this matter, and one could have argued this was acceptable or one could have argued the position the FASB has taken more recently as the appropriate treatment under GAAP. Mr. WYDEN. Was Peat, Marwick wrong when it says in its audit report that Columbia's financial statements are prepared in conformity with generally accepted accounting principles applied on a consistent basis? Mr. SAMPSON. At the time they issued the report, since there was no specific rule in GAAP, one could argue that it was acceptable. The FASB letter from the staff, which told us how they viewed this matter to be treated under GAAP was dated March 28, 1986. Today, this would not be an acceptable presentation. Mr. WYDEN. In testimony before the subcommittee on July 19, 1985, more than 3 months before Columbia's annual report was issued, Chairman Gray of the bank board said There are no differences in the accounting principles applied to thrifts subject to the board's jurisdiction and companies that are registered with the SEC: Thus, thrifts subject to the board's jurisdiction play by the same set of rules as the SEC Exchange Act registrants. Does the SEC permit its registrants to include income capital certificates as net worth in their financial reports that are given to the public? Mr. SAMPSON. To my knowledge, the SEC does not have any registrants that file with us which have these income capital certificates. Mr. DINGELL. Would the gentleman yield? Are you sure of that? It is my understanding that both the FASB and the SEC have made clear that instruments such as income capital certificates cannot be included in net worth under generally accepted accounting principles. Mr. SAMPSON. That is correct at the present time. The certificate issued by Columbia is called an income capital certificate, but it is more like what is called a permanent income capital certificate. The difference is that an income capital certificate generally has to be repaid if the association has sufficient income or net worth. The permanent income capital certificate does not have to be repaid unless the institution so chooses. This is really a permanent income capital certificate. Mr. DINGELL. It is called an income capital certificate, is it not, in the report? Mr. SAMPSON. Yes, sir, but the notes disclose it does not have a maturity date. Mr. DINGELL. It says, "income capital certificate". Mr. SAMPSON. Yes, sir. Mr. DINGELL. And it says note two. I don't know what note two says. Mr. DINGELL. It says, "the ICC outstanding qualifies for use by the association for the purpose of meeting its regulatory net worth requirements." Now, it doesn't say that it meets the requirements for purposes of generally accepted accounting principles, which are the standards you tell us are imposed in matters of this kind. It says, "For financial reporting purposes, the ICC is considered net worth", but that is under regulatory accounting principles as opposed to generally accepted accounting principles. Mr. SAMPSON. I believe that refers to GAAP, Mr. Chairman. Peat, Marwick has reported this is in accordance with GAAP at that time. The note also says that no annual redemption payments are required by the agreement so it is a permanent certificate. Mr. WYDEN. Mr. Sampson, based on the 1985 financial statements, is Chairman Gray wrong when he says the SEC and the home loan bank board used the same accounting rules in Columbia First? Mr. SAMPSON. The bank board has rules which require their public reports to follow GAAP, not regulatory accounting. Mr. WYDEN. Is he wrong when he says that you all have, that the SEC and the home loan bank board have the same accounting rules? Yes or no? Mr. SAMPSON. No, he is not wrong. From time to time, you have to decide how GAAP applies to a particular transaction, and I would not tell you we always would come to the same conclusion. Mr. WYDEN. Chairman Gray also testified the home loan bank board conducts a full review of each filing of the bank under the Exchange Act. If the bank board reviewed Columbia's 1985 annual report and permitted income capital certificates to be included in net worth, do you believe the bank board permitted the issuance of a financial report to the public, which then contains materially misleading information regarding the actual net worth of Columbia under GAAP, generally accepted accounting principles? Mr. SAMPSON. I refer you to my previous statement, Mr. Wyden, where I indicated GAAP did not specifically deal with this transaction at that time. They could have believed this was in accordance with GAAP at that time. Mr. WYDEN. Well, but the rule was evolutionary. It was in the process of going forward. I guess what I would like to know is whether you believe the bank board permitted the issuance of a report to the public which really contained materially misleading information? Mr. SAMPSON. No, I do not. Mr. WYDEN. Is it misleading now? Mr. SAMPSON. Under present rules, it would be required to be revised. It is incorrect. Mr. WYDEN. That makes it clear to me that it is misleading and I think that is what we are concerned about on the subcommittee. That is what we are concerned about in terms of depositors and consumers being hurt on the basis of something you have just told me would have to be revised because, as I see it, it is misleading. Mr. DINGELL. One of these devices works this way. In this instance, the savings and loan gave a $15 million note to somebody, right? Mr. SAMPSON. Yes, sir. Mr. DINGELL. I assume that somebody was the Federal home loan bank board. Mr. SAMPSON. Or FSLIC. Mr. DINGELL. And at the same time, the Federal home loan bank board, or whoever the other party was to this transaction, gave them a note for $15 million. Mr. SAMPSON. That is correct. Mr. DINGELL. How is this different than the way this thing was done when ESM collapsed? ESM was giving notes back and forth among its sundry parts. Mr. SAMPSON. It is different from ESM because ESM didn't always have the assets backing up the notes, they said they did. In this case, there was a note which went to the Federal savings and loan institution and, and there was a note which came from them to Columbia. Mr. DINGELL. These notes wash each other out nicely, do they not? Mr. SAMPSON. That is what the FASB staff indicated in their March 28 letter. They require these to be offset and not shown as either assets or liabilities, yes, sir. Mr. DINGELL. I am trying to figure out how the investor is given the truth. FASB says something ought to be done here to make the truth available for everybody. I don't detect the SEC is doing anything which shows any particular diligence in seeing the truth is made available. These folks show a $15 million asset on the books without a $15 million liability, which should be there. Mr. SAMPSON. Mr. Dingell, you could question whether that is a liability. This particular Mr. DINGELL. Let's put it this way: They get a $15 million_note from somebody else. I guess it is the Federal Home Loan Bank Board. They give us a $15 million note of their own. Mr. SAMPSON. It is not a note in a conventional sense. It does not have a repayment date. Mr. DINGELL. It is a debt, isn't it? Mr. SAMPSON. No, sir. Mr. DINGELL. This is the most remarkable thing. You mean to say they give a note that is not considered a debt? What is it evidence of? Mr. SAMPSON. It is evidence of an interest of the Bank Board in this institution. They have a $15 million interest, then. Mr. DINGELL. The Bank Board gets a note from the bank and the Bank Board gives the bank a note. You have got an exchange of notes. Mr. SAMPSON. It has been likened to a sale of stock to the Bank Board by Columbia. The Bank Board has bought an equity interest. Mr. DINGELL. Why isn't it carried then as a sale of stock? Mr. SAMPSON. Well Mr. DINGELL. It is carried as a debt, is it not? Mr. SAMPSON. No, sir, it is not. Mr. DINGELL. It doesn't show up in the capital structure of the bank, does it? Mr. SAMPSON. Yes, it would show up in the capital structure. That is the way they have presented it as an item in the capital structure, which is called an income capital certificate. That is particular name for a security. Securities can be many different types, common stock, redeemable preferred stocks or income capital certificate, which has no maturity date. Mr. DINGELL. What does this document have that is in common with stock? Is it regulated by the SEC? Mr. SAMPSON. No, sir. Mr. DINGELL. Regulated by the State blue sky laws? Mr. SAMPSON. I don't know that. Mr. DINGELL. Does it meet the disclosure requirements that are supposed to be met in connection with the issuance? Will the requirements which are imposed on the issuance and the issuance of the stock be carried forward? Mr. SAMPSON. It does have some of the rights which normally are associated with the instrument. Mr. DINGELL. Does it have any liabilities that are associated with the shareholder? For example, under State law, a shareholder in a bank or a financial institution has a liability for sometimes double or maybe more the amount of his shareholder interest in the financial institution. Was that obtained here? Mr. SAMPSON. I don't know the answer to that question, Mr. Chairman. Mr. SHAD. It is more similar to— Mr. DINGELL. Does the SEC do anything with regard to this, with regard to disclosure or anything else, or does any State agency do anything that it is supposed to do with regard to issuance of shares of stock that it is supposed to do with any other share of stock that might be issued? Mr. SAMPSON. I do not believe this is subject to the SEC's jurisdiction. Mr. DINGELL. It is not? Mr. SAMPSON. No, sir. Mr. DINGELL. What are the rights of the subject parties? Is this note reachable by creditors in the event of bankruptcy? Mr. SAMPSON. The note receivable would be reachable by the creditors, yes, sir, in the event of bankruptcy. I believe it is subordinate to anything except the common stockholder. Mr. DINGELL. You believe it is subordinate to anything except the common stockholder? Mr. SAMPSON. I can't tell you with absolute fact, but I am fairly certain of that. Mr. DINGELL. Are there not certain requirements either by the SEC or by the FASB or by the State or Federal regulatory institutions on this point? Mr. SAMPSON. No, sir, that would be a legal matter, Mr. Chair man. Mr. DINGELL. Would it be a legal matter if somebody issued a regulation? |