-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSYYQ5jrLPt4P/+a2s1G1uFE5D80v2/1wQ/OarVfn2uwUgCBIQz+kP2jbqA2VpL0 kpcv/Rpp7f9wmslKijq2Jw== 0000950109-97-006094.txt : 19970930 0000950109-97-006094.hdr.sgml : 19970930 ACCESSION NUMBER: 0000950109-97-006094 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL FEDERAL CORP CENTRAL INDEX KEY: 0000744778 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 470658852 STATE OF INCORPORATION: NE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11515 FILM NUMBER: 97686928 BUSINESS ADDRESS: STREET 1: 2120 S 72ND ST CITY: OMAHA STATE: NE ZIP: 68124 BUSINESS PHONE: 4025549200 MAIL ADDRESS: STREET 1: COMMERCIAL FEDERAL TOWER 13TH FLOOR STREET 2: 2120 SOUTHJ72ND STREET CITY: OMAHA STATE: NE ZIP: 68124 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1997, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------- COMMISSION FILE NUMBER: 1-11515 COMMERCIAL FEDERAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEBRASKA 47-0658852 --------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (402) 554-9200 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sales price of the registrant's common stock as quoted on the New York Stock Exchange on September 18, 1997, was $960,207,923. As of September 18, 1997, there were issued and outstanding 21,575,637 shares of the registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 1997 - Parts I, II and IV. 2. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders - Part III. 1 PART I ITEM 1. BUSINESS - -------------------------------------------------------------------------------- GENERAL - ------- Commercial Federal Corporation (the "Corporation") was incorporated in the state of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan holding company. The purpose of the Corporation was to acquire all of the capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in connection with the Bank's 1984 conversion from mutual to stock ownership and to provide the structure to expand and diversify its financial services to activities allowed by regulation to a unitary savings and loan holding company. The general offices of the Corporation are located at 2120 South 72nd Street, Omaha, Nebraska 68124. The primary subsidiary of the Corporation is the Bank. The Bank was originally chartered in 1887 and converted to a federally chartered mutual savings and loan association in 1972. On December 31, 1984, the Bank completed its conversion from mutual to stock ownership and became a wholly-owned subsidiary of the Corporation. Effective August 27, 1990, the Bank's federal charter was amended from a savings and loan to a federal savings bank. The assets of the Corporation, on an unconsolidated basis, substantially consist of all of the Bank's common stock. The Corporation has no significant independent source of income, and therefore depends almost exclusively on dividends from the Bank to meet its funding requirements. The Corporation incurs interest expense on $50.0 million of subordinated extendible notes, $46.4 million of junior subordinated deferrable interest debentures and an unsecured $26.0 million promissory term note. Such interest is payable monthly on the subordinated extendible notes and quarterly on the junior subordinated deferrable interest debentures and the promissory term note. The Corporation also pays scheduled quarterly principal payments on the promissory term note. See " Repurchase of Common Stock," "Subordinated Extendible Notes Offering" and "Cumulative Trust Preferred Securities Offering" under the section captioned "Recent Developments" of this report for additional information. The Corporation also pays operating expenses primarily for shareholder and stock related expenditures such as the annual report, proxy, corporate filing fees and assessments and certain costs directly attributable to the holding company. In addition, common stock cash dividends totaling $5.9 million, or $.277 per common share, were declared and paid during fiscal year 1997. The Bank pays dividends to the Corporation on a periodic basis primarily to cover the amount of the principal and interest payments on the Corporation's debt and for the common stock cash dividends paid to the Corporation's shareholders. During fiscal year 1997 the Corporation received, in cash dividends totaling $34.7 million from the Bank which were made primarily to cover (i) the interest payments on the Corporation's debt which amount totaled $6.2 million in the aggregate, (ii) principal payments of $1.0 million on the Corporation's promissory term note, (iii) the common stock cash dividends of $5.9 million paid by the Corporation to its shareholders through June 30, 1997, (iv) the payment of $3.6 million to acquire Heritage Financial, Ltd. on October 1, 1996, and (v) the payment totaling $18.0 million to assist in the finance of the repurchase of 1,875,150 shares of the Corporation's common stock on August 21, 1996. During fiscal year 1997, the Corporation distributed $17.2 million to the Bank for its purchase of a support operations facility and the cash portion of the Corporation's two fiscal year 1997 acquisitions. The Bank operates as a federally chartered savings institution with deposits insured by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is a consumer-oriented financial institution that emphasizes single-family and construction residential real estate lending, consumer lending and commercial real estate lending, retail deposit activities and mortgage banking. All loan origination activities are conducted through the Bank's branch office network, through the loan offices of Commercial Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage banking subsidiary, and through a nationwide correspondent network numbering 398. The Corporation also provides insurance and securities brokerage and other retail financial services. 2 The operations of the Corporation are significantly influenced by general economic conditions, by inflation and changing prices, by the related monetary, fiscal and regulatory policies of the federal government and by the policies of financial institution regulatory authorities, including the Office of Thrift Supervision ("OTS"), the Board of Governors of the Federal Reserve System ("FRB") and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing, consumer loans and other types of loans, which, in turn, are affected by the interest rates at which such financings may be offered, the availability of funds, and other factors, such as the supply of housing for mortgage loans. At June 30, 1997, the Corporation had assets of $7.1 billion and stockholders' equity of $426.1 million, and through the Bank operated 34 branches in Nebraska, 27 branches in Kansas, 20 branches in greater metropolitan Denver, Colorado, 19 branches in Oklahoma, and seven branches in Iowa. The increase in branches over fiscal year 1996 was the result of two acquisitions during fiscal year 1997. On October 1, 1996, the Corporation consummated its acquisition of Heritage Financial, Ltd., ("Heritage") of Boone, Iowa (six branches and total assets of approximately $182.9 million at acquisition). On May 1, 1997, the Corporation acquired Investors Federal Savings ("Investors") of Kinsley, Kansas (three branches, one of which was closed as part of the acquisition consolidation process, and total assets of approximately $30.7 million at acquisition). The Bank is one of the largest retail financial institutions in the Midwest, and, based upon total assets at June 30, 1997, the Corporation was the 13th largest publicly-held thrift institution holding company in the United States. In addition, CFMC serviced a loan portfolio totaling $10.1 billion at June 30, 1997, with $5.952 billion in loans serviced for third parties and $4.181 billion in loans serviced for the Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" in the Corporation's 1997 Annual Report to Stockholders (the "Annual Report") which is incorporated herein by reference. The Corporation's strategy for growth emphasizes both internal and external growth. Operations focus on increasing deposits, including demand accounts, making loans (primarily single-family mortgage and consumer loans), community banking and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to expand its operations within its market areas either through direct marketing efforts aimed at increasing market share, branch expansions, or opening additional branches. The Corporation's retail strategy will continue to be centered on attracting new customers and selling both new and existing customers multiple products and services. Additionally, the Corporation will continue to build and leverage an infrastructure designed to increase fee and other income. Complementing its strategy of internal growth, the Corporation continues to grow its present five-state franchise through an ongoing program of selective acquisitions of other financial institutions. As mentioned, during fiscal year 1997, the Corporation consummated the acquisitions of two financial institutions. See "Acquisitions During Fiscal Year 1997" of this report. Subsequent to June 30, 1997, the Corporation entered into definitive agreements to acquire three financial institutions. These pending acquisitions will add 59 branches to the Corporation's existing network and approximately $1.2 billion in total assets, $912.0 million in deposits and approximately $1.3 billion in loans serviced for others. See "Subsequent Events- Pending Acquisitions" of this report. Future acquisition candidates will be selected based on the extent to which the candidates can enhance the Corporation's retail presence in new or underserved markets and complement the Corporation's existing retail network. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is one of the 12 regional banks for federally insured savings institutions comprising the FHLB System. The Bank is further subject to regulations of the Federal Reserve Board, which governs reserves required to be maintained against deposits and certain other matters. As a federally chartered savings bank, the Bank is subject to numerous restrictions on operations and investments imposed by applicable statutes and regulations. See "Regulation." 3 RECENT DEVELOPMENTS - ------------------- SUBSEQUENT EVENTS - PENDING ACQUISITIONS. - ----------------------------------------- LIBERTY. On August 18, 1997, the Corporation entered into a reorganization and - -------- merger agreement with Liberty Financial Corporation ("Liberty"), a privately held commercial bank and thrift holding company. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 8,748,500 outstanding shares of Liberty's common stock. As defined in the merger agreement, Liberty's common stock will be exchanged for a pro-rata amount of the Corporation's common stock based on the average closing price of such stock for the twenty-fifth through the sixth trading days preceding the effective date of the proposed merger. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, each share of Liberty common stock would be exchanged for .306 shares of the Corporation's common stock, resulting in the exchange of approximately 2,677,041 shares of the Corporation's common stock with an aggregate value of approximately $119.0 million. At June 30, 1997, Liberty had assets of approximately $620.5 million, deposits of approximately $533.2 million and stockholders' equity of approximately $41.1 million. Liberty operates 36 branches in Iowa and six in the metropolitan area of Tucson, Arizona. This pending acquisition, which is subject to regulatory approvals and other conditions, is expected to be completed by March 31, 1998. MID CONTINENT. On September 2, 1997, the Corporation entered into a - -------------- reorganization and merger agreement with Mid Continent Bancshares, Inc. ("Mid Continent"), parent company of Mid-Continent Federal Savings Bank. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 1,958,250 of the outstanding shares of Mid Continent's common stock. As defined in the merger agreement, Mid Continent's common stock will be exchanged for a pro-rata amount of the Corporation's common stock based upon the average closing price of the Corporation's common stock during a twenty consecutive trading day period prior to closing. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, each share of Mid Continent common stock would be exchanged for .8693 shares of the Corporation's common stock, resulting in the exchange of approximately 1,702,306 shares of the Corporation's common stock with an aggregate value of approximately $75.6 million. At June 30, 1997, Mid Continent had total assets of approximately $408.6 million, deposits of approximately $247.0 million and stockholders' equity of approximately $38.4 million. Mid Continent operates ten branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, Mid Continent shareholders' approval and other conditions, is expected to close by March 31, 1998. FIRST NATIONAL. On September 11, 1997, the Corporation entered into a - --------------- reorganization and merger agreement with First National Bank Shares, LTD ("First National"), parent company of First United Bank and Trust Company. Under the terms of the merger agreement, the Corporation will acquire all of the outstanding shares of First National's common stock. As defined in the merger agreement, First National's common stock will be exchanged for a pro-rata amount of the Corporation's common stock based upon the average closing price of the Corporation's common stock during a twenty consecutive trading day period prior to closing. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, such transaction would result in the exchange of approximately 661,905 shares of the Corporation's common stock with a total aggregate value approximating $29.4 million. At August 31, 1997, First National had assets approximating $153.8 million, deposits of approximately $132.1 million and stockholder's equity of approximately $10.6 million. First National operates seven branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, First National shareholders' approval and other conditions, is expected to close during the quarter ending March 31, 1998. REPURCHASE OF COMMON STOCK. - --------------------------- On August 21, 1996, the Corporation consummated the repurchase of 1,875,150 shares of its common stock, $.01 par value, from CAI Corporation, a Dallas- based investment company, for an aggregate purchase price of approximately $48.9 million, excluding $414,000 in transaction costs. The purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of approximately $28.2 million and surrender of a warrant (valued at approximately $20.7 million) which would have enabled the Corporation to purchase 99 shares of non-voting common stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. The cash portion of the repurchase was financed in part by 4 a $28.0 million short-term promissory note which was refinanced on December 13, 1996, on a long-term basis contractually due December 31, 2001. Pursuant to Nebraska corporate law, the 1,875,150 shares of repurchased common stock were canceled. The Corporation also reimbursed CAI Corporation for certain expenses totaling $2.2 million incurred in connection with its ownership of the 1,875,150 shares, including costs and expenses incurred in connection with the Corporation's 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. These nonrecurring expenses paid to CAI Corporation are included in other operating expenses for fiscal year 1997. Concurrent with the close of the repurchase, two directors of the Corporation, who also serve as executive officers of CAI Corporation, resigned from the Corporation's Board of Directors. In addition, CAI Corporation and each of its shareholders agreed to a standstill agreement for a period of 60 months beginning August 21, 1996. CAI Corporation and the Corporation have each agreed to waive and release all claims against the other and the Corporation has agreed to indemnify CAI Corporation and its directors, officers and affiliates against certain derivative claims. As mentioned, on December 13, 1996, the Corporation refinanced the $28.0 million short-term promissory note due January 31, 1997, obtained in the financing of the repurchase of 1,875,150 shares of the Corporation's common stock, with a five-year term note for $28.0 million due December 31, 2001. This term note, with an outstanding principal balance of $26.0 million at June 30, 1997, bears a monthly adjustable interest rate which was 8.00% at June 30, 1997, and is priced at 50 basis points below the quoted national base prime rate. This term note has a seven year amortization, with scheduled principal payments of $1.0 million payable quarterly with accrued interest, and a balloon of $8.0 million due December 31, 2001. The term note is unsecured but subject to certain covenants. In addition, the Corporation also has a $2.0 million line of credit available with the same financial institution which, at June 30, 1997, had not been drawn on. Both the term note and the revolving credit promissory note may be prepaid, in whole or in part, without penalty, upon proper written notice. On August 11, 1997, the Corporation paid down this term note by $21.0 million and, under the payment terms of the note agreement, results in the remaining balance of $5.0 million payable in $1.0 million installments over the next five calendar quarters with the final payment due September 30, 1998. Also, on August 11, 1997, the line of credit was increased to $6.0 million with no change to the due date or other terms. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT. - --------------------------------------------- Effective September 30, 1996, the Corporation incurred an after-tax charge of $17.3 million ($27.1 million pre-tax) as a result of the imposition of a special assessment by the FDIC to recapitalize the SAIF. The FDIC operates two deposit insurance funds: the Bank Insurance Fund ("BIF") which generally insures deposits of commercial banks and the SAIF which generally insures the deposits of savings associations such as the Bank. Because the reserves of the SAIF were below statutorily required minimums, institutions with SAIF-assessable deposits, like the Bank, were required to pay substantially higher deposit insurance premiums than institutions with deposits insured by the BIF since September 30, 1995. In order to recapitalize the SAIF and address this premium disparity, the Deposit Insurance Funds Act of 1996, effective September 30, 1996, authorized the FDIC to impose a one-time special assessment on institutions with SAIF- assessable deposits in order to increase the reserve levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits as of October 1, 1996. Institutions were assessed at the rate of .657% based on the amount of their SAIF-assessable deposits as of March 31, 1995. This nonrecurring special assessment totaling $27.1 million before income taxes is recorded in the general and administrative expense section of the Consolidated Statement of Operations under a separate line item captioned "Federal deposit insurance special assessment." The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant to which the assessment rate for well-capitalized institutions with the highest supervisory ratings would be reduced to zero and institutions in the lower risk assessment classification will be assessed at the rate of .27% of insured deposits. Until December 31, 1999, however, SAIF-insured institutions will be required to pay assessments to the FDIC at the rate of .064% of insured deposits to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to finance takeovers of insolvent thrifts. During this period, BIF members will be assessed for FICO obligations at the rate of .013% of insured deposits. After December 31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO payments. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, declining to .18% of insured deposits for the quarter ended December 31, 1996, and reduced to .064% of insured deposits effective January 1, 1997. 5 The Deposit Insurance Funds Act of 1996 provides that the BIF and SAIF will be merged into a single deposit insurance fund effective December 31, 1999, but only if there are no insured savings associations on that date. Legislation currently under consideration by Congress would repeal the federal thrift charter and require federal associations like the Bank to convert to national banks two years after the enactment of the bill. The bill, in its current form, would permit federal thrifts that converted to national banks to exercise any authority which they were legally entitled to exercise immediately prior to such conversion and would not be required to divest any branches. Further, these institutions could continue to branch in any state in which they were located to the same extent as national banks. Unitary savings and loan holding companies, like the Corporation, could continue to exercise any powers they had prior to their subsidiary becoming a bank by operation of law as long as they did not acquire another bank. Powers of those unitary savings and loan companies that were grandfathered, however, could not be transferred to another company which acquires control of the unitary holding company after the effective date of the law. There can be no assurance that this legislation will be passed in its current form. At this time, the Corporation is unable to predict whether such legislation would significantly impact its operations. THREE-FOR-TWO STOCK SPLIT. - -------------------------- On November 18, 1996, the Board of Directors of the Corporation declared a three-for-two stock split effected in the form of 50 percent stock dividend to stockholders of record on December 31, 1996. Par value of the common stock remained at $.01 per share. The stock dividend, distributed on January 14, 1997, totaled 7,163,476 shares of common stock. Fractional shares resulting from the stock split were paid in cash totaling $17,792 based on the closing price on the record date. All references to the number of shares, per share amount and stock price for all periods presented have been adjusted on a retroactive basis to reflect the effect of the stock split. The Board of Directors also increased its quarterly cash dividend from $.0667 per common share after adjusting for the three-for-two stock split to $.07 per common share representing an increase of five percent. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Stock Prices and Dividends" in the Annual Report. ACQUISITIONS DURING FISCAL YEAR 1997. - ------------------------------------- Heritage. On October 1, 1996, the Corporation consummated its acquisition of - --------- Heritage Financial, Ltd., parent company of Hawkeye Federal Savings headquartered in Boone, Iowa. The Corporation acquired all 180,762 outstanding shares of Heritage's common stock. Each share of Heritage's common stock was exchanged for $18.73 in cash and 3.74775 shares of the Corporation's common stock (total issuance of 677,449 shares). Based on the Corporation's closing stock price of $28.667 at October 1, 1996, the total consideration for this acquisition, excluding cash paid for fractional shares, approximated $22.8 million. Before purchase accounting adjustments, Heritage had assets of approximately $182.9 million, deposits of approximately $158.2 million and stockholders' equity of approximately $10.3 million. Heritage operated six branches located in west-central Iowa with core value of deposits and goodwill resulting from this transaction totaling $16.3 million. INVESTORS. On May 1, 1997, the Corporation consummated its acquisition of - --------- Investors Federal Savings headquartered in Kinsley, Kansas. The Corporation acquired all 232,465 of the outstanding shares of Investors' common stock for $23.00 in cash for a total consideration of approximately $5.3 million. Before purchase accounting adjustments, Investors had assets of approximately $30.7 million, deposits of approximately $26.1 million and stockholders' equity of approximately $4.4 million. Investors operated three branches in southwest Kansas and, as part of the acquisition consolidation process, one branch was closed on May 24, 1997. This acquisition was accounted for as a purchase. SUBORDINATED EXTENDIBLE NOTES OFFERING. - --------------------------------------- On December 2, 1996, the Corporation completed the issuance of $50.0 million of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the "Notes"). Such offering resulted in the Corporation receiving $48.5 million, net of an underwriting discount of $1.5 million. With the proceeds from the issuance of the Notes, the Corporation redeemed on December 27, 1996, its $40.25 million 10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January 31, 1999. Total expenses associated with this offering 6 approximated $1.9 million which are being deferred and amortized over the life of the Notes resulting in an effective interest rate of 8.52%. Contractual interest on the Notes is set at 7.95% until December 1, 2001, and is paid monthly. The interest rate for the Notes will reset at the Corporation's option, on December 1, 2001, to a rate and for a term of one, two, three or five years determined by the Corporation and will reset thereafter, at its option, upon the date of expiration of each new interest period prior to maturity. Any new interest rate shall not be less than 105% of the effective interest rate on comparable maturity U.S. Treasury obligations. There is no sinking fund. The Notes may not be redeemed prior to December 1, 2001, and thereafter, the Corporation may elect to redeem the Notes in whole on December 1, 2001, and on any subsequent interest reset date at par plus accrued interest to the date fixed for redemption. The Notes are unsecured general obligations of the Corporation and are subordinated to all existing and future senior indebtedness of the Corporation. There are no restrictions in the Indenture on the creation of additional senior indebtedness. The Indenture, among other provisions, limits the ability of the Corporation to pay cash dividends or make other capital distributions under certain circumstances. CUMULATIVE TRUST PREFERRED SECURITIES OFFERING. - ----------------------------------------------- Effective May 14, 1997, CFC Preferred Trust, a special-purpose wholly-owned Delaware trust subsidiary of the Corporation, completed an offering of 1,800,000 shares (issue price of $25.00 per share) totaling $45.0 million of fixed-rate 9.375% cumulative trust preferred securities ("Capital Securities"), which are fully and unconditionally guaranteed by the Corporation. Also affective May 14, 1997, the Corporation purchased all of the common securities ("Common Securities") of CFC Preferred Trust for approximately $1.4 million. CFC Preferred Trust invested the total proceeds of $46.4 million it received in 9.375% junior subordinated deferrable interest debentures ("Debentures") issued by the Corporation. Interest paid on the Debentures will be distributed to the holders of the Capital Securities and to the Corporation as holder of the Common Securities. As a result, under current tax law, distributions to the holders of the Capital Securities will be tax deductible for the Corporation. These Debentures are unsecured and rank junior and are subordinate in right of payment to all senior debt issued by the Corporation. The Capital Securities issued by the CFC Preferred Trust rank senior to the Common Securities. Concurrent with the issuance of the Capital Securities, the Corporation issued guarantees for the benefit of the security holders. The obligations of the Corporation under the Debentures, the indenture, the relevant trust agreement and the guarantees, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the obligations of the trust under the trust preferred securities and rank subordinate and junior in right of payment to all liabilities of the Corporation. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears commencing on September 30, 1997. The Corporation has the right, subject to events of default, to defer payments of interest on the Debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the Debentures. The Capital Securities are subject to mandatory redemption upon repayment of the Debentures. The Debentures mature on May 15, 2027, which may be shortened to not earlier than May 15, 2002, if certain conditions are met. The Debentures are redeemable at the option of the Corporation on or after May 15, 2002, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the CFC Preferred Trust, the Debentures or the Capital Securities. The Corporation has the right at any time to terminate the CFC Preferred Trust and cause the Debentures to be distributed to the holders of the Capital Securities in liquidation of such trust, all subject to the Corporation having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. The Capital Securities would qualify as Tier 1 capital of the Corporation should the Corporation become subject to the Federal Reserve capital requirements for bank holding companies. As a savings and loan holding company, the Corporation is currently not subject to Federal Reserve capital requirements for bank holding companies. Since all of the proceeds of the sale of the Capital Securities were invested by the CFC Preferred Trust in the Debentures, the Corporation paid the underwriting commission and other expenses associated with the offering which totaled $1.8 million and are being amortized over the life of the Debentures resulting in an effective interest rate of 9.78%. Proceeds from the sale of the Debentures will be used for general corporate purposes including, without limitation, possible future acquisitions, funding investments in, or extensions of credit to, the Corporation's subsidiaries, repayment of obligations and redemption of securities. 7 On June 30, 1997, the Corporation distributed $8.2 million to the Bank for its purchase of a facility in which to consolidate certain support operations, and on August 11, 1997, paid $21.0 million down on a $26.0 million term note originally due December 31, 2001. EXTRAORDINARY ITEMS. - -------------------- In December 1996, the Corporation recognized extraordinary losses of $583,000 (net of income tax benefits totaling $316,000) or $.03 loss per share, primarily as a result of the early retirement of its $40.25 million 10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January 31, 1999. The extraordinary losses consisted primarily of the write-off of the related premiums and costs associated with the issuance and redemption of such debt which was retired on December 27, 1996, with the proceeds from the $50.0 million subordinated extendible notes offering completed December 2, 1996. REPEAL OF THRIFT BAD DEBT RESERVES FOR TAX PURPOSES. - ---------------------------------------------------- In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) required recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These tax law changes resulted in the recognition to income tax expense of additional deferred tax liabilities of approximately $103,000 in the first quarter of fiscal year 1997. The remaining unrecognized deferred tax liability totaling $29.9 million could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. SUPERVISORY GOODWILL LAWSUIT. - ----------------------------- On September 13, 1994, the Bank commenced litigation against the United States in the United States Court of Federal Claims seeking to recover monetary relief for the government's refusal to honor certain contracts between the Bank and the Federal Savings and Loan Insurance Corporation. The suit alleges that such governmental action constitutes breach of contract and an unlawful taking of property by the United States without just compensation or due process in violation of the Constitution of the United States. The litigation status and process of the multiple legal actions, such as that instituted by the Bank with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank uncertain as to ultimate outcome, and contingent on a number of factors and future events which are beyond the control of the Bank, both as to substance, timing, and the dollar amount of damages which may be awarded to the Bank if it finally prevails in this litigation. REGULATORY CAPITAL COMPLIANCE. - ------------------------------ The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial position and results of operations. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off- balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the following tables of tangible, core and total risk-based capital. Prompt Corrective Action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") require specific supervisory actions as capital levels decrease. To be considered well-capitalized under the regulatory framework for Prompt Corrective Action under FDICIA, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the following tables. At June 30, 1997, the Bank exceeded the minimum requirements for the well-capitalized category. As of June 8 30, 1997, the most recent notification from the OTS categorized the Bank as "well-capitalized" under the regulatory framework for Prompt Corrective Action provisions under FDICIA. There are no conditions or events since such notification that management believes have changed the Bank's classification. The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements as of June 30, 1997: - --------------------------------------------------------------------------------
Actual Capital Required Capital ------------------------ ----------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - ---------------------- ----------- ----------- ----------- ----------- OTS Capital Adequacy: Tangible capital $ 446,291 6.31% $ 106,079 1.5% Core capital 458,087 6.47 212,511 3.0 Risk-based capital 494,760 13.81 286,597 8.0 FDICIA Regulations to be Classified Well-Capitalized: Tier 1 leverage capital 458,087 6.47 354,185 5.0 Tier 1 risk-based capital 458,087 12.79 214,948 6.0 Total risk-based capital 494,760 13.81 358,246 10.0 - --------------------------------------------------------------------------------
See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to Consolidated Financial Statements in the Annual Report for additional information. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS. - ----------------------------------------- During fiscal year 1997, the Corporation adopted the provisions of the following accounting pronouncements: Statement No. 123 entitled "Accounting for Stock- Based Compensation" and Statement No. 125 entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." See Note 1 to the Consolidated Financial Statements in the Annual Report for a discussion of these new accounting pronouncements and their effect on the Corporation. OTHER INFORMATION. - ------------------ Additional information concerning the general development of the business of the Corporation during fiscal year 1997 is included in the Annual Report under the captions: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. Additional information concerning the Bank's regulatory capital requirements and other regulations which affect the Corporation is included in the "Regulation" section of this report. 9 MARKET RISK - ----------- When used or incorporated by reference in disclosure documents, the words "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including those set forth below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the document. The Corporation expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Corporation's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The Corporation's Assets Liability Management Committee ("ALCO"), which includes senior management representatives, monitors and considers methods of managing the rate and sensitivity repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in net portfolio value ("NPV") and net interest income. A primary purpose of the Corporation's asset and liability management is to manage interest rate risk to effectively invest the Corporation's capital and to preserve the value created by its core business operations. As such, certain management monitoring processes are designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income. The Corporation's exposure to interest rate risk is reviewed on at least a quarterly basis by the Board of Directors and the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the Corporation's change in NPV in the event of hypothetical changes in interest rates and interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank's assets and liabilities. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Corporation has developed strategies to manage its liquidity, shorten its effective maturities of certain interest-earning assets, and increase the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of adjustable-rate residential mortgage loans, consumer loans and adjustable-rate mortgage loans for the acquisition, development, and construction of residential and commercial real estate, all of which are retained by the Bank for its portfolio. In addition, long-term, fixed-rate single-family residential mortgage loans are underwritten according to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA"), and are either swapped with the FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by such loans which are then sold or sold directly for cash in the secondary market, or are retained for the Corporation's loan portfolio if such loans have characteristics which are consistent with the Corporation's asset and liability goals and long-term interest rate yield requirements. Interest rate sensitivity analysis is used to measure the Corporation's interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained one hundred to four hundred basis points increase or decrease in the market interest rates. The Corporation's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the NPV of 10%, 20%, 30% and 40% in the event of a sudden and sustained one hundred to four hundred basis points increase or decrease in market interest rates. The following table presents the Corporation's projected change in NPV for the various rate shock levels of June 30, 1997. All market risk sensitive instruments presented in this table are held to maturity or available for sale. The Corporation has no trading securities. 10
- ------------------------------------------------------------------------------------------------------------ Percent Change -------------------------------- Change in Market Value of Actual Board Interest Rates Portfolio Equity Change Actual Limit - -------------- ---------------- ---------------- ---------------- -------------- (Dollars in Thousands) 400 basis point rise $ 407,038 $ (209,934) (34)% (40)% 300 basis point rise 460,243 (156,729) (25) (30) 200 basis point rise 514,987 (101,985) (17) (20) 100 basis point rise 574,387 (42,585) (7) (10) Base Scenario 616,972 -- -- -- 100 basis point decline 634,264 17,292 3 10 200 basis point decline 653,519 36,547 6 20 300 basis point decline 685,388 68,416 11 30 400 basis point decline 732,160 115,188 19 40 - ------------------------------------------------------------------------------------------------------------
The preceding table indicates that at June 30, 1997, in the event of a sudden and sustained increase in prevailing market interest rates, the Corporation's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Corporation's NPV would be expected to increase. At June 30, 1997, the Corporation's estimated changes in NPV were within the targets established by the Board of Directors. NPV is calculated by the Corporation pursuant to guidelines established by the OTS. The calculation is based on the net present value of estimated discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources as of June 30, 1997, with adjustments made to reflect the shift in the Treasury yield curve as appropriate. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposits decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections presented, should market conditions vary from assumptions used in the calculation of the NPV. Certain assets, such as adjustable-rate loans, which represent one of the Corporation's primary loan products, have features which restrict changes in interest rates on a short-term basis and over the life of the assets. In addition, the proportion of adjustable-rate loans in the Corporation's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the NPV. Finally, the ability of many borrowers to repay their adjustable-rate mortgage loans may decrease in the event of interest rate increases. In addition, the Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. 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. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. The Bank's one-year cumulative gap is a negative $664.7 million, or 9.37% of the Bank's total assets of $7.092 billion at June 30, 1997. The interest rate risk policy of the Bank authorizes a liability sensitive one-year cumulative gap not to exceed 10.0%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" in the Annual Report. 11 LENDING ACTIVITIES - ------------------ GENERAL. The Corporation concentrates its lending activities primarily on the - -------- origination of first mortgage loans for the purpose of financing or refinancing single-family residential properties, single-family residential construction loans, commercial real estate loans, consumer and home improvement loans. As a result of increased emphasis on consumer-oriented lending activities, the origination of consumer loans during fiscal year 1997 increased substantially over fiscal years 1996 and 1995. Residential loan origination activity, including activity through correspondents, was slightly higher for fiscal year 1997 compared to fiscal years 1996 and 1995. See "Loan Originations." The functions of processing and servicing real estate loans, including responsibility for servicing the Corporation's loan portfolio, is conducted by CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation conducts loan origination activities primarily through its 107 branch office network to help increase the volume of single-family residential loan originations and take advantage of its extensive branch network. The Corporation's mortgage banking subsidiary has continued and will continue to originate real estate loans through the Corporation's various loan offices located in its existing market areas, loan offices of CFMC and through its nationwide correspondent network. At June 30, 1997, the Corporation's total loan and mortgage-backed securities portfolio was $6.3 billion, representing over 88.6% of its $7.1 billion of total assets at that date. Mortgage-backed securities totaled $1.0 billion at June 30, 1997, representing 16.3% of the Corporation's total loan and mortgage- backed securities portfolio at such date. Approximately 92.7% of the Corporation's total gross loan and mortgage-backed securities portfolio was secured by real estate at June 30, 1997, compared to 94.2% at June 30, 1996. Commercial real estate and land loans (collectively referred to as "income property loans") totaled $278.6 million or 4.4% of the total loan and mortgage- backed securities portfolio at June 30, 1997, compared to $284.2 million or 4.7% of such total portfolio at June 30, 1996. These loans are secured by various types of commercial properties including office buildings, shopping centers, warehouses and other income producing properties. Single-family residential construction loans totaled $182.4 million or 2.9% of the total loan and mortgage-backed securities portfolio at June 30, 1997, compared to $185.3 million or 3.0% of such portfolio at June 30, 1996. The Corporation's single- family residential construction lending activity is primarily attributable to operations in Las Vegas, Nevada and in its primary five-state market area. At June 30, 1997, multi-family residential loans consisting of loans secured by various types of properties, including townhomes, condominiums and apartment projects with more than four dwelling units, totaled $48.3 million, or .8% of the total loan portfolio, compared to $40.3 million or .7% at June 30, 1996. The Bank presently does not originate a significant amount of multi-family residential loans, and expects to originate such loans primarily for purposes of resolving certain nonperforming assets. The Corporation's primary emphasis continues to be on the origination of loans secured by existing single-family residences. Adjustable-rate single-family residential loans are originated primarily for retention in the Corporation's loan portfolio to match more closely the repricing of the Corporation's interest-bearing liabilities as a result of changes in interest rates. Fixed-rate single-family residential loans are originated using underwriting guidelines, appraisals and documentation which are acceptable to the FHLMC, GNMA and the FNMA to facilitate the sale of such loans to such agencies in the secondary market. The Corporation also originates fixed-rate single-family residential loans using internal lending policies in accordance with what management believes are prudent underwriting standards but which may not strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans are originated or purchased for the Corporation's loan portfolio if such loans have characteristics which are consistent with the Corporation's asset and liability goals and long-term interest rate yield requirements. At June 30, 1997, fixed-rate single-family residential loans were retained for the Corporation's portfolio as such balance increased $188.6 million over last fiscal year to $2.369 billion compared to $2.180 billion at June 30, 1996. The adjustable-rate portfolio increased to $2.033 billion at June 30, 1997 compared to $1.906 billion at June 30, 1996. Such balances are before unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowances for loan losses. 12 In past years, the Corporation has not originated any significant amounts of commercial real estate loans or multi-family residential loans with the exception of loans primarily to resolve nonperforming assets. However, the Corporation has initiated commercial and multi-family real estate lending, on a limited basis, with such loans secured by properties located within the Corporation's primary market areas. Such loans, which are subject to prudent credit review and other underwriting standards and collection procedures, are not expected to constitute a significant portion of the Corporation's lending business in the future. In addition to real estate loans, the Corporation originates consumer, home improvement, savings account and commercial business loans (collectively, "consumer loans") through the Corporation's branch network and direct mail solicitation. Management intends to increase its consumer loan origination activity with strict adherence to prudent underwriting and credit review procedures along with improved collection efforts implemented during fiscal year 1997. However, the Corporation presently does not originate commercial business loans, except for loans to resolve nonperforming assets. Regulatory guidelines generally subject savings institutions to the same loans to one borrower limitations that are applicable to national banks. At June 30, 1997, all loans to one borrower were within the Corporation's limitation of $124.7 million. See "Regulation -- Limitations on Loans to One Borrower." 13 COMPOSITION OF LOAN PORTFOLIO. The following table sets forth the composition of - ------------------------------ the Corporation's loan and mortgage-backed securities portfolios (including loans held for sale and mortgage-backed securities available for sale) as of the dates indicated:
June 30, ---------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Amount Percent Amount Percent Amount Percent -------- --------- ------- -------- -------- ------- (Dollars in Thousands) LOAN PORTFOLIO - -------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $4,024,811 62.9% $3,739,191 61.1% $3,603,379 59.8% Multi-family residential 42,994 0.7 37,322 0.6 33,338 0.5 Land 19,988 0.3 14,582 0.2 7,257 0.1 Commercial real estate 249,783 3.9 258,933 4.2 210,676 3.5 ---------- ----- ---------- ----- ---------- ----- Total 4,337,576 67.8 4,050,028 66.1 3,854,650 63.9 Construction loans - Single-family residential 182,387 2.9 185,327 3.0 177,539 3.0 Multi-family residential 5,348 0.1 3,027 0.1 380 -- Land -- -- -- -- 1,600 -- Commercial real estate 8,795 0.1 10,734 0.2 7,195 0.1 ---------- ----- ---------- ----- ---------- ----- Total 196,530 3.1 199,088 3.3 186,714 3.1 FHA and VA loans 377,349 5.9 347,569 5.7 392,463 6.5 Mortgage-backed securities 1,017,982 15.9 1,171,256 19.1 1,354,142 22.5 ---------- ----- ---------- ----- ---------- ----- Total real estate loans 5,929,437 92.7 5,767,941 94.2 5,787,969 96.0 Consumer and other loans - Home improvement and other consumer loans 451,603 7.1 344,129 5.6 231,818 3.8 Savings account loans 13,319 0.2 11,648 0.2 10,026 0.2 Other loans 939 -- 2,113 -- 853 -- ---------- ----- ---------- ----- ---------- ----- Total consumer and other loans 465,861 7.3 357,890 5.8 242,697 4.0 ---------- ----- ---------- ----- ---------- ----- Total loans $6,395,298 100.0% $6,125,831 100.0% $6,030,666 100.0% ---------- ===== ---------- ===== ---------- =====
June 30, ------------------------------------------ 1994 1993 ------------------- ------------------- Amount Percent Amount Percent ------- ------- ------ ------- (Dollars in Thousands) LOAN PORTFOLIO - -------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $3,125,477 58.0% $2,784,073 59.5% Multi-family residential 43,379 0.8 60,935 1.3 Land 9,080 0.2 9,322 0.2 Commercial real estate 203,840 3.8 254,281 5.4 ---------- ----- ---------- ----- Total 3,381,776 62.8 3,108,611 66.4 Construction loans - Single-family residential 50,870 1.0 20,851 0.5 Multi-family residential -- -- -- -- Land 1,640 -- -- -- Commercial real estate 871 -- -- -- ---------- ----- ---------- ----- Total 53,381 1.0 20,851 0.5 FHA and VA Loans 415,866 7.7 461,066 9.8 Mortgage-backed securities 1,338,775 24.8 947,919 20.2 ---------- ----- ---------- ----- Total real estate loans 5,189,798 96.3 4,538,447 96.9 Consumer and other loans - Home improvement and other consumer loans 188,756 3.5 131,432 2.8 Savings account loans 9,136 0.2 8,713 0.2 Other loans 1,322 -- 3,696 0.1 ---------- ----- ---------- ----- Total consumer and other loans 199,214 3.7 143,841 3.1 ---------- ----- ---------- ----- Total loans $5,389,012 100.0% $4,682,288 100.0% ---------- ===== ---------- =====
(Continued on next page) COMPOSITION OF LOAN PORTFOLIO (CONTINUED): - -----------------------------------------
June 30, ---------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ------------- -------- ------------- -------- ------------ --------- (Dollars in Thousands) Balance forward of total loans $6,395,298 100.0% $6,125,831 100.0% $6,030,666 100.0% ===== ===== ===== Add (subtract): Unamortized premiums, net of discounts 13,777 12,335 6,884 Deferred loan fees, net (532) (3,673) (1,362) Loans in process (75,077) (91,262) (80,211) Allowance for loan losses (48,467) (49,278) (48,541) Allowance for losses on mortgage-backed securities (498) (742) (1,837) ---------- ---------- ---------- Loan portfolio $6,284,501 $5,993,211 $5,905,599 ========== ========== ==========
June 30, --------------------------------------------- 1994 1993 ---------------------- ---------------------- Amount Percent Amount Percent ------------- -------- ------------- -------- (Dollars in Thousands) Balance forward of total loans $5,389,012 100.0% $4,682,288 100.0% Add (subtract): ===== ===== Unamortized discounts, net of premiums 11,938 (4,941) Deferred loan fees, net (1,126) (7,365) Loans in process (32,085) (12,905) Allowance for loan losses (44,851) (46,908) Allowance for losses on mortgage-backed securities (1,860) (1,890) ---------- ---------- Loan portfolio $5,321,028 $4,608,279 ========== ==========
- -------------------------------------------------------------------------------- For additional information regarding the Corporation's loan portfolio and mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated Financial Statement in the Annual Report. 15 The table below sets forth the geographic distribution of the Corporation's total real estate loan portfolio (excluding mortgage-backed securities and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowance for loan losses) as of the dates indicated:
June 30, -------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------- ------------------- ------------------- ------------------- ------------------- State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) -------------------------------------------------------------------------------------------------------- Nebraska $936,901 19.1% $929,982 20.2% $836,054 18.9% $767,988 19.9% $654,850 18.2% Colorado 824,527 16.8 843,670 18.3 909,363 20.5 797,141 20.7 814,384 22.7 Kansas 364,590 7.4 350,248 7.6 317,109 7.2 282,238 7.3 271,892 7.6 Georgia 235,462 4.8 217,957 4.7 202,331 4.6 210,299 5.5 241,286 6.7 Oklahoma 232,240 4.7 212,468 4.6 198,480 4.5 135,893 3.5 91,302 2.5 Texas 186,791 3.8 204,002 4.4 225,866 5.1 181,547 4.7 190,605 5.3 Missouri 156,624 3.2 170,032 3.7 180,144 4.1 158,291 4.1 197,978 5.5 Virginia 140,498 2.9 123,806 2.7 111,081 2.5 81,290 2.1 67,821 1.9 Maryland 138,879 2.8 112,152 2.4 100,762 2.3 76,365 2.0 69,769 1.9 Iowa 137,591 2.8 80,820 1.8 70,515 1.6 65,365 1.7 65,512 1.8 California 128,250 2.6 151,412 3.3 154,803 3.5 172,767 4.5 127,260 3.5 Florida 116,835 2.4 111,692 2.4 100,471 2.3 92,531 2.4 97,116 2.7 Nevada 109,405 2.2 80,624 1.8 51,817 1.2 -- -- -- -- New Jersey 107,022 2.2 113,824 2.5 119,223 2.7 110,267 2.9 38,064 1.1 Illinois 92,269 1.9 79,570 1.7 78,043 1.7 57,378 1.5 69,596 1.9 Washington 90,975 1.9 64,796 1.4 55,812 1.3 40,558 1.1 37,294 1.0 Arizona 86,700 1.8 68,637 1.5 63,467 1.4 60,995 1.6 77,448 2.2 Ohio 75,950 1.6 47,396 1.0 47,851 1.1 37,603 1.0 15,192 0.4 Connecticut 72,154 1.5 75,946 1.7 81,418 1.8 83,002 2.2 85,204 2.4 North Carolina 69,465 1.4 31,601 0.7 23,260 0.5 19,683 0.5 20,404 0.6 Pennsylvania 68,728 1.4 59,859 1.3 53,355 1.2 43,223 1.1 30,372 0.8 Massachusetts 68,061 1.4 44,300 1.0 45,233 1.0 17,658 0.5 6,371 0.2 Minnesota 63,885 1.3 42,144 0.9 32,866 0.7 23,347 0.6 30,880 0.9 New York 48,395 1.0 38,794 0.8 40,532 0.9 27,700 0.7 13,014 0.4 Michigan 46,661 0.9 46,548 1.0 45,784 1.0 46,239 1.2 10,391 0.3 Alabama 37,624 0.8 39,514 0.9 38,147 0.8 38,604 1.0 43,126 1.2 South Carolina 36,372 0.7 40,674 0.9 26,402 0.6 27,163 0.7 13,792 0.4 Indiana 34,689 0.7 27,191 0.6 25,048 0.5 13,652 0.3 7,556 0.2 Maine 23,039 0.5 9,316 0.2 11,023 0.2 1,208 -- 290 -- Other States 180,873 3.5 177,710 4.0 187,567 4.3 181,028 4.7 201,759 5.7 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ $4,911,455 100.0% $4,596,685 100.0% $4,433,827 100.0% $3,851,023 100.0% $3,590,528 100.0% ========== ====== ========== ====== ========== ====== ========== ====== ========== ======
16 The following table presents the composition of the Corporation's total real estate portfolio (excluding mortgage-backed securities and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowace for loan proceeds, deferred loan fees and allowance for loan losses) by state and property type at June 30, 1997:
- -------------------------------------------------------------------------------------------------------- Residential Multi- Land Sub Commercial % of State 1-4 Units Family Loans FHA/VA Total Loans Total Total - ---------- ----------- -------- ------- -------- ---------- ---------- ---------- ----- (Dollars in Thousands) Nebraska $ 770,077 $ 14,580 $ 2,739 $ 79,405 $ 866,801 $ 70,100 $ 936,901 19.1% Colorado 689,411 14,634 1,950 17,999 723,994 100,533 824,527 16.8 Kansas 289,606 -- 15 51,904 341,525 23,065 364,590 7.4 Georgia 223,594 -- -- 9,800 233,394 2,068 235,462 4.8 Oklahoma 210,431 -- -- 21,794 232,225 15 232,240 4.7 Texas 155,271 9,360 -- 18,796 183,427 3,364 186,791 3.8 Missouri 133,368 519 -- 19,894 153,781 2,843 156,624 3.2 Virginia 125,692 -- -- 14,806 140,498 -- 140,498 2.9 Maryland 112,396 -- -- 26,483 138,879 -- 138,879 2.8 Iowa 114,593 2,934 -- 13,000 130,527 7,064 137,591 2.8 California 113,377 -- -- 11,301 124,678 3,572 128,250 2.6 Florida 94,407 -- -- 11,161 105,568 11,267 116,835 2.4 Nevada 83,293 -- 15,284 4,672 103,249 6,156 109,405 2.2 New Jersey 106,038 -- -- 984 107,022 -- 107,022 2.2 Illinois 81,743 -- -- 10,526 92,269 -- 92,269 1.9 Washington 83,358 -- -- 7,617 90,975 -- 90,975 1.9 Arizona 70,542 -- -- 9,532 80,074 6,626 86,700 1.8 Ohio 69,384 -- -- 6,566 75,950 -- 75,950 1.6 Connecticut 72,043 -- -- 111 72,154 -- 72,154 1.5 North Carolina 46,622 6,267 -- 3,835 56,724 12,741 69,465 1.4 Pennsylvania 67,404 -- -- 1,324 68,728 -- 68,728 1.4 Massachusetts 67,878 -- -- 183 68,061 -- 68,061 1.4 Minnesota 59,862 48 -- 3,975 63,885 -- 63,885 1.3 New York 47,616 -- -- 436 48,052 343 48,395 1.0 Michigan 43,950 -- -- 2,711 46,661 -- 46,661 0.9 Alabama 32,265 -- -- 5,359 37,624 -- 37,624 0.8 South Carolina 33,953 -- -- 2,419 36,372 -- 36,372 0.7 Indiana 29,419 -- -- 5,270 34,689 -- 34,689 0.7 Maine 23,039 -- -- -- 23,039 -- 23,039 0.5 Other States 156,566 -- -- 15,486 172,052 8,821 180,873 3.5 ---------- ------- ------- -------- ---------- -------- ---------- ------ Total $4,207,198 $ 48,342 $19,988 $377,349 $4,652,877 $258,578 $4,911,455 100.0% ========== ======= ======= ======== ========== ======== ========== ====== % of Total 85.7% 1.0% 0.4% 7.7% 94.8% 5.2% 100.0% ========== ======= ======= ======== ========== ======== ==========
17 CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain - --------------------------------- information at June 30, 1997, regarding the dollar amount of all loans and mortgage-backed securities maturing in the Corporation's portfolio based on contractual terms to maturity but does not include scheduled payments or an estimate of possible prepayments. Demand loans (loans having no stated schedule of repayments and no stated maturity) and overdrafts are reported as due in one year or less. Since prepayments significantly shorten the average life of mortgage loans and mortgage-backed securities, management believes that the following table will bear little resemblance to what will be the actual repayments of the loan and mortgage-backed securities portfolios. Loan balances have not been reduced for (i) unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowance for loan losses or (ii) nonperforming loans.
- ---------------------------------------------------------------------------------------------------- Due During the Year Ended June 30, ------------------------------------------------------------ - ---------------------------------------------------------------------------------------------------- 1999- After 1998 2002 2002 Total ------------ -------------- -------------- -------------- PRINCIPAL REPAYMENTS (In Thousands) - -------------------- REAL ESTATE LOANS: Single-family residential (1) Fixed-rate $ 77,825 $ 556,061 $ 1,735,165 $ 2,369,051 Adjustable-rate 30,231 147,014 1,855,864 2,033,109 Multi-family residential, land and commercial real estate Fixed-rate 19,228 45,808 49,182 114,218 Adjustable-rate 10,379 58,552 129,616 198,547 ------------ -------------- -------------- -------------- 137,663 807,435 3,769,827 4,714,925 ------------ -------------- -------------- -------------- CONSTRUCTION LOANS: Fixed-rate 52,664 198 -- 52,862 Adjustable-rate 138,248 5,420 -- 143,668 ------------ -------------- -------------- -------------- 190,912 5,618 -- 196,530 ------------ -------------- -------------- -------------- MORTGAGE-BACKED SECURITIES: Fixed-rate 43,811 115,460 162,799 322,070 Adjustable-rate 11,001 51,168 633,743 695,912 ------------ -------------- -------------- -------------- 54,812 166,628 796,542 1,017,982 ------------ -------------- -------------- -------------- CONSUMER AND OTHER LOANS: Fixed-rate 100,379 347,023 -- 447,402 Adjustable-rate 3,609 14,850 -- 18,459 ------------ -------------- -------------- -------------- 103,988 361,873 -- 465,861 ------------ -------------- -------------- -------------- PRINCIPAL REPAYMENTS $ 487,375 $ 1,341,554 $ 4,566,369 $ 6,395,298 ============ ============== ============== ============== - ----------------------------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans. 18 Scheduled contractual principal repayments do not reflect the actual maturities of such assets. The average maturity of loans is substantially less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Corporation the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan rates. Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management" in the Annual Report. The following table sets forth the amount of all loans and mortgage-backed securities due after June 30, 1998, (July 1, 1998 and thereafter), which have fixed interest rates and those which have adjustable interest rates. Such loans and mortgage-backed securities have not been reduced for (i) unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowance for loan losses or (ii) nonperforming loans.
- --------------------------------------------------------------------------------------- Adjustable Fixed-Rate Rate Total ------------- ------------- ------------- (Dollars In Thousands) Real estate loans: Single-family residential $ 2,291,226 $ 2,002,878 $ 4,294,104 Multi-family residential, land and commercial 94,990 188,168 283,158 Construction loans 198 5,420 5,618 Mortgage-backed securities 278,259 684,911 963,170 Consumer and other loans 347,023 14,850 361,873 ------------- ------------- ------------- Principal repayments due after June 30, 1998 $ 3,011,696 $ 2,896,227 $ 5,907,923 ============= ============= ============= - ---------------------------------------------------------------------------------------
LOAN ORIGINATIONS - ----------------- RESIDENTIAL LOANS. The Corporation, through its 107 branch network and CFMC's - ------------------ loan offices and nationwide correspondent network, originates and purchases both fixed-rate and adjustable-rate mortgage loans secured by single-family units. Such residential mortgage loans are either (i) conventional mortgage loans which comply with the requirements for sale to, or conversion into securities issued by, FNMA or FHLMC ("conventional conforming loans"), (ii) mortgage loans which exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise generally comply with FNMA and FHLMC loan requirements ("conventional nonconforming loans") or (iii) FHA/VA loans which qualify for sale in the form of securities guaranteed by GNMA. The Corporation originates substantially all conventional conforming loans or conventional nonconforming loans (collectively, "conventional loans") with loan-to-value ratios at or below 80.0% unless the borrower obtains private mortgage insurance (through the Corporation's mortgage banking subsidiary, which premium the borrower pays with their mortgage payment) for the Corporation's benefit covering that portion of the loan in excess of 80.0% of the appraised value. Occasional exceptions to the 80.0% loan-to-value ratio for conventional loans are made for loans to facilitate the resolution of nonperforming assets. 19 Fixed-rate residential mortgage loans generally are originated with terms of 15 and 30 years and are amortized on a monthly basis with principal and interest due each month. Adjustable-rate residential mortgage loans generally are also originated with terms of 15 and 30 years. However, certain adjustable-rate loans contain provisions which permit the borrower, at the borrower's option, to convert at certain periodic intervals over the life of the loan to a long-term fixed-rate loan. The adjustable-rate loans currently have interest rates which are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various indices, including the Treasury Constant Maturity Index or the Eleventh District Federal Home Loan Bank Board Cost of Funds Index. The amount of any such interest rate increase is limited to one or two percentage points annually and four to six percentage points over the life of the loan. Certain adjustable-rate loans are also offered which have interest rates fixed over annual periods ranging from two through seven years, and also ten year loans, with such loans repricing annually after the fixed interest-rate term. Adjustable-rate loans are primarily offered at the fully indexed contractual rate. The Corporation applies its underwriting criteria to such loans based on the amount of the loan for which the borrower could qualify at the indexed rate. At June 30, 1997, approximately .81%, or $32.8 million, of the Corporation's residential real estate loan portfolio was 90 days or more delinquent. See "Asset Quality" herein. RESIDENTIAL CONSTRUCTION LOANS. Prior to 1995, the Corporation was not actively - ------------------------------ pursuing construction loans, but provided interim construction financing that was tied to permanent real estate mortgage loans. Beginning in fiscal year 1995, the Corporation's single-family residential construction lending activity has increased primarily as a result of the construction lending operations conducted by an institution the Corporation acquired in October 1995. During fiscal years 1997, 1996 and 1995, the Corporation originated $188.2 million, $206.4 million and $216.2 million, respectively, of residential construction loans. The Corporation conducts its single-family residential construction lending operations predominantly in its primary five-state market area and Las Vegas, Nevada. During fiscal year 1997, individual residential construction loan originations over $1.0 million consisted of 10 loans totaling $16.6 million with loan-to-value ratios ranging from 68.0% to 78.0% and interest rates ranging from prime plus 1.25% to prime plus 2.00%. The residential construction lending operations, which loans are subject to prudent credit review and other underwriting standards and procedures, are expected to constitute the approximate same portion of the Corporation's lending business in the future as in fiscal year 1997. At June 30, 1997, approximately .82%, or $1.5 million, of the Corporation's residential construction loan portfolio was 90 days or more delinquent. Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost (including interest) thereof. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Corporation may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the Corporation may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. COMMERCIAL REAL ESTATE AND LAND LOANS. The Corporation originated commercial - -------------------------------------- real estate loans totaling $55.5 million, $45.2 million and $29.4 million, respectively, during fiscal years 1997, 1996 and 1995. Commercial real estate lending may entail significant additional risks compared with residential real estate lending. These additional risks are due to larger loan balances which are more sensitive to economic conditions, business cycle downturns and construction related risks. The payment of principal and interest due on the Corporation's commercial real estate loans is substantially dependent upon the performance of the projects securing such loans. As an example, to the extent that the occupancy and rental rates are not high enough to generate the income necessary to make such payments, the Corporation could experience an increased rate of delinquency and could be required either to declare such loans in default and foreclose upon such properties or to make concessions on the terms of the repayment of such loans. During fiscal year 1997, individual commercial real estate loan originations over $1.0 million consisted of eight loans totaling $21.2 million with loan-to-value ratios ranging from 47.0% to 75.0% and interest rates ranging from 8.25% to 10.0%. At June 30, 1997, approximately .16%, or $424,000, of the Corporation's commercial real estate and land loans were 90 days or more delinquent. See "Asset Quality" herein. The aggregate amount of loans which a federal savings institution may make on the security of liens on nonresidential real property may not exceed 400.0% of the institution's total risk-based capital as determined under current regulatory capital standards. Such limitation totaled approximately $1.979 billion at June 30, 1997, compared to $278.6 million of such loans outstanding at June 30, 1997. This restriction has not and is not expected to materially affect the Corporation's business. CONSUMER LOANS. Federal regulations permit federal savings institutions to make - --------------- secured and unsecured consumer loans up to 30.0% of an institution's total regulatory assets. In addition, a federal savings institution has lending authority above the 30.0% category for certain consumer loans, such as home equity loans, property improvement loans, mobile home loans and savings account secured loans. During fiscal years 1997, 1996 and 1995, the Corporation originated $333.2 million, $276.5 million and $164.5 million, respectively, of consumer loans. Consumer loans originated by the Corporation are primarily second mortgage loans, loans to depositors on the security of their savings accounts and loans secured by automobiles. The Corporation has increased its secured consumer lending activities in 20 order to meet its customer's financial needs and will continue to emphasize such lending activities in the future in its primary market areas. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Corporation, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. At June 30, 1997, approximately .45%, or $2.0 million, of the Corporation's consumer loans are 90 days or more delinquent. See "Asset Quality" herein. BULK LOAN PURCHASES. Between January 1991 and June 30, 1992, as part of its - -------------------- balance sheet restructuring, the Corporation purchased 71 whole loan packages, the majority of which was from the Resolution Trust Corporation ("RTC"), comprised of 46,500 loans primarily collateralized by single-family residential properties with principal balances aggregating $2.5 billion. These purchased loans had a weighted average yield of 8.71%. At June 30, 1997, 1996 and 1995, the aggregate principal balance of these bulk purchased loans associated with such restructuring was $494.6 million, $574.4 million and $701.9 million, respectively. Based upon both a review and analysis of the information provided by the seller with respect to each loan package and management's own due diligence review of a certain percentage (usually 5.0% to 10.0%) of the loans within a loan package, management established specific estimated allowance amounts which were allocated from the discount amounts on the loan packages. At June 30, 1997, 1996 and 1995, $10.8 million, $12.8 million and $15.3 million, respectively, of the discount amount relating to these purchased loans was allocated to an estimated allowance amount for potential credit risk associated with such bulk purchased loans. These allowances are available to absorb losses associated with the respective purchased loan packages and are not available to absorb losses from other loans. At June 30, 1997, 1996 and 1995, $18.3 million, $17.8 million and $17.8, respectively, of these purchased loans were past due 90 days or more. To the extent opportunities to make similar bulk purchases of loans become available, the Corporation will consider making such purchases in the future. The Corporation also purchases loans from its correspondent network and will continue to do so in the future. During fiscal years 1997, 1996 and 1995, the Corporation purchased $300.2 million, $286.1 million and $461.3 million, respectively, of other loan packages not associated with the aforementioned restructuring efforts. 21 Loan Sales. In addition to originating loans for its portfolio, the - ----------- Corporation, through its mortgage banking subsidiary, participates in secondary mortgage market activities by selling whole and securitized loans to institutional investors or other financial institutions with the Corporation generally retaining the right to service such loans. Substantially all of the Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC. Conventional conforming loans are either sold for cash as individual whole loans to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC which are then sold to investment banking firms. FHA/VA loans are originated or purchased by the Corporation's mortgage banking subsidiary and, either are retained for the Corporation's real estate loan portfolio, or are pooled to form GNMA securities which are subsequently sold to investment banking firms, or are sold to the Bank and retained in the Corporation's mortgage-backed securities held for investment portfolio. During fiscal years 1997, 1996 and 1995, the Corporation sold an aggregate of $552.2 million, $667.7 million and $654.4 billion, respectively, in mortgage loans resulting in net gains of $386,000 and $164,000, respectively, in fiscal years 1997 and 1996, and a net loss of $1.7 million in fiscal year 1995. Of the amount of mortgage loans sold during fiscal year 1997, $549.3 million were sold in the secondary market, of which 64.3% were converted into GNMA securities, 31.2% were sold directly to FNMA or FHLMC for cash or were exchanged for securities issued by FNMA or FHLMC, and the remaining were sold to other institutional investors. At June 30, 1997, the carrying value of loans held for sale totaled $68.7 million. The net gains recorded in fiscal years 1997 and 1996 are attributable to the relatively stable interest rate environments over the respective periods. Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125") on a prospective basis as required. SFAS No. 125 supersedes the provisions of SFAS No. 122. The adoption of SFAS No. 125 did not have a material effect on the Corporation's financial position or results of operations. Both statements require capitalization of internally originated mortgage servicing rights as well as purchased mortgage servicing rights. At June 30, 1997, 1996 and 1995, mortgage servicing rights totaled $47.8 million, $45.0 million and $36.2 million, respectively. SFAS No. 125 also requires that mortgage servicing rights be reported at the lower of cost or fair value. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to loan servicing income. No valuation allowance for capitalized servicing rights was necessary to be established as of June 30, 1997 or 1996. The future effect of SFAS No. 125 is dependent, among other items, upon the volume and type of loans originated, the general levels of market interest rates and the rate of estimated loan prepayments. Mortgage loans are generally sold in the secondary mortgage market without recourse to the Corporation in the event of borrower default, subject to certain limitations applicable to VA loans. Historical losses realized by the Corporation as a result of limitations applicable to VA loans have been immaterial on an annual basis. However, in connection with a 1987 acquisition of a financial institution, the Bank assumed agreements providing for recourse in the event of default on obligations transferred in connection with sales of certain securities by such institution. At June 30, 1997, the remaining balance of such loans sold with recourse totaled $28.3 million. 22 Set forth below is a table showing the Corporation's loan and mortgage-backed securities activity for the three fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ----------- ----------- ----------- (In Thousands) LOANS ORIGINATED: Real estate loans- Residential loans (1) $ 416,885 $ 593,488 $ 564,731 Construction loans 188,215 206,364 216,191 Commercial real estate and land loans 55,461 45,214 29,381 Consumer loans 333,188 276,507 164,499 ----------- ----------- ----------- Loans originated $ 993,749 $ 1,121,573 $ 974,802 =========== =========== =========== LOANS PURCHASED: Conventional mortgage loans- Residential loans $ 826,654 $ 607,878 $ 604,958 Bulk loan purchases (2) 300,212 286,066 461,299 Commercial loans -- -- 942 Mortgage-backed securities -- 50,197 11,504 ----------- ----------- ----------- Loans purchased $ 1,126,866 $ 944,141 $ 1,078,703 =========== =========== =========== LOANS SECURITIZED: Conventional mortgage loans securitized into mortgage-backed securities $ 46,165 $ 63,445 $ 189,031 =========== =========== =========== ACQUISITIONS: Residential real estate loans $ 83,413 $ 138,679 $ 101,067 Consumer loans 51,639 27,599 12,173 Mortgage-backed securities 36,194 82,580 42,648 ----------- ----------- ----------- Loans from acquisitions $ 171,246 $ 248,858 $ 155,888 =========== =========== =========== LOANS SOLD: Conventional mortgage loans $ 552,233 $ 667,683 $ 654,439 Mortgage-backed securities 72,275 178,580 40,815 ----------- ----------- ----------- Loans sold $ 624,508 $ 846,263 $ 695,254 =========== =========== =========== - ------------------------------------------------------------------------------------------------------------
(1) Includes single-family and multi-family residential loans and FHA and VA loans. In addition, includes loans refinanced of $97,413, $176,520 and $32,564 for fiscal years 1997, 1996 and 1995, respectively. (2) Includes commercial loans purchased of $4,938 for fiscal year 1997. 23 LOAN SERVICING. The Corporation, through its mortgage banking subsidiary, - --------------- services substantially all of the mortgage loans that it originates and purchases (whether retained for the Bank's portfolio or sold in the secondary market), thereby generating ongoing loan servicing fees. The Corporation also periodically purchases mortgage servicing rights. At June 30, 1997, the Bank's mortgage banking subsidiary was servicing approximately 107,900 loans and participations for others with principal balances aggregating $5.952 billion, compared to 107,800 loans with principal balances totaling $5.870 billion at June 30, 1996. At June 30, 1997, adjustable-rate mortgage loans represented 18.1% of the aggregate dollar amount of loans in the servicing portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General," -- "Loan Servicing Fees" and -- "Note 23 - Segment Information" in the Annual Report for information pertaining to revenue from servicing loans for others. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow (impound funds) for payment of taxes and insurance, making inspections as required of the mortgage premises, collecting amounts due from delinquent mortgagors, supervising foreclosures in the event of unremedied defaults and generally administering the loans for the investors to whom they have been sold. The Corporation receives fees for servicing mortgage loans for others, ranging generally from .25% to .50% per annum on the declining principal balances of the loans. The average service fee collected by the Corporation was .41% and .42%, respectively, for fiscal years 1997 and 1996. The Corporation's servicing portfolio is subject to reduction primarily by reason of normal amortization and prepayment of outstanding mortgage loans. In general, the value of the Corporation's loan servicing portfolio may also be adversely affected as mortgage interest rates decline and loan prepayments increase. It is expected that income generated from the Corporation's loan servicing portfolio also will decline in such an environment. This negative effect on the Corporation's income may be offset somewhat by a rise in origination and servicing fee income attributable to new loan originations, which historically have increased in periods of low mortgage interest rates. The weighted average mortgage loan note rate of the Corporation's servicing portfolio at June 30, 1997, was 7.89% compared to 7.90% at June 30, 1996. At June 30, 1997, 95.0% of the Corporation's mortgage servicing portfolio for other institutions was covered by servicing agreements pursuant to the mortgage- backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the Corporation may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Corporation cannot charge any interest on such advance funds, the Corporation typically recovers the advances within a reasonable number of days upon receipt of the borrower's payment, or in the absence of such payment, advances are recovered through FHA insurance or VA guarantees or FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. During fiscal year 1997, the average amount of funds advanced by the Corporation pursuant to servicing agreements was approximately $2.4 million. INTEREST RATES AND LOAN FEES. Interest rates charged by the Corporation on its - ----------------------------- loans are primarily determined by secondary market yield requirements and competitive loan rates offered in its lending areas. Nebraska, Iowa and Oklahoma law do not provide an interest rate limitation on loans secured by real estate, however, such states do impose various limitations on the interest rate which may be charged on installment and personal loans made to non-corporate borrowers. Generally, interest rates on these loans are limited in Nebraska as follows: (i) 19.0% for unsecured loans made for the purpose of property alterations or repairs and for loans made in accordance with the provisions of Titles I or II of the National Housing Act, and (ii) 16.0% for loans to individuals providing such loans are not secured by real estate, total less than $25,000 and are not home improvement loans. Oklahoma and Iowa laws generally limit interest rates charged on installment and personal loans made to non- corporate borrowers to 21.0%, although loans in excess of $45,000 and $25,000, respectively, are not subject to any interest rate limitation. Colorado statutory usury limitations prohibit the Corporation from contracting for payment by the debtor of any loan finance charge in excess of a 45.0% annual percentage rate when the loan is secured by a first lien against real estate or is for a business or commercial purpose. Colorado usury limitations also restrict the Corporation for all other loans, excluding business or commercial purpose loans, from contracting for payment by the debtor of any loan finance charge in excess of a 21.0% annual law imposes various interest rate limitations on consumer loans of $25,000 or less which are generally limited to 18.0% per annual percentage rate. Kansas law limits the interest rate on fixed-rate non- business loans secured by real estate to an index based on FHLMC securities, while interest rates imposed on variable rate mortgages are generally not limited. In addition to interest earned on loans, the Corporation receives loan 24 origination fees for originating certain loans. These fees are a percentage of the principal amount of the mortgage loan and are charged to the borrower. LOAN COMMITMENTS. At June 30, 1997, the Corporation had issued commitments of - ----------------- $150.8 million, excluding undisbursed portion of loans in process, to fund and purchase loans. These commitments are generally expected to settle within three months following June 30, 1997. These outstanding loan commitments to extend credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn. The Corporation anticipates that normal amortization and prepayments of loan and mortgage-backed security principal will be sufficient to fund these loan commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" in the Annual Report. COLLECTION PROCEDURES. If a borrower fails to make required payments on a loan, - ---------------------- the Corporation generally will take immediate action to satisfy its claim against the security for the loan. If a delinquency cannot otherwise be cured, the Corporation records a notice of default and commences foreclosure proceedings. When a trustee sale is held, the Corporation generally acquires title to the property. The property may then be sold for cash or with financing conforming to normal loan requirements, or it may be sold or financed with a "loan to facilitate" involving terms more favorable to the borrower than those permitted by applicable regulations for new loans. ASSET QUALITY - ------------- NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are placed on a - --------------------- nonaccruing status when, in the opinion of management, the collection of additional interest is doubtful. Loans are placed on a nonaccruing status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on nonaccruing status is charged against interest income. Subsequent payments are applied to the outstanding principal balance until such time as the loan is removed from nonaccruing status. Real estate acquired by the Corporation as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. Such property is stated at the lower of cost or fair value, minus estimated costs to sell. Valuation allowances for estimated losses on real estate are subsequently provided when the carrying value exceeds the fair value minus estimated costs to sell the property. In certain circumstances the Corporation does not immediately foreclose when a delinquency is not cured promptly, particularly when the borrower does not intend to abandon the collateral, since by not foreclosing the risk of ownership would still be retained by the borrower. The evaluation of borrowers and collateral may involve determining that the most economic way to reduce the Corporation's risk of loss may be to allow the borrower to remain in possession of the property and to restructure the debt as a troubled debt restructuring. In these circumstances, the Corporation would strive to ensure that the borrower's continued participation in and management of the collateral does not put the Corporation at further risk of loss. In situations in which the borrower is not performing under the restructured terms, foreclosure proceedings are commenced when legally allowable. A troubled debt restructuring is a loan on which the Corporation, for reasons related to the debtor's financial difficulties, grants a concession to the debtor, such as a reduction in the loan's interest rate, a reduction in the face amount of the debt, or an extension of the maturity date of the loan, that the Corporation would not otherwise consider. A loan classified as a troubled debt restructuring may be reclassified as current if such loan has returned to a performing status at a market rate of interest for at least 8 to 12 months, the loan-to-value ratio is 80.0% or less, the cash flows generated from the collateralized property support the loan amount subject to minimum debt service coverage as defined and overall applicable economic conditions are favorable. Such loans have decreased steadily over the past five fiscal years to a balance of $9.6 million at June 30, 1997, compared to $14.8 million and $17.9 million, respectively, at June 30, 1996 and 1995. No materially significant loans classified as troubled debt restructuring have been added to the Corporation's nonperforming assets since fiscal year 1994. The Corporation's nonperforming assets totaling $63.5 million decreased by $3.1 million, or 4.6%, at June 30, 1997, compared to June 30, 1996, primarily as a result of net decreases of $5.2 million in troubled debt restructurings and $1.1 million in nonperforming loans offset by a net increase of $3.2 million in real estate. 25 The following table sets forth information with respect to the Bank's nonperforming assets at June 30 as follows: - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Loans accounted for on a nonaccrual basis: (1) Real estate - Residential $34,348 $34,660 $30,841 $27,470 $29,888 Commercial 424 2,357 773 5,613 1,377 Consumer 2,042 888 644 409 322 ------- ------- ------- ------- -------- Total 36,814 37,905 32,258 33,492 31,587 ------- ------- ------- ------- -------- Accruing loans which are contractually past due 90 days or more - - - - - ------- ------- ------- ------- -------- Total nonperforming loans 36,814 37,905 32,258 33,492 31,587 ------- ------- ------- ------- -------- Real estate: (2) Commercial 8,417 8,850 8,795 16,869 23,808 Residential 8,599 4,986 3,784 4,566 6,519 ------- ------- ------- ------- -------- Total 17,016 13,836 12,579 21,435 30,327 ------- ------- ------- ------- -------- Troubled debt restructurings: (3) Commercial 8,857 13,894 16,566 19,455 39,852 Residential 787 909 1,294 1,580 2,164 ------- ------- ------- ------- -------- Total 9,644 14,803 17,860 21,035 42,016 ------- ------- ------- ------- -------- Nonperforming assets $63,474 $66,544 $62,697 $75,962 $103,930 ======= ======= ======= ======= ======== Nonperforming loans to total loans (4) 0.68% 0.77% 0.69% 0.83% 0.85% Nonperforming assets to total assets 0.89% 1.01% 0.95% 1.27% 1.97% - --------------------------------------------------------------------------------------------------------- Allowance for loan losses: Other loans $37,658 $36,513 $33,261 $27,530 $24,637 Bulk purchased loans (5) 10,809 12,765 15,280 17,321 22,271 ------- ------- ------- ------- -------- Total $48,467 $49,278 $48,541 $44,851 $46,908 ======= ======= ======= ======= ======== Allowance for bulk purchased loan losses to bulk purchased loans (5) 2.19% 2.22% 2.18% 2.00% 1.69% Allowance for loan losses (other loans) to total loans (less bulk purchased loans) 0.77% 0.83% 0.84% 0.87% 1.02% Allowance for loan losses to total loans (4) 0.90% 0.99% 1.04% 1.11% 1.26% Allowance for loan losses to total nonperforming assets 76.36% 74.05% 77.42% 59.04% 45.13% Allowance for loan losses (other loans) to total nonperforming loans (less nonperforming bulk purchased loans) (6) 203.19% 182.00% 230.10% 171.61% 183.16% - ---------------------------------------------------------------------------------------------------------
(Continued on next page) 26 (1) During fiscal years 1997, 1996 and 1995, the Corporation did not record any interest income on these nonaccruing loans. Had these loans been current in accordance with their original terms and outstanding throughout this fiscal year or since origination, the Corporation would have recorded gross interest income on these loans of $2.4 million, $2.2 million and $1.9 million, respectively. (2) Real estate as a component of nonperforming assets does not include performing real estate held for investment, which totaled $2.7 million, $2.8 million and $4.2 million, respectively, at June 30, 1997, 1996 and 1995. (3) During fiscal years 1997, 1996 and 1995, the Corporation recognized interest income on these loans classified as troubled debt restructurings aggregating $804,000, $1.3 million and $1.7 million, respectively, whereas under their original terms the Corporation would have recognized interest income of $985,000, $1.5 million and $1.9 million, respectively. At June 30, 1997, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. (4) Based on the total balance of loans receivable (before any reduction for unamortized discounts net of premiums, undisbursed loan proceeds, deferred loan fees and allowance for loan losses) at the respective dates. (5) At June 30, 1997, 1996 and 1995, $10.8 million, $12.8 million and $15.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans is included in the total allowance for loan losses to provide for the credit risk associated with these bulk purchased loans, which had balances of $494.6 million, $574.4 million and $701.9 million, respectively, at June 30, 1997, 1996 and 1995. These allowances are available only to absorb losses associated with the respective bulk purchased loans and are not available to absorb losses from other loans. (6) Nonperforming bulk purchased loans approximating $18.3 million, $17.8 million and $17.8 million, respectively, at June 30, 1997, 1996 and 1995, and the allowance for loan losses associated with the total bulk purchased loans, have been excluded from this calculation since these allowances are not available to absorb the losses associated with other loans in the portfolio. - -------------------------------------------------------------------------------- For a discussion of the major components of the $3.1 million decrease in nonperforming assets during the fiscal year ended June 30, 1997, compared to June 30, 1996, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Loan Losses and Real Estate Operations" in the Annual Report. 27 The geographic concentration of nonperforming loans at June 30 was as follows:
- -------------------------------------------------------------------------------------- State 1997 1996 1995 1994 1993 - ----- --------- --------- --------- --------- --------- (In Thousands) Texas $ 3,274 $ 3,290 $ 3,601 $ 4,417 $ 3,377 California 2,977 4,624 3,758 3,966 2,802 Nebraska 2,629 2,352 2,037 1,551 2,237 Georgia 2,601 3,389 2,559 2,355 3,273 Missouri 2,402 2,018 1,864 1,720 2,334 Oklahoma 2,303 1,496 1,019 541 609 Kansas 2,041 2,012 469 1,022 1,407 Illinois 1,754 1,158 1,234 1,502 1,976 Maryland 1,623 1,548 743 613 -- Colorado 1,489 2,789 2,794 5,016 2,260 Florida 1,389 891 1,553 1,148 1,268 New Jersey 1,060 1,069 1,680 1,361 793 Connecticut 860 739 643 37 385 Pennsylvania 855 663 715 823 967 Virginia 656 880 446 790 552 Arizona 619 411 539 569 2,061 New York 606 447 855 407 366 Indiana 489 238 411 145 113 Washington 449 647 745 841 465 North Carolina 392 205 455 237 220 Other States 6,346 7,039 4,138 4,431 4,122 --------- --------- --------- --------- --------- Nonperforming loans $ 36,814 $ 37,905 $ 32,258 $ 33,492 $ 31,587 ========= ========= ========= ========= ========= - --------------------------------------------------------------------------------------
Nonperforming loans at June 30, 1997, consisted of 1,096 loans with an average balance of $33,589. Nonperforming loans totaling $36.8 million at June 30, 1997, consisted of $424,000 (three loans) collateralized by commercial real estate, $32.8 million (757 loans) collateralized by residential real estate, $1.5 million (10 loans) collateralized by residential construction real estate and $2.0 million (326 loans) of consumer loans. 28 The geographic concentration of nonperforming real estate at June 30 was as follows:
- ---------------------------------------------------------------------------------------- State 1997 1996 1995 1994 1993 - ----- --------- --------- --------- --------- --------- (In Thousands) Nebraska $ 5,565 $ 5,356 $ 5,770 $ 6,868 $ 8,871 Colorado 5,161 6,011 6,823 4,027 8,241 California 1,191 187 109 64 8,772 Georgia 933 187 510 2,549 1,016 Kansas 832 36 47 138 551 Nevada 603 -- -- -- -- Missouri 522 125 262 219 -- Oklahoma 509 384 391 1,348 2,888 Florida 277 312 197 115 -- New Jersey 240 270 280 90 362 Texas 220 1,608 999 8,323 653 Iowa 106 108 129 248 1,664 Pennsylvania 102 116 326 351 -- Tennessee -- -- 119 -- 23 Other states 1,940 2,063 624 1,484 774 Unallocated reserves (1,185) (2,927) (4,007) (4,389) (3,488) --------- --------- --------- --------- --------- Nonperforming real estate $ 17,016 $ 13,836 $ 12,579 $ 21,435 $ 30,327 ========= ========= ========= ========= ========= - -----------------------------------------------------------------------------------------
At June 30, 1997, total nonperforming commercial real estate amounted to $8.4 million (18 properties) or 49.5% of the $17.0 million in total nonperforming real estate (consisting of 179 properties), and the remaining $8.6 million (161 properties) consisted of nonperforming residential real estate. The Corporation's commercial real estate at June 30, 1997, is located primarily in Colorado and Nebraska. Under the Corporation's credit policies and practices, certain real estate loans meet the definition of impaired loans under Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." A loan is considered impaired when it is probable that the Corporation, based upon current information, will not collect amounts due, both principal and interest, according to the contractual terms of the loan agreement. Certain loans are exempt from the provisions of the aforementioned accounting statements, including large groups of smaller-balance homogenous loans that are collectively evaluated for impairment which, for the Corporation, include one-to-four family first mortgage loans and consumer loans. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. Loans reviewed for impairment by the Corporation are primarily limited to loans modified in a troubled debt restructuring (after July 1, 1994) and commercial real estate loans. The Corporation's impaired loan identification and measurement processes are conducted in conjunction with the Corporation's review of classified assets and adequacy of its allowance for possible loan losses. Specific factors utilized in the impaired loan identification process include, but are not limited to, delinquency status, loan-to-value ratio, debt coverage and certain other conditions pursuant to the Corporation's classification policy. At June 30, 1997, the Corporation had impaired loans totaling $7.4 million, net of specific reserves, of which $6.5 million are classified as troubled debt restructurings. This balance of troubled debt restructurings is included in the Corporation's $8.9 million balance as shown in the table for nonperforming assets. 29 CLASSIFICATION OF ASSETS. Savings institutions are required to review their - ------------------------- assets on a regular basis and, as warranted, classify them as "substandard," "doubtful," or "loss" as defined by OTS regulations. Adequate general valuation allowances are required to be established for assets classified as substandard or doubtful. If an asset is classified as a loss, the institution must either establish a specific valuation allowance equal to the amount classified as loss or charge off such amount. An asset which does not currently warrant classification as substandard but which possesses credit deficiencies or potential weaknesses deserving close attention is required to be designated as "special mention." In addition, a savings institution is required to set aside adequate valuation allowances to the extent that any affiliate possesses assets which pose a risk to the savings institution. The OTS has the authority to approve, disapprove or modify any asset classification or any amount established as an allowance pursuant to such classification. Based on a review of the Corporation's portfolio at June 30, 1997, pursuant to reporting on the quarterly thrift financial report, the Corporation had $16.3 million in assets classified as special mention, $60.9 million in assets classified as substandard, no assets classified as doubtful or as loss. As required, specific valuation allowances have been established in an amount equal to 100.0% of all assets classified as loss. Substantially all nonperforming assets at June 30, 1997, are classified as either substandard or loss pursuant to applicable asset classification standards. Of the Corporation's loans which were not classified at June 30, 1997, there were no loans where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms. LOAN AND REAL ESTATE REVIEW POLICY. Management of the Corporation has the - ----------------------------------- responsibility of establishing policies and procedures for the timely evaluation of the credit risk in the Corporation's loan and real estate portfolios. Management is also responsible for the determination of all specific and general provisions for loan and real estate losses, taking into consideration a number of factors, including changes in the composition of the Corporation's loan portfolio and real estate balances, current economic conditions, including real estate market conditions in the Corporation's lending areas, that may affect the borrower's ability to make payments on loans, regular examinations by the Corporation's credit review group of the quality of the overall loan and real estate portfolios, and regular review of specific problem loans and real estate. See "Nonperforming Assets" herein. Management also has the responsibility of ensuring timely charge-offs of loan and real estate balances, as appropriate, when general and economic conditions warrant a change in the value of these loans and real estate. To ensure that credit risk is properly and timely monitored, this responsibility has been delegated to a credit review group which consists of key personnel of the Corporation knowledgeable in the specific areas of loan and real estate valuation. The objectives of the credit review group are (i) to define the risk of collectibility of the Corporation's loans and the likelihood of liquidation of real estate and other assets and their book value, (ii) to identify problem assets at the earliest possible time, (iii) to assure an adequate level of allowances for possible losses to cover identified and anticipated credit risks, (iv) to monitor the Corporation's compliance with established policies and procedures, and (v) to provide the Corporation's management with information obtained through the asset review process. This credit review group analyzes all significant loans and real estate of the Corporation for appropriate levels of reserves on these assets based on varying degrees of loan or real estate value weakness. Accordingly, these types of loans and real estate are assigned a credit risk rating ranging from one (excellent) to six (loss). Loans and real estate with minimal credit risk (not adversely classified or with a credit risk rating of one to four) generally have general reserves established on the basis of the Corporation's historical loss experience. Loans and real estate adversely classified (substandard, loss or with a credit risk rating of five or six) generally have greater levels of general reserves similarly established on the basis of the Corporation's historical loss experience, as well as specific reserves established as applicable to recognize permanent declines in the value of loans or real estate. 30 It is management's responsibility to maintain a reasonable allowance for loan losses applicable to all categories of loans through periodic charges to operations. The Corporation employs a systematic methodology to determine the amount of general loan losses, in addition to specific valuation allowances, to be recorded as a percentage of the respective loan balances as follows:
General Loan Loss Type of Loan and Status Percentage ----------------------- ---------- RESIDENTIAL REAL ESTATE LOANS: Current .25% 90 days delinquent (or classified substandard) 7.50 RESIDENTIAL CONSTRUCTION LOANS: Current 1.00 90 days delinquent 12.50 COMMERCIAL REAL ESTATE LOANS: Current 1.00 Classified special mention 2.00 90 days delinquent (or classified substandard) 10.00 CONSUMER LOANS: Current .50 Classified substandard and 90 days delinquent 20.00 120 days delinquent 100.00 ( The unsecured balance of consumer loans over 120 days delinquent is generally written off )
As appropriate, management of the Corporation attempts to ensure that the Corporation's reserves are in general compliance with previously established regulatory examination guidelines. ALLOWANCE FOR LOSSES ON LOANS. The allowance for loan losses is based upon - ------------------------------ management's continuous evaluation of the collectibility of outstanding loans, which takes into consideration such factors as changes in the composition of the loan portfolio and economic conditions that may affect the borrower's ability to pay, regular examinations by the Corporation's credit review group of specific problem loans and of the overall portfolio quality and real estate market conditions in the Corporation's lending areas. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Provision for Loan Losses and Real Estate Operations" in the Annual Report. The Corporation's policy is to charge-off loans or portions thereof against the allowance for loan losses in the period in which loans or portions thereof are determined to be uncollectible. A majority of the Corporation's loans are collateralized by residential or commercial real estate. Therefore, the collectibility of such loans is susceptible to changes in prevailing real estate market conditions and other factors which can cause the fair value of the collateral to decline below the loan balance. When the Corporation records charge-offs on these loans, it also begins the foreclosure process of taking possession of the real estate which served as collateral for such loans. Recoveries of loan charge-offs generally occur only when the loan deficiencies are completely cured. Upon foreclosure and conversion of the loan into real estate owned, the Corporation may realize a credit to real estate operations through the disposition of such real estate when the sale proceeds exceed the value of the real estate. During fiscal year 1997 consumer loan charge-offs, net of recoveries, totaled $7.0 million compared to $3.5 million and $1.3 million, respectively, during fiscal years 1996 and 1995. Consumer loan balances increased to $451.6 million at June 30, 1997, from $344.1 million and $231.8 million, respectively, at June 30, 1996 and 1995. Net consumer loan charge-offs of the Corporation reflect the overall trend in consumer credit quality deterioration generally experienced by the financial industry in the last 12 months. Management intends to increase its consumer loan portfolio, however, with improved underwriting and credit review procedures in place, along with improved collection efforts, implemented during fiscal year 1997, management does not anticipate similar increases in the loan loss provisions or in net charge-offs for consumer loans in fiscal 1998. 31 Although management believes that the Corporation's allowance for loan losses is adequate to reflect the risk inherent in its portfolios, there can be no assurance that the Corporation will not experience increases in its nonperforming assets, that it will not increase the level of its allowances in the future or that significant provisions for losses will not be required based on factors such as deterioration in market conditions, changes in borrowers' financial conditions, delinquencies and defaults. In addition, regulatory agencies review the adequacy of the allowance for losses on loans on a regular basis as an integral part of their examination process. Such agencies may require additions to the allowance based on their judgments of information available to them at the time of their examinations. 32 The following table sets forth the activity in the Bank's allowance for loan losses for the fiscal years ended June 30 as indicated:
- -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Allowance for losses on loans at beginning of year $ 49,278 $ 48,541 $ 44,851 $ 46,908 $ 50,704 ----------- ----------- ----------- ----------- ----------- Loans charged-off: Single-family residential (2,083) (1,130) (1,171) (940) (1,475) Multi-family residential and commercial real estate -- (210) (842) (2,083) (1,264) Consumer (9,116) (4,193) (1,758) (1,075) (1,043) ----------- ----------- ----------- ----------- ----------- Loans charged-off (11,199) (5,533) (3,771) (4,098) (3,782) ----------- ----------- ----------- ----------- ----------- Recoveries: Single-family residential 3 20 64 147 -- Multi-family residential and commercial real estate 175 46 815 164 857 Consumer 2,079 668 455 432 404 ----------- ----------- ----------- ----------- ----------- Recoveries 2,257 734 1,334 743 1,261 ----------- ----------- ----------- ----------- ----------- Net loans charged-off (8,942) (4,799) (2,437) (3,355) (2,521) ----------- ----------- ----------- ----------- ----------- Provision charged to operations 8,121 6,107 6,408 6,248 6,185 ----------- ----------- ----------- ----------- ----------- Railroad activity for the six months ended June 30, 1994, net -- -- (58) -- -- Allowances acquired in acquisitions 1,966 1,944 1,818 -- -- Estimated allowance added for bulk purchased loans (1) -- -- -- 39 173 Change in estimate of allowance for bulk purchased loans (1)(2) (1,878) (2,273) (1,705) (4,357) (5,334) Charge off to allowance for bulk purchased loans (1) (78) (242) (336) (632) (2,299) ----------- ----------- ----------- ----------- ----------- Allowances for losses on loans at end of year $ 48,467 $ 49,278 $ 48,541 $ 44,851 $ 46,908 =========== =========== =========== =========== =========== - -------------------------------------------------------------------------------------------------------------------------- Ratio of net loans charged-off to average loans outstanding during the year 0.18% 0.10% 0.06% 0.11% 0.13% - --------------------------------------------------------------------------------------------------------------------------
(1) At June 30, 1997, 1996 and 1995, $10.8 million, $12.8 million and $15.3 million, respectively, of allowance for loan losses for bulk purchased loans, which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans, was included in the total allowance for loan losses. Such bulk purchased loans had balances of $494.6 million, $574.4 million and $701.9 million, respectively, at June 30, 1997, 1996 and 1995. These allowances are available only to absorb losses associated with the respective bulk purchased loans and are not available to absorb losses from other loans. (2) Consists primarily of changes in estimates of allowance amounts for bulk purchased loans resulting from the 100% payoff of such purchased loans or from loan principal paydowns such that these reclassed allowance amounts will be amortized into income as a yield adjustment over the respective remaining lives of the related purchased loans. 33 INVESTMENT ACTIVITIES - --------------------- The Corporation is required by federal regulations to maintain average daily balances of liquid assets (defined as U.S. Treasury and other governmental agency obligations, cash, deposits maintained pursuant to Federal Reserve Board requirements, time and savings deposits in certain institutions, obligations of states and political subdivisions thereof, shares in mutual funds with certain restricted investment policies, highly rated corporate debt, and mortgage loans and mortgage related securities with less than one year to maturity or subject to purchase within one year) equal to the monthly average of not less than a specified percentage (currently 5.0%) of its net withdrawable savings deposits plus short-term borrowings. The Corporation is also required to maintain average daily balances of short-term liquid assets at a specified percentage (currently 1.0%) of the total of net withdrawable savings accounts and borrowings payable in one year or less. The Corporation's general policy is to invest primarily in short-term liquid assets in compliance with these regulatory requirements. As of June 30, 1997, the Corporation had total average liquid assets of $327.9 million, which consisted of $34.6 million in cash, $1.9 million in federal funds and $291.4 million in agency-backed securities. The Corporation's liquidity and short-term liquidity ratios were 5.77% and 1.48%, respectively, at June 30, 1997. See "Regulation -- Liquidity Requirements." The Corporation's management objective is to maintain liquidity at a level sufficient to assure adequate funds, taking into account anticipated cash flows and available sources of credit, to allow future flexibility to meet withdrawal requests, to fund loan commitments, to maximize income while protecting against credit risks and to manage the repricing characteristics of the Corporation's assets and liabilities. Such liquid funds are managed in an effort to produce the highest yield consistent with maintaining safety of principal and within regulations governing the thrift industry. The relative size and mix of investment securities in the Corporation's portfolio are based on management's judgment compared to the yields and maturities available on other investment securities. The Corporation emphasizes low credit risk in selecting investment options. The following table sets forth the carrying value of the Corporation's investment securities held to maturity and short-term cash investments at June 30:
- ------------------------------------------------------------------------------------------------------ 1997 1996 1995 ----------- ----------- ----------- (Dollars in Thousands) Investment securities held to maturity: U.S. Treasury and other Government agency obligations $ 345,877 $ 213,800 $ 296,443 Obligations of states and political subdivisions 14,068 18,642 -- Other securities 19,182 10,703 1,050 ---------- ---------- ---------- Total investment securities held to maturity 379,127 243,145 297,493 Interest earning cash on deposit (federal funds) -- 2,400 6,345 ---------- ---------- ---------- Total Investments $ 379,127 $ 245,545 $ 303,838 ========== ========== ========== - ------------------------------------------------------------------------------------------------------
34 The following table sets forth the scheduled maturities, carrying values, market values and weighted average yields for the Corporation's investment securities held to maturity at June 30, 1997:
- ---------------------------------------------------------------------------------------------------------------------------------- One Year Over One Within Over Five Within or Less Five Years Ten Years ------------------------- ------------------------- ------------------------- Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield ----------- ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Investment securities held to maturity: - --------------------------------------- U.S. Treasury and other Government agency obligations $ 45,224 5.38% $ 135,677 5.75% $ 65,000 7.29% States and political subdivisions -- -- 2,696 6.75 11,001 6.28 Other debt securities -- -- 100 7.09 926 12.50 ----------- ----------- ----------- ----------- ----------- ----------- Total $ 45,224 5.38% $ 138,473 5.77% $ 76,927 7.21% =========== =========== =========== =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------- More Than Ten Years Total ------------------------- --------------------------------------- Amortized Average Amortized Market Average Cost Yield Cost Value Yield ----------- ----------- ----------- ----------- ----------- (Dollars in Thousands) Investment securities held to maturity: - --------------------------------------- U.S. Treasury and other Government agency obligations $ 99,976 7.91% $ 345,877 $ 343,824 6.61% States and political subdivisions 371 5.50 14,068 13,950 6.35 Other debt securities 18,156 7.21 19,182 19,322 7.47 ----------- ----------- ----------- ----------- ----------- Total $ 118,503 7.80% $ 379,127 $ 377,096 6.65% =========== =========== =========== =========== ===========
For further information regarding the Corporation's investment securities held to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the Annual Report. 35 SOURCES OF FUNDS - ---------------- GENERAL. Deposits have historically been the major source of the Corporation's - -------- funds for lending and other investment purposes. In addition to deposits, the Corporation derives funds from principal and interest repayments on loans and mortgage-backed securities, sales of loans, FHLB advances, securities sold under agreements to repurchase, prepayment and maturity of investment securities, and other borrowings. At June 30, 1997, deposits made up 66.7% of total interest- bearing liabilities compared to 70.6% at June 30, 1996. Deposit levels are significantly influenced by general interest rates, economic conditions and competition. Other borrowings, primarily FHLB advances, are utilized to compensate for any decreases in the normal or expected inflow of deposits. The Corporation anticipates that it will in the future continue to grow its present five-state franchise through an ongoing program of selective acquisitions of other financial institutions. During fiscal year 1997 the Corporation consummated the acquisitions of Heritage and Investors. In addition, subsequent to June 30, 1997, the Corporation entered into definitive agreements to acquire three financial institutions: Liberty Financial Corporation, Mid Continent Bancshares, Inc., and First National Bank Shares, LTD. See Notes 2 and 29 to the Consolidated Financial Statements for additional information on these completed and pending acquisitions. Such completed and proposed acquisitions present the Corporation with the opportunity to further expand its retail network over last fiscal year in the Iowa and Kansas markets and to enter the Arizona market, as well as to increase its earnings potential by increasing its mortgage and consumer loan volumes funded by deposits which generally bear lower rates of interest than alternative sources of funds. DEPOSITS. The Corporation's deposit strategy is to emphasize retail branch - --------- deposits through extensive marketing efforts and product promotion, such as by offering a variety of checking accounts and deposit programs to satisfy customer needs. As such, during fiscal year 1997, NOW accounts increased $49.8 million, from $332.2 million at June 30, 1996, to $382.1 million at June 30, 1997. In addition, during fiscal year 1997 passbook accounts increased $118.5 million, from $623.5 million at June 30, 1996 to $742.0 million at June 30, 1997. Market rate savings decreased at June 30, 1997, to $137.9 million compared to $159.7 million at June 30, 1996. Rates on deposits are priced based on investment opportunities as the Corporation attempts to control the flow of funds in its deposit accounts according to its business objectives and the cost of alternative sources of funds. Fixed-term, fixed-rate retail certificates are the primary sources of deposits for the Corporation and at June 30, 1997, represented 71.2% (or $3.117 billion) of the Bank's total deposits compared to 74.1% at June 30, 1996 (or $3.189 billion). The Corporation offers certificate accounts with terms ranging from one month to 120 months. Total deposits increased $74.3 million during fiscal year 1997 from $4.305 billion at June 30, 1996, to $4.379 billion at June 30, 1997. This increase is primarily a result of the acquisitions of Heritage and Investors with acquired deposits totaling $158.2 million and $26.1 million, respectively. For fiscal year 1997, this increase was partially offset by decreases due mainly to depositors leaving for higher interest rates. 36 The following table sets forth the balances and percentages of the various types of deposits offered by the Corporation at the dates indicated and the change in the dollar amount of deposits between such dates:
June 30, 1997 June 30, 1996 June 30, 1995 ---------------------------------- ---------------------------------- ---------------------- % of Increase % of Increase % of Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits ---------- -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in Thousands) Passbook accounts $ 741,994 16.9% $118,489 $ 623,505 14.5% $ 73,648 $ 549,857 13.7% NOW accounts 382,076 8.7 49,843 332,233 7.7 35,681 296,552 7.4 Market rate savings 137,892 3.2 (21,780) 159,672 3.7 (31,322) 190,994 4.8 Certificates of deposit 3,116,957 71.2 (72,209) 3,189,166 74.1 215,246 2,973,920 74.1 ---------- ------- ---------- ---------- ------- --------- ---------- ------- Total Deposits $4,378,919 100.0% $ 74,343 $4,304,576 100.0% $293,253 $4,011,323 100.0% ========== ======= ========== ========== ======= ========= ========== =======
37 The following table shows the composition of average deposit balances and average rates for the fiscal years indicated:
- ------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ----------------------- ----------------------- ----------------------- Average Avg. Average Avg. Average Avg. Balance Rate Balance Rate Balance Rate ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Passbook accounts $ 684,977 4.29% $ 582,706 4.24% $ 541,061 4.38% NOW accounts 351,190 0.71 436,027 0.63 277,995 0.93 Market rate savings 149,641 3.48 170,886 3.34 218,646 3.36 Certificate of deposit 3,199,572 5.72 2,966,505 6.10 2,752,501 5.33 ---------- ---------- ---------- ---------- ---------- ---------- Average deposit accounts $4,385,380 5.02% $4,156,124 5.15% $3,790,203 4.76% ---------- ---------- ---------- ---------- ---------- ---------- ------------------------------------------------------------------------------
The following table sets forth the Corporation's certificates of deposit (fixed maturities) classified by rates for the three fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- (In Thousands) Rate ---- Less than 3.00% $ 6,708 $ 8,848 $ 11,846 3.00% - 3.99% 6,327 19,978 67,404 4.00% - 4.99% 200,708 285,083 518,061 5.00% - 5.99% 2,170,421 1,948,836 1,017,841 6.00% - 6.99% 604,337 606,704 1,026,035 7.00% - 7.99% 113,030 300,040 290,950 8.00% - 8.99% 10,844 15,090 34,798 9.00% and over 4,582 4,587 6,985 ---------- ---------- ---------- Certificates of deposit $3,116,957 $3,189,166 $2,973,920 ========== ========== ==========
The following table presents the outstanding amount of certificates of deposit in amounts of $100,000 or more by time remaining until maturity for the three fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------ Maturity Period - ----------------------------- 1997 1996 1995 ---------- ---------- ---------- (In Thousands) Three months or less $ 69,350 $ 98,128 $ 63,978 Over three through six months 29,531 43,718 37,346 Over six through twelve months 34,989 73,999 37,025 Over twelve months 48,426 62,994 64,728 ---------- ---------- ---------- Total $ 182,296 $ 278,839 $ 203,077 ========== ========== ========== - ------------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's deposits, see Note 12 to the Notes to Consolidated Financial Statements in the Annual Report. 38 BORROWINGS. The Corporation has also relied upon other - ----------- borrowings, primarily advances from the FHLB of Topeka, as additional sources of funds. Advances from the FHLB of Topeka are typically secured by the Corporation's stock in the FHLB and a portion of first mortgage real estate loans. The maximum amount of FHLB advances which the FHLB will advance for purposes other than meeting deposit withdrawals fluctuates from time to time in accordance with federal regulatory policies. The Corporation is required to maintain an investment in FHLB stock in an amount equal to the greater of 1.0% of the aggregate unpaid loan principal of the Corporation's loans secured by home mortgage loans, home purchase contracts and similar obligations, or 5.0% of advances from the FHLB to the Corporation. The Corporation is also required to pledge such stock as collateral for FHLB advances. In addition to this collateral requirement, the Corporation is required to pledge additional collateral which may be unencumbered whole residential first mortgages with an aggregate unpaid principal amount equal to 158.0% of the Corporation's total outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of the market value of U.S. government or U.S. government agency guaranteed securities, including mortgage-backed securities, as collateral for the outstanding FHLB advances. Pursuant to this requirement, as of June 30, 1997, the Corporation had pledged $2.8 billion of its real estate loans and held FHLB stock of $72.5 million. At June 30, 1997, the Corporation had advances totaling approximately $1.416 billion from the FHLB of Topeka at interest rates ranging from 5.06% to 7.90% and at a weighted average rate of 5.94%. At June 30, 1996, such advances from the FHLB totaled $1.350 billion at interest rates ranging from 4.61% to 9.43% and at a weighted average rate of 5.66%. The Corporation also borrows funds under repurchase agreements. During fiscal years 1997 and 1996 the Corporation utilized securities sold under agreements to repurchase primarily for liquidity and asset liability management purposes. Under a repurchase agreement, the Corporation sells securities (generally, government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued mortgage-backed securities) and agrees to buy such securities back at a specified price at a subsequent date. Repurchase agreements are generally made for terms ranging from one day to four years, are subject to renewal, and are deemed to be borrowings collateralized by the securities sold. At June 30, 1997, the Corporation's repurchase agreements aggregated $639.3 million at an average rate of 6.04%. The Corporation's repurchase agreements were collateralized by $599.4 million and $73.8 million, respectively, of mortgage- backed securities and investment securities at June 30, 1997. At June 30, 1997, these repurchase agreements had maturities ranging from August 1997 to May 1999 with a weighted average maturity of 305 days. Set forth below is certain information relating to the Corporation's securities sold under agreements to repurchase at the dates and for the periods indicated:
- ----------------------------------------------------------------------------------------------------------------- Year Ended June 30, --------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Balance at end of year $ 639,294 $ 380,755 $ 208,373 Maximum month-end balance $ 696,318 $ 380,755 $ 208,373 Average balance $ 591,288 $ 189,568 $ 103,223 Weighted average interest rate during the year 6.19% 7.14% 7.59% Weighted average interest rate at the end of year 6.04% 6.51% 7.08% - -----------------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's FHLB advances and securities sold under agreements to repurchase, see Notes 13 and 14 to the Notes to the Consolidated Financial Statements in the Annual Report. 39 CUSTOMER SERVICES. The Corporation aggressively markets its various checking - ------------------ and loan products as they are mass market entry points to target all consumers. This enables it to attract and service customers to which it can cross-sell its numerous services on a cost-effective, profitable basis with the goal of providing them with 100% of their financial needs. Accordingly, management continues to update data processing equipment in the Corporation's branch operations in order to provide a cost-effective and efficient delivery of services to its customers. The Corporation also has been proactive in the implementation of new consumer-oriented technologies, offering home banking services by providing Microsoft's Money, Intuit's Quicken, and America Online's BankNow financial software to its customer base. The Corporation continues to strive to meet the customer's financial needs. This is exemplified by the availability of home banking via personal computers, extended evening and weekend branch hours, extended hour customer service lines, and 24-hour telephone bill paying services. Additional information about the Corporation and its competitive products also can be accessed through the Corporation's "web site" at http://www.comfedbank.com. At June 30, 1997, there were 107 strategically located proprietary automatic teller machines ("ATMs") in use. These ATMs are also linked with a series of regional, national and international ATM services, including CASHBOX, CIRRUS, NETS, and MINIBANK. As a result of the Corporation's participation in these ATM services, electronic banking machines are currently available worldwide for the convenience of the Corporation's customers. SUBSIDIARIES - ------------ The Bank is permitted to invest an amount equal to 2.0% of its consolidated regulatory assets in capital stock and secured and unsecured loans in its service corporations, and an amount equal to 1.0% of its consolidated regulatory assets when such additional investment is used for community development purposes. In addition, federal savings institutions meeting regulatory capital requirements and certain other tests may invest up to 50.0% of their regulatory core capital in conforming first mortgage loans to service corporations. Under such limitations, at June 30, 1997, the Bank was authorized to invest up to $212.5 million in the stock of, or loans to, service corporations (based upon the 3.0% limitation). As of June 30, 1997, the Bank's investment in capital stock in its service corporations and their wholly-owned subsidiaries was $19.0 million less unsecured loans including conforming loans from those entities totaling $5.4 million for a net investment of $13.6 million. Regulatory capital standards also contain a provision requiring that in determining capital compliance all savings associations must deduct from capital the amount of all post April 12, 1989, investments in and extensions of credit to subsidiaries engaged in activities not permissible for national banks. Currently, the Bank has one subsidiary, Commercial Federal Service Corporation, engaged in activities not permissible for national banks. Investments in such subsidiary must be 100% deducted from capital. See "Regulation -- Regulatory Capital Requirements." At June 30, 1997, the total investment in such subsidiary was $3.8 million which was deducted from capital. Capital deductions are not required for investment in subsidiaries engaged in non-national bank activities as agent for customers rather than as principal, subsidiaries engaged solely in mortgage banking activities, and certain other exempted subsidiaries. The Bank is also required to give the FDIC and the Director of OTS 30 days prior notice before establishing or acquiring a new subsidiary, or commencing any new activity through an existing subsidiary. Both the FDIC and the Director of OTS have authority to order termination of subsidiary activities determined to pose a risk to the safety or soundness of the institution. At June 30, 1997, the Bank had eleven wholly-owned subsidiaries, two of which own and operate certain real estate properties of the Bank. As such, these subsidiaries are considered engaged in permissible activities and do not require deductions from capital as discussed above. In 1994, CFMC was approved by the OTS to be classified as an "operating subsidiary" and as such, CFMC ceased to be subject to the regulatory investment in service corporation limitations as of June 30, 1994. The remaining wholly-owned subsidiaries, exclusive of CFMC, are classified as service corporations. The principal active subsidiaries of the Bank are described below. COMMERCIAL FEDERAL MORTGAGE CORPORATION ("CFMC"). CFMC is a full-service - ------------------------------------------------- mortgage banking company. The Corporation's real estate lending, secondary marketing, mortgage servicing and foreclosure activities are conducted primarily through CFMC. At June 30, 1997, CFMC serviced 63,000 loans for the Bank and 107,900 loans for others. See "Loan Originations -- Loan Servicing." 40 CFC Preferred Trust ("CFCPT"). CFCPT is a statutory business trust created under - ----------------------------- Delaware law pursuant to a trust agreement executed, in part, by the Corporation and the filing of a certificate of trust with Delaware on January 30, 1997. CFCPT exists for the exclusive purposes of (i) issuing and selling its trust securities, (ii) using the proceeds from the sale of such trust securities to acquire Debentures issued by the Corporation, and (iii) engaging in only those other activities necessary, convenient or incidental thereto. See, "General - Cumulative Trust Preferred Securities Offering." COMMERCIAL FEDERAL INVESTMENT SERVICES, INC. ("CFIS"). CFIS offers customers - ------------------------------------------------------ discount brokerage services through INVEST, a service of INVEST Financial Corporation ("IFC"), in 30 of the Corporation's branch offices. INVEST provides investment advice and access to all major stock, bond, mutual fund, and option markets. IFC, the registered broker-dealer, provides all support functions either independently or through affiliates. INVEST affects transactions only on behalf of its customers and does not buy or sell for its own account nor does it underwrite securities. COMMERCIAL FEDERAL INSURANCE CORPORATION ("CFIC"). CFIC was formed in - ------------------------------------------------- November 1983 and serves as a full-service independent insurance agency, offering a full line of homeowners, commercial, health, auto and life insurance products. Additionally, a wholly-owned subsidiary of CFIC provides reinsurance on credit life and disability policies written by an unaffiliated carrier for consumer loan borrowers of the Corporation. COMMERCIAL FEDERAL SERVICE CORPORATION ("CFSC"). CFSC was formed primarily to - ------------------------------------------------ develop and manage real estate, principally apartment complexes located in eastern Nebraska, directly and through a number of limited partnerships. Subsidiaries of CFSC act as general partner and syndicator in many of the limited partnerships. Under the capital regulations discussed above, the Bank's investments in and loans to CFSC are fully excluded from regulatory capital. See "Regulation -- Regulatory Capital Requirements." EMPLOYEES - --------- At June 30, 1997, the Corporation and its wholly-owned subsidiaries had 1,541 full-time equivalent employees. The Corporation provides its employees with a comprehensive benefit program, including basic and major medical insurance, dental plan, a deferred compensation 401(k) plan, life insurance, accident insurance, short and long-term disability coverage and sick leave. The Corporation also offers loans with below market rates to its employees who qualify based on term of employment (except that no preferential rates or terms are offered to executive officers and senior management). The Corporation considers its employee relations to be good. EXECUTIVE OFFICERS - ------------------ For certain information concerning the Registrant's directors and executive officers as of June 30, 1997, refer to Part III -- Item 10. "Directors and Executive Officers of the Registrant" of this report. COMPETITION - ----------- The Corporation faces strong competition in the attraction of deposits and in the origination of real estate loans. Its most direct competition for savings deposits has come historically from commercial banks and from thrift institutions located in its primary market areas. The Corporation's primary market area for savings deposits includes Nebraska, Colorado, Kansas, Oklahoma and Iowa and, for loan originations, includes Nebraska, Colorado, Kansas, Oklahoma, Iowa and Las Vegas, Nevada (residential construction lending). Management believes that the Corporation's extensive branch network has enabled the Corporation to compete effectively for deposits and loans against commercial banks and other financial institutions. The Corporation has been able to attract savings deposits primarily by offering depositors a wide variety of deposit accounts, convenient branch locations, a full range of financial services and competitive rates of interest. The Corporation's competition for real estate loans comes principally from other thrift institutions, mortgage banking companies, commercial banks, insurance companies and other institutional lenders. The Corporation competes for loans principally through the efficiency and quality of the service provided to borrowers and the interest rates and loan fees charged. 41 REGULATION ---------- GENERAL - ------- As a federal savings bank, the Bank is subject to extensive regulation by the OTS. The lending and deposit taking activities and other investments of the Bank must comply with various regulatory requirements. The OTS periodically examines the Bank for compliance with various regulatory requirements and the FDIC also has the authority to conduct special examinations of the Bank because its deposits are insured by the SAIF. The Bank must file reports with the OTS describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. As a savings and loan holding company, the Corporation is subject to the OTS's regulation, examination, supervision and reporting requirements. Certain of these regulatory requirements are referred to below or appear elsewhere herein. The laws and regulations governing savings institutions have been through at least two major revisions in recent years. First, the Riegel-Neal Interstate Banking and Efficiency Act of 1994, effective on June 1, 1997, permits commercial banks interstate branching which could result in more intense competition from out of state banks. Second, on September 30, 1996, the Regulatory Paperwork Reduction Act was signed into law. Among other things, this legislation substantially eliminated the premium differential between SAIF insured institutions and BIF insured institutions. The new legislation also provides for the merger of SAIF and BIF if certain conditions are met by January 1, 1999. REGULATORY CAPITAL REQUIREMENTS - ------------------------------- At June 30, 1997, the Bank exceeded all minimum regulatory capital requirements mandated by the OTS. The following table sets forth information relating to the Bank's regulatory capital compliance at June 30, 1997:
- ----------------------------------------------------------------------------------------------------------------------------- Dollars in Thousands Actual Requirement Excess - ----------------------------------------------------------------------------------------------------------------------------- Bank's stockholder's equity $497,882 Add unrealized holding loss on securities available for sale, net 417 Less intangible assets (48,178) Less investments in non-includable subsidiaries (3,830) - ----------------------------------------------------------------------------------------------------------------------------- Tangible capital $446,291 $106,079 $340,212 - ----------------------------------------------------------------------------------------------------------------------------- Tangible capital to adjusted assets(1) 6.31% 1.50% 4.81% - ----------------------------------------------------------------------------------------------------------------------------- Tangible capital $446,291 Plus certain restricted amounts of other intangible assets 11,796 - ----------------------------------------------------------------------------------------------------------------------------- Core capital (Tier 1 capital) $458,087 $212,511 $254,576 - ----------------------------------------------------------------------------------------------------------------------------- Core capital to adjusted assets(2) 6.47% 3.00% 3.47% - ----------------------------------------------------------------------------------------------------------------------------- Core Capital $458,087 Plus general loan loss allowances 36,846 Less amount of land loans and non-residential construction loans in excess of an 80.0% loan-to-value ratio (173) - ----------------------------------------------------------------------------------------------------------------------------- Risk-based capital (Total capital) $494,760 $286,597 $208,163 - ----------------------------------------------------------------------------------------------------------------------------- Risk-based capital to risk-weighted assets(3) 13.81% 8.00% 5.81% - ----------------------------------------------------------------------------------------------------------------------------- (1) Based on adjusted total assets totaling $7,071,906 (2) Based on adjusted total assets totaling $7,083,702 (3) Based on risk-weighted assets totaling $3,582,459 - -----------------------------------------------------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five regulatory capital categories: well-capitalized, adequately- capitalized, undercapitalized, significantly undercapitalized and critically 42 undercapitalized; and authorized banking regulatory agencies to take prompt corrective action with respect to institutions in the three undercapitalized categories. These corrective actions become increasingly more stringent as an institution's regulatory capital declines. In addition, the OTS has adopted a prompt corrective action rule under which a savings institution that has a core capital ratio of less than 4.0% would be deemed to be "undercapitalized" and may be subject to certain sanctions. At June 30, 1997, the Bank exceeded the minimum requirements for the well-capitalized category as shown in the following table:
- --------------------------------------------------------------------------------------------- Tier 1 Capital Tier 1 Capital Total Capital to Adjusted to Risk- to Risk- Total Assets Weighted Assets Weighted Assets - --------------------------------------------------------------------------------------------- Percentage of adjusted assets 6.47% 12.79% 13.81% Minimum requirements to be classified well-capitalized 5.00% 6.00% 10.00% - ---------------------------------------------------------------------------------------------
Under OTS capital regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal to 3.0% of adjusted total assets and "total" or "risk-based" capital (a combination of core and "supplementary" capital) equal to 8.0% of risk-weighted assets. In addition, the OTS has recently adopted regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See "-- Prompt Corrective Regulatory Action." Under the OTS's capital regulations, tangible capital is defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries and certain nonwithdrawable accounts and pledged deposits, less intangible assets, with only a limited exception for purchased mortgage servicing rights and purchased credit card relationships. Purchased mortgage servicing rights and purchased credit card relationships may be deducted from tangible capital, if not meeting certain criteria (the lower of 90.0% of fair market value, 90.0% of original cost, or 100.0% of current amortized book value). Core capital consists of tangible capital plus restricted amounts of certain grandfathered intangible assets. Effective December 31, 1994, no newly added intangible assets other than those includable in tangible capital are permitted to be included in core capital. The Bank's core capital of $458.1 million at June 30, 1997, includes no qualifying supervisory goodwill and $11.8 million of restricted amounts of certain intangible assets (core value of deposits). Regulatory capital is further reduced by an amount equal to the savings association's debt and equity investments in subsidiaries engaged in activities not permissible for national banks. Certain subsidiaries are exempted from this treatment, including any subsidiary engaged in impermissible activities solely as agent for its customers (unless the FDIC determines otherwise), subsidiaries engaged solely in mortgage banking, and depository institution subsidiaries acquired prior to May 1, 1989. In addition, the capital deduction is not applied to federal savings associations existing as of August 9, 1989, that were either chartered as a state savings bank or state cooperative bank prior to October 1, 1982, or that acquired their principal assets from such an association. Accordingly, at June 30, 1997, the Bank had approximately $3.8 million of debt and equity invested in CFSC which is engaged in activities not permissible for national banks which was deducted from capital. See "Business -- Subsidiaries." 43 Adjusted total assets for purposes of the core and tangible capital requirements are equal to a savings institution's total assets as determined under generally accepted accounting principles, increased by certain goodwill amounts and by a prorated portion of the assets of subsidiaries in which the savings institution holds a minority interest and which are not engaged in activities for which the capital rules require the savings institution to net its debt and equity investments in such subsidiaries against capital, as well as a prorated portion of the assets of other subsidiaries for which netting is not fully required under phase-in rules. Adjusted total assets are reduced by the amount of assets that have been deducted from capital and the portion of savings institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. In determining compliance with the risk-based capital requirement, the Bank is allowed to include both core capital and supplementary capital in its total capital, provided the amount of supplementary capital included does not exceed its core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the Bank's general loss allowances. Allowances for loan and lease losses includable in capital are includable only up to 1.25% of risk-weighted assets. In addition, equity investments and those portions of nonresidential construction and land loans, and loans with loan-to-value ratios in excess of 80.0% must be deducted from total capital under the same phase-out period as is applied to investments in subsidiaries engaged in activities not permissible for national banks. The Bank's investments subject to this deduction totaled $173,000 at June 30, 1997, which was deducted from capital in accordance with applicable regulations. The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a zero percent risk weight. Mortgage-backed securities that qualify under the Secondary Mortgage Enhancement Act, including those issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family first mortgages not more than 90 days past due with loan-to-value ratios under 80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80.0% and average annual occupancy rates over 80.0%, and certain qualifying loans for the construction of one- to four-family residences pre-sold to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non- qualifying residential construction loans and commercial real estate loans, repossessed assets and assets more than 90 days past due, as well as all other assets not specifically categorized, are assigned a risk weight of 100.0%. The portion of equity investments not deducted from core or supplementary capital is assigned a 100.0% risk-weight. OTS capital regulations require savings institutions to maintain minimum total capital, consisting of core capital plus supplemental capital, equal to 8.0% of risk-weighted assets. The OTS' risk-based capital requirments require savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. A savings institution's interest rate risk is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution is considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. A savings institution with a greater than normal interest rate risk is required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The OTS calculates the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from a savings institution's total capital is based on the institution's Thrift Financial Report filed two quarters earlier. The Bank has determined that, on the basis of current financial data, it will not be deemed to have more than normal level of interest rate risk under the rule and believes that it will not be required to increase its total capital as a result of the rule. 44 The OTS has adopted a prompt corrective action rule under which a savings institution that has a core capital ratio of less than 4.0% would be deemed to be "undercapitalized" and may be subject to certain sanctions. See "Prompt Corrective Regulatory Action." In addition to generally applicable capital standards for savings institutions, the Director of the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the Director determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The Director of the OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC. FEDERAL HOME LOAN BANK SYSTEM - ----------------------------- The FHLB of Topeka serves as a reserve or central bank for its member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Topeka. Under applicable law, long-term advances may only be made for the purpose of providing funds for residential housing lending. At June 30, 1997 the Bank had advances of $1.4 billion from the FHLB of Topeka. The Bank is a member of the FHLB System. The FHLB System consists of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB of Topeka, the Bank is required to acquire and hold shares of capital stock in the FHLB of Topeka in an amount at least equal to the greater of (i) 1.0% of the Bank's aggregate unpaid principal of its residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or (ii) 5.0% of its then outstanding advances (borrowings) from the FHLB of Topeka. The Bank was in compliance with this requirement at June 30, 1997, with an investment in FHLB of Topeka stock totaling $72.5 million compared to a required amount of $70.8 million. During fiscal years 1997, 1996 and 1995 the Bank received income from its investment in FHLB stock totaling $4.6 million, $5.8 million and $6.0 million, respectively. LIQUIDITY REQUIREMENTS - ---------------------- Federal regulations require savings associations to maintain an average daily balance of liquidity assets (defined as cash, deposits maintained pursuant Federal Reserve Board requirements, time and savings deposits in certain institutions, U.S. Treasury and other government agency obligations, obligations of states and political subdivisions thereof, shares in mutual funds with certain restricted investment policies, highly rated corporate debt, and mortgage loans and mortgage-related securities with less than one year to maturity or subject to purchase within one year) equal to a monthly average of not less than a specified percentage of its net withdrawable savings deposits plus short-term borrowings. This liquidity requirement, which is currently 5.0%, may be changed from time to time by the OTS to any amount within the range of 4.0% to 10.0% depending upon economic conditions and the savings flows of savings associations. Regulations also require each savings association to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1.0%) of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. The average liquidity and short-term liquidity ratios of the Bank as of June 30, 1997, were 5.77% and 1.48%, respectively. On May 14, 1997, the OTS proposed the following amendments in an effort to update, simplify and streamline its liquidity regulation: (i) exclude accounts with unexpired maturities exceeding one year from the definition of "net withdrawable accounts," (ii) streamline the average balance calculations of liquid assets and liquidity base; (iii) reduce the liquid asset requirement from 5.0% to 4.0% and remove the 1.0% short-term requirement, (iv) expand the categories of liquid assets that count toward satisfaction of the liquidity requirement, and (v) add a general safety and soundness requirement. 45 QUALIFIED THRIFT LENDER TEST - ---------------------------- The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a qualified thrift lender ("QTL") test. A savings institution that does not meet the QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; (iii) the institution shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). To meet the QTL test, an institution's "Qualified Thrift Investments" must total at least 65.0% of "portfolio assets." Under OTS regulations, portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20.0% of assets. Qualified Thrift Investments consist of (i) loans, equity positions or securities related to domestic, residential real estate or manufactured housing, (ii) 50.0% of the dollar amount of residential mortgage loans subject to sale under certain conditions, and (iii) stock in an FHLB or the FHLMC or FNMA. In addition, subject to a 20.0% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments 200.0% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas. In order to maintain QTL status, the savings institution must maintain a weekly average percentage of Qualified Thrift Investments to portfolio assets equal to 65.0% on a monthly average basis in nine out of 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. At June 30, 1997, approximately 90.1% of the Bank's portfolio assets were invested in Qualified Thrift Investments, which was in excess of the percentage required to qualify the Bank under the QTL test. RESTRICTIONS ON CAPITAL DISTRIBUTIONS - ------------------------------------- OTS regulations impose certain limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Bank. Under these regulations, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirements (a "Tier 1 Association") is generally permitted, after notice, to make capital distributions during a calendar year in the amount equal to the greater of: (a) 75.0% of its net income for the previous four quarters; or (b) up to 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk-based capital ratio requirement at the beginning of the calendar year. A savings institution with total capital in excess of current minimum capital ratio requirements but not in excess of the fully phased-in requirements (a "Tier 2 Association") is permitted, after notice, to make capital distributions without OTS approval of up to 75.0% of its net income for the previous four quarters, less dividends already paid for such period. At June 30, 1997, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $113.1 million in dividends under these regulations. A savings institution that fails to meet current minimum capital requirements (a "Tier 3 Association") is prohibited from making any capital distributions without the prior approval of the OTS. A Tier 1 Association that has been notified by the OTS that its is in need of more than normal supervision will be treated as either a Tier 2 or Tier 3 Association. The Bank is a Tier 1 Association. Despite the above authority, the OTS may prohibit any savings institution from making a capital distribution that would otherwise be permitted by the regulation, if the OTS were to determine that the distribution constituted an unsafe or unsound practice. Furthermore, under the OTS's prompt corrective action regulations, which took effect on December 19, 1992, the Bank would be prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "-- Prompt Corrective Regulatory Action." 46 ENFORCEMENT - ----------- Under the Federal Deposit Insurance Act of 1996 (the "FDI Act"), the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on a savings institution. Civil penalties cover a wide range of violations and actions and range up to $25,000 per day unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. Criminal penalties for most financial institution crimes include fines of up to $1.0 million and imprisonment for up to 30 years. In addition, regulators have substantial discretion to take enforcement action against an institution that fails to comply with its regulatory requirements, particularly with respect to the capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. DEPOSIT INSURANCE - ----------------- The Bank is charged an annual premium by the SAIF for federal insurance of its insurable deposit accounts up to applicable regulatory limits. The FDIC may establish an assessment rate for deposit insurance premiums which protects the insurance fund and considers the fund's operating expenses, case resolution expenditures, income and effect of the assessment rate on the earnings and capital of SAIF members. The SAIF assessment is based on the capital adequacy and supervisory rating of the institution and is assigned by the FDIC. The FDIC has adopted a risk-based deposit insurance assessment system under which the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which is determined by the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period. Well capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk- based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well capitalized institutions but which satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized institutions consist of institutions that do not qualify as either "well capitalized" or "adequately capitalized." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. On August 8, 1995, the FDIC approved a significant reduction in the deposit insurance premiums charged to those financial institutions that are members of the BIF. The FDIC adopted an amendment to the BIF risk-based assessment schedule which lowered the deposit insurance assessment rate for most commercial banks and other depository institutions with deposits insured by the BIF to a range from 0.31% of insured deposits for undercapitalized BIF-insured institutions to 0.04% of deposits for well-capitalized institutions, which constitute over 90% of BIF-insured institutions. The FDIC amendment became effective September 30, 1995. No similar reduction was approved for institutions, such as the Bank, that are members of the SAIF. Subsequently, the FDIC reduced the premium rate for the most highly rated BIF-insured institutions to the statutory minimum of $1,000 per semi-annual period and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27% of insured deposits. The FDIC amendment created a substantial disparity in the deposit insurance premiums paid by the BIF and SAIF members and placed SAIF-insured savings institutions at a significant competitive disadvantage to BIF-insured institutions. 47 In order to recapitalize the SAIF and address this premium disparity, the Deposit Insurance Funds Act of 1996, effective September 30, 1996, authorized the FDIC to impose a one-time special assessment on institutions with SAIF- assessable deposits in order to increase the reserve levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits as of October 1, 1996. Institutions were assessed at the rate of .657% based on the amount of their SAIF-assessable deposits as of March 31, 1995. For the Corporation, this nonrecurring special assessment totaled $27.1 million before income taxes and is recorded in the general and administrative expense section of the Consolidated Statement of Operations under a separate line item captioned "Federal deposit insurance special assessment." The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant to which the assessment rate for well-capitalized institutions with the highest supervisory ratings would be reduced to zero and institutions in the lower risk assessment classification will be assessed at the rate of .27% of insured deposits. Until December 31, 1999, however, SAIF-insured institutions will be required to pay assessments to the FDIC at the rate of .064% of insured deposits to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to finance takeovers of insolvent thrifts. During this period, BIF members will be assessed for FICO obligations at the rate of .013% of insured deposits. After December 31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO payments. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, declining to .18% of insured deposits for the quarter ended December 31, 1996, and reduced to .064% of insured deposits effective January 1, 1997. The FDI Act provides that the BIF and SAIF will be merged into a single deposit insurance fund effective December 31, 1999, but only if there are no insured savings associations on that date. The legislation directed the Department of Treasury to make recommendations to Congress for the establishment of a single charter for banks and thrifts. Management of the Corporation cannot predict accurately at this time what effect this legislation will have on the Corporation. The FDIC is authorized to raise insurance premiums for SAIF-member institutions in certain circumstances. If the FDIC determines to increase the assessment rate for all SAIF-member institutions, institutions in all risk categories could be affected. While an increase in premiums for the Bank could have an adverse effect on the Bank's earnings, a decrease in premiums could have a positive impact on the earnings of the Bank. Since the SAIF now meets its designated reserve ratio as a result of the special assessment, SAIF members are now permitted to convert to the status of members of the BIF and may merge with or transfer assets to a BIF member. However, substantial entrance and exit fees apply to conversions from SAIF to BIF insurance and such fees may make a SAIF to BIF conversion prohibitively expensive. In the past, the substantial disparity existing between deposit insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a competitive advantage over SAIF-insured institutions like the Bank. The reduction of the SAIF deposit insurance premiums effectively eliminated this disparity and will have the effect of increasing the net income of the Bank and restoring the competitive equality between BIF-insured and SAIF-insured institutions. The FDIC has adopted a regulation which provides that any insured depository institution with a ratio of Tier 1 capital to total assets of less than 2.0% will be deemed to be operating in an unsafe or unsound condition, which would constitute grounds for the initiation of termination of deposit insurance proceedings. The FDIC, however, will not initiate termination of insurance proceedings if the depository institution has entered into and is in compliance with a written agreement with its primary regulator, and the FDIC is a party to the agreement, to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is defined as the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased servicing rights and purchased credit card receivables and qualifying supervisory goodwill eligible for inclusion in core capital under OTS regulations and minus identified losses and investments in certain securities subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2.0% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the savings association is meeting the 48 Tier 1 capital requirement for state non-member banks of 4.0% of total assets for all but the most highly rated state non-member banks. TRANSACTIONS WITH RELATED PARTIES - --------------------------------- Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10.0% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Further, savings institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's Regulation O thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10.0% stockholder of a savings institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution's loans-to-one-borrower limit (generally equal to 15.0% of the institution's unimpaired capital and surplus). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10.0% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Savings institutions are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires approval by the board of directors of a depository institution for extension of credit to executive officers of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 (i) prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) prohibits extensions of credit to executive officers, directors, and greater than 10.0% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. 49 CLASSIFICATION OF ASSETS - ------------------------ Savings institutions are required to classify their assets on a regular basis, to establish appropriate allowances for losses and report the results of such classification quarterly to the OTS. Troubled assets are classified into one of four categories as follows: Special Mention Assets, Substandard Assets, Doubtful Assets and Loss Assets. A special mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special mention assets are not considered as adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. An asset classified substandard is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses. They are characterized by the distinct possibility that an association will sustain some loss if the deficiencies are not corrected. An asset classified doubtful has the weaknesses of those classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. That portion of an asset classified loss is considered uncollectible and of such little value that its continuance as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off a basically worthless asset (or portion thereof) even though partial recovery may be effected in the future. With respect to classified assets, if the OTS concludes that additional assets should be classified or that the valuation allowances established by the savings institution are inadequate, the examiner may determine, subject to review by the savings institution's Regional Director, the need for and extent of additional classification or any increase necessary in the savings institution's general or specific valuation allowances. A savings institution is also required to set aside adequate valuation allowances to the extent that an affiliate possesses assets posing a risk to the institution and to establish liabilities for off- balance sheet items, such as letters of credit, when loss becomes probable and estimable. In August 1993, the OTS issued revised guidance for the classification of assets and a new policy on the classification of collateral-dependent loans (where proceeds from repayment can be expected to come only from the operation and sale of the collateral). With limited exceptions, effective September 30, 1993, for troubled collateral-dependent loans where it is probable that the lender will be unable to collect all amounts due, an institution must classify as "loss" any excess of the recorded investment in the loan over its "value", and classify the remainder as "substandard". The "value" of a loan is either all present value of the expected future cash flows, the loan's observable market price or the fair value of the collateral. The Bank does not anticipate any adverse impact from the implementation of the revised guidance for classification of assets or collateral dependent loans. On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve Board issued an interagency policy statement on the allowance for loan and lease losses (the "Policy Statement"). The Policy Statement requires that federally-insured depository institutions maintain an allowance for loan and lease losses ("ALLL") adequate to absorb credit losses associated with the loan and lease portfolio, including all binding commitments to lend. The Policy Statement defines an adequate ALLL as a level that is no less than the sum of the following items, given the appropriate facts and circumstances as of the evaluation date: (1) For loans and leases classified as substandard or doubtful, all credit losses over the remaining effective lives of those loans. (2) For those loans that are not classified, all estimated credit losses forecasted for the upcoming 12 months. (3) Amounts for estimated losses from transfer risk on international loans. Additionally, an adequate level of ALLL should reflect an additional margin for imprecision inherent in most estimates of expected credit losses. 50 The Policy Statement also provides guidance to examiners in evaluating the adequacy of the ALLL. Among other things, the Policy Statement directs examiners to check the reasonableness of ALLL methodology by comparing the reported ALLL against the sum of the following amounts: (a) 50 percent of the portfolio that is classified doubtful, (b) 15 percent of the portfolio that is classified substandard; and (c) For the portions of the portfolio that have not been classified (including those loans designated special mention), estimated credit losses over the upcoming twelve months given the facts and circumstances as of the evaluation date (based on the institution's average annual rate of net charge-offs experienced over the previous two or three years on similar loans, adjusted for current conditions and trends). The Policy Statement specified that the amount of ALLL determined by the sum of the amounts above is neither a floor nor a "safe harbor" level for an institution's ALLL. However, it is expected that the examiners will review a shortfall relative to this amount as indicating a need to more closely review management's analysis to determine whether it is reasonable, supported by the weight of reliable evidence and that all relevant factors have been appropriately considered. The Bank has reviewed the Policy Statement and does not believe that it will adversely affect the level of the Bank's allowances for loan losses. PROMPT CORRECTIVE REGULATORY ACTION - ----------------------------------- Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements, including a leverage limit, a risk-based capital requirement, and any other measure deemed appropriate by the federal banking regulators for measuring the capital adequacy of an insured depository institution. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees that would cause the institution to become undercapitalized. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") generally is: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5.0% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A significantly undercapitalized institution, as well as any undercapitalized institution that does not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution may also be required to divest the institution. The senior executive officers of such an institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt, with certain exceptions. If an institution's ratio of tangible capital to total assets falls below the "critical capital level" established by the appropriate federal banking regulator, the institution is subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. Under OTS regulations implementing the prompt corrective action provisions of FDICIA, the OTS measures a savings institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk- weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). A savings institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% 51 or greater. An "adequately capitalized" savings institution is a savings institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk- based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a composite 1 CAMEL rating). An "undercapitalized institution" is a savings institution that has (i) a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMEL rating). A "significantly undercapitalized" institution is defined as a savings institution that has: (i) a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized" savings institution is defined as a savings institution that has a ratio of core capital to total assets of less than 2.0%. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less- than-satisfactory rating for any CAMEL rating category. The Bank is classified as "well capitalized" under the OTS regulations. STANDARDS FOR SAFETY AND SOUNDNESS - ---------------------------------- SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle - -------------------------------- Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"), each federal banking agency is required to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS, released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The final rule and the guidelines took effect on August 9, 1995. The guidelines require savings associations to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the association's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings associations should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a savings association is not in compliance with the safety and soundness guidelines, it may require the association to submit an acceptable plan to achieve compliance with the guidelines. A savings association must submit an acceptable compliance plan to the OTS within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the association to regulatory sanctions. Management believes that the Bank already meets substantially all the standards adopted in the interagency guidelines, and therefore does not believe that implementation of these regulatory standards will materially affect the Bank's operations. Additionally under FDICIA, as amended by the CDRI Act, the federal banking agencies are required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate. On July 10, 1995, the federal banking agencies, including the OTS, issued proposed guidelines relating to asset quality and earnings. Under the proposed guidelines, a savings association would be required to maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the asset quality and earnings standards, in the form proposed by the banking agencies, would not have a material effect on the Bank's operations. FEDERAL RESERVE SYSTEM - ---------------------- Pursuant to current regulations of the Federal Reserve Board, a thrift institution must maintain average daily reserves equal to 3.0% on the first $49.3 million of transaction accounts, plus 10.0% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non- interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of June 30, 1997, the Bank met its reserve requirements. 52 LIMITATIONS ON LOANS TO ONE BORROWER - ------------------------------------ Under applicable law, with certain limited exceptions, loans and extensions of credit to a person outstanding at one time shall not exceed 15.0% of a savings association's unimpaired capital and surplus (defined as an association's core and supplementary capital, plus the balance of its allowance for loan and lease losses not included in its supplementary capital). Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10.0% of unimpaired capital and surplus. Savings associations are further permitted to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to develop residential housing provided (i) the purchase price of each single- family dwelling in the development does not exceed $500,000 (ii) the savings association is in compliance with its fully phased-in capital standards, (iii) the loans comply with applicable loan-to-value requirements, (iv) the aggregate amount of loans made under this authority does not exceed 150.0% of unimpaired capital and surplus and (v) the savings association is, and continues to be, in compliance with its fully phased in capital requirements. At June 30, 1997, the Bank's loan to one borrower limitation was $124.7 million and all loans to one borrower were within such limitation. LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS - ----------------------------------------------- The aggregate amount of loans which a savings association may make on the security of liens on nonresidential real property may not exceed 400.0% of the institution's capital. The Director of the OTS is authorized to permit federal savings associations to exceed the 400.0% capital limit in certain circumstances. The Bank estimates that it is permitted to make loans secured by nonresidential real property in an amount equal to $2.0 billion. At June 30, 1997 the Bank's nonresidential real property loans totaled $278.6 million. SAVINGS AND LOAN HOLDING COMPANY REGULATION - ------------------------------------------- The Corporation is a savings and loan holding company as defined by the HOLA. As such, it is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Corporation and affiliates thereof. ACTIVITIES RESTRICTIONS - ----------------------- The Board of Directors of the Corporation operates the Corporation as a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director of the OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution; (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies and, unless the savings institution requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Qualified Thrift Lender Test." If the Corporation were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency 53 or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. RESTRICTIONS ON ACQUISITIONS - ---------------------------- Savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5.0% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15.0% of the voting shares of an under- capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company's other subsidiaries must have tangible capital of at least 6.5% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25.0% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquired is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). Under the Bank Holding Company Act of 1956, bank holding companies are specifically authorized to acquire control of any savings association. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating a savings institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the BIF with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the Bank Holding Company Act. TAXATION - -------- The Corporation is subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). The Corporation and its subsidiaries, including the Bank, file a consolidated federal income tax return based on a fiscal year ending June 30. Consolidated taxable income is determined on an accrual basis. Prior to July 1, 1996, savings institutions that met certain definitional tests and other conditions prescribed by the Code were allowed to deduct, within limitations, a bad debt deduction computed as a percentage of taxable income if more favorable than the bad debt deduction based on actual loss experience (i.e. experience method). The bad debt 54 deduction for fiscal years 1996 and 1995 was computed under the percentage of taxable income method since it yielded a greater deduction than did the experience method. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) required recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These tax law changes resulted in the recognition to income tax expense of additional deferred tax liabilities of approximately $103,000 in fiscal year 1997. The recapture of excess reserves has no effect on the Corporation's results of operations since income taxes were provided for in prior years in accordance with SFAS No. 109, "Accounting for Income Taxes." The recapture may be delayed for a one or two- year period if the Corporation originates more residential loans than its average originations in the past six years. The Corporation met the origination requirement for fiscal 1997, therefore delaying the recapture at least until the six-year period beginning in fiscal year 1998. The recapture of excess reserves totals $3,161,000 and will result in income tax payments of $1,130,000 which have been previously accrued. In accordance with provisions of SFAS No. 109, a deferred tax liability has not been recognized for the bad debt reserves of the Bank created in the tax years which began prior to December 31, 1987 (the base year). At June 30, 1997, the amount of these reserves totaled approximately $81,757,000 with an unrecognized deferred tax liability approximating $29,866,000. Such unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. The Corporation is currently under audit by the Internal Revenue Service with respect to its tax return for fiscal year 1994. Management is unaware of any significant income tax deficiencies outstanding. The State of Nebraska imposes a franchise tax on all financial institutions. Under the franchise tax, the Bank may not join in the filing of a consolidated return with the Corporation and will be assessed at a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to 3.81% of the Bank's income before tax (including subsidiaries) as reported on the regular books and records. At June 30, 1997, the Bank paid its Nebraska franchise tax based on the average level of deposits. For Iowa, Kansas, Oklahoma, and Colorado the taxes are computed on federal taxable income, subject to certain adjustments and apportioned to that particular state. For further information regarding federal income taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated Financial Statements. 55 ITEM 2. PROPERTIES - -------------------------------------------------------------------------------- At June 30, 1997, the Corporation conducted business through 34 offices in Nebraska, 27 offices in Kansas, 20 offices in Colorado, 19 offices in Oklahoma and seven offices in Iowa. See Item 1. Business - "Recent Developments--Pending Acquisitions" for additional branches that will be added pursuant to pending acquisitions. At June 30, 1997, the Corporation owned the buildings for 79 of its branch offices and leased the remaining 28 offices under leases expiring (not assuming exercise of renewal options) between July 1997 and August 2031. The Corporation has 107 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma, and Iowa. At June 30, 1997, the total net book value of land, office properties and equipment owned by the Corporation was $84.1 million. Management believes that the Corporation's premises are suitable for its present and anticipated needs. ITEM 3. LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- There are no pending legal proceedings to which the Corporation, the Bank or any subsidiary is a party or to which any of their property is subject which are expected to have a material adverse effect on the Corporation's financial position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill Lawsuit" for other legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1997. 56 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- The information contained under "Regulation -- Restrictions on Capital Distributions" in Part I of this Report and the section "Stock Prices and Dividends" appearing on page 35 of the Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- The presentation of selected financial data for the years ended June 30, 1993 through 1997 is included in the "Selected Consolidated Financial Data" section appearing on pages 12 and 13 of the Annual Report and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Management's comments on the Corporation's financial condition, changes in financial condition, and the results of operations for fiscal year 1997 compared to fiscal year 1996 and fiscal year 1996 compared to fiscal year 1995 are included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section appearing on pages 14 through 35 of the Annual Report and are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The information contained under "Business-Market Risk" in Part I of this Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- The "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Independent Auditors' Report" set forth on pages 36 through 80 of the Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES - -------------------------------------------------------------------------------- None. 57 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- For information concerning the Board of Directors of the Corporation, the information contained under the section captioned "Proposal I -- Election of Directors" in the Corporation's definitive proxy statement for the Corporation's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. The executive officers of the Corporation and the Bank as of June 30, 1997, are as follows:
Age at Name June 30, 1997 Current Position(s) as of June 30, 1997 - --------------------------- ------------- ------------------------------------------------------------------------------- William A. Fitzgerald 59 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank James A. Laphen 49 President, Chief Operating Officer and Chief Financial Officer of the Corporation and the Bank Gary L. Matter 52 Senior Vice President, Controller and Secretary of the Corporation and the Bank Joy J. Narzisi 41 Senior Vice President and Treasurer of the Corporation and the Bank and Assistant Secretary of the Bank Margaret E. Ash 44 Senior Vice President and Assistant Secretary of the Bank Gary L. Baugh 56 Senior Vice President of the Bank Roger L. Lewis 47 Senior Vice President and Assistant Secretary of the Bank Jon W. Stephenson 49 Senior Vice President of the Bank Terry A. Taggart 42 Senior Vice President of the Bank Gary D. White 52 Senior Vice President of the Bank Ronald A. Aalseth 41 First Vice President of the Bank R. Hal Bailey 49 First Vice President of the Bank Melissa M. Beumler 34 First Vice President of the Bank Ronald P. Cheffer 45 First Vice President of the Bank Monte M. Deere 56 First Vice President of the Bank
58
Age at Name June 30, 1997 Current Position(s) as of June 30, 1997 - ---------------------- ------------- --------------------------------------- John J. Griffith 37 First Vice President of the Bank Robert E. Gruwell 49 First Vice President of the Bank David E. Gunter, Jr. 59 First Vice President of the Bank Michael J. Hoffman 43 First Vice President of the Bank Kevin C. Parks 42 First Vice President of the Bank Thomas N. Perkins 45 First Vice President of the Bank Dennis R. Zimmerman 46 First Vice President of the Bank
The principal occupation of each executive officer of the Corporation and the Bank for the last five years is set forth below. WILLIAM A. FITZGERALD, Chairman of the Board and Chief Executive Officer of the - ---------------------- Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice President in 1968, Executive Vice President in 1973, President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is well known in the banking community for his participation in numerous industry organizations, including the Federal Home Loan Bank Board, the Heartland Community Bankers, the board of America's Community Bankers and the Board of Governors of the Federal Reserve System Thrift Institutions Advisory Council. Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973. JAMES A. LAPHEN is President, Chief Operating Officer and Chief Financial - --------------- Officer of the Corporation and the Bank. Prior to his promotion to President in November 1994, Mr. Laphen held the positions of Executive Vice President, Secretary and Treasurer of the Corporation and Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined the Corporation in November 1988 as Treasurer of the Corporation and First Vice President and Treasurer of the Bank and has been in various positions of responsibility within the organization. Prior to 1988, Mr. Laphen was President and Chief Executive Officer of Home Unity Mortgage Services, Inc. in Pennsylvania and, prior to such positions, was Executive Vice President and Chief Financial Officer of Home Unity Savings Bank. GARY L. MATTER, a Senior Vice President, Controller and Secretary of the - -------------- Corporation and the Bank since November 1993, joined the Bank in December 1990, as First Vice President and Controller. Mr. Matter, a certified public accountant, was the Treasurer of Anchor Glass Container Corporation from June 1983 to November 1990. JOY J. NARZISI, Treasurer and Senior Vice President of the Corporation, and - --------------- Assistant Secretary of the Bank, joined the Bank in September 1980. Ms. Narzisi was named Senior Vice President and Assistant Secretary of the Bank in July 1995 after first being appointed Treasurer of the Corporation in November 1994, Treasurer of the Bank in 1991 and First Vice President in June of 1989. Prior to 1989, Ms. Narzisi was Investment Portfolio Manager since July 1987. Since joining the Bank, she has held other various Treasury related management positions. MARGARET E. ASH was named Senior Vice President and Assistant Secretary of the - --------------- Bank and Director of the Operations and Customer Services Division in July 1995. Previous positions held include First Vice President of Operations in 1993, First Vice President of Colorado Retail in 1989 and Vice President and Colorado Regional Manager in 1987. Ms. Ash joined Commercial Federal in 1973 and also serves as President of Commercial Federal Mortgage Corporation. 59 GARY L. BAUGH, a Senior Vice President responsible for the Kansas operation of - -------------- the Bank since October 1995, joined the Bank pursuant to the Railroad acquisition. Mr. Baugh, a certified public accountant, joined Railroad in 1973, was employed in various capacities and in June 1988 was named President and Chief Operating Officer. ROGER L. LEWIS, a Senior Vice President and Assistant Secretary of the Bank, - --------------- joined the Bank in 1986 as Vice President and Director of Public Relations until he became First Vice President and Director of Marketing in March 1988. Prior to joining Commercial Federal, Mr. Lewis was Vice President and Communications Director for Omaha National Bank. JON W. STEPHENSON was appointed Senior Vice President of the Bank in July 1995 - ----------------- and serves as Director of Retail Banking, a position held since March 1997. Mr. Stephenson joined the Bank as First Vice President in July 1994, with responsibility for Oklahoma retail operations. Mr. Stephenson, a certified public accountant, was President and Chief Executive Officer of Home Federal Savings and Loan Association of Ada, Oklahoma prior to joining Commercial Federal. TERRY A. TAGGART, a Senior Vice President of the Bank and State Director of - ---------------- Colorado since June 1995, has held various positions of responsibility within the bank, including Senior Vice President of Corporate Retail Banking in August 1993, First Vice President and Manager of Retail Operations in May 1989, and Vice President and Regional Sales Manager in March 1988. Mr. Taggart joined the Bank in January 1986 as an advanced manager trainee. GARY D. WHITE was named Senior Vice President for Administration and Special - ------------- Projects in February 1997. Previous positions held include Senior Vice President and Director of Nebraska/Iowa in July of 1995, Director of Residential Mortgage Lending in May 1994, and First Vice President and Director of Human Resources in March 1984. Mr. White joined the Bank in 1976 as an Investment Account Executive and also has held the positions of Branch Manager and Employment Manager. Prior to 1976, Mr. White was Vice President of College Relations at the College of Saint Mary. RONALD A. AALSETH, a First Vice President of the Bank since November 1994, - ------------------ joined the Bank in December 1984 and serves as President of Commercial Federal Insurance Corporation; ComFed Insurance Services Company, Limited; and Commercial Federal Investment Services, Inc. He has served in this capacity since June 1987. R. HAL BAILEY was named First Vice President of the Bank in October 1995 and - ------------- serves as Director of Residential Construction Lending. He joined Railroad Savings Bank in June 1987 as Senior Vice President and Chief Lending Officer. Prior to that he worked for American Savings and Loan in Salt Lake City, Utah; Bank of America in Los Angeles and Smith Barney in San Francisco. MELISSA M. BEUMLER was named First Vice President of the Bank in September 1996 - ------------------ and serves as Director of Advertising and Sales Development. Ms. Beumler joined Commercial Federal Bank in June 1995 as Vice President of Advertising and Sales Promotion. Prior to joining Commercial Federal, she was Vice President, Director of Marketing for Norwest Bank Nebraska, N.A. Ms. Beumler is the daughter of Sharon G. Marvin, a Board of Director member of the Bank. RONALD P. CHEFFER was named First Vice President of the Bank in September 1996 - ----------------- and serves as Manager of Credit Administration. He joined the Bank in June 1985. Prior to joining the Bank, Mr. Cheffer was an Assistant Vice President at Harris Trust & Savings Bank in Chicago from June 1974 to May 1985. MONTE M. DEERE was appointed First Vice President of the Bank in May 1997 and - -------------- serves as Oklahoma State Director. He joined the Bank in March 1996 as a Branch Manager II and in November 1996, he was promoted to Area Sales Manager before being promoted to his current position. Prior to joining the Bank, Mr. Deere was a Branch Manager for Commercial Bank-Texas from 1994 to 1996, CFO of Commercial Brick Corporation from 1993 to 1994 and CEO of the Trails Golf Club from 1989 to 1993. JOHN J. GRIFFITH was named First Vice President of the Bank in September 1996 - ---------------- and Community Investment Officer in June 1994. Mr. Griffith joined the Bank in January 1984 and has held various management positions in the Bank's Treasury and mortgage operations. 60 ROBERT E. GRUWELL joined the Bank in December 1996 as a First Vice President - ----------------- with responsibility for the Treasury function. Prior to joining the Bank, Mr. Gruwell was Vice President with Citibank for 16 years holding various positions within its Treasury division. DAVID E. GUNTER, JR., has been with the Bank since 1982. Mr. Gunter became - -------------------- First Vice President of the Bank in December 1992 with responsibility for commercial real estate lending and income recovery. Mr. Gunter is also the President of Commercial Federal Service Corporation. MICHAEL J. HOFFMAN joined the Bank in June 1997 as First Vice President and - ------------------ State Director of Nebraska and Iowa Retail. Mr. Hoffman is a certified financial planner and chartered financial consultant. Prior to joining the Bank, Mr. Hoffman was Director of Sales for Direct-Link Insurance Services LLC and has over 20 years experience in the financial services industry. KEVIN C. PARKS was named First Vice President of the Bank responsible for - -------------- Internal Audit, Legal Oversight/Compliance and Security in November 1993. Mr. Parks, a certified public accountant, certified internal auditor and chartered bank auditor was previously self employed as a practicing accountant since 1989. Prior to 1989, Mr. Parks was Manager of Internal Audit for Security Pacific Bank - - Arizona since 1985. THOMAS N. PERKINS was named First Vice President in May 1992 and is in charge of - ----------------- acquisitions. Mr. Perkins joined the Bank in 1976 and has held various management positions in the Bank's Retail division prior to assuming the Acquisitions position in August 1993. DENNIS R. ZIMMERMAN became First Vice President in October 1991 and Director of - ------------------- Information Systems as of July 1993. Mr. Zimmerman joined the Bank in 1987 and has held the positions of Information Systems Audit Manager, Internal Audit Manager and Director of Internal Audit/Legal Oversight. Prior to 1987, Mr. Zimmerman was the Director of Financial Systems for a subsidiary of Enron Corporation. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------------------------------------------------------- The information under the section captioned "Proposal I -- Election of Directors - -- Executive Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------------- Information concerning beneficial owners of more than 5.0% of the Corporation's common stock and security ownership of the Corporation's management is included under the section captioned "Principal Stockholders" and "Proposal I -- Election of Directors" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" in the Proxy Statement. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (A.) The following documents are filed as part of this report: (1.) Consolidated Financial Statements (incorporated herein by reference from the indicated section of the Annual Report): (a.) Consolidated Statement of Financial Condition at June 30, 1997 and 1996. (b.) Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 (c.) Consolidated Statement of Operations for the Years Ended June 30, 1997, 1996 and 1995 (d.) Consolidated Statement of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995. (e.) Notes to Consolidated Financial Statements. (f.) Independent Auditors' Report. (2.) Financial Statement Schedules: All schedules have been omitted as the required information is not applicable, not required or is included in the financial statements or related notes thereto. (3.) Exhibits: 3.1 Articles of Incorporation of Registrant (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 3.2 Bylaws of Registrant, as amended and restated (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 4.1 Form of Certificate of Common Stock of Registrant (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-003300) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Manufacturers Hanover Trust Company (incorporated by reference to the Registrant's Form 8-K Current Report Dated January 9, 1989) 4.3 The Corporation hereby agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of the Cumulative Trust Preferred Securities and the Subordinated Extendible Notes of the Corporation. 10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.2 Change in Control Executive Severance Agreements with William A. Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.3 Form of Change in Control Executive Severance Agreement entered into with Senior Vice Presidents and First Vice Presidents (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 62 10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as Amended and Restated Effective August 1, 1992 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-60448) 10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated August 21, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.8 Employment Agreement with William A. Fitzgerald, dated May 15, 1974, as Amended February 14, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, as Amended February 14, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.10 Employment Agreement with James A. Laphen dated June 1, 1997 (filed herewith) 10.11 Commercial Federal Corporation 1996 Stock Option and Incentive Plan Effective January 30, 1997 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 333-20739) 10.12 Railroad Financial Corporation 1994 Stock Option and Incentive Plan, Railroad Financial Corporation 1991 Directors' Stock Option Plan and Railroad Financial Corporation 1986 Stock Option and Incentive Plan, as Amended February 22, 1991 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-63221 and Post-Effective Amendment No. 1 to Registration Statement No. 33-01333 and No. 33-10396) 10.13 Railroad Financial Corporation 1994 Stock Option and Incentive Plan (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-63629) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith) (B.) Reports on Form 8-K: The Corporation filed no reports on Form 8-K during the three months ended June 30, 1997. (C.) Exhibits to this Form 10-K are attached or incorporated by reference as stated above. (D.) No financial statement schedules are filed, and as such are excluded from the Annual Report as provided by Exchange Act Rule 14A-3(b)(i). With the exception of the information expressly incorporated by reference in Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1997 Annual Report to Stockholders is not deemed "filed" with the Securities and Exchange Commission or otherwise subject to Section 18 of the Securities and Exchange Act of 1934. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there unto duly authorized. COMMERCIAL FEDERAL CORPORATION Date: September 10, 1997 By: /s/ William A. Fitzgerald ---------------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated. PRINCIPAL EXECUTIVE OFFICER: Date: September 10, 1997 By: /s/ William A. Fitzgerald ---------------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: Date: September 10, 1997 By: /s/ James A. Laphen ---------------------------------- James A. Laphen President, Chief Operating Officer and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER: Date: September 10, 1997 By: /s/ Gary L. Matter ---------------------------------- Gary L. Matter Senior Vice President, Controller and Secretary DIRECTORS: Date: September 10, 1997 By: /s/ Talton K. Anderson ---------------------------------- Talton K. Anderson Director Date: September 10, 1997 By: ---------------------------------- Michael P. Glinsky Director 64 Date: September 10, 1997 By: /s/ Robert F. Krohn ---------------------------------- Robert F. Krohn Director Date: September 10, 1997 By: /s/ Carl G. Mammel ---------------------------------- Carl G. Mammel Director Date: September 10, 1997 By: /s/ Robert S. Milligan ---------------------------------- Robert S. Milligan Director Date: September 10, 1997 By: ---------------------------------- James P. O'Donnell Director Date: September 10, 1997 By: /s/ Robert D. Taylor ---------------------------------- Robert D. Taylor Director Date: September 10, 1997 By: /s/ Aldo J. Tesi ---------------------------------- Aldo J. Tesi Director 65 INDEX TO EXHIBITS Page (by Sequential Exhibit Numbering Number Identity of Exhibits System) - ------ -------------------- ---------- 3.1 Articles of Incorporation of Registrant (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 3.2 Bylaws of Registrant, as amended and restated (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 4.1 Form of Certificate of Common Stock of Registrant (incorporated by reference to the Registrant's Form S-1 Registration Statement No. 33-003300) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Manufacturers Hanover Trust Company (incorporated by reference to the Registrant's Form 8-K Current Report Dated January 9, 1989) 4.3 The Corporation hereby agrees to furnish upon request to the Securities and Exchange Commission a copy of each instrument defining the rights of holders of the Cumulative Trust Preferred Securities and the Subordinated Extendible Notes of the Corporation. 10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.2 Change in Control Executive Severance Agreements with William A. Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.3 Form of Change in Control Executive Severance Agreement entered into with Senior Vice Presidents and First Vice Presidents (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July 1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082) 10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as Amended and Restated Effective August 1, 1992 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-60448) 10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated August 21, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.8 Employment Agreement with William A. Fitzgerald, dated May 15, 1974, as Amended February 14, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, as Amended February 14, 1996 (incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515) 10.10 Employment Agreement with James A. Laphen dated June 1, 1997 (filed herewith). 10.11 Commercial Federal Corporation 1996 Stock Option and Incentive Plan Effective January 30, 1997 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 333-20739) INDEX TO EXHIBITS (Continued) Page (by Sequential Exhibit Numbering Number Identity of Exhibits System) - ------ -------------------- ---------- 10.12 Railroad Financial Corporation 1994 Stock Option and Incentive Plan, Railroad Financial Corporation 1991 Directors' Stock Option Plan and Railroad Financial Corporation 1986 Stock Option and Incentive Plan, as Amended February 22, 1991 (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-63221 and Post-Effective Amendment No. 1 to Registration Statement No. 33-01333 and No. 33-10396) 10.13 Railroad Financial Corporation 1994 Stock Option and Incentive Plan (incorporated by reference to the Registrant's Form S-8 Registration Statement No. 33-63629) 11 Computation of Earnings Per Share (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith) EX-10.10 2 EXHIBIT 10.10 EXHIBIT 10.10 Employment Agreement with James A. Laphen dated June 1, 1997 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT ("Agreement") is entered into as of the 1st day of June, 1997, by and between COMMERCIAL FEDERAL CORPORATION, a Nebraska corporation (the "Corporation"), and its wholly-owned subsidiary, COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK (the "Bank"), referred to herein sometimes collectively as the "Employer," and JAMES A. LAPHEN ("Laphen"). R E C I T A L S: --------------- A. Laphen is a key member of the senior management of both the Corporation and the Bank and has devoted long service and substantial skill to the affairs of the Corporation and the Bank, and the Boards of Directors of both (the "Boards") wish to recognize the significant contribution that Laphen has made to the Corporation and its shareholders and the Bank. B. It is in the best interest of the Corporation, its shareholders, and the Bank to provide an inducement to Laphen to remain in the service of the Corporation and the Bank. NOW, THEREFORE, the Corporation, the Bank, and Laphen hereby agree to the following terms of employment: 1. Employment. The Employer agrees to employ Laphen and Laphen agrees to ---------- be employed in the capacity as President and Chief Operating Officer of the Corporation and the Bank for a period of three (3) years beginning the date of this Agreement. The Boards will review this Agreement annually to consider an additional one (1) year extension. 2. Time and Effort. Laphen shall diligently and conscientiously devote --------------- his full time and best efforts to the discharge of his duties. 3. Compensation. ------------ a. The Employer shall pay to Laphen a base salary at a rate no less than the rate in effect on the date of this Agreement. The base salary may be increased from time to time as the Boards may approve. b. Laphen shall be entitled to participate in all benefits available to executive officers of the Employer in effect as of this date, and as may be amended from time to time by the Boards, including, but not limited to (i) all short-term and long-term incentive plans (both cash and stock) and all deferred compensation plans; (ii) all benefit plans (such as, but not limited to, medical, life insurance, retirement, vacation); and (iii) any perquisite program. 4. Termination of Employment. -------------------------- a. The Employer may terminate Laphen's employment at any time upon thirty (30) days notice. However, if the Employer terminates Laphen's employment at any time during the term of this Agreement for any reason other than cause, as defined herein, Laphen will receive all compensation and benefits detailed in Section 3 through the effective date of termination, together with a severance payment equal to thirty six (36) months base salary. Such amount shall be payable monthly beginning on the first day of the month following the month is which such termination occurs. b. Laphen shall have no right to receive such severance payment if his employment is terminated for cause. With respect to the Corporation, termination for cause shall mean and be limited to any act of personal dishonesty, willful misconduct, or willful violation of law, which act results in substantial loss to the Employer or its reputation. With respect to the Bank, termination for cause shall mean termination because of Laphen's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. 5. Regulatory Provisions Applicable Only to the Bank. ------------------------------------------------- a. If Laphen is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) or (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay Laphen all or part of the compensation withheld while its contract obligations were suspended; and (ii) reinstate (in whole or in part) any of its obligations which were suspended. b. If Laphen is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. c. If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations of the Bank under this Agreement shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. d. All obligations of the Bank under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank: i. At any time the Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust Corporation ("RTC") enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or ii. At any time the FDIC or RTC approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. 6. Disability, Death, Retirement. If Laphen should become disabled while ----------------------------- this Agreement is in effect, the compensation, benefits, and severance payment specified in Section 4 of this Agreement shall be payable, as in the case of a termination for reasons other than cause, to Laphen. If Laphen should die while this Agreement is in effect, a severance payment equal to twelve (12) months base salary shall be paid to his heirs at law, payable monthly beginning on the first day of the month following the month in which such death occurs. If Laphen retires, this Agreement shall terminate and no severance payments shall be due hereunder. The benefits provided pursuant to this Agreement shall be in addition to any other benefits provided by the Employer. "Disability" shall mean Laphen's absence from his duties with the Employer on a full-time basis for one hundred eighty (180) consecutive business days, as a result of Laphen's incapacity due to physical or mental illness, unless within thirty (30) days thereafter Laphen shall have returned to the full-time performance of his duties. 7. Severability. In the event that any portion of this Agreement is held ------------ to be invalid or unenforceable for any reason, it is hereby agreed that invalidity or unenforceabilty shall not affect the other portions of this Agreement and that the remaining convenants, terms, and conditions, or portions thereof shall remain in full force and effect, and any court of competent jurisdiction may so modify the objectionable provisions as to make it valid and enforceable. 8. Successors and Assigns. This Agreement shall be binding upon and inure ---------------------- to the benefit of the Employer, its successors, and assigns, including any corporation which may merge or consolidate with Employer, or acquire all, or substantially all of the assets and business of the Employer. 9. Joint and Several Liability. It is the intent of the parties hereto --------------------------- that the liability portion of the Corporation and the Bank hereunder be joint and several. If either party shall be prohibited for any reason from fulfilling the terms hereof, the other such party shall nevertheless be and remain fully liable. 10. Change of Control. The parties hereto have, in addition to this ----------------- Agreement, entered into a Change of Control Agreement. To the extent that Laphen receives a severance payment under this Agreement, such amount shall reduce the amount to which Laphen would otherwise be entitled under such Change of Control Agreement. 11. Federal Deposit Insurance Act. Notwithstanding anything in this ----------------------------- Agreement to the contrary, no payment shall be made under this Agreement contrary to the requirements or prohibitions of Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. 1828(k)) or regulations or orders issued thereunder and applicable to and binding upon the Bank or Corporation. 12. Governing Law. This Agreement shall be construed and enforced in ------------- accordance with the laws of the State of Nebraska. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMMERCIAL FEDERAL CORPORATION By /s/ William A. Fitzgerald -------------------------------------------- William A. Fitzgerald, Chairman of the Board COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK By /s/ William A. Fitzgerald -------------------------------------------- William A. Fitzgerald, Chairman of the Board /s/ James A. Laphen -------------------- - JAMES A. LAPHEN EX-11 3 EXHIBIT 11 EXHIBIT 11 Computation of Earnings Per Share EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE - ---------------------------------------------- Computation of Income per Common and Common Equivalent Shares: ================================================================================
Year Ended June 30, ------------------------------------------ 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Income before extraordinary items $ 44,677,352 $ 55,306,421 $ 31,180,779 Extraordinary items, net of tax benefit (583,312) - - ------------ ------------ ------------ Net Income $ 44,094,040 $ 55,306,241 $ 31,180,779 ============ ============ ============ - -------------------------------------------------------------------------------------------------- PRIMARY: - -------- Weighted average common shares outstanding 21,583,083 21,939,148 21,282,715 Add shares applicable to stock options using average market price 321,877 331,566 337,685 ------------ ------------ ------------ Total average common and common equivalent shares outstanding 21,904,960 22,270,714 21,620,400 ============ ============ ============ Income before extraordinary items $ 2.04 $ 2.48 $ 1.44 Extraordinary items, net of tax benefit (0.03) - - ------------ ------------ ------------ Net income per common and common equivalent share $ 2.01 $ 2.48 $ 1.44 ============= ============ ============ - -------------------------------------------------------------------------------------------------- FULLY DILUTED (1): - ------------------ Weighted average common shares outstanding 21,583,083 21,939,148 21,282,715 Add shares applicable to stock options using the period-end market price if higher than average market price and other dilutive factors 338,231 339,320 342,264 ------------ ------------ ------------ Total average common and common equivalent shares outstanding assuming full dilution 21,921,314 22,278,468 21,624,979 ============ ============ ============ Income before extraordinary items $ 2.04 $ 2.48 $ 1.44 Extraordinary items, net of tax benefit (0.03) - - ------------ ------------ ------------ Net income per common share assuming full dilution $ 2.01 $ 2.48 $ 1.44 ============ ============ ============
- -------------------------------------------------------------------------------- ALL PER SHARE DATA RESTATED TO REFLECT THE THREE-FOR-TWO STOCK SPLIT EFFECTIVE JANUARY 14, 1997. (1) This calculation is submitted in accordance with Regulation S-K under Item 602 (b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3.0%. ================================================================================ EX-13 4 EXHIBIT 13 EXHIBIT 13 Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997 Vision When people think of a financial institution, they will choose Commercial Federal. Mission Commercial Federal is dedicated to growth for its customers, shareholders, employees and communities. Values In All That We Do We will be ethical and fair, and will hold those who work with us to this standard. Customers Our customers come first. We will exceed their expectations regularly and be proud to ask for their business. Shareholders We will concentrate on enhancing long-term shareholder value. Employees We will provide equal opportunity for all individuals in an environment which encourages open communication, personal growth and creativity. Community We will actively contribute to our communities through corporate and employee involvement. Style Our business is not complicated. Our objectives and methods are simple: Hire Good People Work Hard Be Resourceful Serve Customers Extremely Well Have Fun [LOGO OF COMMERCIAL FEDERAL CORPORATION APPEARS HERE] CORPORATE PROFILE Commercial Federal Corporation (NYSE: CFB), parent company of Commercial Federal Bank, a federal savings bank headquartered in Omaha, Nebraska, is one of the largest retail financial institutions in the Midwest and the 13th largest publicly-held thrift institution in the United States with $7.1 billion in assets at June 30, 1997. Commercial Federal is a consumer-oriented financial institution that emphasizes single-family residential and construction real estate lending, consumer lending, commercial real estate lending, retail deposit activities, including demand deposit accounts and mortgage banking. Commercial Federal's services are united by a common theme of meeting the financial needs of individuals and families for comprehensive, convenient and cost-effective retail financial services. The Company's retail strategy will continue to be centered on attracting new customers and selling both new and existing customers multiple products and services. Commercial Federal continues to pursue its designed growth plans as a means of increasing the size of its customer base, increasing profitability and enhancing shareholder value. As a complement to its savings bank, the Company has other major subsidiary operations: Commercial Federal Mortgage Corporation, a mortgage banking operation conducting loan origination and servicing activities with $6.0 billion in loans serviced for other institutions at June 30, 1997; Commercial Federal Investment Services, Inc., which provides a full range of brokerage and other investment services to consumers; and Commercial Federal Insurance Corporation, offering a variety of insurance products. Commercial Federal has 1,630 employees. Founded in 1887, Commercial Federal operates 107 branches in Nebraska (34), Kansas (27), Colorado (20), Oklahoma (19), and Iowa (7). Commercial Federal also has three acquisitions pending which, when complete, will add 36 branches in Iowa, 17 branches in Kansas and six branches in Arizona. In addition, Commercial Federal benefits from a network of CASHBOX automated teller machines (ATMs) and belongs to several regional, national and international electronic systems that provide customers access to their accounts at more than 286,000 ATMs in this country and abroad. [MAP APPEARS HERE] Nebraska Iowa 34 Branches 7 Branches (36 branches pending) Colorado 20 Branches Kansas 27 Branches (17 branches pending) Arizona (6 branches pending) Oklahoma 19 Branches HIGHLIGHTS OF THE 1997 FISCAL YEAR During the 1997 fiscal year, your Company: . Attained record operating income from core banking business increasing 15.6 percent to $105.0 million for fiscal year 1997; . Established account relationships with 94,000 new households - a 47 percent increase; . Increased account relationships with existing customers by 95,000, a 22 percent increase; . Completed two strategic acquisitions in Kansas and Iowa to add eight branch offices and $184 million in deposits; . Completed two public debt offerings totaling $95 million, providing the ability to further lower costs and to quickly respond to various investment and future acquisition opportunities; . Repurchased 1,875,150 shares of its common stock to significantly enhance shareholder value; . Completed a three-for-two stock split in the form of a 50 percent stock dividend and announced an increase of 5 percent in the cash dividend; and . Achieved a 45.6 percent increase in the price of its common stock, advancing to $37.125 at June 30, 1997. OUTSTANDING PERFORMANCE Commercial Federal's focus for the 1997 fiscal year was to continue building a superior performing company. Your Company is a valuable regional retail banking franchise and we are pleased to report that we have met or exceeded many of our financial performance expectations. The efforts of every Commercial Federal employee are dedicated to growth and service for its customers, shareholders, and communities. As a result of these successful efforts, and as your Company continues to attain greater operating performance goals, Commercial Federal has positioned itself as one of the premier financial services institutions in the regions we service. You will discover throughout this annual report to shareholders indications of your Company's outstanding accomplishments for fiscal year 1997. All of the achievements noted in this report prepare your Company for continued success in the future. The Board of Directors, Management & Employees of Commercial Federal TABLE OF CONTENTS Financial Highlights.............................................. 1 Letter to Shareholders............................................ 2 Board of Directors................................................ 9 Financial Information............................................. 11 Investor Information.............................................. 81 Executive Officers and Senior Management.......................... 82 Branch Locations.................................................. 83 FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------- Amounts in thousands except per share data 1997 1996 - ------------------------------------------------------------------------------------------------------------------- FOR THE YEAR: Interest income................................................................. $ 505,050 $ 491,092 Net interest income after provision for loan losses............................. 159,882 156,668 Other income.................................................................... 58,479 49,646 General and administrative expenses............................................. 112,931 114,517 Federal deposit insurance special assessment.................................... 27,062 -- Amortization of goodwill and core value of deposits............................. 9,855 9,529 Provision for income taxes...................................................... 23,836 26,962 Income before extraordinary items............................................... 44,677 55,306 Extraordinary items, net of tax benefit......................................... (583) -- Net income...................................................................... 44,094 55,306 Per common share (1): Income before extraordinary items............................................ 2.04 2.48 Extraordinary items, net of tax benefit...................................... (.03) -- Net income................................................................... 2.01 2.48 Dividends declared........................................................... .277 .267 Return on average assets (2).................................................... .65% .84% Return on average equity (2).................................................... 11.04% 14.74% General and administrative expenses divided by average assets (2)............... 2.05% 1.75% - --------------------------------------------------------------------------------------------------------------------- AT JUNE 30: Total assets.................................................................... $7,096,665 $6,607,670 Investment and mortgage-backed securities....................................... 1,424,820 1,433,089 Loans receivable, net........................................................... 5,258,739 4,813,164 Deposits........................................................................ 4,378,919 4,304,576 Other borrowings................................................................ 2,183,782 1,789,591 Stockholders' equity............................................................ 426,106 413,277 Book value per common share (1)................................................. 19.77 18.26 Tangible book value per common share (1)........................................ 17.53 16.46 Stock price (1)................................................................. 37.125 25.50 Nonperforming assets to total assets............................................ .89% 1.01% Net yield on interest-earning assets............................................ 2.60% 2.68% - -------------------------------------------------------------------------------------------------------------------- Regulatory capital ratios of the Bank: Tangible capital............................................................. 6.31% 6.18% Core capital (Tier 1 capital)................................................ 6.47% 6.41% Risk-based capital: Tier 1 capital............................................................. 12.79% 12.56% Total capital.............................................................. 13.81% 13.62% - -------------------------------------------------------------------------------------------------------------------
(1) All per share data and the stock price for fiscal year 1996 restated to reflect the three-for-two stock split effective January 14, 1997. (2) Return on average assets and return on average stockholders' equity for fiscal year 1997 are .93% and 15.91%, respectively, excluding the after-tax effect of the nonrecurring expenses associated with the Savings Association Insurance Fund (SAIF) special assessment, the repurchase of 1,875,150 shares of the Corporation's common stock, the extraordinary loss on early retirement of debt and the change in income taxes for tax bad debt reserves charge totaling $17.3 million, $1.5 million, $583,000 and $103,000, respectively. Return on average assets and return on average stockholders' equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses associated with the Railroad Financial Corporation (Railroad) merger and the Corporation's 1995 proxy contest totaling $2.9 million and $585,000, respectively. General and administrative expenses divided by average assets for fiscal year 1997 is 1.62% excluding the nonrecurring expenses totaling $27.1 million and $2.3 million, respectively, associated with the SAIF special assessment and the repurchase of 1,875,150 shares of the Corporation's common stock. General and administrative expenses divided by average assets for fiscal year 1996 is 1.68% excluding the nonrecurring expenses totaling $3.6 million and $901,000, respectively, associated with the Railroad merger and the Corporation's 1995 proxy contest. - -------------------------------------------------------------------------------- 1 TO OUR SHAREHOLDERS Commercial Federal's mission statement focuses our Company on achieving growth for our customers, shareholders, employees and the communities we serve. Our accomplishments over the past several years were dedicated to that mission. In our message to shareholders last year, we stated that we had achieved our goal of becoming one of the top performing thrifts in the United States and that we were now setting out to become one of the premier financial institutions -- thrift or bank -- in the Midwest. Solid progress was made toward achieving that goal in fiscal year 1997. Our formula for growth is simple to explain, but not simple to achieve. The formula is to grow both the number of households we serve and the number of relationships we own per household. We do this by providing financial products and services that are valuable to the customer and at the same time translate to solid bottom-line results for your Company. Achieving success with this formula requires a relentless focus on: . Continually challenging our business lines and operating practices to ensure that we are meeting the changing needs of the customer while optimizing our core earnings potential. . Creating break-through marketing programs to continually attract new customers, coupled with top-flight proactive sales and customer service efforts by our retail and support personnel to maximize the number and value of the financial relationships we share with each customer. . Pursuing a controlled acquisitions program that seeks opportunities not simply for the sake of growth, but for those opportunities that immediately add value to the company's franchise and offer significant future earnings potential. . Maintaining high levels of operating efficiency through strict expense controls and forward-thinking capital investments that allow for growth in volume while keeping costs in check. We believe our management team is highly successful at focusing on all of these factors. That is why we have achieved our mission of growth in the past and why we are confident that we will continue to build on the value of your investment with increasing success in the future. RECORD OPERATING EARNINGS ACHIEVED Commercial Federal recorded operating earnings of $63.6 million, or $2.90 per share, for the fiscal [PICTURE APPEARS HERE] William A. Fitzgerald James A. Laphen 2 year ended June 30, 1997. This represents a 12 percent increase on a per share basis, compared with $2.59 per share, or $57.6 million, for fiscal 1996. All per share amounts have been adjusted to reflect a three-for-two stock split distributed on January 14, 1997, to shareholders of record as of December 31, 1996. Operating earnings do not include the effect of nonrecurring income and expenses. For five consecutive years, Commercial Federal has achieved record operating earnings. This is a key measure of profitability since operating earnings reflect the Company's ability to generate ongoing income from its core banking business without the impact of any one-time or nonrecurring items. Excluding nonrecurring charges, return on average equity rose to 15.91 percent in fiscal 1997 from 15.68 percent in fiscal 1996, while return on average assets increased to .93 percent in fiscal 1997 from .90 percent the prior year. Reported net income for fiscal 1997 -- which includes the effect of nonrecurring income and expenses -- was $44.1 million, or $2.01 per share. These results include the Company's share of the one-time, industry-wide special assessment to recapitalize the Savings Association Insurance Fund (SAIF), which amounted to an after-tax charge of $17.3 million, or $.79 per share; an extraordinary loss on early retirement of debt, net of tax benefit, of $583,000, or $.03 per share; a nonrecurring after-tax charge of $1.5 million, or $.07 per share, for transaction costs related to its repurchase of 1,875,150 shares of its common stock; and a nonrecurring charge of $103,000 for a tax law change regarding bad debt reserves -- all of which were recorded in the first two quarters of fiscal 1997. The reported net income for fiscal 1997 compares with reported net income of $55.3 million, or $2.48 per share, for fiscal 1996. The fiscal 1996 net income was affected by nonrecurring charges which totaled $3.5 million, or $.16 per share, associated with the Company's purchase of Railroad Financial Corporation and the 1995 proxy contest. In addition, the Company realized an income tax benefit of $1.0 million, or $.05 per share, from the final disposition of leases the Company owned in a nuclear generating facility. GROWTH IN CORE PROFITABILITY CONTINUES We were successful in maintaining net interest income and net interest spreads during fiscal 1997, despite strong price competition on both the asset and liability sides of the balance sheet. Net interest income increased to $159.9 million in fiscal 1997, up from $156.7 million the prior year. The net interest rate spread for fiscal 1997 rose to 2.39 percent compared with 2.34 percent in fiscal 1996. Strong growth was experienced in non-interest income during the fiscal year, reflecting our [BAR GRAPH APPEARS HERE] Core Operations ($ in Millions) 93 $60.1 94 $75.9 95 $82.5 96 $90.9 97 $105.0
[BAR GRAPH APPEARS HERE] Net Interest Income ($ in Millions) 93 $121.9 94 $131.5 95 $143.4 96 $156.7 97 $159.9
3 continued focus on augmenting interest income with increased retail fees and charges and mortgage servicing fees as our number of households and mortgage servicing portfolio expand. Total non-interest income increased by 18 percent to $58.5 million in fiscal 1997, compared with $49.6 million the prior year. A 26 percent increase in retail fees and charges was indicative of our success in attracting and cross-selling services to our retail households. Loan servicing fees increased by 9 percent during fiscal 1997 as our servicing portfolio increased to $10.1 billion, of which $6.0 billion were loans serviced for others. BUILDING FRANCHISE VALUE A prime objective as we build Commercial Federal's future is to continually enhance the value of your retail franchise through disciplined acquisitions and through the growth of our existing retail network. This activity serves as a catalyst to earnings gains as we grow our customer base and work to own more of each customer's financial business -- checking, savings, investments and loans - -- through proactive selling and outstanding customer service and by increasing our ability to serve our customers when, where and how they want to be served. We have realized impressive progress in all of these areas. Commercial Federal has achieved considerable success in its acquisitions program, which has more than doubled the Company's retail locations since the current program began in October 1993. As of June 30, 1997, the company had 107 retail locations in five states: Nebraska (34 branches), Kansas (27), Colorado (20), Oklahoma (19), and Iowa (7). Our franchise is particularly desirable because of the strong economies -- very low unemployment and steady or increasing property values -- in all of the markets we serve. In fiscal 1997, two acquisitions were completed. On October 1, 1996, the Company acquired Heritage Financial, Ltd., parent company of Hawkeye Federal Savings Bank, adding six full-service branch offices in west-central Iowa and approximately $158 million in deposits, strengthening our franchise in the attractive Iowa market. Later in the fiscal year, Commercial Federal completed the acquisition of Investors Federal Savings, a thrift with three full-service offices and $26 million in deposits in southwest Kansas, complementing our existing Kansas franchise. Commercial Federal has proven itself to be an opportunistic, yet disciplined acquirer. Management continues to aggressively pursue acquisition opportunities in both existing and contiguous markets. While many opportunities exist, management remains solidly focused on its strategy of pursuing only those acquisitions that are accretive to earnings, have the potential for significant [BAR GRAPH APPEARS HERE] Fee Income ($ in Millions) 93 $26.7 94 $31.4 95 $34.3 96 $40.6 97 $46.5
[BAR GRAPH APPEARS HERE] Gross Revenues ($ in Millions) 93 $162.5 94 $182.4 95 $194.9 96 $212.4 97 $226.5
4 franchise improvement, and most important, will solidly increase shareholder value. SUBSEQUENT ACQUISITION ANNOUNCEMENTS Since the close of the fiscal year, Commercial Federal has announced three major acquisitions that will significantly strengthen our franchise and broaden the range of financial services we offer. In August 1997, we announced a definitive agreement to acquire Liberty Financial Corporation, an Iowa-based, privately-held commercial bank and thrift holding company headquartered in West Des Moines, Iowa. With approximately $620 million in assets and approximately $533 million in deposits, Liberty operates seven bank subsidiaries and one thrift subsidiary with 36 branch locations in Iowa and six offices in metropolitan Tucson, Arizona. The Liberty acquisition significantly expands our presence in Iowa and moves us into the exciting Arizona market. More important, this transaction launches Commercial Federal's entry into community banking with the opportunity to extend these services into our existing markets. In September 1997, we announced a definitive agreement to acquire Mid Continent Bancshares, Inc., parent company of Mid-Continent Savings Bank, headquartered in El Dorado, Kansas. Mid Continent operates 10 branch offices in Kansas and has approximately $408 million in assets and $247 million in deposits. The addition of Mid Continent's operations further enhances our retail franchise and earnings potential in Kansas. In September 1997, we also announced the signing of a definitive agreement to acquire First National Bank Shares, LTD, parent company of First United National Bank and Trust Company, headquartered in Great Bend, Kansas. First National operates seven branches in Kansas and has approximately $153 million in assets and $132 million in deposits. Commercial Federal will have 40 branches and over 70 agency offices across Kansas, after the consummation of the Mid Continent and First National acquisitions. All three of these transactions are subject to regulatory approvals. We anticipate completing all three of these transactions in the first calendar quarter of 1998. SALES CLIMB IN BRANCHES Just as important as building our customer base through the acquisition of new retail offices is building the customer base in the offices that already exist. Intensive marketing programs aimed at two lead products -- checking and consumer loans -- attracted record numbers of customers in fiscal 1997. We realized a net gain of about 28,000 new checking accounts, net of acquisitions, during the fiscal year, which was 3,000 above goal and double the net gain the prior year. Consumer loan production reached a record of $333 million in fiscal 1997, up 20 percent from fiscal 1996. The [PICTURE APPEARS HERE] 5 number of new customer households added overall in fiscal 1997 exceeded fiscal 1996's performance by 32 percent. Attracting customers to our branches through effective marketing is only the beginning. Our objective as they sit down with a Personal Banker is to develop an understanding of their broader financial needs and how we can help serve those needs with our array of products. Fast Forward, our sales development program, was implemented at the beginning of fiscal 1997, to help enhance our retail staff's ability to build customer loyalty and retention by developing multi-service relationships with each and every customer. The impact of the Fast Forward program on sales results during the year was dramatic. During the fiscal year, our cross-selling efforts resulted in 94,000 relationships with new households, up 47 percent from relationships opened with new households in fiscal 1996. In addition, we opened another 95,000 new relationships among existing households, up 22 percent from the prior year. Reflecting this increased activity was a 27 percent increase in average daily sales by personal bankers throughout the retail system. While sales and service excellence is a prime objective, we also realize that accessibility is a critical factor in meeting the needs of busy customers. To that end, we have added 36 branches through acquisition and internal expansion in the past two years and have several new or replacement branches scheduled to open early in the new fiscal year. While we believe branches will continue to be the basis for our overall delivery system and have extended hours in many branches to meet customer schedules, alternative systems also are necessary to meet the needs of today's customer. That is why we have installed 22 new ATMs in the last two fiscal years and have several more on the drawing board for fiscal 1998. Other examples of our commitment to serve customers when, where and how they want to be served include our extended-hour telephone customer assistance capability, our Telephone Bill Paying service, on-line banking and bill paying through our PC-based Home Banking service, and our completely redesigned and newly interactive web site at the internet address: www.comfedbank.com. Operating efficiency is another important element of franchise value, and Commercial Federal has a reputation of being one of the most efficient operators in our industry. Excluding nonrecurring charges, in fiscal 1997 the ratio of general and administrative expenses to average assets improved from 1.68 percent to 1.62 percent. As our business has grown, we have invested in infrastructure upgrades to ensure that we can handle more volume while keeping costs under control. During the past year we renegotiated our contract with our data systems provider at very favorable terms to ensure adequate processing capacity as we continue to expand. We have deployed Local Area Network (LAN) and Wide Area Network (WAN) technology to speed communication and data delivery throughout our system. In addition, we are completing installation of new sales and transaction software in our branches that will appreciably reduce transaction time, dramatically simplify transaction [PICTURE APPEARS HERE] 6 and account opening processes, and provide important customer relationship information at a glance to aid in the sales process. INVESTING IN OUR COMMUNITIES Our mission to foster growth for our customers and communities extends to all economic segments. The Community Reinvestment Act mandates actions by financial institutions to ensure that we are working to meet the needs of low- and moderate-income customers in our markets. For Commercial Federal, however, this mission dates back to our founders' efforts to help immigrants in South Omaha realize the dream of home ownership more than 100 years ago. Our objective is to significantly contribute to the long-term economic and social well-being of the communities we serve by being a leading provider of credit and financial services to all customer segments. To realize this objective, Commercial Federal has become involved with, and in many cases has helped develop, a number of community lending programs to provide home ownership financing to those families who may not otherwise be in a position to realize the dream of home ownership. One example of such an organization is a lending consortium called Omaha 100, founded in 1992. The long-term goal of this organization is to provide home financing for 100 families per year, working with the City of Omaha and various non-profit developers to accomplish this goal. Over the past five years, Omaha 100 has assisted more than 320 families with loans totaling $13.5 million. The average median income of these homeowners has been 42 percent of Omaha's median income. Commercial Federal has been honored with a Partnership Achievement Award by the Social Compact for its work with Omaha 100. We are pleased to participate in this and other efforts throughout our operating region that provide an opportunity for families to live in safe, comfortable homes that they can call their own and to begin building a foundation of financial security. CREATING ADDED VALUE FOR SHAREHOLDERS In addition to our efforts to strengthen our retail franchise and serve our communities better, we pursued several financial initiatives designed to significantly enhance shareholder value during the fiscal year. In August 1996, Commercial Federal completed the repurchase of 1,875,150 shares of its common stock, representing approximately 8.3 percent of the Company's outstanding shares at the time of the transaction. With an approximate 5.5 percent enhancement to earnings per share annually resulting from the repurchase, this transaction was consistent with the Company's strategy to explore all strategic alternatives that create shareholder value. [BAR GRAPH APPEARS HERE] Efficiency Ratio 93 56.1% 94 53.3% 95 53.5% 96 52.1% 97 49.3%
[BAR GRAPH APPEARS HERE] Stockholders' Equity ($ in Millions) 93 $297.8 94 $304.6 95 $337.6 96 $413.3 97 $426.1
7 In another effort to increase shareholder value, Commercial Federal completed in January a three-for-two stock split in the form of a 50 percent stock dividend to shareholders of record on December 31, 1996. At the same time, the Company announced a five percent increase in the quarterly cash dividend. During fiscal year 1997, Commercial Federal stock rose from $25.50 per share at June 30, 1996, to $37.125 per share at June 30, 1997. Your Company also completed two public debt offerings totaling $95 million during the fiscal year. These transactions provided the ability to lower borrowing costs and to quickly respond to various investment and future acquisition opportunities. Finally, the Company realized a major reduction in deposit insurance expense with the Federal Deposit Insurance Corporation's move to increase the SAIF reserve levels. While the Company had to pay a one-time special assessment of $27.1 million ($17.3 million after-tax) as its share of the [BAR GRAPH APPEARS HERE] Stock Performance 93 $17.50 94 $15.67 95 $18.17 96 $25.50 97 $37.13
[BAR GRAPH APPEARS HERE] Total Assets ($ in Millions) 93 $5,262 94 $5,982 95 $6,570 96 $6,608 97 $7,097
recapitalization, deposit insurance rates declined from .23 percent of insured deposits to .064 percent effective January 1, 1997. These lower rates will have a long-term positive effect on future earnings. FOCUS ON THE FUTURE Commercial Federal's mission of growth for its customers, shareholders, employees and communities has become our focus in all that we do every day. Because of that focus, your Company continues to expand in size, strength and reach. Today Commercial Federal is one of the superior performing companies in our industry and is becoming recognized as one of the premier financial institutions in the United States. Your Board of Directors, management and employees remain strongly dedicated to enhancing Commercial Federal's performance and thus the value of your investment. As you will discover throughout this report, the Company's results continue to reach record levels indicating that many objectives are being realized on your behalf. We are proud of our past successes and confident in our ability to sustain significant growth in fiscal 1998 and beyond. We sincerely appreciate your confidence, encouragement and support. /s/ William A. Fitzgerald William A. Fitzgerald Chairman of the Board and Chief Executive Officer /s/ James A. Laphen James A. Laphen President and Chief Operating Officer 8 BOARD OF DIRECTORS WILLIAM A. FITZGERALD - Chairman of the Board and Chief Executive Officer of Commercial Federal Corporation and Commercial Federal Bank. Mr. Fitzgerald joined Commercial in 1955. He was named Vice President in 1968, Executive Vice President in 1973, President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is well known in the banking community for his participation in numerous industry organizations, including the Federal Home Loan Bank Board, the Heartland Community Bankers, the board of America's Community Bankers and the Board of Governors of the Federal Reserve System Thrift Institutions Advisory Council. Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973. TALTON K. ANDERSON - Owner and President of three automobile dealerships in Omaha, Nebraska, as well as one in Lincoln, Nebraska. Mr. Anderson is also the President of a Nebraska-based automobile leasing company and a reinsurance company. He purchased his first dealership in 1984. In 1988, he acquired Southroads Toyota and has been owner of Lexus of Omaha since 1990. In 1993, he bought Lincoln Dodge of Lincoln, Nebraska. Mr. Anderson incorporated Protection Life, a reinsurance company, in 1974. Mr. Anderson also serves on the Board of Trustees for Boys Town and is actively involved with the University of Nebraska at Omaha Alumni Board and the University of Nebraska College of Business Administration Advisory Board. Mr. Anderson joined Commercial Federal's Board of Directors in November 1991. Committee memberships: Executive Committee (1996-Present); Audit (1992-Present); Compensation and Stock Option (1993-Present). ROBERT F. KROHN - Vice Chairman and CEO of PSI Group, Inc., a national mail presort company headquartered in Omaha, Nebraska. Mr. Krohn served as Chairman of the Board of Directors for Commercial Federal Corporation from 1990 through 1994. He is the former President and Chief Executive Officer of HDR, Inc., an international architecture, planning and engineering firm. In addition to Commercial Federal's Board of Directors, Mr. Krohn serves on the boards of Ameritas Financial Services, Inc., Streck Laboratories, PSI Group, Inc., and Midwest Research Institute. Mr. Krohn is active in a number of state and national professional and community organizations. Mr. Krohn has served on Commercial Federal's Board of Directors since January 1984. Committee memberships: Executive Committee (1990-Present); Audit (1996-Present). [PHOTO APPEARS HERE] ALDO J. TESI - President of First Data Card Enterprise Group since 1996. Prior to this position, Mr. Tesi was President of First Data Resources for six years. First Data is the leading third-party provider of credit, debit, private label and commercial card processing services. In addition to Commercial Federal, Mr. Tesi's board memberships include Applied Information Management (AIM) Institute, the Omaha Chamber of Commerce, the Knights of Aksarben and the MasterCard U.S. Region. Mr. Tesi joined Commercial Federal's Board in November 1996. Committee membership: Audit (1996-Present). [PHOTO APPEARS HERE] MICHAEL P. GLINSKY - Executive Vice President and Chief Financial Officer of U S WEST, Inc. Mr. Glinsky was appointed to the Board of Directors of Commercial Federal Corporation in September 1997, to replace former director Charles Lillis and will stand for election to a two-year term at the Company's 1997 annual meeting of stockholders in November. He assumed his position at US West in April 1996 and was formerly managing partner in the Denver office of Coopers & Lybrand. Mr. Glinsky also serves on the Boards of the Santa Fe Opera, Colorado Symphony, and Regis University. SHARON G. MARVIN - (Commercial Federal Bank Board Member) Nebraska civic leader and real estate consultant with NP Dodge Company. Ms. Marvin has served in numerous leadership positions in the real estate industry. Ms. Marvin has been a member of Commercial Federal Bank's Board since May 1980. ROBERT S. MILLIGAN - Chairman of the Board and Chief Executive Officer of MI Industries, a protein processing company headquartered in Lincoln, Nebraska, which produces products for pharmaceutical, biological and research markets throughout the world. He is also President of Oak Grove Farms, a U.S. pork production firm. Mr. Milligan has held positions with the U.S. Department of Justice, the U.S. Office of Trade, the Environmental Protection Agency and the U.S. Department of Commerce. In addition to Commercial Federal, his board memberships include Bryan Memorial Hospital, Nebraska Wesleyan University, Boy Scouts of America, and the Nebraska Council of Economic Education. Mr. Milligan joined Commercial Federal's Board of Directors in June 1987. Committee memberships: Finance (1996-Present). 9 CARL G. MAMMEL - Chairman of the Board of Mammel & Associates, a consulting firm providing services in executive benefits, employee benefits planning and wealth transfer planning. Mr. Mammel is considered one of the nation's top experts in the field of employee benefit planning and executive benefits. He is Chairman of the Board of M Financial Holdings, a network of financial service firms throughout the United States, and Chairman of the Board of M Life Insurance Company. In addition to Commercial Federal's Board of Directors, Mr. Mammel is a member of the boards of Omaha Community Foundation, recently serving as President from 1994 to 1997, the Salvation Army and Childrens Hospital. Mr. Mammel joined Commercial Federal's Board of Directors in November 1991. Committee memberships: Finance (1992-Present); Compensation and Stock Option (1993-Present). MICHAEL T. O'NEIL - (Commercial Federal Bank Board Member) Orthopedic surgeon, who began his private practice in 1971 and was board certified by the American Board of Orthopedic Surgeons in 1972. Dr. O'Neil joined Commercial Federal Bank's Board in September 1980. ROBERT D. TAYLOR - Owner and President of Taylor Financial, a Wichita, Kansas-based consulting and investment firm. Mr. Taylor is also Chairman of Westchester Health Systems Group, which owns and operates three assisted living facilities in Fort Worth, Texas, and a Director of Sirloin Stockade International, Inc., a 75-unit family steakhouse chain. From 1991 to 1995, Mr. Taylor was Chairman and Chief Executive Officer of Railroad Financial Corporation, Wichita, Kansas, which was acquired by Commercial Federal in 1995. He serves as a Director of the Business School Advisory Board at the University of Kansas and is a trustee of the Sedgwick County Zoo in Wichita. Mr. Taylor joined Commercial Federal's Board of Directors in 1996. Committee membership: Finance (1996-Present). JAMES P. O'DONNELL - Senior Vice President and Chief Financial Officer of ConAgra, Inc., an Omaha, Nebraska-based international diversified food company with annual sales of approximately $24 billion. Mr. O'Donnell, a certified management accountant, is responsible for ConAgra's finance, control and reporting, risk management, tax, and internal audit functions. In addition to Commercial Federal, he is a member of several local and national civic and professional boards of directors. Mr. O'Donnell has served on Commercial Federal's Board of Directors since June 1991. Committee memberships: Executive Committee (1996-Present); Finance (1991-Present); Compensation and Stock Option (1993-Present). Starting from left (standing): Robert F. Krohn, James P. O'Donnell, Talton K. Anderson, Robert S. Milligan, William A. Fitzgerald (seated) Michael T. O'Neil, M.D., Carl G. Mammel, Robert D. Taylor, Sharon G. Marvin [PHOTO APPEARS HERE] 10
FINANCIAL INFORMATION Selected Consolidated Financial Data...................................... 12 Management's Discussion and Analysis...................................... 14 Consolidated Statement of Financial Condition............................. 36 Consolidated Statement of Stockholders' Equity............................ 37 Consolidated Statement of Operations...................................... 38 Consolidated Statement of Cash Flows...................................... 40 Notes to Consolidated Financial Statements................................ 42 Management's Report on Internal Controls.................................. 80 Independent Auditors' Report.............................................. 81
11 SELECTED CONSOLIDATED FINANCIAL DATA - --------------------------------------------------------------------------------
For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income.................................... $ 505,050 $ 491,092 $ 454,368 $ 393,854 $ 404,628 Interest expense................................... 337,047 328,317 304,526 256,102 276,584 ---------- ---------- ---------- ---------- ---------- Net interest income................................ 168,003 162,775 149,842 137,752 128,044 Provision for loan losses.......................... (8,121) (6,107) (6,408) (6,248) (6,185) Loan servicing fees................................ 30,350 27,891 24,731 22,227 18,776 Retail fees and charges............................ 16,114 12,747 9,547 9,155 7,874 Real estate operations............................. 1,016 172 1,490 (1,449) (5,243) Gain (loss) on sales of loans...................... 386 164 (1,695) 1,433 1,194 Gain (loss) on sales of securities, net............ 390 253 (41) 220 (231) Gain on sales of loan servicing rights............. -- 452 3,519 5,929 6,903 Other operating income............................. 10,223 7,967 7,515 7,178 5,169 General and administrative expenses................ 112,931 114,517 102,554 94,115 89,560 Federal deposit insurance special assessment....... 27,062 -- -- -- -- Amortization of goodwill and core value of deposits.......................... 9,855 9,529 10,262 14,131 10,544 Valuation adjustment and accelerated amortization of goodwill........................ -- -- 21,357 52,703 -- ---------- ---------- ---------- ---------- ---------- Income before income taxes, extraordinary items and cumulative effects of changes in accounting principles..... 68,513 82,268 54,327 15,248 56,197 Provision for income taxes......................... 23,836 26,962 23,146 16,875 22,081 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effects of changes in accounting principles................ 44,677 55,306 31,181 (1,627) 34,116 Extraordinary items (1)............................ (583) -- -- -- -- Cumulative effects of changes in accounting principles (2)....................... -- -- -- 6,597 -- ---------- ---------- ---------- ---------- ---------- Net income......................................... $ 44,094 $ 55,306 $ 31,181 $ 4,970 $ 34,116 ========== ========== ========== ========== ========== Earnings per share (fully diluted) (3): Income (loss) before extraordinary items and cumulative effects of changes in accounting principles.............. $ 2.04 $ 2.48 $ 1.44 $ (.08) $ 1.62 Extraordinary items (1)......................... (.03) -- -- -- -- Cumulative effects of changes in accounting principles (2)..................... -- -- -- .31 -- ---------- ---------- ---------- ---------- ---------- Net income......................................... $ 2.01 $ 2.48 $ 1.44 $ .23 $ 1.62 ========== ========== ========== ========== ========== Dividends declared per common share (3)............ $ .277 $ .267 $ -- $ -- $ -- ========== ========== ========== ========== ========== Weighted average common shares outstanding (fully diluted) (3)................. 21,921,314 22,278,468 21,624,979 21,508,567 21,123,028 ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------
Other data: Net interest rate spread........................ 2.39% 2.34% 2.26% 2.43% 2.57% Net yield on interest-earning assets............ 2.57% 2.58% 2.46% 2.59% 2.65% Return on average assets (4).................... .65% .84% .49% .09% .67% Return on average equity (4).................... 11.04% 14.74% 9.98% 1.54% 12.39% Dividend payout ratio (5)....................... 13.78% 10.75% -- -- -- Total number of branches at end of period....... 107 98 89 73 55 - ------------------------------------------------------------------------------------------------------------------------------------
12 SELECTED CONSOLIDATED FINANCIAL DATA (continued)
- ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended June 30, (Dollars in Thousands Except Per Share Data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets....................................... $ 7,096,665 $ 6,607,670 $ 6,569,579 $ 5,982,307 $ 5,262,336 Investment securities (6).......................... 399,057 253,043 300,481 290,807 254,889 Mortgage-backed securities (7)..................... 1,025,763 1,180,046 1,364,907 1,350,402 952,539 Loans receivable, net (8).......................... 5,258,739 4,813,164 4,540,692 3,970,626 3,655,740 Goodwill and core value of deposits................ 48,178 40,734 37,263 67,661 87,946 Deposits........................................... 4,378,919 4,304,576 4,011,323 3,675,825 2,731,127 Advances from Federal Home Loan Bank............... 1,415,506 1,350,290 1,787,352 1,625,456 1,868,779 Securities sold under agreements to repurchase...................................... 639,294 380,755 208,373 157,432 154,862 Other borrowings................................... 128,982 58,546 65,303 66,640 76,966 Stockholders' equity............................... 426,106 413,277 337,614 304,568 297,848 Book value per common share (3).................... 19.77 18.26 15.77 14.34 14.19 Tangible book value per common share (3)(9)........ 17.53 16.46 14.03 11.15 10.00 Regulatory capital ratios of the Bank: Tangible capital................................ 6.31% 6.18% 5.16% 4.69% 4.62% Core capital (Tier 1 capital)................... 6.47% 6.41% 5.47% 5.53% 5.93% Risk-based capital: Tier 1 capital................................ 12.79% 12.56% 12.02% 12.18% 11.93% Total capital................................. 13.81% 13.62% 13.12% 13.16% 12.81% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents the loss on early retirement of debt, net of income tax benefits. (2) Represents the cumulative effect of the change in the method of accounting for income taxes less the cumulative effect of the change in accounting for postretirement benefits, net of income tax benefit. (3) On November 18, 1996, the Board of Directors of the Corporation authorized a three-for-two stock split to be effected in the form of a 50 percent stock dividend to stockholders of record on December 31, 1996. Par value remained at $.01 per share. The stock dividend was paid on January 14, 1997. Fractional shares resulting from the stock split were paid in cash. All per share data and stock prices for all periods presented have been adjusted on a retroactive basis to reflect the effect of this three-for-two stock split. (4) Based on average daily balances during fiscal years 1997, 1996, 1995 and 1994 and on average monthly balances for fiscal year 1993. Return on average assets (ROA) and return on average equity (ROE) for fiscal year 1997 are .93% and 15.91%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $17.3 million, $1.5 million, $583,000 and $103,000, associated with the Savings Association Insurance Fund special assessment, the repurchase of 1,875,150 shares of the Corporation's common stock, the loss on early retirement of debt and the change in income taxes for tax bad debt reserves, respectively. ROA and ROE for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $2.9 million and $585,000 associated with the Railroad Financial Corporation merger and the Corporation's 1995 proxy contest, respectively. ROA and ROE for fiscal year 1995 are .83% and 16.82%, respectively, excluding the accelerated amortization of goodwill totaling $21.4 million. ROA and ROE for fiscal year 1994 are .75% and 13.11%, respectively, excluding the after-tax effect of the intangible assets valuation adjustment and the cumulative effects of changes in accounting principles totaling $43.9 million and $6.6 million, respectively. (5) Represents dividends declared per share divided by net income per share. The Corporation established a quarterly common stock cash dividend policy on October 4, 1995, and paid its first dividend on October 31, 1995. (6) Includes investment securities available for sale totaling $19.9 million, $9.9 million, $3.0 million, $5.4 million and $1.3 million, respectively, at June 30, 1997, 1996, 1995, 1994 and 1993. (7) Includes mortgage-backed securities available for sale totaling $195.8 million, $263.2 million, $37.0 million, $45.0 million and $41.3 million, respectively, at June 30, 1997, 1996, 1995, 1994 and 1993. (8) Includes loans held for sale totaling $68.7 million, $89.4 million, $113.4 million, $187.7 million and $171.8 million, respectively, at June 30, 1997, 1996, 1995, 1994 and 1993. (9) Calculated by dividing stockholders' equity, reduced by the amount of goodwill and core value of deposits, by the number of shares of common stock outstanding at the respective dates. - -------------------------------------------------------------------------------- 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GENERAL Commercial Federal Corporation (the Corporation) is a unitary non-diversified savings and loan holding company whose primary asset is Commercial Federal Bank, a Federal Savings Bank (the Bank), which is one of the largest financial institutions in the Midwest and the 13th largest publicly held thrift holding company in the United States. The Bank is a consumer-oriented financial institution that emphasizes single-family residential and construction real estate lending, consumer lending, commercial real estate lending, retail deposit activities, including demand deposit accounts, and mortgage banking. At June 30, 1997, the Corporation operated 107 branch offices with 34 located in Nebraska, 27 in Kansas, 20 primarily in greater metropolitan Denver, Colorado, 19 in Oklahoma and seven in Iowa. Throughout its 110 year history, the Corporation has emphasized customer service. To serve its customers, the Corporation conducts loan origination activities through its 107 branch office network, loan offices of its wholly-owned mortgage banking subsidiary and a nationwide correspondent network of mortgage loan originators. The Corporation also provides insurance and securities brokerage and other retail financial services. Net income for fiscal year 1997 was $44.1 million, or $2.01 per share, which compares to net income of $55.3 million and $31.2 million, respectively, for fiscal years 1996 and 1995, or $2.48 per share and $1.44 per share, respectively. Fiscal year 1997 net income was reduced by the effect of three significant items totaling approximately $19.4 million on an after-tax basis. First, the Corporation was assessed an after-tax charge of $17.3 million, or $.79 per share, ($27.1 million pre-tax) as a result of the imposition of a one- time industry-wide deposit insurance special assessment to recapitalize the Savings Association Insurance Fund. Second, in connection with its repurchase of 1,875,150 shares of its common stock, the Corporation reimbursed the seller for certain expenses totaling $2.3 million ($1.5 million after-tax, or $.07 per share) incurred in connection with the seller's ownership of such stock. Third, after-tax losses on early retirement of debt totaling $583,000, or $.03 per share, classified as an extraordinary item, were incurred by the Corporation. The Corporation's strategy for growth emphasizes both internal and external growth. Operations focus on increasing deposits, including demand accounts, making loans (primarily single-family mortgage and consumer loans), community banking, and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to expand its operations within its market areas either through direct marketing efforts aimed at increasing market share, branch expansions, or opening additional branches. The Corporation's retail strategy will continue to be centered on attracting new customers and selling both new and existing customers multiple products and services. Additionally, the Corporation will continue to build and leverage an infrastructure designed to increase fee and other income. Complementing its strategy of internal growth, the Corporation continues to grow its present five-state franchise through an ongoing program of selective acquisitions of other financial institutions. During fiscal year 1997, the Corporation consummated the acquisitions of two financial institutions: Heritage Financial, Ltd., headquartered in Boone, Iowa, and Investors Federal Savings, headquartered in Kinsley, Kansas. Subsequent to June 30, 1997, the Corporation entered into definitive agreements to acquire three financial institutions: Liberty Financial Corporation, Mid Continent Bancshares, Inc., and First National Bank Shares, LTD. These pending acquisitions will add 59 branches to the Corporation's existing network and approximately $1.2 billion in total assets, approximately $912.0 million in deposits and approximately $1.3 billion in loans serviced for others. Liberty Financial Corporation, a privately-held commercial bank and thrift holding company, headquartered in West Des Moines, Iowa, operates 36 branches in Iowa and six branches in the Tucson, Arizona metropolitan area. This pending acquisition will expand the Corporation's presence in Iowa, allow the Corporation to enter the Arizona market and extend community banking services to all existing market areas. Mid Continent Bancshares, Inc., is headquartered in El Dorado, Kansas and operates 10 branches in Kansas. First National Bank Shares, LTD, headquartered in Great Bend, Kansas, operates seven branches in Kansas. Future acquisition candidates will be selected based on the extent to which the candidates can enhance the Corporation's retail presence in new or underserved markets and complement the Corporation's existing retail network. REPURCHASE OF COMMON STOCK On August 21, 1996, the Corporation consummated the repurchase of 1,875,150 shares of its common stock, $.01 par value, from CAI Corporation, a Dallas-based investment company, for an aggregate purchase price of approximately $48.9 million, excluding $414,000 in transaction costs. The purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of approximately $28.2 14 million and surrender of a warrant (valued at approximately $20.7 million) which would have enabled the Corporation to purchase 99 shares of non-voting common stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. The cash portion of the repurchase was financed in part by a $28.0 million short-term promissory note which was refinanced on December 13, 1996, on a long-term basis contractually due December 31, 2001. The Corporation also reimbursed CAI Corporation for certain expenses totaling $2.2 million incurred in connection with its ownership of the 1,875,150 shares, including costs and expenses incurred in connection with the Corporation's 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. These nonrecurring expenses paid to CAI Corporation are included in other operating expenses for fiscal year 1997. Concurrent with the close of the repurchase, two directors of the Corporation, who also serve as executive officers of CAI Corporation, resigned from the Corporation's Board of Directors. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT Effective September 30, 1996, the Corporation incurred an after-tax charge of $17.3 million ($27.1 million pre-tax) as a result of the imposition of a special assessment by the Federal Deposit Insurance Corporation (FDIC) to recapitalize the Savings Association Insurance Fund (SAIF). The FDIC operates two deposit insurance funds: the Bank Insurance Fund (BIF) which generally insures deposits of commercial banks and the SAIF which generally insures the deposits of savings associations such as the Bank. Because the reserves of the SAIF were below statutorily required minimums, institutions with SAIF-assessable deposits, like the Bank, were required to pay substantially higher deposit insurance premiums than institutions with deposits insured by the BIF since September 30, 1995. In order to recapitalize the SAIF and address this premium disparity, the Deposit Insurance Funds Act of 1996, effective September 30, 1996, authorized the FDIC to impose a one-time special assessment on institutions with SAIF-assessable deposits in order to increase the reserve levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits as of October 1, 1996. Institutions were assessed at the rate of .657% based on the amount of their SAIF-assessable deposits as of March 31, 1995. This nonrecurring special assessment totaling $27.1 million before income taxes is recorded in the general and administrative expense section of the Consolidated Statement of Operations under a separate line item captioned "Federal deposit insurance special assessment." The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant to which the assessment rate for well-capitalized institutions with the highest supervisory ratings would be reduced to zero and institutions in the lower risk assessment classification will be assessed at the rate of .27% of insured deposits. Until December 31, 1999, however, SAIF-insured institutions will be required to pay assessments to the FDIC at the rate of .064% of insured deposits to help fund interest payments on certain bonds issued by the Financing Corporation (FICO), an agency of the federal government established to finance takeovers of insolvent thrifts. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, declining to .064% of insured deposits effective January 1, 1997. Such reduction in deposit insurance premiums will increase net income in future periods and, for fiscal year 1997, was a significant reason that regulatory insurance and assessments, excluding this SAIF special assesment, decreased $3.7 million compared to fiscal year 1996. The Deposit Insurance Funds Act of 1996 provides that the BIF and SAIF will be merged into a single deposit insurance fund effective December 31, 1999, but only if there are no insured savings associations on that date. The legislation directed the Department of Treasury to make recommendations to Congress for the establishment of a single charter for banks and thrifts. STOCK SPLIT On November 18, 1996, the Board of Directors of the Corporation declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders of record on December 31, 1996. Par value of the common stock remained at $.01 per share. The stock dividend, distributed on January 14, 1997, totaled 7,163,476 shares of common 15 stock. Fractional shares resulting from the stock split were paid in cash totaling $17,792 based on the closing price on the record date. All references to the number of shares, per share amounts and stock prices for all periods presented have been adjusted on a retroactive basis to reflect the effect of the stock split. The Board of Directors also increased its quarterly cash dividend from $.0667 per common share after adjusting for the three-for-two stock split to $.07 per common share representing an increase of five percent. ACQUISITIONS DURING FISCAL YEAR 1997 On October 1, 1996, the Corporation consummated its acquisition of Heritage Financial, Ltd. (Heritage), parent company of Hawkeye Federal Savings headquartered in Boone, Iowa. The Corporation acquired all 180,762 outstanding shares of Heritage's common stock. Each share of Heritage's common stock was exchanged for $18.73 in cash and 3.74775 shares of the Corporation's common stock (total issuance of 677,449 shares). Based on the Corporation's closing stock price of $28.667 at October 1, 1996, the total consideration for this acquisition, excluding cash paid for fractional shares, approximated $22.8 million. Before purchase accounting adjustments, Heritage had assets of approximately $182.9 million, deposits of approximately $158.2 million and stockholders' equity of approximately $10.3 million. Heritage operated six branches located in west-central Iowa with core value of deposits and goodwill resulting from this transaction totaling $16.3 million. On May 1, 1997, the Corporation consummated its acquisition of Investors Federal Savings (Investors) headquartered in Kinsley, Kansas. The Corporation acquired all 232,465 of the outstanding shares of Investors' common stock for $23.00 in cash for a total consideration of approximately $5.3 million. Before purchase accounting adjustments, Investors had assets of approximately $30.7 million, deposits of approximately $26.1 million and stockholders' equity of approximately $4.4 million. Investors operated three branches in southwest Kansas and, as part of the acquisition consolidation process, one branch was closed on May 24, 1997. This acquisition was accounted for as a purchase. SUBORDINATED EXTENDIBLE NOTES OFFERING On December 2, 1996, the Corporation completed the issuance of $50.0 million of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes). Such offering resulted in the Corporation receiving $48.5 million, net of an underwriting discount of $1.5 million. With the proceeds from the issuance of the Notes, the Corporation redeemed on December 27, 1996, its $40.25 million 10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January 31, 1999. Total expenses associated with this offering approximated $1.9 million which are being deferred and amortized over the life of the Notes resulting in an effective interest rate of 8.52%. Contractual interest on the Notes is set at 7.95% until December 1, 2001, and is paid monthly. The interest rate for the Notes will reset at the Corporation's option, on December 1, 2001, to a rate and for a term of one, two, three or five years determined by the Corporation and will reset thereafter, at its option, upon the date of expiration of each new interest period prior to maturity. Any new interest rate shall not be less than 105% of the effective interest rate on comparable maturity U.S. Treasury obligations. The Notes may not be redeemed prior to December 1, 2001, and thereafter, the Corporation may elect to redeem the Notes in whole on December 1, 2001, and on any subsequent interest reset date at par plus accrued interest to the date fixed for redemption. The Notes are unsecured general obligations of the Corporation and are subordinated to all existing and future senior indebtedness of the Corporation. There are no restrictions in the Indenture on the creation of additional senior indebtedness. The Indenture, among other provisions, limits the ability of the Corporation to pay cash dividends or make other capital distributions under certain circumstances. CUMULATIVE TRUST PREFERRED SECURITIES OFFERING Effective May 14, 1997, CFC Preferred Trust, a special-purpose wholly-owned Delaware trust subsidiary of the Corporation, completed an offering of 1,800,000 shares (issue price of $25.00 per share) totaling $45.0 million of fixed-rate 9.375% cumulative trust preferred securities (Capital Securities), which are fully and unconditionally guaranteed by the Corporation. Also effective May 14, 1997, the Corporation purchased all of the common securities (Common Securities) of CFC Preferred Trust for approximately $1.4 million. CFC Preferred Trust invested the total proceeds of $46.4 million it received in 9.375% junior subordinated deferrable interest debentures (Debentures) issued by the Corporation. Interest paid on 16 the Debentures will be distributed to the holders of the Capital Securities and to the Corporation as holder of the Common Securities. As a result, under current tax law, distributions to the holders of the Capital Securities will be tax deductible for the Corporation. These Debentures are unsecured and rank junior and are subordinate in right of payment to all senior debt of the Corporation. The Capital Securities issued by the CFC Preferred Trust rank senior to the Common Securities. Concurrent with the issuance of the Capital Securities, the Corporation issued guarantees for the benefit of the security holders. The obligations of the Corporation under the Debentures, the indenture, the relevant trust agreement and the guarantees, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the obligations of the trust under the trust preferred securities and rank subordinate and junior in right of payment to all liabilities of the Corporation. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears commencing on September 30, 1997. The Corporation has the right, subject to events of default, to defer payments of interest on the Debentures at any time by extending the interest payment period for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the Debentures. The Capital Securities are subject to mandatory redemption upon repayment of the Debentures. The Debentures mature on May 15, 2027, which may be shortened to not earlier than May 15, 2002, if certain conditions are met. The Debentures are redeemable at the option of the Corporation on or after May 15, 2002, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the CFC Preferred Trust, the Debentures or the Capital Securities. The Corporation has the right at any time to terminate the CFC Preferred Trust and cause the Debentures to be distributed to the holders of the Capital Securities in liquidation of such trust, all subject to the Corporation having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. The Capital Securities would qualify as Tier 1 capital of the Corporation should the Corporation become subject to the Federal Reserve capital requirements for bank holding companies. As a savings and loan holding company, the Corporation is currently not subject to Federal Reserve capital requirements for bank holding companies. SUBSEQUENT EVENTS - PENDING ACQUISITIONS On August 18, 1997, the Corporation entered into a reorganization and merger agreement with Liberty Financial Corporation (Liberty), a privately held commercial bank and thrift holding company. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 8,748,500 outstanding shares of Liberty's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, the transaction would result in the exchange of approximately 2,677,041 shares of the Corporation's common stock with an aggregate value of $119.0 million. At June 30, 1997, Liberty had assets of approximately $620.5 million, deposits of approximately $533.2 million and stockholders' equity of approximately $41.1 million. Liberty operates 36 branches in Iowa and six in the metropolitan area of Tucson, Arizona. This pending acquisition, which is subject to regulatory approvals and other conditions, is expected to be completed by March 31, 1998. On September 2, 1997, the Corporation entered into a reorganization and merger agreement with Mid Continent Bancshares, Inc. (Mid Continent), parent company of Mid-Continent Federal Savings Bank. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 1,958,250 outstanding shares of Mid Continent's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, the transaction would result in the exchange of approximately 1,702,306 shares of the Corporation's common stock with an aggregate value of $75.6 million. At June 30, 1997, Mid Continent had total assets of approximately $408.6 million, deposits of approximately $247.0 million and stockholders' equity of approximately $38.4 million. Mid Continent operates ten branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, Mid Continent shareholders' approval and other conditions, is expected to close by March 31, 1998. On September 11, 1997, the Corporation entered into a reorganization and merger agreement with First National Bank Shares, LTD (First National), parent company of First United National Bank and Trust Company. Under the terms of the merger agreement, the Corporation will acquire all of the outstanding shares of First National's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375 such transaction would result in the exchange of approximately 661,905 shares of the Corporation's common stock with an aggregate value approximating $29.4 million. At August 31, 1997, First 17 National had assets approximating $153.8 million, deposits of approximately $132.1 million and stockholder's equity of approximately $10.6 million. First National operates seven branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, First National shareholders' approval and other conditions, is expected to close during the quarter ending March 31, 1998. ASSET/LIABILITY MANAGEMENT The operations of the Corporation are subject to the risk of interest rate fluctuations to the extent that there is a difference, or mismatch, between the amount of the Corporation's interest-earning assets and interest-bearing liabilities which mature or reprice in specified periods. Consequently, when interest rates change, to the extent the Corporation's interest-earning assets have longer maturities or effective repricing periods than its interest-bearing liabilities, the interest income realized on the Corporation's interest-earning assets will adjust more slowly than the interest expense on its interest-bearing liabilities. This mismatch in the maturity and interest rate sensitivity of assets and liabilities is commonly referred to as the "gap." A gap is considered positive when the amount of interest rate sensitive assets maturing or repricing during a specified period exceeds the amount of interest rate sensitive liabilities maturing or repricing during such period, and is considered negative when the amount of interest rate sensitive liabilities maturing or repricing during a specified period exceeds the amount of interest rate assets maturing or repricing during such period. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income while a positive gap would result in an increase in net interest income, and during a period of declining interest rates, a negative gap would result in an increase in net interest income while a positive gap would adversely affect net interest income. The Corporation has historically invested in interest-earning assets that have a longer duration than its interest-bearing liabilities. The mismatch in duration of the interest-sensitive liabilities indicates that the Corporation is exposed to interest rate risk. In a rising rate environment, in addition to reducing the market value of long-term interest-earning assets, liabilities will reprice faster than assets, therefore decreasing net interest income. To mitigate this risk, the Corporation has placed a greater emphasis on shorter-term higher yielding assets that reprice more frequently in reaction to interest rate movements. In addition, the Corporation has continued its concentration of adjustable-rate assets as a percentage of total assets to benefit the one-year cumulative gap as such adjustable-rate assets reprice and are more responsive to the sensitivity of more frequently repricing interest-bearing liabilities. In connection with its asset/liability management program, the Corporation has interest rate swap agreements with other counterparties under terms that provide an exchange of interest payments on the outstanding notional amount of the swap agreement. Such agreements are primarily used to artificially lengthen the maturity of certain deposit liabilities. In accordance with these arrangements, the Corporation pays fixed rates and receives variable rates of interest according to a specified index. The Corporation increased its level of such swap agreements to a notional principal amount of $135.0 million at June 30, 1997, from balances of $10.0 million and $78.5 million, respectively, at June 30, 1996 and 1995. The Corporation had an interest rate cap agreement, which terminated March 1997, with a notional principal amount of $10.0 million and with terms that required the Corporation to pay a 7.0% fixed rate of interest and receive a variable rate with a quarterly cash settlement. For fiscal years 1997, 1996 and 1995, the Corporation recorded $916,000, $2.3 million and $4.4 million, respectively, in net interest expense from its interest rate swap and cap agreements. Swap agreements totaling $10.0 million mature during fiscal year 1998 with the remainder maturing between March 2000 and June 2001. The following table represents management's projected maturity and repricing of the Bank's interest-earning assets and interest-bearing liabilities on an unconsolidated basis at June 30, 1997. The amounts of interest-earning assets, interest-bearing liabilities and interest rate risk management instruments presented which mature or reprice within a particular period were determined in accordance with the contractual terms of such assets, liabilities and interest rate swap agreements, except (i) adjustable-rate loans are included in the period in which they are first scheduled to adjust and not in the period in which they mature and are also adjusted for prepayment rates ranging from 3.5% to 25.0% for single-family residential loans and mortgage-backed securities, (ii) prepayment rates ranging from 8.0% to 18.1%, based on the contractual interest rate, were utilized for fixed-rate, single-family residential loans and mortgage-backed securities, (iii) prepayment rates ranging from 1.8% to 3.5%, based on the contractual interest rate, were utilized for commercial real estate and multi-family loans and a prepayment rate of 35.0% was utilized for 18 consumer loans, (iv) passbook deposits and negotiable order of withdrawal ("NOW") accounts totaling $446.1 million, all of which have fixed-rates, are assumed to mature according to the decay rates as defined by regulatory guidelines, which at June 30, 1997, ranged from 14.0% to 32.0%, (v) market bonus savings and commercial money market accounts totaling $83.1 million are assumed to reprice or mature according to the decay rates as defined by regulatory guidelines, which at June 30, 1997, was 31.0%, and (vi) money market rate deposits totaling $658.1 million are deemed to reprice or mature within the one- year category, even though a certain portion of these deposits is not likely to be interest rate sensitive. Management believes that these assumptions approximate actual experience and considers such assumptions reasonable; however, the interest rate sensitivity of the Bank's interest-earning assets and interest-bearing liabilities could vary substantially if different assumptions were used or actual experience differs from the assumptions used, such as actual prepayment experience varying from estimates, early deposit withdrawals, and caps on adjustable-rate loans and mortgage-backed securities.
- ------------------------------------------------------------------------------------------------------------------------------------ Within 91 Days Over 1 3 Years (Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Fixed-rate mortgage loans (1) (2)....... $ 194,298 $ 344,871 $ 806,876 $1,327,192 $2,673,237 Other loans (2) (3)............ 1,111,954 1,579,194 848,431 111,552 3,651,131 Investments (4)................ 82,752 47,535 75,367 265,831 471,485 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets........ 1,389,004 1,971,600 1,730,674 1,704,575 6,795,853 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Savings deposits............... 694,769 103,034 165,960 379,804 1,343,567 Other time deposits............ 650,371 1,437,992 970,383 59,044 3,117,790 Borrowings (5)................. 559,073 705,105 440,137 358,842 2,063,157 Impact of interest rate swap agreements.............. (125,000) -- 75,000 50,000 -- - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities... 1,779,213 2,246,131 1,651,480 847,690 6,524,514 - ------------------------------------------------------------------------------------------------------------------------------------ Gap position...................... (390,209) (274,531) 79,194 856,885 271,339 - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative gap position........... $ (390,209) $ (664,740) $ (585,546) $ 271,339 $ 271,339 - ------------------------------------------------------------------------------------------------------------------------------------ Gap as a percentage of the Bank's total assets............ (5.50)% (3.87)% 1.12% 12.08% 3.83% Cumulative gap as a percentage of the Bank's total assets..... (5.50)% (9.37)% (8.25)% 3.83% 3.83% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes conventional single-family and multi-family mortgage loans and mortgage-backed securities. (2) Such amounts are, as applicable, before deductions for unamortized discounts and premiums, loans in process, deferred loan fees and allowance for loan losses. (3) Includes adjustable-rate single-family mortgage loans, adjustable-rate mortgage-backed securities and all other types of loans with either fixed or adjustable interest rates. (4) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of $72.5 million. (5) Includes advances from the FHLB, securities sold under agreements to repurchase and other borrowings. - -------------------------------------------------------------------------------- The Bank's one-year cumulative gap is a negative $664.7 million, or 9.37% of the Bank's total assets of $7.092 billion at June 30, 1997, contrasted to a negative $681.4 million, or 10.31% of total assets at June 30, 1996. The interest rate risk policy of the Bank authorizes a liability sensitive one-year cumulative gap not to exceed 10.0%. Accordingly, subsequent to June 30, 1996, adjustments were made so that the one-year cumulative gap fell within such policy guidelines. 19 RESULTS OF OPERATIONS Net income for fiscal year 1997 was $44.1 million, or $2.01 per share, which includes after-tax losses on early retirement of debt totaling $583,000, or $.03 loss per share. These results compare to net income for fiscal year 1996 of $55.3 million, or $2.48 per share, and to net income for fiscal year 1995 of $31.2 million, or $1.44 per share. The Corporation's emphasis on single-family residential and consumer lending and the promotion of retail financial services, along with the Corporation's growth through acquisitions, continues to have positive effects on the Corporation's core operations. Defined as operating income before income taxes excluding (i) gains on nonrecurring sales of mortgage-backed securities and loan servicing rights and (ii) amortization expense of intangible assets, core earnings totaled $105.0 million for fiscal year 1997 compared to $90.9 million and $82.4 million, respectively, for fiscal years 1996 and 1995. On a percentage basis, core earnings for fiscal year 1997 increased 15.6% over fiscal year 1996, up from the 10.2% increase of fiscal year 1996 over 1995. This increase in core earnings resulted primarily from increases in net interest income, loan servicing fees and retail fee income. The decrease in net income for fiscal year 1997 compared to fiscal year 1996 is primarily due to the following: the $27.1 million nonrecurring Federal deposit insurance special assessment, an increase of $2.0 million in the provision for loan losses, an increase of $326,000 in amortization expense of intangible assets and the extraordinary loss on early retirement of debt totaling $583,000. These decreases to net income were partially offset by a net increase of $5.2 million in net interest income, an increase of $3.4 million in retail fees and charges, a reduction in the provision for income taxes totaling $3.1 million, net increases of $2.5 million in loan servicing fees and $2.2 million in other operating income and net gains on the sales of loans and loan servicing rights, a reduction of $1.6 million in general and administrative expenses and an improvement of $844,000 in real estate operations. The increase in net income for fiscal year 1996 compared to fiscal year 1995 is primarily due to the following: a $21.4 million nonrecurring charge for accelerated amortization of goodwill recorded in fiscal year 1995 not incurred in the 1996 fiscal year, an increase of $13.2 million in net interest income after provision for loan losses, increases of $3.2 million each in retail fees and charges and loan servicing fees, an increase of $746,000 in other operating income and a decline of $733,000 in amortization of intangible assets. These increases to net income were partially offset by an increase of $12.0 million in general and administrative expenses, an increase of $3.8 million in the provision for income taxes, a decline of $1.3 million in real estate operations and a decrease of $1.2 million in net gains on the sales of loans and loan servicing rights. NET INTEREST INCOME AND INTEREST RATE SPREAD Net interest income was $168.0 million for fiscal year 1997 compared to $162.8 million for fiscal year 1996, an increase of $5.2 million, or 3.2%; and compared to $149.8 million for fiscal year 1995. Based on the portfolios of interest-earning assets and interest-bearing liabilities at the end of the last three fiscal years, interest rate spreads were 2.44%, 2.48% and 2.21%, respectively, at June 30, 1997, 1996 and 1995, a decrease of four basis points comparing the interest rate spread at June 30, 1997, to the interest rate spread at June 30, 1996, and an increase of 27 basis points comparing the spreads at June 30, 1996, to June 30, 1995. In addition, during the fiscal years 1997, 1996 and 1995, interest rate spreads were 2.39%, 2.34% and 2.26%, respectively, representing an increase of five basis points comparing the interest rate spread during fiscal year 1997 to fiscal year 1996 and an increase of eight basis points comparing the spread during fiscal year 1996 to 1995. The net yield on interest-earning assets during fiscal years 1997, 1996 and 1995 was 2.57%, 2.58% and 2.46%, respectively, representing a decrease of one basis point comparing fiscal year 1997 to 1996 and an increase of 12 basis points comparing fiscal year 1996 to 1995. The net interest rate spread increased five basis points during fiscal year 1997 to 2.39% from 2.34% for fiscal year 1996. As discussed in the following paragraph, the sale of approximately $230.8 million of securities available-for-sale during the last six months of fiscal year 1996 and the utilization of such proceeds to repay maturing Federal Home Loan Bank of Topeka (FHLB) advances, the reduction in interest rates on interest-bearing liabilities (5.34% for fiscal year 1997 compared to 5.44% for fiscal year 1996), a more favorable interest-earning assets mix primarily in increased levels of adjustable-rate mortgage loans, consumer loans and commercial real estate loans, and the acquisitions of Conservative Savings Corporation (Conservative) on February 1, 1996, Heritage on October 1, 1996, and Investors on May 1, 1997, have contributed to the improvement in the interest rate spreads for the current fiscal year compared to 1996. Net interest income increased over fiscal year 1996 due primarily to 20 average interest-earning assets increasing $223.0 million to $6.534 billion for fiscal year 1997 compared to $6.311 billion for fiscal year 1996 and the reduction in interest rates on interest-bearing liabilities over the respective fiscal years. The future trend in interest rate spreads and net interest income will be dependent upon such factors as the composition and size of the Corporation's interest-earning assets and interest-bearing liabilities, the interest rate risk exposure of the Corporation, and the maturity and repricing activity of interest-sensitive assets and liabilities, as influenced by changes in and levels of both short-term and long-term market interest rates. During fiscal year 1996, pursuant to the reassessment of the appropriateness of the classifications of all securities held, and in accordance with the one-time reclassification permitted under a special accounting report, management of the Corporation developed an asset/liability management strategy to reclassify substantially all of its 15- and 30-year fixed rate mortgage-backed securities approximating $370.4 million and agency investment securities approximating $49.9 million from held to maturity to available for sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. The purpose of this strategy was to sell such securities and use the proceeds to fund FHLB advances as they became due, and to have the flexibility, as the opportunity arose, to reinvest proceeds into adjustable-rate or shorter duration interest-earning assets. During fiscal year 1996, approximately $230.8 million of such investment and mortgage-backed securities were sold with the proceeds used primarily to pay maturing FHLB advances. The sale of approximately $230.8 million of the securities available for sale and the utilization of such proceeds to repay maturing FHLB advances, the Corporation's favorable asset liability mix (primarily increased levels of adjustable-rate mortgage loans, consumer loans and multi-family commercial real estate loans) and the acquisition of Conservative, improved the interest rate spreads and yields. Net interest income increased due primarily to average interest-earning assets increasing $210.0 million to $6.311 billion for fiscal year 1996 compared to $6.101 billion for fiscal year 1995. This increase in average interest-earning assets is primarily due to the Conservative acquisition in February 1996 with a higher net interest rate spread than the Corporation and to internal growth moderately offset by the sale of securities available for sale previously discussed. The following table presents certain information concerning yields earned on interest-earning assets and rates paid on interest-bearing liabilities during and at the end of each of the fiscal years presented:
- ----------------------------------------------------------------------------------------------------------------------------------- For the Year Ended June 30, At June 30, ---------------------------------- --------------------------------- 1997 1996 1995 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average yield on: Loans......................................... 8.10% 8.29% 8.04% 8.12% 8.19% 8.26% Mortgage-backed securities.................... 6.52 6.45 6.02 6.73 6.73 6.38 Investments................................... 6.40 6.13 6.14 6.65 6.20 6.18 - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets..................... 7.73 7.78 7.45 7.81 7.81 7.71 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average rate paid on: Savings deposits.............................. 3.13 2.79 3.24 3.08 3.04 3.08 Other time deposits........................... 5.72 6.10 5.32 5.75 5.75 5.88 Advances from FHLB............................ 5.77 5.79 5.71 5.94 5.66 5.89 Securities sold under agreements to repurchase............................... 6.19 7.14 7.59 6.04 6.51 7.08 Other borrowings.............................. 9.24 10.89 10.89 8.75 11.05 10.67 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities................ 5.34 5.44 5.19 5.37 5.33 5.50 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest rate spread......................... 2.39% 2.34% 2.26% 2.44% 2.48% 2.21% - ------------------------------------------------------------------------------------------------------------------------------------ Net yield on interest-earning assets............. 2.57% 2.58% 2.46% 2.60% 2.68% 2.42% - ------------------------------------------------------------------------------------------------------------------------------------
21 The table below presents average interest-earning assets and average interest-bearing liabilities, interest income and interest expense, and average yields and rates during the periods indicated. The following table includes nonaccruing loans averaging $39.2 million, $35.5 million and $30.9 million, respectively, for fiscal years 1997, 1996 and 1995 as interest-earning assets at a yield of zero percent:
- ---------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, ----------------------------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- ----------------------------- --------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ---------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans.................. $5,029,050 $407,416 8.10% $4,643,401 $384,765 8.29% $4,277,946 $344,109 8.04% Mortgage-backed securities........... 1,120,019 72,994 6.52 1,284,448 82,830 6.45 1,402,237 84,404 6.02 Investments............ 385,280 24,640 6.40 383,433 23,497 6.13 421,089 25,855 6.14 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets............... 6,534,349 505,050 7.73 6,311,282 491,092 7.78 6,101,272 454,368 7.45 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Savings deposits....... 1,185,808 37,058 3.13 1,189,619 33,177 2.79 1,037,702 33,638 3.24 Other time deposits.... 3,199,572 183,128 5.72 2,966,505 180,863 6.10 2,752,501 146,525 5.32 Advances from FHLB..... 1,247,267 71,999 5.77 1,625,950 94,057 5.79 1,913,467 109,314 5.71 Securities sold under agreements to repurchase........... 591,288 36,615 6.19 189,568 13,525 7.14 103,223 7,837 7.59 Other borrowings....... 89,213 8,247 9.24 61,480 6,695 10.89 66,245 7,212 10.89 - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities.......... 6,313,148 337,047 5.34 6,033,122 328,317 5.44 5,873,138 304,526 5.19 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings balance...... $ 221,201 $ 278,160 $ 228,134 Net interest income....... $168,003 $162,775 $149,842 Interest rate spread...... 2.39% 2.34% 2.26% - ------------------------------------------------------------------------------------------------------------------------------------ Net yield on interest- earning assets......... 2.57% 2.58% 2.46% - ------------------------------------------------------------------------------------------------------------------------------------
During fiscal year 1997, the Corporation experienced lower costs on interest-bearing liabilities primarily due to decreases in the interest rate offered on certain types of deposit products and decreases in interest rates primarily on securities sold under agreements to repurchase and other borrowings. The net earnings balance (the difference between average interest-bearing liabilities and average interest-earning assets) decreased by $57.0 million for fiscal year 1997 compared to fiscal year 1996 primarily due to cash outlays totaling (i) approximately $51.7 million for federal and state tax liabilities principally paid in June 1996 associated with taxable income recognized from the final disposition of a subsidiary's interest in a nuclear generating facility, and (ii) approximately $51.2 million for the Corporation's repurchase of its common stock during the first quarter of the current fiscal year. The effects of these decreases were partially offset by improvements primarily from the acquisitions of Conservative and Heritage (both of which were acquired, in part, through the issuance of common stock). The percentage of average interest-earning assets to average interest-bearing liabilities was 103.5% during fiscal year 1997 compared to 104.6% and 103.9%, respectively, during fiscal years 1996 and 1995. 22 During fiscal year 1996, the Corporation's net earnings balance improved by $50.0 million compared to fiscal year 1995 primarily from the acquisition of Conservative (which was acquired, in part, through the issuance of common stock) and net internal growth with earnings retention. The table below presents the dollar amount of changes in interest income and expense for each major component of interest-earning assets and interest-bearing liabilities, respectively, and the amount of change in each attributable to: (i) changes in volume (change in volume multiplied by prior year rate), and (ii) changes in rate (change in rate multiplied by prior year volume). The net change attributable to change in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate. The following table demonstrates the effect of the increased volume of interest-earning assets and interest-bearing liabilities, the changes in interest rates and the effect on the interest rate spreads previously discussed:
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, Year Ended June 30, 1997 Compared to 1996 1996 Compared to 1995 --------------------------------------- -------------------------------------------- (In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to - ------------------------------------------------------------------------------------------------------------------------------------ Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans................................ $ 31,393 $ (8,742) $ 22,651 $ 30,052 $10,604 $ 40,656 Mortgage-backed securities........... (10,707) 871 (9,836) (7,364) 5,790 (1,574) Investments.......................... 113 1,030 1,143 (2,308) (50) (2,358) - ------------------------------------------------------------------------------------------------------------------------------------ Interest income.................... 20,799 (6,841) 13,958 20,380 16,344 36,724 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Savings deposits..................... (108) 3,989 3,881 4,574 (5,035) (461) Other time deposits.................. 13,755 (11,490) 2,265 11,969 22,369 34,338 Advances from FHLB................... (21,860) (198) (22,058) (16,616) 1,359 (15,257) Securities sold under agreements to repurchase...................... 25,098 (2,008) 23,090 6,187 (499) 5,688 Other borrowings..................... 2,678 (1,126) 1,552 (519) 2 (517) - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense................... 19,563 (10,833) 8,730 5,595 18,196 23,791 - ------------------------------------------------------------------------------------------------------------------------------------ Effect on net interest income........... $ 1,236 $ 3,992 $ 5,228 $ 14,785 $ (1,852) $ 12,933 - ------------------------------------------------------------------------------------------------------------------------------------
The improvements due to changes in volume between fiscal years 1997 and 1996, and between fiscal years 1996 and 1995, reflect the growth the Corporation has experienced, both internally and from acquisitions. The improvements due to changes in volume between fiscal years 1997, 1996 and 1995 in part reflect the changes in the difference between average interest-bearing liabilities and average interest-earning assets of $57.0 million and $50.0 million, respectively. The net improvements due to changes in rates between fiscal years 1997 and 1996 reflect the decline in rates on interest-bearing liabilities, primarily certificates of deposit, partially offset by the net decreases in rates on interest-earning assets, primarily fixed-rate residential mortgage loans. 23 NON-INTEREST INCOME AND EXPENSE PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS The Corporation recorded loan loss provisions of $8.1 million, $6.1 million and $6.4 million in fiscal years 1997, 1996 and 1995, respectively. The loan loss provision increased for fiscal year 1997 compared to 1996 due primarily to the addition of general reserves recorded in the current fiscal year to cover consumer loan losses and the net increase of $445.6 million in the total loan portfolio at June 30, 1997, compared to 1996. During fiscal year 1997 consumer loan charge-offs, net of recoveries, totaled $7.0 million compared to $3.5 million and $1.3 million, respectively, during fiscal years 1996 and 1995. Consumer loan balances increased to $451.6 million at June 30, 1997, from $344.1 million and $231.8 million, respectively, at June 30, 1996 and 1995. Net consumer loan charge-offs for the Corporation reflect the overall trend in consumer credit quality deterioration generally experienced by the financial industry in the last 12 months. Management intends to increase its consumer loan portfolio and, with improved underwriting and credit review procedures along with improved collection efforts implemented during fiscal year 1997, management does not anticipate similar increases in the loan loss provisions or in net charge-offs for consumer loans in fiscal 1998. At June 30, 1997, the Corporation's conventional, FHA and VA loans, including loans held for sale, totaling approximately $4.7 billion, are secured by single-family residential properties located primarily in Nebraska (19%), Colorado (16%), Kansas (7%), Georgia and Oklahoma (5% each), and the remaining 48% in 45 other states. At June 30, 1996, the balance of such loans totaled $4.3 billion and were secured by single-family residential properties located in Nebraska (20%), Colorado (17%), Kansas (7%), Georgia, Oklahoma and Texas (5% each) and the remaining 41% in 44 other states. The commercial real estate loan portfolio at June 30, 1997, totaling $258.6 million is secured by properties located in Colorado (39%), Nebraska (27%), Kansas (9%) and the remaining 25% in 17 other states. At June 30, 1996, commercial real estate loans totaled $269.7 million and were secured by properties located in Colorado (33%), Nebraska (31%), Florida (12%) and the remaining 24% in 18 other states. The allowance for loan losses is based upon management's continuous evaluation of the collectibility of outstanding loans, which takes into consideration such factors as changes in the composition of the loan portfolio and economic conditions that may affect the borrower's ability to pay, regular examinations by the Corporation's credit review group of specific problem loans and of the overall portfolio quality and real estate market conditions in the Corporation's lending areas. The Corporation recorded net income from real estate operations totaling $1.0 million, $172,000 and $1.5 million in fiscal years 1997, 1996 and 1995, respectively. Real estate operations reflect provisions for real estate losses, net real estate operating activity, and gains and losses on dispositions of real estate. The increase in real estate operations of $844,000 for fiscal year 1997 compared to fiscal year 1996 is primarily due to the recognized gain of $1.1 million on the sale of two commercial properties recorded in fiscal year 1997. Fiscal years 1997 and 1995 reflect real estate loss provisions charged to operations of $467,000 and $199,000, respectively, compared to a credit to the provision for real estate operations totaling $479,000 for fiscal year 1996. The credit to provision for real estate operations in fiscal year 1996 was primarily due to excess reserves recaptured into income upon settlement of a lawsuit. The decrease in real estate operations of $1.3 million for fiscal year 1996 from fiscal year 1995 is primarily due to a pre-tax gain of $1.2 million recorded in fiscal year 1995 from the sale of an apartment and assisted-care facility in Dallas, Texas. Management believes that the positive results from real estate operations are indicative of the improvements made in the reduction of the Corporation's real estate portfolio and to the improvement in the real estate markets in general. Although the Corporation believes that present levels of allowances for loan losses are adequate to reflect the risks inherent in its portfolios, there can be no assurance that the Corporation will not experience increases in its nonperforming assets, that it will not increase the level of its allowances in the future or that significant provisions for losses will not be required based on factors such as deterioration in market conditions, changes in borrowers' financial conditions, delinquencies and defaults. In addition, regulatory agencies review the adequacy of allowances for losses on loans on a regular basis as an integral part of their examination process. Such agencies may require additions to the allowances based on their judgments of information available to them at the time of their examinations. 24 Nonperforming assets are monitored on a regular basis by the Corporation's internal credit review and asset workout groups. Nonperforming assets decreased by $3.1 million, or 4.6%, at June 30, 1997, compared to June 30, 1996, primarily as a result of net decreases of $5.2 million in troubled debt restructurings and $1.1 million in nonperforming loans partially offset by a net increase of $3.2 million in real estate. Nonperforming assets at June 30 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Nonperforming loans (1) Residential real estate................................................. $34,348 $34,660 $30,841 Commercial real estate.................................................. 424 2,357 773 Consumer................................................................ 2,042 888 644 - ------------------------------------------------------------------------------------------------------------------------------------ Total................................................................. 36,814 37,905 32,258 - ------------------------------------------------------------------------------------------------------------------------------------ Real estate (2) Commercial.............................................................. 8,417 8,850 8,795 Residential............................................................. 8,599 4,986 3,784 - ------------------------------------------------------------------------------------------------------------------------------------ Total................................................................. 17,016 13,836 12,579 - ------------------------------------------------------------------------------------------------------------------------------------ Troubled debt restructurings (3) Commercial.............................................................. 8,857 13,894 16,566 Residential............................................................. 787 909 1,294 - ------------------------------------------------------------------------------------------------------------------------------------ Total................................................................. 9,644 14,803 17,860 - ------------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets................................................. $63,474 $66,544 $62,697 - ------------------------------------------------------------------------------------------------------------------------------------ Nonperforming loans to total loans......................................... .68% .77% .69% Nonperforming assets to total assets....................................... .89% 1.01% .95% - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses: Other loans (4)......................................................... $37,658 $36,513 $33,261 Bulk purchased loans (5)................................................ 10,809 12,765 15,280 - ------------------------------------------------------------------------------------------------------------------------------------ Total................................................................. $48,467 $49,278 $48,541 - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan losses to total loans................................... .90% .99% 1.04% Allowance for loan losses to total nonperforming assets.................... 76.36% 74.05% 77.42% - ------------------------------------------------------------------------------------------------------------------------------------
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more past due) and accruing loans that are contractually past due 90 days or more. At June 30, 1997, 1996 or 1995, there were no accruing loans contractually past due 90 days or more. (2) Real estate consists of commercial and residential property acquired through foreclosure or repossession (real estate owned and real estate in judgment) and real estate from certain subsidiary operations, and does not include performing real estate held for investment totaling $2.7 million, $2.8 million and $4.2 million, respectively, at June 30, 1997, 1996 and 1995. (3) A troubled debt restructuring is a loan on which the Corporation, for reasons related to the debtor's financial difficulties, grants a concession to the debtor, such as a reduction in the loan's interest rate, a reduction in the face amount of the debt, or an extension of the maturity date of the loan, that the Corporation would not otherwise consider. (4) Includes $77,000 at June 30, 1997, and $78,000 at both June 30, 1996 and 1995, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. (5) Represents the allowance for loan losses for single-family residential whole loans purchased between January 1991 and June 30, 1992 (bulk purchased loans), which had been allocated from the amount of net discounts associated with the Corporation's purchase of these loans to provide for the credit risk associated with such bulk purchased loans. These bulk purchased loans had principal balances of $494.6 million, $574.4 million and $701.9 million, respectively, at June 30, 1997, 1996 and 1995. These allowances are available only to absorb losses associated with respective bulk purchased loans, and are not available to absorb losses from other loans. - -------------------------------------------------------------------------------- 25 The ratio of nonperforming loans to total loans was .68% at June 30, 1997, based on loan balances of $5.377 billion, compared to .77% and .69%, respectively, at June 30, 1996 and 1995, which were based on loan balances of $4.955 billion and $4.677 billion. The ratio of nonperforming assets to total assets was .89%, 1.01% and .95%, respectively, at June 30, 1997, 1996 and 1995. Ratios for both nonperforming loans to total loans and nonperforming assets to total assets improved at June 30, 1997, compared to 1996 due to net decreases in both nonperforming loans and nonperforming assets and to net increases in both total loans and total assets. The total allowance for loan losses decreased to $48.5 million at June 30, 1997, compared to $49.3 million and $48.5 million, respectively, at June 30, 1996 and 1995, due to decreases in the allowance for loan losses from loan repayments for bulk purchased loans. The percentage of allowance for loan losses to total loans at June 30, 1997, was .90%, compared to the ratios of .99% and 1.04%, respectively, at June 30, 1996 and 1995. The total allowance for loan losses to total nonperforming assets of 76.36%, 74.05% and 77.42%, respectively, at June 30, 1997, 1996 and 1995, also indicates improved coverage for potential losses. The ratio for allowance for loan losses to total loans decreased compared to June 30, 1996, primarily due to a net increase of $422.7 million in total loans. The ratio for allowance for loan losses to total nonperforming assets increased at June 30, 1997, compared to June 30, 1996, primarily due to the net decrease in total nonperforming assets. Ratios for both nonperforming loans to total loans and nonperforming assets to total assets increased at June 30, 1996, compared to June 30, 1995, primarily due to a net increase in nonperforming loans of $5.6 million offset slightly by net increases of $278.1 million in total loans and $38.1 million in total assets compared to June 30, 1995. Nonperforming loans at June 30, 1997, decreased $1.1 million compared to June 30, 1996, primarily due to net decreases of $1.9 million and $312,000, respectively, in delinquent commercial and residential real estate loans offset by a net increase of $1.1 million in delinquent consumer loans. Residential construction real estate loans decreased $968,000 from a balance of $2.5 million at June 30, 1996, to $1.5 million at June 30, 1997, primarily due to loan principal repayments and transfers to nonperforming real estate. Nonperforming loans at June 30, 1996, increased $5.6 million compared to June 30, 1995, primarily due to net increases of $3.8 million, $1.6 million and $244,000 in delinquent residential real estate loans, commercial real estate loans and consumer loans, respectively. The increase of $3.8 million in delinquent residential real estate loans is primarily due to residential construction real estate loans increasing $1.9 million from a balance of $603,000 at June 30, 1995, to $2.5 million at June 30, 1996, primarily due to increased loan volume in residential construction lending. The net increase of $3.2 million in real estate at June 30, 1997, compared to June 30, 1996, is due primarily to the addition of residential and commercial real estate totaling $14.4 million and $2.0 million, respectively, and the capitalization of $518,000 in lot development costs partially offset by the disposition of certain residential and commercial real estate properties totaling $9.5 million and $4.4 million, respectively. The net increase of $1.3 million in real estate at June 30, 1996, compared to June 30, 1995, is substantially attributable to a net increase of $1.2 million in residential real estate. Real estate is located primarily in Nebraska and Colorado and at June 30, 1997, before allowance for losses, totaled $5.6 million and $5.2 million, respectively, compared to $5.4 million and $6.0 million, respectively, at June 30, 1996. Troubled debt restructurings decreased $5.2 million at June 30, 1997, compared to June 30, 1996, primarily attributable to net decreases of approximately $5.0 million in commercial real estate loans and $122,000 in residential real estate loans with the net decreases due to loan principal repayments totaling $2.9 million and transfers to nonperforming loans totaling $2.3 million. Troubled debt restructurings decreased $3.1 million at June 30, 1996, compared to June 30, 1995, primarily attributable to net decreases of $2.7 million in commercial real estate loans and $385,000 in residential real estate loans with the net decreases due primarily to loan principal repayments. LOAN SERVICING FEES Loan servicing fees, which also include miscellaneous loan fees for late payments and prepayment charges, and assumption and modification fees, totaled $30.4 million, $27.9 million and $24.7 million for fiscal years 1997, 1996 and 1995, respectively. This current year increase over previous fiscal years is primarily due to increases in the size of the Corporation's loan servicing portfolio. Fees from loans serviced for other institutions totaled $24.2 million, $22.7 million and $20.9 million for fiscal years 1997, 1996 26 and 1995, respectively. The mortgage loan servicing portfolio totaled $5.952 billion, $5.870 billion and $5.151 billion at June 30, 1997, 1996 and 1995, respectively. The value of the Corporation's loan servicing portfolio increases as mortgage interest rates rise and loan prepayments decrease. It is expected that income generated from the Corporation's loan servicing portfolio will increase in such an environment. However, this positive effect on the Corporation's income is offset, in part, by a decrease in additional servicing fee income attributable to new loan originations, which historically decrease in periods of higher, or increasing, mortgage interest rates, and by an increase in expenses from loan production costs since a portion of such costs cannot be deferred due to lower loan originations. Conversely, the value of the Corporation's loan servicing portfolio will decrease as mortgage interest rates decline. RETAIL FEES AND CHARGES Retail fees and charges totaled $16.1 million, $12.7 million and $9.5 million for fiscal years 1997, 1996 and 1995, respectively. The primary source of this fee income is customer charges for retail financial services such as checking account fees and service charges, charges for insufficient checks or uncollected funds, stop payment fees, debit card fees, overdraft protection fees and transaction fees for personal checking and automatic teller machine services. The net increases of $3.4 million from fiscal year 1997 compared to 1996 and $3.2 million from fiscal year 1996 compared to fiscal year 1995 primarily results from an increased focus on cross-selling of products, and increases in certain checking account fees and related ancillary fees for overdraft and insufficient funds charges from the Corporation's expanding retail customer deposit base, increasing both in number of accounts and dollar amounts, over the last two fiscal years. GAIN (LOSS) ON SALES OF LOANS During fiscal years 1997, 1996 and 1995, the Corporation sold loans to third parties through its mortgage banking operations totaling $552.2 million, $667.7 million and $654.4 million, respectively, resulting in net pre-tax gains of $386,000 and $164,000, respectively, for fiscal years 1997 and 1996 and a net pre-tax loss of $1.7 million for fiscal year 1995. Mortgage loans are generally sold in the secondary market with loan servicing retained and without recourse to the Corporation. The net gains recorded in fiscal years 1997 and 1996 are attributable to the relatively stable interest rate environments over the respective periods. The net loss recorded in fiscal year 1995 is primarily from mortgage banking operations recorded from the Railroad Financial Corporation (Railroad) merger which have been combined under the pooling of interests accounting treatment. Such losses were incurred primarily from the sale of loans which were originated pursuant to unhedged commitments. GAIN ON SALES OF LOAN SERVICING RIGHTS Gain on the sales of loan servicing rights totaled $452,000 and $3.5 million, respectively, for fiscal years 1996 and 1995. All such sales activity of loan servicing rights was from the mortgage banking operations recorded from the Railroad merger which were combined under the pooling of interests accounting treatment. OTHER OPERATING INCOME Other operating income totaled $10.6 million, $8.2 million and $7.5 million for fiscal years 1997, 1996 and 1995, respectively. The major components of other operating income are brokerage and insurance commissions. Brokerage commission income totaled $4.1 million, $3.0 million and $2.6 million, respectively, for fiscal years 1997, 1996 and 1995. Brokerage commission income increased by $1.1 million for fiscal year 1997 compared to fiscal year 1996 attributable to significant growth in the volume of transactions processed for customers due to the focus on stocks and mutual funds as preferred investment options. A greater focus on cross-selling, an increase in the number of sales locations due to acquisitions and a fully-trained staff to initiate orders also contributed to this increase. The $400,000 increase in fiscal year 1996 compared to 1995 is partially due to the aforementioned reasons but to a lesser degree since 27 investment alternatives more attractive to consumers such as certificates of deposit with higher interest rates would have contributed to lower revenues for brokerage commissions, primarily affecting annuity commissions. Insurance commission income totaled $2.2 million, $1.7 million and $2.4 million, respectively, for fiscal years 1997, 1996 and 1995. The increase in insurance commission income for fiscal year 1997 over 1996 is due to increased volume primarily from cross-selling efforts and an increase in sales of health and accident policies. Fiscal year 1996 results were lower than 1995 due to lower volume with such commissions affected to a significant degree by other competing products. Credit life and disability commission income totaled $1.9 million, $1.6 million and $1.2 million, respectively, for fiscal years 1997, 1996 and 1995. The increases in the credit life and disability commission income is directly related to increased volume in consumer loans. Other miscellaneous sundry income totaled approximately $2.4 million, $1.9 million and $1.3 million, respectively, for fiscal years 1997, 1996 and 1995. The increase of $500,000 comparing fiscal year 1997 to 1996 is primarily due to the net gain on sales of fixed assets over fiscal year 1996 totaling $617,000. The increase of $600,000 comparing fiscal year 1996 to 1995 is primarily attributable to the recognition of $344,000 in fiscal year 1996 on the disposition of a leasing transaction and $253,000 recorded as net gains on the sales of securities compared to a loss of $41,000 for fiscal year 1995. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, excluding the $27.1 million Federal deposit insurance special assessment, totaled $112.9 million, $114.5 million and $102.6 million for fiscal years 1997, 1996 and 1995, respectively. Overall, general and administrative expenses remained at favorable levels as illustrated by the efficiency ratio. The efficiency ratio is defined as general and administrative expenses divided by the sum of (i) net interest income before provision for loan losses, (ii) loan servicing fees, (iii) retail fees and charges and (iv) other operating income. The Corporation's efficiency ratio for fiscal year 1997 is 49.3%, excluding the $27.1 million special assessment and the nonrecurring expenses totaling $2.3 million associated with the repurchase of 1,875,150 shares of the Corporation's common stock. This ratio compares to 52.1% for fiscal year 1996, which excludes the nonrecurring expenses totaling $4.5 million associated with the Railroad merger and the Corporation's 1995 proxy contest, and to 53.5% for fiscal year 1995. The efficiency ratio is lower for fiscal year 1997 compared to 1996, even though operating expenses increased approximately $600,000 after adjusting for the aforementioned nonrecurring expenses for both fiscal years, due to increased core earnings in fiscal year 1997. The 1996 efficiency ratio of 52.1%, adjusted for nonrecurring expenses, is lower compared to fiscal year 1995 due to increased core earnings partially offset by an increase in operating expenses. The net decrease of $1.6 million in general and administrative expenses, excluding the deposit insurance special assessment, in fiscal year 1997 compared to 1996 is primarily due to net decreases of $3.7 million in regulatory insurance and assessments and $860,000 in compensation and benefits partially offset by net increases of $1.6 million in advertising, $944,000 in data processing charges and $550,000 in occupancy and equipment. The net decrease of $1.6 million for fiscal year 1997 compared to fiscal year 1996 is in part attributable to the nonrecurring expenses incurred in fiscal year 1996 related to the Railroad merger and the Corporation's 1995 proxy contest totaling $4.5 million, a decrease in regulatory insurance expenses totaling $3.7 million, a decrease in amortization expense of mortgage servicing rights of $1.3 million and to the deferral of consumer loan production costs totaling $2.2 million. Partially offsetting these decreases are the nonrecurring expenses associated with the repurchase of 1,875,150 shares of the Corporation's common stock totaling $2.3 million, a net increase in operating expenses due to acquisitions totaling $2.5 million, increased marketing costs for checking accounts and related products and consumer loans totaling $1.6 million, net increases in expenses associated with mortgage loan production costs totaling $855,000, increased data processing costs and other net increases in employee benefits, rent and occupancy and other operating expenses primarily due to branch expansion over last fiscal year. The decrease in regulatory insurance and assessments of $3.7 million comparing fiscal year 1997 to 1996 was substantially due to the revised rate structure on insured deposits adopted by the FDIC after the recapitalization of the SAIF. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, declining to .18% of insured deposits for the quarter ended December 31, 1996, and reduced to .064% 28 of insured deposits effective January 1, 1997. Such reduction in deposit insurance premiums will increase net income in future periods and, for fiscal year 1997, was a significant reason that regulatory insurance and assessments decreased $3.7 million compared to fiscal year 1996. The net increases in expenses from acquisitions totaling $2.5 million results from the acquisitions of Heritage and Investors during fiscal year 1997 and a full fiscal year of operations from the 1996 Conservative acquisition consummated February 1, 1996. Such acquisitions result in increased personnel wages and benefits and costs of operating additional branches, as well as other expenses also incurred on an indirect basis attributable to these acquisitions. The net decrease in amortization expense totaling $1.3 million of mortgage servicing rights is due to repayment assumption revisions increasing the expected lives of the related loans serviced. The increase of approximately $12.0 million in general and administrative expenses in fiscal year 1996 compared to fiscal year 1995 was due to increases in compensation and benefits of $1.7 million, occupancy and equipment of $1.7 million, regulatory insurance and assessments of $1.3 million, advertising of $1.9 million, amortization of mortgage servicing rights of $688,000, data processing charges of $532,000 and $4.2 million in other operating expenses. The net increase of approximately $12.0 million, or 11.7%, comparing fiscal year 1996 to fiscal year 1995 is in part attributable to nonrecurring expenses associated with the Railroad merger and the Corporation's 1995 proxy contest, expenses associated with loan production, additional branches and increased marketing costs for deposits and other product and image promotions. During fiscal year 1996 total nonrecurring costs and expenses totaled $4.5 million consisting of (i) $3.6 million related to the Railroad merger for accounting, legal, investment banking, severance benefits, advertising and miscellaneous transition and conversion expenses and (ii) $901,000 related to the Corporation's 1995 proxy contest for consulting services, legal fees, solicitation fees and printing and mailing costs. Other increases in general and administrative expenses for fiscal year 1996 are attributable to loan production costs, primarily compensation and benefits, which exceeded fiscal year 1995 expenses by approximately $3.5 million. Advertising expenditures, up $1.9 million, fluctuate based upon desired levels of product promotion and were higher compared to fiscal year 1995 due to increased campaigns for checking accounts and related products, certificates of deposit, consumer and mortgage lending and image promotion. Amortization of mortgage servicing rights increased by $688,000 over fiscal year 1995 primarily due to an increase of $14.1 million in capitalized mortgage servicing rights. In addition, loans serviced for other institutions increased $718.7 million over fiscal year 1995 resulting in increased staffing levels and related expenses. Other net increases in general and administrative expenses directly resulting from the Corporation's recent acquisitions, excluding Railroad, totaled approximately $876,000 over fiscal year 1995. Such increases in general and administrative expenses result from increased personnel wages and benefits, costs of operating additional branches and higher regulatory insurance costs from deposits acquired. Other expenses were also incurred on an indirect basis attributable to such acquisitions. GOODWILL AND CORE VALUE OF DEPOSITS Total amortization expense for goodwill and core value of deposits for fiscal years 1997, 1996 and 1995 was $9.9 million, $9.5 million and $10.3 million, respectively. The net increase in amortization expense of goodwill and core value of deposits for fiscal year 1997 compared to 1996 is primarily due to amortization expense totaling $957,000 resulting from the Heritage acquisition and a net increase of $787,000 in amortization expense from the Conservative acquisition consummated February 1, 1996. Partially offsetting these increases was the reduction in fiscal year 1997 of $1.4 million in amortization expense of core value of deposits since such balances are amortized on an accelerated basis and certain amounts from previous acquisitions became fully amortized during the year. Amortization of goodwill and core value of deposits for fiscal year 1996 was lower than fiscal year 1995 primarily due to a reduction in amortization expense on core value of deposits which was amortized on an accelerated basis partially offset by the $725,000 increase in intangible amortization from the Conservative acquisition as of February 1, 1996. An appraisal performed in fiscal year 1994 by an independent third party of the existing intangible assets relating to acquisitions during 1986 through 1988 of five troubled savings institutions located in Colorado, Kansas and Oklahoma resulted in a fair value estimate of $41.0 million which was classified as core value of deposits totaling $19.6 million and goodwill totaling $21.4 million. The $21.4 million of goodwill was fully amortized to expense over the first six months of fiscal year 1995. The $19.6 million of core value of deposits was fully amortized as of April 30, 1997. 29 PROVISION FOR INCOME TAXES For fiscal years 1997, 1996 and 1995 the provision for income taxes was $23.8 million, $27.0 million and $23.1 million, respectively. The effective tax rates for fiscal years 1997, 1996 and 1995 were 34.8%, 32.8% and 42.6%, respectively. In August 1996, changes in the federal law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) required recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These tax law changes resulted in the recognition to income tax expense of additional deferred tax liabilities of approximately $103,000 in fiscal year 1997. The remaining unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank, or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. The provision for income taxes for fiscal year 1996 was reduced by approximately $1.0 million for an income tax benefit recognized for financial reporting purposes from a leveraged lease settlement. The provision for income taxes for fiscal year 1995 was reduced by $2.3 million due to the recognition of pre-acquisition tax credits and net operating losses that the Corporation was entitled to from a thrift acquired in 1987 and two leasing companies acquired in 1984 and 1986. For the three fiscal years ended June 30, 1997, the effective tax rates vary from the applicable statutory rates primarily due to the nondeductibility of amortization of goodwill and core value of deposits in relation to the level of taxable income for the respective fiscal years. The effective tax rate also varied from the statutory rate of 35.0% for fiscal year 1996 due to the nondeductibility of certain Railroad merger and acquisition costs offset slightly by the aforementioned income tax benefit recognized from the leveraged lease settlement. In addition, the effective tax rate varied from the statutory rate for fiscal year 1995 due to the recognition of the pre-acquisition tax credits and net operating losses of $2.3 million. EXTRAORDINARY ITEMS In December 1996, the Corporation recognized extraordinary losses of $583,000 (net of income tax benefits totaling $316,000), or $.03 loss per share, primarily as a result of the early retirement of its $40.25 million 10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January 31, 1999. The extraordinary losses consisted primarily of the write-off of the related premiums and costs associated with the issuance and redemption of such debt which was retired on December 27, 1996, with the proceeds from the $50.0 million subordinated extendible notes offering completed December 2, 1996. RATIOS The table below sets forth certain performance ratios of the Corporation for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended June 30, - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Return on average assets: net income divided by average total assets (1) (2).................. .65% .84% .49% Return on average equity: net income divided by average equity (1) (2)........................ 11.04 14.74 9.98 Equity-to-assets ratio: average stockholders' equity to average total assets (1).............. 5.86 5.72 4.95 General and administrative expenses divided by average assets (1) (2)......................... 2.05 1.75 1.62 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on average daily balances during fiscal years 1997, 1996 and 1995. (2) Return on average assets and return on average stockholders' equity for fiscal year 1997 are .93% and 15.91%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $17.3 million, $1.5 million, $583,000 and $103,000, associated with the SAIF special assessment, the repurchase of 1,875,150 shares of the Corporation's common stock, the loss on early retirement of debt and the change in income taxes for bad debt reserves, respectively. Return on average assets and return on average stockholders' equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $2.9 million and $585,000, respectively, associated with the Railroad merger and the Corporation's 1995 proxy contest. Return on averages assets and return on average stockholders' equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the accelerated amortization of goodwill totaling $21.4 million. General and administrative expenses divided by average assets for fiscal year 1997 is 1.62% excluding the nonrecurring expenses totaling $27.1 million and $2.3 million, respectively, associated with the SAIF special assessment and the repurchase of 1,875,150 shares of the Corporation's common stock. General and administrative expenses divided by average assets for fiscal year 1996 is 1.68% excluding the nonrecurring expenses totaling $3.6 million and $901,000, respectively, associated with the Railroad merger and the Corporation's 1995 proxy contest. - -------------------------------------------------------------------------------- 30 The increase in the operating ratio for general and administrative expenses for fiscal year 1997 compared to fiscal year 1996 is attributable to a net increase of $25.5 million in such expenses due to the nonrecurring SAIF special assessment of $27.1 million and the nonrecurring expenses totaling $2.3 million associated with the repurchase of 1,875,150 shares of the Corporation's common stock. The increase in the operating ratio for general and administrative expenses for fiscal year 1996 compared to fiscal year 1995 is attributable to a net increase of approximately $12.0 million in such expenses primarily due to the nonrecurring expenses totaling $4.5 million associated with the Railroad merger and the Corporation's 1995 proxy contest as well as increased expenses attributable to a fiscal year 1996 acquisition. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS During fiscal year 1997, the Corporation adopted the provisions of two accounting pronouncements: Statement No. 123 entitled "Accounting for Stock-Based Compensation" and Statement No. 125 entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." See Note 1 to the Consolidated Financial Statements for a discussion of these new accounting pronouncements and their effect on the Corporation. LIQUIDITY AND CAPITAL RESOURCES The Corporation's principal asset is its investment in the capital stock of the Bank, and because it does not generate any significant revenues independent of the Bank, the Corporation's liquidity is dependent on the extent to which it receives dividends from the Bank. The Bank's ability to pay dividends to the Corporation is dependent on its ability to generate earnings and is subject to a number of regulatory restrictions and tax considerations. Under capital distribution regulations of the OTS, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed dividend, has total capital that is at least equal to the amount of its fully phased-in capital requirements (a "Tier 1 Association") is permitted to pay dividends during a calendar year in an amount equal to the greater of (i) 75.0% of its net income for the recent four quarters, or (ii) 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk-based capital ratio requirement at the beginning of the calendar year. At June 30, 1997, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $113.1 million in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law would require approval by the OTS of such proposed dividends and, in some cases, would prohibit the payment of dividends. On August 21, 1996, the Corporation repurchased 1,875,150 shares of its common stock. Total cash consideration for this transaction, including certain expenses and costs associated with the seller's ownership of such stock, approximated $51.2 million. The sources of cash to consummate this stock repurchase consisted of (i) a short-term variable-rate promissory note totaling $28.0 million due January 31, 1997 (refinanced on December 13, 1996), (ii) a dividend from the Bank totaling $18.0 million, and (iii) cash totaling $5.2 million paid directly by Commercial Federal Corporation (the parent company). In addition, transaction costs totaling approximately $414,000 were incurred by the Corporation for this repurchase. On December 13, 1996, the Corporation refinanced the $28.0 million short-term promissory note due January 31, 1997, obtained in the financing of the repurchase of 1,875,150 shares of the Corporation's common stock, with a five-year term note for $28.0 million due December 31, 2001. This term note, with an outstanding principal balance of $26.0 million at June 30, 1997, bears a monthly adjustable interest rate which was 8.00% at June 30, 1997, and is priced at 50 basis points below the quoted national base prime rate. This term note has a seven year amortization, with scheduled principal payments of $1.0 million payable quarterly with accrued interest, and a balloon of $8.0 million due December 31, 2001. The term note is unsecured but subject to certain covenants. In addition, the Corporation had a $2.0 million line of credit available with the same financial institution which, at June 30, 1997, had not been drawn on. Both the term note and the revolving credit promissory note may be prepaid, in whole or in part, without penalty, upon proper written notice. On August 11, 1997, the Corporation paid down this term note by $21.0 million and, under the payment terms of the note agreement, results in the remaining balance of $5.0 million payable in $1.0 million installments over the next five calendar quarters with the final payment due September 30, 1998. Also, on August 11, 1997, the line of credit was increased to $6.0 million with no change to the due date or other terms. 31 On December 2, 1996, as previously discussed, the Corporation completed the issuance of $50.0 million of 7.95% fixed-rate subordinated extendible notes due December 1, 2006, which resulted in the Corporation receiving $48.5 million, net of an underwriting discount of $1.5 million. With the proceeds from the issuance of the Notes, the Corporation redeemed on December 27, 1996, its $40.25 million 10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January 31, 1999. Also, effective May 14, 1997, the Corporation, through CFC Preferred Trust, a special-purpose wholly-owned Delaware trust subsidiary of the Corporation, issued $45.0 million of fixed-rate 9.375% cumulative trust preferred securities, which are fully and unconditionally guaranteed by the Corporation. Since all of the proceeds of the sale of the Capital Securities were invested by the CFC Preferred Trust in Debentures of the Corporation, the Corporation paid the underwriting commission and other expenses associated with the offering which totaled $1.8 million and are being amortized over the life of the Debentures resulting in an effective interest rate of 9.78%. Proceeds from the sale of the Debentures will be used for general corporate purposes including, without limitation, possible future acquisitions, funding investments in, or extensions of credit to, the Corporation's subsidiaries, repayment of obligations and redemption of securities. On June 30, 1997, the Corporation distributed $8.2 million to the Bank for its purchase of a facility in which to consolidate certain support operations, and on August 11, 1997, paid $21.0 million down on the $26.0 million term note originally due December 31, 2001. See "Cumulative Trust Preferred Securities Offering" for additional information. At June 30, 1997, the cash of Commercial Federal Corporation, the parent company, totaled $42.2 million. This cash balance at June 30, 1997, is larger than normal primarily because the proceeds of $45.0 million from the issuance of the Debentures had not been fully disbursed; however, $21.0 million of such cash balance was disbursed on August 11, 1997, to pay down the $26.0 million term note. Due to the parent company's limited independent operations, management believes that its cash balance at June 30, 1997, is currently sufficient to meet operational needs. However, the parent company's ability to make future interest and principal payments on the Notes, on the promissory term note due December 31, 2001, and on the Debentures due May 15, 2027, is dependent upon its receipt of dividends from the Bank. Accordingly, during fiscal years 1997 and 1996, the parent company received, in cash, dividends totaling $34.7 million and $9.3 million, respectively, from the Bank. The dividends received during fiscal year 1997 were paid to cover (i) interest payments totaling $6.2 million on the parent company's debt, (ii) a principal payment of $1.0 million on the parent company's promissory term note, (iii) common stock cash dividends totaling $5.9 million paid by the parent company to its shareholders through June 30, 1997, (iv) the payment of $3.6 million to acquire Heritage on October 1, 1996, and (v) the payment totaling $18.0 million to assist in the finance of the repurchase of 1,875,150 shares of the Corporation's common stock on August 21, 1996. Cash dividends paid to shareholders totaled $5.9 million and $4.4 million, respectively, during fiscal years 1997 and 1996. The payment of dividends on the common stock is subject to the discretion of the Board of Directors of the Corporation and depends on a variety of factors, including operating results and financial condition, liquidity, regulatory capital limitations and other factors. The Bank will continue to pay dividends to the parent company, pursuant to regulatory restrictions, to cover future principal and interest payments on the parent company's debt and on cash dividends on common stock that the parent company intends to continue to pay on a quarterly basis. The parent company also receives cash from the exercise of stock options and the sale of stock under its employee benefit plans which totaled $2.1 million and $2.3 million, respectively, during fiscal years 1997 and 1996, as well as from the Bank for income tax benefits as provided in the corporate tax sharing agreement from operating losses of the parent company. During fiscal year 1997, the Corporation distributed $17.2 million to the Bank for its purchase of a support operations facility and the cash portion of the Heritage and Investors acquisitions. The Corporation's primary sources of funds are (i) deposits, (ii) principal repayments on loans, mortgage-backed and investment securities, (iii) advances from the FHLB of Topeka, (iv) cash generated from operations and (v) securities sold under agreements to repurchase. As reflected in the Consolidated Statement of Cash Flows, net cash flows provided by operating activities for fiscal years 1997 and 1995 totaled $3.1 million and $18.9 million, respectively, and net cash flows used by operating activities for fiscal year 1996 totaled $6.3 million. Amounts fluctuate from period to period primarily as a result of 32 mortgage banking activity relating to the purchase and origination of loans for resale and the subsequent sale of such loans. The origination of loans for resale totaling $193.9 million for fiscal year 1997 is lower compared to the $365.5 million and $332.8 million for fiscal years 1996 and 1995, respectively, primarily due to the lower volume of loan refinancing activity. Such decrease is partially offset by an increase in the purchase of loans for resale from correspondents totaling $403.7 million for fiscal year 1997 compared to $317.6 million and $378.9 million, respectively, for fiscal years 1996 and 1995. Net cash flows used by investing activities totaled $201.1 million and $264.1 million for fiscal years 1997 and 1995, respectively, and net cash flows provided by investing activities totaled $253.0 million for fiscal year 1996. Amounts fluctuate from period to period primarily as a result of (i) principal repayments on loans and mortgage-backed securities and (ii) the purchase and origination of loans, mortgage-backed and investment securities. The acquisitions of Heritage and Investors during fiscal year 1997 resulted in cash paid totaling approximately $3.4 million and $5.3 million, respectively, for the common stock of these institutions in addition to the exchange of 677,449 shares of the Corporation's common stock for the Heritage acquisition. During fiscal year 1996 the acquisition of Railroad had no material effect on liquidity, except for the cash outlay totaling $3.6 million relating to nonrecurring merger related costs, since such transaction was consummated in an exchange of common stock between companies; and the acquisition of Conservative resulted in a cash payment totaling approximately $18.3 million, in addition to the issuance of common stock the Corporation exchanged for Conservative's common and preferred stock. During fiscal year 1995 the Corporation acquired the assets and liabilities of two financial institutions for which it paid cash totaling $16.5 million and received cash totaling $91.8 million primarily from the acquisition of the deposits and branches of a Kansas institution. The pending acquisitions of Liberty, Mid Continent and First National will have no material effect on liquidity, except for the cash outlays relating to nonrecurring merger related costs, since such transactions are structured to be consummated in an exchange of common stock between the Corporation and these respective companies. At December 31, 1995, pursuant to the reassessment of the appropriateness of the classifications of all securities held, and in accordance with the one-time reclassification permitted under the special report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," management of the Corporation developed an asset/liability management strategy to reclassify substantially all of its 15- and 30-year fixed-rate mortgage-backed securities approximating $370.4 million and agency investment securities approximating $49.9 million from held to maturity to available for sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. The purpose of this strategy was to sell such securities and use the proceeds to fund FHLB advances as they became due, and to have the flexibility, as opportunities arose, to reinvest proceeds into adjustable-rate or shorter duration interest-earning assets. In addition, on February 1, 1996, the Corporation acquired mortgage-backed and investment securities totaling approximately $90.1 million as part of the acquisition of Conservative and classified such securities as available for sale. During fiscal year 1996, approximately $230.8 million of such investment and mortgage-backed securities were sold with the proceeds used primarily to pay maturing FHLB advances. Net cash flows provided by financing activities totaled $218.1 million and $252.8 million, respectively, for fiscal years 1997 and 1995 and net cash flows used by financing activities totaled $246.1 million for fiscal year 1996. Advances from the FHLB and retail deposits have been the primary sources to balance the Corporation's funding needs during each of the fiscal years presented. The Corporation experienced a net decrease of $109.9 million for fiscal year 1997 and net increases of $93.8 million and $103.9 million, respectively, in deposits for fiscal years ended June 30, 1996 and 1995, excluding deposits acquired in acquisitions. The decrease in deposits during fiscal year 1997 was primarily due to depositors leaving for higher interest rates while increases in deposits are due to a broadened retail deposit base, compared to previous years, created from acquisitions, opening new branches and increasing marketing efforts and product promotion. In addition, during fiscal years 1997, 1996 and 1995 the Corporation utilized securities sold under agreements to repurchase primarily for liquidity and asset liability management purposes. Also, during fiscal year 1997, the Corporation borrowed $28.0 million to partially finance the repurchase of 1,875,150 shares of the Corporation's common stock which was refinanced on December 13, 1996, and the Corporation's $40.25 million 10.25% 33 subordinated debt and $6.9 million 10.0% senior notes were paid in full on December 27, 1996, from the proceeds of the Corporation's $50.0 million 7.95% subordinated extendible notes due December 1, 2006. In addition, as previously discussed, on May 14, 1997, the Corporation, through CFC Preferred Trust, issued $45.0 million of 9.375% cumulative trust preferred securities due May 15, 2027. Legislation signed into law on September 30, 1996, to recapitalize the SAIF fund required SAIF-insured institutions to pay a one-time special assessment of .657% of SAIF-insured deposits held as of March 31, 1995. This nonrecurring special assessment resulted in a one-time after-tax charge to the Corporation of approximately $17.3 million ($27.1 million pre-tax) incurred in the quarter ended September 30, 1996. Such a special assessment substantially eliminated the deposit insurance premium disparity between BIF-insured and SAIF-insured institutions and fully recapitalized the SAIF. Such results associated with this special assessment will have the effect of significantly reducing the Corporation's deposit insurance premiums to the SAIF, thereby increasing net income in future periods. The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant to which the assessment rate for well-capitalized institutions with the highest supervisory ratings would be reduced to zero and institutions in the lower risk assessment classification will be assessed at the rate of .27% of insured deposits. Until December 31, 1999, however, SAIF-insured institutions will be required to pay assessments to the FDIC at the rate of .064% to help fund interest payments on certain bonds issued by the FICO, an agency of the federal government established to finance takeovers of insolvent thrifts. During this period, BIF members will be assessed for FICO obligations at the rate of .013%. After December 31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO payments. The Deposit Insurance Funds Act of 1996 provides that the BIF and the SAIF will be merged into a single deposit insurance fund effective December 31, 1999, but only if there are no insured savings associations on that date. The legislation directed the Department of Treasury to make recommendations to Congress for the establishment of a single charter for banks and thrifts. As a result of the final disposition of a subsidiary's interest in a nuclear generating facility located in Palo Verde, Arizona in February 1996, the Corporation recognized taxable income totaling approximately $154.9 million. Accordingly, such income for tax purposes resulted in federal and state tax liabilities totaling approximately $51.8 million. These tax payments were paid in June 1996 for the federal tax liability and in September and October 1996 for the state tax liabilities. While these payments affected the Corporation's cash flow position, they had no material adverse impact on the Corporation's financial condition or results of operations. The Corporation will continue to grow its franchise through an ongoing program of selective acquisitions of other financial institutions. During fiscal year 1997 the Corporation consummated the acquisitions of Heritage and Investors, and, subsequent to June 30, 1997, entered into merger agreements with Liberty, Mid Continent and First National. See Notes 2 and 29 to the Consolidated Financial Statements for additional information on these completed and pending acquisitions. Such acquisitions present the Corporation with the opportunity to further expand its retail network in its existing markets; and to increase its earnings potential by increasing its mortgage and consumer loan volumes funded by deposits which generally bear lower rates of interest than alternative sources of funds. Acquisition candidates will be selected based on the extent to which the candidate can enhance the Corporation's retail presence in new or existing markets and complement the Corporation's present retail network. At June 30, 1997, the Corporation had issued commitments of $150.8 million to fund and purchase loans as follows: $82.8 million of single-family fixed-rate mortgage loans, $38.5 million of single-family adjustable-rate mortgage loans, $9.1 million of commercial real estate loans and $20.4 million of consumer loan lines of credit. In addition, at June 30, 1997, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $1.3 million. These outstanding loan commitments to extend credit in order to originate loans or fund consumer loan lines of credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn. The Corporation expects to fund these commitments, as necessary, from the sources of funds previously described. 34 The maintenance of an appropriate level of liquid resources to meet not only regulatory requirements but also to provide funding necessary to meet the Corporation's current business activities and obligations is an integral element in the management of the Corporation's assets. The Corporation is required by federal regulation to maintain a minimum average daily balance of cash and certain qualifying liquid investments equal to 5.0% of the aggregate of the prior month's daily average savings deposits and short-term borrowings. The Corporation's liquidity ratio was 5.77% at June 30, 1997. Liquidity levels will vary depending upon savings flows, future loan fundings, cash operating needs, collateral requirements and general prevailing economic conditions. The Corporation does not foresee any difficulty in meeting its liquidity requirements. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related consolidated financial information have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant effect on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. STOCK PRICES AND DIVIDENDS The Corporation's common stock is traded on the New York Stock Exchange under the symbol "CFB." The following table sets forth the high and low closing sales prices for the periods indicated for the common stock of the Corporation:
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Common stock prices: High.......................... $37.625 $39.00 $32.33 $28.67 $25.92 $25.92 $25.17 $24.67 Low........................... 32.125 31.125 27.92 24.00 24.58 23.33 21.58 18.08 Close......................... 37.125 33.75 32.00 28.67 25.50 25.92 25.17 23.83 - ------------------------------------------------------------------------------------------------------------------------------------ Dividends declared............... $ .07 $ .07 $ .07 $ .067 $ .067 $ .067 $ .133 $ -- - ------------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1997, there were 21,552,837 shares of common stock issued and outstanding which were held by more than 2,300 shareholders of record and 728,104 shares subject to outstanding options. The number of shareholders of record does not reflect the persons or entities who hold their stock in nominee or "street" name. On November 18, 1996, the Board of Directors of the Corporation declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders of record on December 31, 1996. Par value of the common stock remained at $.01 per share. The stock dividend, distributed on January 14, 1997, totaled 7,163,476 shares of common stock with $72,000 transferred from the additional paid-in capital account to the common stock account to record this distribution. Fractional shares resulting from the stock split were paid in cash totaling $17,792 based on the closing price on the record date. The Board of Directors also increased its quarterly cash dividend from $.0667 per common share after adjusting for the three-for-two stock split to $.07 per common share for an increase of five percent. Accordingly, cash dividends were declared during fiscal year 1997 totaling $5.925 million, or $.277 per common share, and $5.880 million, or $.267 per common share, during fiscal year 1996. See "Liquidity and Capital Resources" and Note 18 to the Consolidated Financial Statements regarding the payment of future dividends and any possible restrictions thereon. 35
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF FINANCIAL CONDITION - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) June 30, ASSETS 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash (including short-term investments of $2,400 in 1996)...................................... $ 55,809 $ 35,827 Investment securities available for sale, at fair value........................................ 19,930 9,898 Mortgage-backed securities available for sale, at fair value................................... 195,766 263,206 Loans held for sale, net....................................................................... 68,658 89,379 Investment securities held to maturity (fair value of $377,096 and $239,141)................... 379,127 243,145 Mortgage-backed securities held to maturity (fair value of $829,929 and $905,034).............. 829,997 916,840 Loans receivable, net of allowances of $48,390 and $49,200..................................... 5,190,081 4,723,785 Federal Home Loan Bank stock................................................................... 72,452 79,113 Interest receivable, net of reserves of $183 and $388.......................................... 44,521 40,683 Real estate, net............................................................................... 19,728 16,669 Premises and equipment, net.................................................................... 84,116 73,555 Prepaid expenses and other assets.............................................................. 88,302 74,836 Goodwill and core value of deposits, net of accumulated amortization of $83,597 and $73,742...................................... 48,178 40,734 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets............................................................................ $7,096,665 $6,607,670 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities: Deposits.................................................................................... $4,378,919 $4,304,576 Advances from Federal Home Loan Bank........................................................ 1,415,506 1,350,290 Securities sold under agreements to repurchase.............................................. 639,294 380,755 Other borrowings............................................................................ 128,982 58,546 Interest payable............................................................................ 24,992 24,298 Other liabilities........................................................................... 82,866 75,928 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities....................................................................... 6,670,559 6,194,393 - ------------------------------------------------------------------------------------------------------------------------------------ Commitments and Contingencies.................................................................. -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued.................. -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 21,552,837 and 22,634,551 shares issued and outstanding................................... 216 151 Additional paid-in capital.................................................................. 147,857 175,548 Retained earnings........................................................................... 278,450 240,281 Unrealized holding loss on securities available for sale, net............................... (417) (2,703) - ------------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity.............................................................. 426,106 413,277 - ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity.............................................. $7,096,665 $6,607,670 - ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued and outstanding at June 30, 1996, restated to reflect the three-for-two stock split effective January 14, 1997. See accompanying Notes to Consolidated Financial Statements. 36
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Unrealized Holding Gain (Loss) Additional on Securities Common Paid-in Retained Available Stock Capital Earnings for Sale, Net Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1994...................................... $142 $144,295 $159,674 $ (530) $303,581 Issuance of 167,991 shares under certain compensation and employee plans........................ 1 1,333 -- -- 1,334 Restricted stock and deferred compensation plans, net................................ -- 1,173 -- -- 1,173 Purchase and retirement of 26,638 shares of treasury stock...................................... -- (271) -- -- (271) Net income............................................... -- -- 31,181 -- 31,181 Change in unrealized holding gain (loss) on securities available for sale, net.................. -- -- -- 616 616 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1995...................................... 143 146,530 190,855 86 337,614 Issuance of 170,184 shares under certain compensation and employee plans........................ 1 2,290 -- -- 2,291 Issuance of 1,061,343 shares of common stock for acquisition of business...................... 7 25,819 -- -- 25,826 Restricted stock and deferred compensation plans, net................................ -- 909 -- -- 909 Cash dividends declared ($.267 per share)................ -- -- (5,880) -- (5,880) Net income............................................... -- -- 55,306 -- 55,306 Change in unrealized holding gain (loss) on securities available for sale, net.................. -- -- -- (2,789) (2,789) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1996...................................... 151 175,548 240,281 (2,703) 413,277 Issuance of 7,163,476 shares in three-for-two stock split effected in the form of a 50 percent stock dividend................ 72 (72) -- -- -- Repurchase and cancellation of 1,875,150 shares of common stock................................. (12) (49,312) -- -- (49,324) Issuance of 104,118 shares under certain compensation and employee plans................ 1 2,065 -- -- 2,066 Issuance of 677,449 shares of common stock for acquisition of business...................... 4 19,416 -- -- 19,420 Restricted stock and deferred compensation plans, net................................ -- 212 -- -- 212 Cash dividends declared ($.277 per share)................ -- -- (5,925) -- (5,925) Net income............................................... -- -- 44,094 -- 44,094 Change in unrealized holding gain (loss) on securities available for sale, net.................. -- -- -- 2,286 2,286 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1997...................................... $216 $147,857 $278,450 $ (417) $426,106 - ------------------------------------------------------------------------------------------------------------------------------------
Shares of common stock and per share data for the fiscal years ended June 30, 1997, 1996 and 1995, restated to reflect the three-for-two stock split effective January 14, 1997. See accompanying Notes to Consolidated Financial Statements. 37
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income: Loans receivable.......................................................... $ 407,416 $ 384,765 $ 344,109 Mortgage-backed securities................................................ 72,994 82,830 84,404 Investment securities..................................................... 24,640 23,497 25,855 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income................................................. 505,050 491,092 454,368 Interest Expense:............................................................ Deposits.................................................................. 220,186 214,040 180,163 Advances from Federal Home Loan Bank...................................... 71,999 94,057 109,314 Securities sold under agreements to repurchase............................ 36,615 13,525 7,837 Other borrowings.......................................................... 8,247 6,695 7,212 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense................................................ 337,047 328,317 304,526 Net Interest Income.......................................................... 168,003 162,775 149,842 Provision for Loan Losses.................................................... (8,121) (6,107) (6,408) - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income After Provision for Loan Losses.......................... 159,882 156,668 143,434 Other Income (Loss): Loan servicing fees....................................................... 30,350 27,891 24,731 Retail fees and charges................................................... 16,114 12,747 9,547 Real estate operations.................................................... 1,016 172 1,490 Gain (loss) on sales of loans............................................. 386 164 (1,695) Gain on sales of loan servicing rights.................................... -- 452 3,519 Other operating income.................................................... 10,613 8,220 7,474 - ------------------------------------------------------------------------------------------------------------------------------------ Total other income.................................................... 58,479 49,646 45,066 Other Expense: General and administrative expenses - Compensation and benefits............................................... 44,553 45,413 43,737 Occupancy and equipment................................................. 15,999 15,449 13,777 Data processing......................................................... 9,067 8,123 7,591 Regulatory insurance and assessments.................................... 6,945 10,642 9,317 Advertising............................................................. 8,003 6,451 4,594 Other operating expenses................................................ 28,364 28,439 23,538 - ------------------------------------------------------------------------------------------------------------------------------------ General and administrative expenses before Federal deposit insurance special assessment........................ 112,931 114,517 102,554 Federal deposit insurance special assessment............................ 27,062 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total general and administrative expenses........................... 139,993 114,517 102,554 Amortization of goodwill and core value of deposits....................... 9,855 9,529 10,262 Accelerated amortization of goodwill...................................... -- -- 21,357 - ------------------------------------------------------------------------------------------------------------------------------------ Total other expense................................................. 149,848 124,046 134,173 - ------------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes and Extraordinary Items........................... 68,513 82,268 54,327 Provision for Income Taxes................................................... 23,836 26,962 23,146 - ------------------------------------------------------------------------------------------------------------------------------------ Income Before Extraordinary Items............................................ 44,677 55,306 31,181 Extraordinary Items - Loss on Early Retirement of Debt, Net of Tax Benefit of $316................................................ (583) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net Income................................................................... $ 44,094 $ 55,306 $ 31,181 - ------------------------------------------------------------------------------------------------------------------------------------
38
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (continued) - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data) Year Ended June 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings Per Common Share: - ------------------------------------------------------------------------------------------------------------------------------------ Income before extraordinary items......................................... $ 2.04 $ 2.48 $ 1.44 Extraordinary items, net of tax benefit................................... (.03) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net income................................................................ $ 2.01 $ 2.48 $ 1.44 - ------------------------------------------------------------------------------------------------------------------------------------ Average Common and Common Equivalent Shares Outstanding...................... 21,904,960 22,270,714 21,620,400 - ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share for the fiscal years ended June 30, 1996 and 1995, restated to reflect the three-for-two stock split effective January 14, 1997. See accompanying Notes to Consolidated Financial Statements. 39
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Year Ended June 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 44,094 $ 55,306 $ 31,181 Adjustments to reconcile net income to net cash provided (used) by operating activities: Extraordinary items, net of tax benefit.................................. 583 -- -- Amortization of goodwill and core value of deposits...................... 9,855 9,529 10,262 Accelerated amortization of goodwill..................................... -- -- 21,357 Provision for loss on loans and real estate.............................. 8,588 5,628 6,607 Depreciation and amortization............................................ 7,812 6,855 5,613 Accretion of deferred discounts and fees, net............................ (369) (4,296) (2,476) Amortization of mortgage servicing rights................................ 7,733 9,011 8,323 Amortization of deferred compensation on restricted stock and premiums on other borrowings....................................... 915 1,365 1,340 Deferred tax provision................................................... 253 (52,591) 14,374 Gain on sales of real estate, loans and loan servicing rights, net....... (2,226) (1,574) (4,022) Stock dividends from Federal Home Loan Bank.............................. (4,582) (4,216) -- Proceeds from the sale of loans.......................................... 552,619 667,847 652,744 Origination of loans for resale.......................................... (193,920) (365,484) (332,831) Purchase of loans for resale............................................. (403,645) (317,567) (378,886) (Increase) decrease in interest receivable............................... (2,244) 3,459 (3,781) Increase (decrease) in interest payable and other liabilities............ 117 (14,016) (9,452) Other items, net......................................................... (22,513) (5,532) (1,493) ---------- ----------- --------- Total adjustments...................................................... (41,024) (61,582) (12,321) ---------- ----------- --------- Net cash provided (used) by operating activities..................... 3,070 (6,276) 18,860 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of loans............................................................ (723,221) (576,377) (688,313) Repayment of loans, net of originations....................................... 395,845 411,420 176,911 Principal repayments of mortgage-backed securities available for sale......... 30,864 20,315 -- Proceeds from sale of mortgage-backed securities available for sale........... 72,665 179,041 40,774 Principal repayments of mortgage-backed securities held to maturity........... 135,626 176,225 137,060 Purchases of mortgage-backed securities held to maturity...................... -- (50,197) (11,504) Maturities and repayments of investment securities held to maturity........... 92,429 104,458 24,172 Purchases of investment securities held to maturity........................... (215,926) (76,266) (25,000) Proceeds from sale of investment securities available for sale................ -- 51,770 14,797 Maturities and repayments of investment securities available for sale......... 2,750 2,077 800 Purchases of mortgage loan servicing rights................................... (7,959) (14,034) (9,386) Proceeds from sale of loan servicing rights................................... -- 452 3,519 Proceeds of sale of Federal Home Loan Bank stock.............................. 21,502 41,085 13,548 Purchases of Federal Home Loan Bank stock..................................... (8,504) (4,178) (16,236) Acquisitions, net of cash received (paid)..................................... 2,595 (15,234) 75,414 Proceeds from sale of real estate............................................. 15,917 12,080 12,009 Payments to acquire real estate............................................... (847) (1,817) (1,444) Purchases of premises and equipment, net...................................... (15,882) (8,211) (11,241) Other items, net.............................................................. 999 413 -- ---------- ----------- --------- Net cash (used) provided by investing activities..................... (201,147) 253,022 (264,120) - ------------------------------------------------------------------------------------------------------------------------------------
40
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (continued) - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Year Ended June 30, 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in deposits............................................... $(109,892) $ 93,755 $ 103,936 Proceeds from Federal Home Loan Bank advances................................. 852,950 1,169,500 617,602 Repayment of Federal Home Loan Bank advances.................................. (796,660) (1,672,784) (506,392) Proceeds from securities sold under agreements to repurchase.................. 444,856 230,000 195,755 Repayment of securities sold under agreements to repurchase................... (186,317) (57,618) (157,432) Proceeds from issuances of other borrowings................................... 139,500 -- 4,000 Repayment of other borrowings................................................. (70,657) (6,836) (5,702) Payment for debt issue costs.................................................. (2,218) -- -- Payment of cash dividends on common stock..................................... (5,906) (4,370) -- Repurchase of common stock.................................................... (49,324) -- -- Issuance of common stock...................................................... 2,066 2,291 1,334 Other items, net.............................................................. (339) (2) (271) ---------- ----------- --------- Net cash provided (used) by financing activities..................... 218,059 (246,064) 252,830 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS: Increase in net cash position................................................. 19,982 682 7,570 Balance, beginning of year.................................................... 35,827 35,145 27,575 ---------- ----------- --------- Balance, end of year.......................................................... $ 55,809 $ 35,827 $ 35,145 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for-- Interest expense........................................................... $ 337,983 $ 328,861 $ 306,634 Income taxes, net.......................................................... 19,809 73,741 4,179 Non-cash investing and financing activities-- Securities transferred from held to maturity to available for sale, net.... -- 410,930 -- Loans exchanged for mortgage-backed securities............................. 46,165 63,445 189,031 Loans transferred to real estate........................................... 15,262 9,908 7,853 Loans to facilitate the sale of real estate................................ 107 51 583 Common stock issued in connection with the acquisition of businesses....... 19,420 25,826 -- Reduction in core value of deposits on recognition of pre-acquisition tax credits and net operating losses..................................... -- -- (6,810) - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 41 COMMERCIAL FEDERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF CONSOLIDATION - The consolidated financial statements are prepared on an accrual basis and include the accounts of Commercial Federal Corporation (the Corporation) and its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank (the Bank), and all majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts for years prior to fiscal year 1997 have been reclassified for comparative purposes. NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and loan holding company whose primary asset is the Bank which is a consumer-oriented financial institution that emphasizes single-family residential and construction real estate lending, consumer lending, commercial real estate lending, retail deposit activities, mortgage banking and other retail financial services. The Bank conducts loan origination activities through its branch office network, loan offices of its wholly-owned mortgage banking subsidiary and a nationwide correspondent network. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and cash equivalents include cash, restricted cash and federal funds sold. Generally, federal funds are purchased and sold for a one-day period. SECURITIES - Securities are classified in one of three categories and accounted for as follows: (i) debt securities that the Corporation has the positive intent and ability to hold to maturity are classified as "held-to-maturity securities" and reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity net of deferred income taxes. The Corporation did not hold any trading securities at June 30, 1997 or 1996. Premiums and discounts are amortized over the contractual lives of the related securities on the level yield method. Unrealized losses on securities, if any, reflecting a decline in the fair value of such securities to be other than temporary, are charged against income. Realized gains or losses on securities available for sale are based on the specific identification method and are included in results of operations on the trade date. LOANS - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are recorded at the contractual amounts owed by borrowers less unamortized discounts, net of premiums, undisbursed funds on loans in process, deferred loan fees and allowance for loan losses. Interest on loans is accrued to income as earned, except that interest is not accrued on first mortgage loans contractually delinquent three months or more. Any related discounts or premiums on loans purchased are amortized into interest income using the level yield method over the contractual lives of the loans, adjusted for actual prepayments. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the estimated average life of the loan as a yield adjustment. Loans held for sale are carried at the lower of aggregate cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate loan basis. Valuation adjustments, if necessary, to reflect the lower of aggregate cost or market value, are recorded in current operations. REAL ESTATE - Real estate includes real estate acquired through foreclosure, real estate in judgment and real estate held for investment, which includes equity in unconsolidated joint ventures and investment in real estate partnerships. Real estate acquired through foreclosure and in judgment are initially recorded at the lower of cost or fair value minus estimated costs to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuation allowances for estimated losses on real estate are provided when the carrying value exceeds the fair value minus estimated costs to sell the property. 42 Real estate held for investment is stated at the lower of cost or net realizable value. Cost includes acquisition costs plus construction costs of improvements, holding costs and costs of amenities incurred to date. Joint venture and partnership investments are carried on the equity method of accounting and, where applicable, are stated at net realizable value. The Corporation's ability to recover the carrying value of real estate held for investment (including capitalized interest) is based upon future sales of land or projects. The ability to effect such sales is subject to market conditions and other factors which may be beyond the Corporation's control. ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the Corporation's past loan loss experience, known and inherent risks in the portfolio, the estimated value of any underlying collateral and current economic conditions. Impaired loans except large groups of smaller balance homogeneous loans (such as residential real estate and consumer loans) that are collectively evaluated for impairment and loans that are measured at fair value or the lower of cost or market value, are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the underlying collateral if the loan is collateral dependent. ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation previously purchased single-family residential whole loan packages (bulk purchased loans) at net discounts. Portions of such discounts were allocated to allowance for losses (credit allowances) relating to the credit risk associated with each mortgage loan package purchased. These credit allowances are available to absorb possible losses on these bulk purchased loans only or are credited to interest income as actual prepayments of individual loans occur. Collectibility is evaluated throughout the life of the acquired loans and if the estimate of total probable collections is increased or decreased, the amount of the allowance on bulk purchased loans (and the corresponding discount to be amortized) is adjusted accordingly. MORTGAGE SERVICING RIGHTS - Mortgage servicing rights represent the cost of acquiring the right to service mortgage loans. Such costs are initially capitalized and subsequently amortized in proportion to, and over the period of, estimated net loan servicing income. Effective January 1, 1997, the Corporation adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) on a prospective basis as required. SFAS No. 125 supersedes the provisions of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS No. 122), which was adopted by the Corporation on July 1, 1995, and amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities." The adoption of SFAS No. 125 did not have a material effect on the Corporation's financial position or results of operations. Both statements require that a mortgage banking enterprise recognize as a separate asset the rights to service mortgage loans for unrelated third parties that have been acquired through either the purchase or origination of a loan. Previous to July 1, 1995, only purchased mortgage servicing rights were capitalized as assets. Both statements also provide that an institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells or securitizes those loans with servicing rights retained will allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Amortization of mortgage servicing rights is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the mortgage servicing rights. Projected net servicing income is in turn determined on the basis of the estimated future balance of the underlying mortgage loan portfolio, which decreases over time from scheduled loan amortization and prepayments. The Corporation estimates future prepayment rates based on relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience, as well as current interest rate levels, market forecasts and other economic conditions. Additionally, SFAS No. 125 requires that mortgage servicing rights be reported at the lower of cost or fair value. The value of mortgage servicing rights is determined based on the present value of estimated expected future cash flows, using assumptions as to current market discount rates, prepayment speeds and servicing costs per loan. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Loan types include government, conventional and adjustable-rate mortgage 43 loans. Impairment losses are recognized to the extent the unamortized mortgage servicing rights for each stratum exceed the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to loan servicing income. No valuation allowance for capitalized servicing rights was necessary to be established as of June 30, 1997 or 1996. The net effect of adopting the provisions of SFAS No. 122 in fiscal year 1996 was to increase pre-tax earnings approximately $3,995,000 (after-tax approximately $2,547,000 or $.11 per common share). PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building improvements, leasehold improvements and furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets. Estimated lives are 10 to 50 years for buildings and three to 15 years for furniture, fixtures and equipment. Leasehold improvements are generally amortized on the straight-line method over the terms of the respective leases. Maintenance and repairs are charged to expense as incurred. INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS - Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. Core value of deposits represents the intangible value assigned to core deposit bases arising from purchase acquisitions. The Corporation reviews its intangible assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. In such cases, the expected future cash flows (undiscounted and without interest charges) resulting from the use of the asset are estimated and an impairment loss recognized if the sum of such cash flows is less than the carrying amount of the asset. Should such an assessment indicate that the value of the intangible asset may be impaired, an impairment loss is recognized for the difference between the carrying value of the asset and its estimated fair value. Core value of deposits is amortized on an accelerated basis over a period not to exceed 10 years and goodwill is amortized on a straight-line basis over a period not to exceed 20 years. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Corporation enters into sales of securities under agreements to repurchase with primary dealers only, which provide for the repurchase of the same security. Securities sold under agreements to purchase identical securities are collateralized by assets which are held in safekeeping in the name of the Corporation by the dealers who arranged the transaction. Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase such securities are reflected as a liability. The securities underlying the agreements remain in the asset accounts of the Corporation. DERIVATIVE FINANCIAL INSTRUMENTS - The Corporation utilizes derivative financial instruments as part of an overall interest rate risk management strategy. Derivative financial instruments utilized by the Corporation include interest rate swap agreements and interest rate floor agreements. The Corporation is an end-user of derivative financial instruments and does not conduct trading activities for derivatives. These derivative financial instruments involve, to varying degrees, elements of credit and market risk which are not recognized on the balance sheet. Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract which exceeds the value of existing collateral, if any. Market risk is the possibility that future changes in market conditions may make the derivative financial instrument less valuable. The Corporation evaluates the risks associated with derivatives in much the same way as the risks with on-balance sheet financial instruments. The derivative's risk of credit loss is generally a small fraction of the notional value of the instrument and is represented by the fair value of the derivative instrument. The Corporation attempts to limit its credit risk by dealing with creditworthy counterparties and obtaining collateral where appropriate. Interest rate swap agreements are used principally as a tool to synthetically extend the maturities of certain deposit liabilities for asset liability management and interest rate risk management purposes for the Corporation. These contracts represent an exchange of interest payment streams based on an agreed-upon notional principal amount with at least one stream based on a specified floating-rate index. The underlying principal balances of 44 the deposit liabilities are not affected. Net settlement amounts are reported as adjustments to interest expense on an accrual basis over the lives of the agreements. Cash flows are reported net as operating activities. Interest rate floor agreements require the seller to pay the purchaser, at specified dates, the amount, if any, by which the market interest rate falls below the agreed-upon floor, applied to a notional principal amount. Such positions are designed to protect the value of the mortgage servicing rights from the effects of increased prepayment activity that generally result from declining interest rates. Realized gains and losses on positions used as hedges of capitalized mortgage servicing rights are deferred and amortized to expense over the remaining life of the original agreement while unrealized gains and losses are considered in the impairment analysis of the fair value of such mortgage servicing rights. Premiums are amortized to expense on a straight-line basis over the life of the agreement. Unamortized premiums paid are included in other assets. Cash flows are reported as net operating activities. INCOME TAXES - The Corporation files a consolidated federal income tax return. The Corporation and its subsidiaries entered into a tax-sharing agreement that provides for the allocation and payment of federal and state income taxes. The provision for income taxes of each corporation is computed on a separate company basis, subject to certain adjustments. The Corporation calculates income taxes on the liability method, under which the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax bases of the various assets and liabilities of the Corporation giving current recognition to changes in tax rates and laws. STOCK SPLIT - On November 18, 1996, the Board of Directors of the Corporation declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders of record on December 31, 1996. Par value of the common stock remained at $.01 per share. The stock dividend, distributed on January 14, 1997, totaled 7,163,476 shares of common stock. All references to the number of shares, per share amounts and stock prices for all periods presented have been adjusted on a retroactive basis to reflect the effect of the stock split. EARNINGS PER COMMON SHARE - Earnings per common share are calculated on the basis of the weighted average common shares outstanding and those outstanding options and warrants that are dilutive. STOCK BASED COMPENSATION - The Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 entitled "Accounting for Stock-Based Compensation" (SFAS No. 123) as of July 1, 1996. SFAS No. 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock-based compensation plans. As permitted under the provisions of SFAS No. 123, management of the Corporation elected to continue to recognize compensation expense using the intrinsic value-based method of valuing stock options as contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. As such, pursuant to the disclosure requirements of SFAS No. 123, the Corporation has included in Note 21 the effect of the fair value of employee stock-based compensation plans on net income and earnings per share on a pro forma basis for awards granted since July 1, 1995, as if the fair value based method of accounting defined in SFAS No. 123 was applied. NOTE 2. ACQUISITIONS: Heritage Financial, Ltd.: On October 1, 1996, the Corporation consummated its acquisition of Heritage Financial, Ltd. (Heritage), parent company of Hawkeye Federal Savings headquartered in Boone, Iowa. Under the terms of the Reorganization and Merger Agreement, the Corporation acquired all 180,762 outstanding shares of Heritage's common stock. Each share of Heritage's common stock was exchanged for $18.73 in cash ($3,386,000) and 3.74775 shares of the Corporation's common stock (677,449 shares). Based on the Corporation's closing stock price of $28.667 at October 1, 1996, the total consideration for this acquisition, excluding cash paid for fractional shares, approximated $22,806,000. At October 1, 1996, before purchase accounting adjustments, Heritage had assets of approximately $182,934,000, deposits of approximately $158,168,000 and stockholders' equity of approximately $10,308,000. Heritage operated six branches located in west-central Iowa. This acquisition has been accounted for as a 45 purchase. Core value of deposits resulting from this transaction totaled $7,633,000 and is amortized on an accelerated basis over 10 years; and goodwill totaling $8,617,000 recorded from this transaction is amortized on a straight- line basis over 20 years. Investors Federal Savings: On May 1, 1997, the Corporation consummated its acquisition of Investors Federal Savings (Investors) headquartered in Kinsley, Kansas. Under the terms of the agreement, the Corporation acquired all 232,465 of the outstanding shares of Investors' common stock for $23.00 in cash for a total consideration of approximately $5,347,000. At April 30, 1997, before purchase accounting adjustments, Investors had assets of approximately $30,723,000, deposits of approximately $26,117,000 and stockholders' equity of approximately $4,431,000. Investors operated three branches in southwest Kansas and, as part of the acquisition consolidation process, one branch was closed on May 24, 1997. This acquisition has been accounted for as a purchase with resulting goodwill to be amortized on a straight line basis over 20 years. The effect of these acquisitions on the Corporation's consolidated financial statements as if these acquisitions had occurred at the beginning of the fiscal year would not be material. Railroad Financial Corporation: On October 2, 1995, the Corporation consummated its acquisition of Railroad Financial Corporation (Railroad) and, pursuant to the terms of the merger agreement, 2,156,232 shares of Railroad's common stock were delivered to the Corporation in exchange for approximately 2,066,425 shares of the Corporation's common stock (exchange ratio of .95835 based on an average closing price of $23.375) for total consideration of approximately $48,303,000. Railroad operated 18 branches and 71 agency offices throughout Kansas and at September 30, 1995, had assets of approximately $602,900,000, deposits of approximately $421,400,000 and stockholders' equity of approximately $27,700,000. This acquisition was accounted for as a pooling of interests and, accordingly, the Corporation's historical consolidated financial statements were restated for all periods prior to the acquisition to include the accounts and results of operations of Railroad. The following table summarizes results of operations of the Corporation and Railroad for the three months ended September 30, 1995, as separately reported prior to the merger, that are included in results of operations for fiscal year 1996:
- ------------------------------------------------------------------------------------------------------------------------------------ Corporation Railroad Combined - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income and other income..................................... $120,560 $13,531 $134,091 Total interest expense..................................................... 76,320 8,283 84,603 Net income (loss).......................................................... 11,859 (615) 11,244 - ------------------------------------------------------------------------------------------------------------------------------------
The following table reconciles revenue and earnings previously reported by the Corporation to give effect to the merger as currently presented in the financial statements for fiscal year 1995:
- ------------------------------------------------------------------------------------------------------------------------------------ Corporation Railroad Combined - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income and other income..................................... $449,526 $49,908 $499,434 Total interest expense..................................................... 277,806 26,720 304,526 Net income................................................................. 27,535 3,646 31,181 - ------------------------------------------------------------------------------------------------------------------------------------
46 NOTE 3. INVESTMENT SECURITIES:
Investment securities are summarized as follows: - ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1997 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and other Government agency obligations........... $ 16,913 $ 60 $ (25) $ 16,948 Other debt securities........................................... 2,982 -- -- 2,982 - ----------------------------------------------------------------------------------------------------------------------------------- $ 19,895 $ 60 $ (25) $ 19,930 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 6.13% - ----------------------------------------------------------------------------------------------------------------------------------- Held to maturity: U.S. Treasury and other Government agency obligations........... $345,877 $281 $(2,334) $343,824 States and political subdivisions............................... 14,068 19 (137) 13,950 Other debt securities........................................... 19,182 140 -- 19,322 - ----------------------------------------------------------------------------------------------------------------------------------- $379,127 $440 $(2,471) $377,096 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 6.71% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1996 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Treasury and other Government agency obligations........... $ 6,876 $ 97 $ (63) $ 6,910 Other debt securities........................................... 2,966 22 -- 2,988 - ----------------------------------------------------------------------------------------------------------------------------------- $ 9,842 $119 $ (63) $ 9,898 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 5.50% - ----------------------------------------------------------------------------------------------------------------------------------- Held to maturity: U.S. Treasury and other Government agency obligations........... $213,800 $ 78 $(3,642) $210,236 States and political subdivisions............................... 18,642 -- (440) 18,202 Other debt securities........................................... 10,703 -- -- 10,703 - ----------------------------------------------------------------------------------------------------------------------------------- $243,145 $ 78 $(4,082) $239,141 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 6.06% - -----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1997 and 1996, the Corporation recorded unrealized gains on securities available for sale as increases to stockholders' equity totaling $35,000 and $56,000, respectively, net of deferred income taxes of $13,000 and $20,000, respectively. 47 The amortized cost and fair value of investment securities by contractual maturity at June 30, 1997, are shown below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
- ---------------------------------------------------------------------------------------------------------------------------------- Available for Sale Held to Maturity ---------------------------------- ------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - ---------------------------------------------------------------------------------------------------------------------------------- Due in one year or less........................... $ 6,973 $ 6,987 $ 45,224 $ 45,151 Due after one year through five years............. 12,922 12,943 138,473 137,495 Due after five years through ten years............ -- -- 76,927 76,495 Due after ten years............................... -- -- 118,503 117,955 - ---------------------------------------------------------------------------------------------------------------------------------- $19,895 $19,930 $379,127 $377,096 - ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from the sale of investment securities available for sale totaled $51,770,000 and $14,797,000, respectively, for the fiscal years ended June 30, 1996 and 1995, resulting in gross realized gains of $14,000 and gross realized losses of $222,000 for fiscal year 1996, and in no gross realized gains or losses for fiscal year 1995. The net pre-tax loss of $208,000 for fiscal year 1996 is included in other operating income. During fiscal year 1997 there were no sales of investment securities available for sale. During fiscal year 1996, agency-backed investment securities totaling $49,945,000 were reclassified from securities held to maturity to securities available for sale pursuant to the reassessment of the appropriateness of the classifications of all securities held as permitted by a special report by the Financial Accounting Standards Board entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities." At June 30, 1997 and 1996, investment securities totaling $74,463,000 and $494,000, respectively, were pledged to secure public funds and securities sold under agreements to repurchase. 48 NOTE 4. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows: - ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1997 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation.......................... $ 20,774 $ 154 $ (159) $ 20,769 Government National Mortgage Association........................ 103,853 343 (1,165) 103,031 Federal National Mortgage Association........................... 38,431 715 (1) 39,145 Collateralized Mortgage Obligations............................. 32,471 36 (772) 31,735 Other........................................................... 1,082 4 -- 1,086 - ----------------------------------------------------------------------------------------------------------------------------------- $196,611 $1,252 $(2,097) $195,766 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 7.13% - ----------------------------------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation.......................... $192,267 $1,349 $(3,241) $190,375 Government National Mortgage Association........................ 481,259 3,597 (1,587) 483,269 Federal National Mortgage Association........................... 91,610 1,608 (1,240) 91,978 Collateralized Mortgage Obligations............................. 44,499 34 (1,248) 43,285 Privately Issued Mortgage Pool Securities....................... 20,362 747 (87) 21,022 - ----------------------------------------------------------------------------------------------------------------------------------- $829,997 $7,335 $(7,403) $829,929 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 6.63% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1996 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation.......................... $ 17,134 $ 66 $ (376) $ 16,824 Government National Mortgage Association........................ 119,424 264 (3,099) 116,589 Federal National Mortgage Association........................... 73,456 508 (64) 73,900 Collateralized Mortgage Obligations............................. 57,649 169 (1,925) 55,893 - ----------------------------------------------------------------------------------------------------------------------------------- $267,663 $1,007 $ (5,464) $263,206 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 7.25% - ----------------------------------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation.......................... $221,190 $1,478 $ (4,517) $218,151 Government National Mortgage Association........................ 511,834 965 (7,310) 505,489 Federal National Mortgage Association........................... 108,473 1,323 (1,949) 107,847 Collateralized Mortgage Obligations............................. 50,715 21 (1,553) 49,183 Privately Issued Mortgage Pool Securities....................... 24,628 -- (264) 24,364 - ----------------------------------------------------------------------------------------------------------------------------------- $916,840 $3,787 $(15,593) $905,034 - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate.................................. 6.58% - -----------------------------------------------------------------------------------------------------------------------------------
49 Mortgage-backed securities held to maturity at June 30 are classified by type of interest payment and contractual maturity term as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------- --------------------------------- Amortized Fair Weighted Amortized Fair Weighted Cost Value Rate Cost Value Rate - ---------------------------------------------------------------------------------------------------------------------------------- Adjustable rate................................ $635,406 $636,152 6.64% $707,359 $700,300 6.49% Fixed rate, 5-year term........................ 56,044 55,811 6.32 63,663 62,654 6.32 Fixed rate, 7-year term........................ 38,388 37,871 6.00 43,746 42,067 5.99 Fixed rate, 15-year term....................... 23,855 23,462 6.59 12,815 12,264 6.35 Fixed rate, 30-year term....................... 31,805 33,347 8.77 38,542 38,566 10.29 - ---------------------------------------------------------------------------------------------------------------------------------- 785,498 786,643 6.67 866,125 855,851 6.62 Collateralized mortgage obligations............ 44,499 43,286 5.89 50,715 49,183 5.91 - ---------------------------------------------------------------------------------------------------------------------------------- $829,997 $829,929 6.63% $916,840 $905,034 6.58% - ----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1997 and 1996, the Corporation recorded unrealized losses on securities available for sale as decreases to stockholders' equity totaling $687,000 and $4,276,000, respectively, net of deferred income tax benefits of approximately $248,000 and $1,537,000, respectively. Proceeds from the sale of mortgage-backed securities available for sale totaled $72,665,000, $179,041,000 and $40,774,000, respectively, for fiscal years ended June 30, 1997, 1996 and 1995 resulting in gross realized gains of $886,000, $960,000 and $28,000, respectively, and gross realized losses of $496,000, $499,000 and $69,000, respectively. The net pre-tax gains of $390,000 and $461,000 for fiscal years 1997 and 1996, respectively, and a pre-tax loss of $41,000 for fiscal year 1995, are included in other operating income. During fiscal year 1996, pursuant to the reassessment of the appropriateness of the classifications of all securities held, and as permitted by the aforementioned special report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities," mortgage-backed securities totaling $370,400,000 were reclassified from securities held to maturity to securities available for sale. In addition, approximately $9,415,000 of adjustable-rate mortgage-backed securities were reclassified from available for sale to held to maturity. At June 30, 1997 and 1996, the Corporation pledged mortgage-backed securities totaling $638,548,000 and $458,666,000, respectively, as collateral primarily for collateralized mortgage obligations, public funds, securities sold under agreements to repurchase, interest rate swap agreements and Federal Home Loan Bank advances. NOTE 5. LOANS HELD FOR SALE: Loans held for sale from mortgage banking operations at June 30, 1997 and 1996, totaled $68,658,000 and $89,379,000, respectively, with weighted average rates of 7.47% and 7.82%, respectively. Loans held for sale are secured by single-family residential properties which at June 30, 1997, consisted entirely of fixed rate mortgage loans and at June 30, 1996, consisted of fixed and adjustable rate mortgage loans totaling $89,294,000 and $85,000, respectively. 50
NOTE 6. LOANS RECEIVABLE: Loans receivable at June 30 are summarized as follows: - ------------------------------------------------------------------------------------------------------ 1997 1996 - ------------------------------------------------------------------------------------------------------ Conventional mortgage loans........................................ $4,064,797 $3,757,513 FHA and VA loans................................................... 331,835 291,755 Commercial real estate loans....................................... 249,783 261,046 Construction loans................................................. 196,530 199,088 Consumer and other loans........................................... 465,861 355,777 - ------------------------------------------------------------------------------------------------------ 5,308,806 4,865,179 Unamortized premiums, net.......................................... 5,418 2,794 Loans-in-process................................................... (75,077) (91,262) Deferred loan fees, net............................................ (676) (3,726) Allowance for loan losses.......................................... (48,390) (49,200) - ------------------------------------------------------------------------------------------------------ $5,190,081 $4,723,785 - ------------------------------------------------------------------------------------------------------ Weighted average interest rate..................................... 8.12% 8.20% - ------------------------------------------------------------------------------------------------------
At June 30, 1997, conventional, FHA and VA loans, including loans held for sale, totaling $4,652,877,000 are secured by single-family residential properties located as follows: 19% in Nebraska, 16% in Colorado, 7% in Kansas, 5% each in Georgia and Oklahoma, 4% in Texas, and the remaining 44% in 44 other states. At June 30, 1996, conventional, FHA and VA loans, including loans held for sale, totaling $4,327,018,000 were secured by single-family residential properties located as follows: 20% in Nebraska, 17% in Colorado, 7% in Kansas, 5% each in Georgia, Oklahoma and Texas, and the remaining 41% in 44 other states. The commercial real estate portfolio at June 30, 1997, is secured by properties located as follows: 39% in Colorado, 27% in Nebraska, 9% in Kansas and the remaining 25% in 17 other states. The commercial real estate portfolio at June 30, 1996, was secured by properties located as follows: 33% in Colorado, 31% in Nebraska, 12% in Florida and the remaining 24% in 18 other states. Nonperforming loans at June 30, 1997 and 1996, aggregated $36,814,000 and $37,905,000, respectively. Of the nonperforming loans at June 30, 1997, approximately 9% are secured by properties located in Texas, 8% in California, 7% in Georgia, 6% in Missouri, 5% each in Illinois, Kansas, Maryland and Nebraska, 4% each in Colorado, Florida and Oklahoma and the remaining 38% located in 31 other states. Of the nonperforming loans at June 30, 1996, approximately 12% were secured by properties located in California, 9% each in Georgia and Texas, 7% in Colorado, 6% in Nebraska, 5% each in Kansas and Missouri, 4% each in Maryland and Oklahoma and the remaining 39% located in 35 other states. Also included in loans receivable at June 30, 1997 and 1996, are loans with carrying values of $9,644,000 and $14,803,000, respectively, the terms of which have been modified in troubled debt restructurings. During the fiscal years ended June 30, 1997 and 1996, the Corporation recognized interest income on these loans aggregating $804,000 and $1,276,000, respectively, whereas under their original terms the Corporation would have recognized interest income of $985,000 and $1,515,000, respectively. At June 30, 1997, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. Impaired loans, a portion of which are included in the balances for troubled debt restructurings at June 30, 1997 and 1996, are not material for either fiscal year 1997 or 1996. At June 30, 1997 and 1996, the Corporation pledged real estate loans totaling $2,830,951,000 and $2,513,091,000, respectively, as collateral for Federal Home Loan Bank advances and other borrowings. 51 NOTE 7. REAL ESTATE: Real estate at June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Real estate owned and in judgment, net of allowance for losses of $2,078 and $3,353............................................... $11,390 $ 8,008 Real estate held for investment, which includes equity in unconsolidated joint ventures and investments in real estate partnerships, net of allowance for losses of $1,058 and $1,090................................. 8,338 8,661 - ---------------------------------------------------------------------------------------------------------------------------------- $19,728 $16,669 - ----------------------------------------------------------------------------------------------------------------------------------
Commercial and residential real estate comprise approximately 57% and 43%, respectively, of the total amount of real estate at June 30, 1997, and approximately 70% and 30%, respectively, of the total amount of real estate at June 30, 1996. Real estate located by states at June 30, 1997, is as follows: 42% in Nebraska, 26% in Colorado, 6% in California, and the remaining 26% in 22 other states. Real estate located by states at June 30, 1996, was as follows: 42% in Nebraska, 31% in Colorado, 8% in Texas, and the remaining 19% in 23 other states. NOTE 8. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE: An analysis of the allowances for losses on loans and real estate is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- Loans Real Estate Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994..................................................... $ 44,851 $ 6,372 $ 51,223 - ---------------------------------------------------------------------------------------------------------------------------------- Provision charged to operations............................................ 6,408 199 6,607 Charges.................................................................... (3,771) (683) (4,454) Recoveries................................................................. 1,334 152 1,486 Allowances acquired in acquisitions........................................ 1,818 -- 1,818 Railroad activity for the six months ended June 30, 1994, net.............. (58) (66) (124) Change in estimate of allowance for bulk purchased loans................... (1,705) -- (1,705) Charge-offs to allowance for bulk purchased loans.......................... (336) -- (336) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995 (1)................................................. 48,541 5,974 54,515 - ---------------------------------------------------------------------------------------------------------------------------------- Provision charged (credited) to operations................................. 6,107 (479) 5,628 Charges.................................................................... (5,533) (1,211) (6,744) Recoveries................................................................. 734 159 893 Allowances acquired in acquisitions........................................ 1,944 -- 1,944 Change in estimate of allowance for bulk purchased loans................... (2,273) -- (2,273) Charge-offs to allowance for bulk purchased loans.......................... (242) -- (242) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 (1)................................................. 49,278 4,443 53,721 - ---------------------------------------------------------------------------------------------------------------------------------- Provision charged to operations............................................ 8,121 467 8,588 Charges.................................................................... (11,199) (1,848) (13,047) Recoveries................................................................. 2,257 43 2,300 Allowances acquired in acquisitions........................................ 1,966 31 1,997 Change in estimate of allowance for bulk purchased loans................... (1,878) -- (1,878) Change-offs to allowance for bulk purchased loans.......................... (78) -- (78) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 (1)................................................. $48,467 $3,136 $51,603 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes $77,000 at June 30, 1997, and $78,000 at June 30, 1996 and 1995, in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans held for sale. - -------------------------------------------------------------------------------- 52 Bulk loan purchases acquired at a discount are allocated an estimated allowance for bulk purchased loans that will be available for potential losses in the future on a particular loan package. At June 30, 1997, 1996 and 1995, $10,809,000, $12,765,000 and $15,280,000, respectively, are included in the allowance for losses on loans presented above. NOTE 9. LOAN SERVICING: The Corporation's mortgage banking subsidiary services real estate loans for investors which are not included in the accompanying consolidated financial statements. The mortgage banking subsidiary also services a substantial portion of the Corporation's real estate loan portfolio. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding advance payments by borrowers for taxes and insurance, making inspections as required of the mortgage premises, collecting amounts due from delinquent mortgagors, supervising foreclosures in the event of unremedied defaults and generally administering the loans for the investors to whom they have been sold. The amount of loans serviced for others at June 30, 1997, 1996 and 1995, was $5,951,800,000, $5,869,800,000 and $5,151,100,000, respectively. The mortgage servicing portfolio is covered by servicing agreements pursuant to the mortgage-backed securities programs of the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the Corporation may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Corporation cannot charge any interest on such advance funds, the Corporation typically recovers the advances within a reasonable number of days upon receipt of the borrower's payment, or in the absence of such payment, advances are recovered through FHA insurance, VA guarantees or FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. The amount of funds advanced by the Corporation pursuant to servicing agreements was not material. Custodial escrow balances maintained in connection with loan servicing totaled approximately $101,249,000, $101,671,000 and $110,714,000 at June 30, 1997, 1996 and 1995, respectively. Mortgage servicing rights are included in the Consolidated Statement of Financial Condition under the caption "Prepaid expenses and other assets." The activity of mortgage servicing rights at June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Beginning balance............................................................ $44,970 $36,236 $34,128 Purchases of mortgage servicing rights....................................... 7,959 14,034 9,386 Mortgage servicing rights from purchase acquisitions......................... 271 38 1,045 Mortgage servicing rights capitalized through loan originations..................................... 2,039 3,673 -- Amortization expense......................................................... (7,733) (9,011) (8,323) Other items, net............................................................. 254 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Ending balance............................................................... $47,760 $44,970 $36,236 - ----------------------------------------------------------------------------------------------------------------------------------
At June 30, 1997, 1996 and 1995 the fair value of the Corporation's mortgage servicing rights totaled approximately $70,033,000, $77,500,000 and $61,400,000, respectively, therefore no valuation allowance was necessary to be established. Outstanding commitments to purchase mortgage loan servicing rights totaled $1,284,000 and $9,000, respectively, at June 30, 1997 and 1996. There was no commitment to sell any bulk packages of mortgage servicing rights at June 30, 1997. 53 NOTE 10. PREMISES AND EQUIPMENT: Premises and equipment at June 30 are summarized as follows:
- --------------------------------------------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------- Land.............................................................. $ 14,103 $ 11,998 Buildings and improvements........................................ 66,769 58,307 Leasehold improvements............................................ 2,783 2,875 Furniture, fixtures and equipment................................. 69,954 62,596 - --------------------------------------------------------------------------------------------------- 153,609 135,776 Less accumulated depreciation and amortization.................... 69,493 62,221 - --------------------------------------------------------------------------------------------------- $ 84,116 $ 73,555 - ---------------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment, included in occupancy and equipment expenses, totaled $7,812,000, $6,855,000 and $5,613,000 for fiscal years ended June 30, 1997, 1996 and 1995, respectively. The Bank has operating lease commitments on certain premises and equipment. Rent expense totaled $2,000,000, $2,834,000 and $2,939,000 for fiscal years ended June 30, 1997, 1996 and 1995, respectively. Annual minimum operating lease commitments as of June 30, 1997, are as follows: 1998 - $1,287,000; 1999 - $1,155,000; 2000 - $848,000; 2001 - $508,000; 2002 - $487,000; 2003 and thereafter - $4,274,000. NOTE 11. GOODWILL AND CORE VALUE OF DEPOSITS: An analysis of goodwill and core value of deposits is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- Core Value Goodwill of Deposits Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1994......................................................... $ 21,727 $ 45,934 $ 67,661 Additions relating to acquisitions, net........................................ 1,510 6,521 8,031 Accelerated amortization expense............................................... (21,357) -- (21,357) Write-off due to recognition of pre-acquisition tax credits and net operating losses........................................ -- (6,810) (6,810) Amortization expense........................................................... (48) (10,214) (10,262) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1995......................................................... 1,832 35,431 37,263 - ---------------------------------------------------------------------------------------------------------------------------------- Additions relating to acquisitions............................................. 6,158 6,842 13,000 Amortization expense........................................................... (218) (9,311) (9,529) - ---------------------------------------------------------------------------------------------------------------------------------- Balance June 30, 1996.......................................................... 7,772 32,962 40,734 - ---------------------------------------------------------------------------------------------------------------------------------- Additions relating to acquisitions............................................. 9,666 7,633 17,299 Amortization expense........................................................... (736) (9,119) (9,855) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997......................................................... $ 16,702 $ 31,476 $ 48,178 - ----------------------------------------------------------------------------------------------------------------------------------
An appraisal performed in fiscal year 1994 by an independent third party of the existing intangible assets relating to acquisitions during 1986 through 1988 of five troubled savings institutions located in Colorado, Kansas and Oklahoma resulted in a fair value estimate of $41,000,000 which was classified as core value of deposits totaling $19,643,000 and goodwill totaling $21,357,000. Effective July 1, 1994, the remaining 54 $19,643,000 of core value of deposits was amortized to expense on a straight-line basis primarily through April 30, 1997, and the goodwill of $21,357,000 was fully amortized over the first six months of fiscal year 1995. No impairment adjustment has been made to the intangible assets resulting from the Corporation's acquisitions during fiscal years 1997, 1996 or 1995. NOTE 12. DEPOSITS: Deposits at June 30 are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ----------------------- -------------------------- Description and interest rates Amount % Amount % - ---------------------------------------------------------------------------------------------------------------------------------- Passbook accounts (average of 4.29% and 4.24%)....................... $ 741,994 16.9% $ 623,505 14.5% NOW accounts (average of .71% and .63%).............................. 382,076 8.7 332,233 7.7 Market rate savings (average of 3.48% and 3.34%)..................... 137,892 3.2 159,672 3.7 - ---------------------------------------------------------------------------------------------------------------------------------- Total savings (no stated maturities)................................. 1,261,962 28.8 1,115,410 25.9 - ---------------------------------------------------------------------------------------------------------------------------------- Certificates of deposits: Less than 3.00%................................................... 6,708 0.2 8,848 0.2 3.00% - 3.99%.................................................... 6,327 0.1 19,978 0.5 4.00% - 4.99%.................................................... 200,708 4.6 285,083 6.6 5.00% - 5.99%.................................................... 2,170,421 49.6 1,948,836 45.3 6.00% - 6.99%.................................................... 604,337 13.8 606,704 14.1 7.00% - 7.99%.................................................... 113,030 2.6 300,040 7.0 8.00% - 8.99%.................................................... 10,844 0.2 15,090 0.3 9.00% and over................................................... 4,582 0.1 4,587 0.1 - ---------------------------------------------------------------------------------------------------------------------------------- Total certificates of deposit (fixed maturities; average of 5.72% and 6.10%)....................................... 3,116,957 71.2 3,189,166 74.1 - ---------------------------------------------------------------------------------------------------------------------------------- $4,378,919 100.0% $4,304,576 100.0% - ----------------------------------------------------------------------------------------------------------------------------------
Interest expense on deposit accounts for the years ended June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Passbook accounts.............................................................. $ 29,377 $ 24,702 $ 23,696 NOW accounts................................................................... 2,480 2,766 2,586 Market rate savings............................................................ 5,201 5,709 7,356 Certificates of deposit........................................................ 183,128 180,863 146,525 - ---------------------------------------------------------------------------------------------------------------------------------- $220,186 $214,040 $180,163 - ----------------------------------------------------------------------------------------------------------------------------------
55 At June 30, 1997, scheduled maturities of certificates of deposit are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- Year Ending June 30, --------------------------------------------------------------------------------------------------- Rate 1998 1999 2000 2001 2002 Thereafter Total - ---------------------------------------------------------------------------------------------------------------------------------- Less than 3.00%............. $ 5,001 $ 158 $ 32 $ 43 $ 5 $ 1,469 $ 6,708 3.00% - 3.99%............. 5,302 862 151 -- 12 -- 6,327 4.00% - 4.99%............. 196,470 3,815 151 3 97 172 200,708 5.00% - 5.99%............. 1,497,976 572,643 55,878 19,460 18,099 6,365 2,170,421 6.00% - 6.99%............. 300,982 270,294 20,044 6,504 4,447 2,066 604,337 7.00% - 7.99%............. 77,661 14,936 19,092 777 266 298 113,030 8.00% - 8.99%............. 8,369 1,523 767 179 -- 6 10,844 9.00% and over............ 4,407 138 21 -- 1 15 4,582 - ---------------------------------------------------------------------------------------------------------------------------------- $2,096,168 $864,369 $96,136 $26,966 $22,927 $10,391 $3,116,957 - ----------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit in amounts of $100,000 or more totaled $182,296,000 and $278,839,000, respectively, at June 30, 1997 and 1996. There were no brokered certificates of deposit at June 30, 1997 or 1996. At June 30, 1997 and 1996, deposits of certain state and municipal agencies and other various non-retail entities were collateralized by mortgage-backed securities with carrying values of $17,217,000 and $7,765,000, respectively, and investment securities with carrying values of $691,000 and $494,000, respectively. In accordance with regulatory requirements, at June 30, 1997 and 1996, the Corporation maintained $13,494,000 and $13,633,000, respectively, in cash on hand and deposits at the Federal Reserve Bank in noninterest earning reserves against certain transaction checking accounts and nonpersonal certificates of deposit. NOTE 13. ADVANCES FROM THE FEDERAL HOME LOAN BANK: The Corporation was indebted to the Federal Home Loan Bank of Topeka on notes maturing as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 -------------------------------------------- ---------------------------- Weighted Weighted Interest Average Average Scheduled Maturities Due: Rate Range Rate Amount Rate Amount - ---------------------------------------------------------------------------------------------------------------------------------- Within 1 year.................................. 5.06% - 7.90% 5.69% $ 845,709 5.59% $ 825,691 Over 1 year to 2 years......................... 5.25 - 6.73 6.08 150,797 5.74 502,844 Over 2 years to 3 years........................ 6.20 - 6.84 6.75 62,000 5.54 10,705 Over 3 years to 4 years........................ 6.21 - 6.78 6.60 106,000 6.78 10,000 Over 4 years to 5 years........................ 5.96 - 6.46 6.20 250,000 -- -- Over 5 years................................... 6.55 - 7.19 6.77 1,000 6.76 1,050 - ---------------------------------------------------------------------------------------------------------------------------------- 5.06% - 7.90% 5.94% $1,415,506 5.66% $1,350,290 - ----------------------------------------------------------------------------------------------------------------------------------
Outstanding advances were collateralized by real estate loans totaling $2,826,327,000 and $2,507,377,000, respectively, at June 30, 1997 and 1996, and mortgage-backed securities totaling $1,245,000 at June 30, 1997. The Corporation is also required to hold shares of Federal Home Loan Bank stock in an amount at least equal to the greater of 1.0% of certain of its residential mortgage loans or 5.0% of its outstanding advances. The Corporation was in compliance with this requirement at June 30, 1997 and 1996, holding Federal Home Loan Bank stock totaling $72,452,000 and $79,113,000, respectively. At June 30, 1997 and 1996, there were no commitments for advances from the Federal Home Loan Bank. 56 NOTE 14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: At June 30, 1997 and 1996, securities sold under agreements to repurchase identical securities totaled $639,294,000 and $380,755,000, respectively, with weighted average interest rates of 6.04% and 6.51%, respectively. There were no securities sold under agreements to repurchase substantially identical securities at June 30, 1997 or 1996. An analysis of securities sold under agreements to repurchase identical securities for the years ended June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Maximum month-end balance........................................................................ $696,318 $380,755 - ---------------------------------------------------------------------------------------------------------------------------------- Average balance.................................................................................. $591,288 $189,568 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average interest rate during the period................................................. 6.19% 7.14% Weighted average interest rate at end of period.................................................. 6.04% 6.51% - ----------------------------------------------------------------------------------------------------------------------------------
At June 30, 1997, securities sold under agreements to repurchase had maturities ranging from August 1997 to May 1999 with a weighted average maturity of 305 days. At June 30, 1997, mortgage-backed securities and investment securities with carrying values totaling $599,356,000 and $73,772,000, respectively, and fair values totaling $598,629,000 and $76,567,000, respectively, were pledged as collateral for securities sold under agreements to repurchase. At June 30, 1996, mortgage-backed securities with carrying values totaling $410,527,000 and fair values totaling $405,521,000 were pledged as collateral. It is the Corporation's policy to enter into repurchase agreements only with major brokerage firms that are primary dealers in government securities. At June 30, 1997, there were no repurchase agreements with any broker with balances at risk in excess of 10.0% of stockholders' equity. NOTE 15. OTHER BORROWINGS: Other borrowings at June 30 consist of the following:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Subordinated extendible notes, interest 7.95%, due December 1, 2006.............................. $ 50,000 $ -- Guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures, interest 9.375%, due May 15, 2027.................................... 45,000 -- Term note, adjustable interest, due December 31, 2001............................................ 26,000 -- Collateralized mortgage obligations.............................................................. 5,602 8,867 Subordinated notes, interest 10.25%, due December 15, 1999....................................... -- 40,250 Senior notes, interest 10.00%, due January 31, 1999.............................................. -- 6,900 Other borrowings................................................................................. 2,380 2,529 - ---------------------------------------------------------------------------------------------------------------------------------- $128,982 $58,546 - ----------------------------------------------------------------------------------------------------------------------------------
On December 2, 1996, the Corporation completed the issuance of $50,000,000 of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes). With the proceeds from the issuance of the Notes the Corporation redeemed on December 27, 1996, its $40,250,000 10.25% subordinated debt due December 15, 1999, and its $6,900,000 10.0% senior notes due January 31, 1999. Total expenses associated with this offering approximated $1,930,000 which are being amortized over the life of the Notes resulting in an effective interest rate of 8.52%. Contractual interest on the Notes is set at 7.95% until December 1, 2001, and is paid monthly. The interest rate for the Notes will reset at the Corporation's option on December 1, 2001, to a rate and for a term of one, two, 57 three or five years determined by the Corporation and will reset thereafter, at its option, upon the date of expiration of each new interest period prior to maturity. Any new interest rate shall not be less than 105% of the effective interest rate on comparable maturity U. S. Treasury obligations. The Notes may not be redeemed prior to December 1, 2001, and thereafter, the Corporation may elect to redeem the Notes in whole on December 1, 2001, and on any subsequent interest reset date at par plus accrued interest to the date fixed for redemption. The Notes are unsecured general obligations of the Corporation and are subordinated to all existing and future senior indebtedness of the Corporation. The Indenture, among other provisions, limits the ability of the Corporation to pay cash dividends or to make other capital distributions under certain circumstances. Effective May 14, 1997, CFC Preferred Trust (the Issuer), a special-purpose wholly-owned Delaware trust subsidiary of the Corporation, completed an offering of 1,800,000 shares (issue price of $25.00 per share) totaling $45,000,000 of fixed-rate 9.375% cumulative trust preferred securities (Capital Securities), which are fully and unconditionally guaranteed by the Corporation. Also effective May 14, 1997, the Corporation purchased all of the common securities (Common Securities) of the Issuer for approximately $1.4 million. The Issuer invested the total proceeds of $46,391,775 it received in 9.375% junior subordinated deferrable interest debentures (Debentures) issued by the Corporation. The sole assets of the Issuer are the Debentures. Interest paid on the Debentures will be distributed to the holders of Capital Securities and to the Corporation as holder of the Common Securities. As a result, under current tax law, distributions to the holders of the Capital Securities will be tax deductible for the Corporation. These Debentures are unsecured and rank junior and are subordinate in right of payment of all senior debt of the Corporation. The Capital Securities issued by the CFC Preferred Trust rank senior to the Common Securities. Concurrent with the issuance of the Capital Securities, the Corporation issued guarantees for the benefit of the security holders. The obligations of the Corporation under the Debentures, the indenture, the relevant trust agreement and the guarantees, in the aggregate, constitute a full and unconditional guarantee by the Corporation of the obligations of the trust under the trust preferred securities and rank subordinate and junior in right of payment to all liabilities of the Corporation. The distribution rate payable on the Capital Securities is cumulative and is payable quarterly in arrears commencing on September 30, 1997. The Corporation has the right, subject to events of default, at any time, to defer payments of interest on the Debentures by extending the interest payment period thereon for a period not exceeding 20 consecutive quarters with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the Debentures. The Capital Securities are subject to mandatory redemption upon repayment of the Debentures. The Debentures mature on May 15, 2027, which may be shortened to not earlier than May 15, 2002, if certain conditions are met. The Debentures are redeemable at the option of the Corporation on or after May 15, 2002, or at any time upon the occurrence and continuation of certain changes in either the tax treatment or the capital treatment of the Issuer, the Debentures or the Capital Securities. The Corporation has the right at any time to terminate the Issuer and cause the Debentures to be distributed to the holders of the Capital Securities in liquidation of the Issuer, all subject to the Corporation having received prior approval of the Federal Reserve to do so if then required under applicable capital guidelines or policies of the Federal Reserve. Expenses associated with the offering totaled $1,775,000 which are being amortized over the life of the Debentures resulting in an effective interest rate of 9.78%. The Capital Securities would qualify as Tier 1 capital of the Corporation should the Corporation become subject to the Federal Reserve capital requirements for bank holding companies. As a savings and loan holding company, the Corporation is currently not subject to Federal Reserve capital requirements for bank holding companies. On December 31, 1996, the Corporation borrowed $28,000,000 with a five-year term note due December 31, 2001. Proceeds were used to refinance a short-term promissory note due January 31, 1997, obtained in the financing of the repurchase of 1,875,150 shares of the Corporation's common stock on August 21, 1996. This term note bears a monthly adjustable interest rate which was 8.00% at June 30, 1997, and is priced at 50 basis points below the quoted national base prime rate. The term note calls for principal payments of $1,000,000 payable each calendar quarter with accrued interest and a balloon of $8,000,000 due December 31, 2001. The term note is unsecured but subject to certain convenants. In addition, the Corporation had a $2,000,000 line of credit available with the same financial institution. This revolving credit promissory note, if drawn on, would be due in a single payment on December 31, 1997, with interest rates, interest payments and convenants the same as the term note. At June 30, 1997, the revolving credit promissory note had not been drawn on. Both the term note and the revolving credit promissory note may be prepaid in whole or in part, without penalty, upon proper written notice. On 58 August 11, 1997, the Corporation paid down this term note by $21,000,000 and, under the payment terms of the note agreement, results in the remaining balance of $5,000,000 payable in $1,000,000 installments over the next five calendar quarters with the final payment due September 30, 1998. Also, on August 11, 1997, the line of credit was increased to $6,000,000 with no change to the due date or other terms. At June 30, 1997, the remaining two notes issued in conjunction with collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due in varying amounts contractually through September 1, 2015. The notes are secured by FNMA mortgage-backed securities with book values of approximately $11,639,000 and $14,540,000 at June 30, 1997 and 1996, respectively. As the principal balance on the collateral on these notes repay, the notes are correspondingly repaid. The subordinated notes for $40,250,000 and senior notes for $6,900,000 were paid in full on December 27, 1996. The subordinated notes paid interest semi-annually and have been redeemable since December 15, 1995. The senior notes paid interest monthly and have been redeemable since February 1, 1995. The notes did not have sinking funds, and were unsecured general obligations of the Corporation. The subordinated notes were subordinated to all existing and future senior indebtedness of the Corporation, and the senior notes were senior to all existing and future indebtedness of the Corporation other than debt obligations secured by certain liens. The Note Indentures, among other provisions, restricted the ability of the Corporation and its subsidiaries, under certain circumstances, to incur additional indebtedness and restricted the Corporation's ability to pay cash dividends or to make other capital distributions. The Corporation was also required to maintain not less than $3,500,000 in cash and cash equivalents under the terms of the subordinated note indenture. Other borrowings are collateralized by unencumbered first mortgage loans with unpaid principal balances of approximately $4,625,000 and $5,714,000 at June 30, 1997 and 1996, respectively. Principal maturities of other borrowings as of June 30, 1997, for the next five fiscal years are as follows: 1998 - $6,899,000; 1999 - $6,595,000; 2000 - $4,665,000; 2001 - $4,240,000; 2002 - $11,586,000 and thereafter - $94,997,000. NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS: The following summarizes the Corporation's interest rate swap agreements, by maturity date, at June 30:
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------ --------------------------------------- Notional Interest Rate Notional Interest Rate ------------------ ------------------ Scheduled Maturities Due: Amount Paying Receiving Amount Paying Receiving - --------------------------------------------------------------------------------------------------------------------------------- June 30, 1998.................................. $ 10,000 13.26% 6.03% $10,000 13.26% 5.97% June 30, 2000.................................. 75,000 6.24 5.20 -- -- -- June 30, 2001.................................. 50,000 6.21 5.11 -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- $135,000 6.75% 5.23% $10,000 13.26% 5.97% - ---------------------------------------------------------------------------------------------------------------------------------
During fiscal year 1997, the Corporation began utilizing interest rate swaps with a notional amount totaling $125,000,000 to artificially lengthen the maturity of certain deposit liabilities. Under these agreements, the Corporation pays fixed rates of interest and receives variable rates of interest that are based on the same rates that the Corporation pays on the hedged deposit liabilities. Such variable rates are based on the 13-week average yield of the three-month U.S. Treasury bill. Net interest settlement is quarterly. The interest rate swap agreement for a notional amount of $10,000,000 was acquired in an acquisition in 1984 with an original life of 13 years. Net interest expense on the swap agreements totaled $916,000, $2,280,000 and $4,345,000, respectively, for fiscal years 1997, 1996 and 1995. The interest rate swap agreements were collateralized at June 30, 1997 and 1996, by mortgage-backed securities with carrying values of $7,782,000 and $15,721,000, respectively. Entering into interest rate swap agreements involves the credit risk of dealing with intermediary and primary counterparties and their ability to meet the terms of the respective contracts. The Corporation is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swaps if the Corporation 59 is in a net interest receivable position at the time of potential default by the counterparties. However, at June 30, 1997, the Corporation was in a net interest payable position. The Corporation does not anticipate nonperformance by the counterparties. During fiscal year 1997, the Corporation entered into interest rate floor agreements with a notional amount totaling $165,000,000 at June 30, 1997. The Corporation had not entered into such agreements prior to fiscal year 1997. These interest rate floor agreements are designed to hedge against impairment losses on mortgage loan servicing rights due to decreasing interest rates. By purchasing floor agreements, the Corporation would be paid cash based on the differential between a short-term rate and the strike rate, applied to the notional principal amount, should the current short-term rate fall below the strike rate level of the agreement. These interest rate floor agreements mature between September 1999 and March 2000. Premiums paid to enter into such agreements totaled $344,000 of which $61,000 was amortized to expense during fiscal year 1997. One agreement was sold resulting in a deferred gain of $39,000 of which $10,000 was amortized as a contra to expense during fiscal year 1997. The premiums are amortized over the three-year life of the agreements and the deferred gain is being amortized over the remaining life of the agreement sold. The Corporation also had one interest rate cap agreement totaling $10,000,000 which expired on March 9, 1997, which would have paid interest quarterly when the three-month LIBOR exceeded 7.00%. Through the life of this agreement, the Corporation was not owed any interest from its counterpart. The premium paid on March 9, 1995 (the effective date of this agreement) totaled $115,000 with $38,000, $58,000 and $19,000, respectively, amortized to interest expense for fiscal years ended June 30, 1997, 1996 and 1995. NOTE 17. INCOME TAXES: The following is a comparative analysis of the provision for federal and state taxes on income:
- ---------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Current: Federal.................................................................... $22,316 $75,927 $ 7,816 State...................................................................... 1,267 3,626 956 - ---------------------------------------------------------------------------------------------------------------------------------- 23,583 79,553 8,772 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred: Federal.................................................................... 568 (45,316) 14,123 State...................................................................... (315) (7,275) 251 - ---------------------------------------------------------------------------------------------------------------------------------- 253 (52,591) 14,374 - ---------------------------------------------------------------------------------------------------------------------------------- Total provision for income taxes.............................................. $23,836 $26,962 $23,146 - ----------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate:
- ---------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate............................................. 35.0% 35.0% 35.0% Amortization of discounts, premiums and intangible assets from acquisitions........................................ 0.4 0.1 13.8 Income tax credits............................................................ (0.9) (0.7) (3.1) Bad debt deduction............................................................ -- (0.2) (2.9) State income taxes, net of federal income tax benefit......................... 0.9 (2.0) 1.6 Other items, net.............................................................. (0.6) 0.6 (1.8) - ---------------------------------------------------------------------------------------------------------------------------------- Effective tax rate............................................................ 34.8% 32.8% 42.6% - ----------------------------------------------------------------------------------------------------------------------------------
60 The components of deferred tax assets and liabilities at June 30 are as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Federal Home Loan Bank stock................................................................... $ 9,007 $ 9,666 Differences between book and tax basis of premises and equipment............................... 6,864 6,761 Core value of acquired deposits................................................................ 5,436 4,595 Mortgage servicing rights...................................................................... 2,889 2,552 Basis differences arising from acquisitions.................................................... 2,753 4,134 Other items.................................................................................... 5,442 3,129 - ---------------------------------------------------------------------------------------------------------------------------------- 32,391 30,837 - ---------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for losses on loans and real estate not currently deductible......................... 14,856 14,565 Basis differences between tax and financial reporting arising from acquisitions.................................................................... 4,443 4,620 State operating loss carryforwards............................................................. 3,149 2,167 Collateralized mortgage obligations............................................................ 2,751 3,046 Employee benefits.............................................................................. 2,253 2,095 Accretion of discount on purchased items....................................................... 2,052 2,301 Other items.................................................................................... 2,110 2,566 - ---------------------------------------------------------------------------------------------------------------------------------- 31,614 31,360 Valuation allowance............................................................................... 2,871 2,279 - ---------------------------------------------------------------------------------------------------------------------------------- 28,743 29,081 - ---------------------------------------------------------------------------------------------------------------------------------- Net deferred tax liability........................................................................ $ 3,648 $ 1,756 - ----------------------------------------------------------------------------------------------------------------------------------
The valuation allowance, primarily attributable to state operating loss carryforwards, was $2,871,000 at June 30, 1997, increasing from $2,279,000 at June 30, 1996, primarily due to increases in such state net operating losses available for income tax purposes. Prior to July 1, 1996, savings institutions that met certain definitional tests and other conditions prescribed by the Internal Revenue Code were allowed to deduct, within limitations, a bad debt deduction computed as a percentage of taxable income if more favorable than the bad debt deduction based upon actual loan loss experience (i.e., experience method). The bad debt deduction for fiscal years 1996 and 1995 was computed under the percentage of taxable income method since it yielded a greater deduction than did the experience method. In August 1996, changes in the federal tax law (i) repealed both the percentage of taxable income and experience methods effective July 1, 1996, allowing a bad debt deduction for specific charge-offs only, and (ii) required recapture into taxable income over a six year period of tax bad debt reserves which exceed the base year amount, adjusted for any loan portfolio shrinkage. These tax law changes resulted in the recognition to income tax expense of additional deferred tax liabilities of approximately $103,000 in fiscal year 1997. The recapture of excess reserves has no effect on the Corporation's results of operations since income taxes were provided for in prior years in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The recapture may be delayed for a one or two-year period if the Corporation originates more residential loans than its average originations in the past six years. The Corporation met the origination requirement for fiscal year 1997 therefore delaying the recapture at least until the six-year period beginning in fiscal year 1998. The recapture of excess reserves totals $3,161,000 and will result in income tax payments of $1,130,000 which have been previously accrued. In accordance with provisions of SFAS No. 109, a deferred tax liability has not been recognized for the bad debt reserves of the Bank created in the tax years which began prior to December 31, 1987 (the base year). At 61 June 30, 1997, the amount of these reserves totaled approximately $81,757,000 with an unrecognized deferred tax liability approximating $29,866,000. Such unrecognized deferred tax liability could be recognized in the future, in whole or in part, if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain definitional tests and other conditions in the federal tax law, (iii) certain distributions are made with respect to the stock of the Bank or (iv) the bad debt reserves are used for any purpose other than absorbing bad debt losses. NOTE 18. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS: On December 19, 1988, the Board of Directors of the Corporation adopted a Shareholder Rights Plan and declared a dividend of stock purchase rights consisting of one primary right and one secondary right for each outstanding share of common stock payable on December 30, 1988, and with respect to each share of common stock issued by the Corporation at any time after such date and prior to the earlier of the occurrence of certain events or expiration of such rights. These rights are attached to and trade only together with the common stock shares. The provisions of the Shareholder Rights Plan are designed to protect the interests of the stockholders of record in the event of an unsolicited or hostile attempt to acquire the Corporation at a price or on terms that are not fair to all shareholders. Unless rights are exercised, holders have no rights as a stockholder of the Corporation (other than rights resulting from such holder's ownership of common shares), including, without limitation, the right to vote or to receive dividends. With certain exceptions, the rights expire December 31, 1998, unless earlier redeemed by the Corporation. At June 30, 1997, no such rights were exercised. The Corporation is authorized to issue 10,000,000 shares of preferred stock having a par value of $.01 per share. None of the shares of the authorized preferred stock has been issued. The Board of Directors is authorized to establish and state voting powers, designation preferences, and other special rights of such shares and the qualifications, limitations and restrictions thereof. The preferred stock may rank prior to the common stock as to dividend rights, liquidation preferences, or both, and may have full or limited voting rights. Under the Office of Thrift Supervision's (OTS) capital distribution regulations, a savings institution that, immediately prior to, and on a pro forma basis after giving effect to, a proposed dividend, has total capital that is at least equal to the amount of its fully phased-in capital requirements (a "Tier 1 Association") is permitted to pay dividends during a calendar year in an amount equal to the greater of (i) 75.0% of its net income for the recent four quarters, or (ii) 100.0% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its ratio of total capital to assets exceeded its fully phased-in risk-based capital ratio requirement at the beginning of the calendar year. At June 30, 1997, the Bank qualified as a Tier 1 Association, and would be permitted to pay an aggregate amount approximating $113,139,000 in dividends under these regulations. Should the Bank's regulatory capital fall below certain levels, applicable law and certain other federal regulations would require prior approval of such proposed dividends and, in some cases, would prohibit the payment of dividends. On August 21, 1996, the Corporation consummated the repurchase of 1,875,150 shares of its common stock, $.01 par value, from CAI Corporation, a Dallas-based investment company, for an aggregate purchase price totaling $48,910,000 excluding $414,000 in transaction costs. The purchase price, excluding transaction costs incurred by the Corporation for this repurchase, consisted of cash consideration of $28,227,000 and surrender of a warrant (valued at approximately $20,683,000) which would have enabled the Corporation to purchase 99 shares of non-voting stock of CAI Corporation. The repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. The total cost of $49,324,000 reduced common stock by $12,000 (representing $.01 par value on 1,250,100 shares before the three-for-two stock split effective January 14, 1997) and additional paid-in capital by the difference of $49,312,000. Pursuant to Nebraska corporate law, the 1,875,150 shares of repurchased common stock were canceled. The Corporation also reimbursed CAI Corporation for certain expenses totaling $2,200,000 incurred in connection with its ownership of the 1,875,150 shares, including costs and expenses incurred in connection with the Corporation's 1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of the pro rata portion of any dividend CAI Corporation otherwise would have received for the quarter ended September 30, 1996. These nonrecurring expenses paid to CAI Corporation are included in other operating expenses. Concurrent with the close of the repurchase, two directors of the Corporation who also serve as executive officers of CAI Corporation, resigned from the Board of Directors. On November 18, 1996, the Board of Directors of the Corporation declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders 62 of record on December 31, 1996. Par value of the common stock remained at $.01 per share. The stock dividend, distributed on January 14, 1997, totaled 7,163,476 shares of common stock with $72,000 transferred from the additional paid-in capital account to the common stock account to record this distribution. Fractional shares resulting from the stock split were paid in cash totaling $17,792 based on the closing price on the record date. NOTE 19. REGULATORY CAPITAL REQUIREMENTS: The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators, that, if undertaken, could have a direct material effect on the Corporation's financial position and results of operations. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios as set forth in the following tables of tangible, core and total risk-based capital. Prompt Corrective Action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) require specific supervisory actions as capital levels decrease. To be considered well-capitalized under the regulatory framework for Prompt Corrective Action provisions under FDICIA, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the following tables. At June 30, 1997 and 1996, the Bank exceeded the minimum requirements for the well-capitalized category. The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements:
- ------------------------------------------------------------------------------------------------------------------------------ As of June 30, 1997 ----------------------------------------------------------------- Actual Capital Required Capital ------------------------------ ------------------------------ Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------ OTS capital adequacy: Tangible capital...................................... $446,291 6.31% $106,079 1.50% Core capital.......................................... 458,087 6.47 212,511 3.00 Risk-based capital.................................... 494,760 13.81 286,597 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital............................... 458,087 6.47 354,185 5.00 Tier 1 risk-based capital............................. 458,087 12.79 214,948 6.00 Total risk-based capital.............................. 494,760 13.81 358,246 10.00 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ As of June 30, 1996 ----------------------------------------------------------------- Actual Capital Required Capital ------------------------------ ------------------------------ Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------ OTS capital adequacy: Tangible capital...................................... $408,708 6.18% $ 99,137 1.50% Core capital.......................................... 424,909 6.41 198,760 3.00 Risk-based capital.................................... 460,674 13.62 270,629 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital............................... 424,909 6.41 331,266 5.00 Tier 1 risk-based capital............................. 424,909 12.56 202,971 6.00 Total risk-based capital.............................. 460,674 13.62 338,286 10.00 - ------------------------------------------------------------------------------------------------------------------------------
63 As of June 30, 1997, the most recent notification from the OTS categorized the Bank as "well-capitalized" under the regulatory framework for Prompt Corrective Action provisions under FDICIA. There are no conditions or events since such notification that management believes have changed the Bank's classification. NOTE 20. COMMITMENTS AND CONTINGENCIES: The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, financial guarantees on certain loans sold with recourse and on other contingent obligations. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contractual amounts of these instruments represent the maximum credit risk to the Corporation. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At June 30, 1997, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $150,784,000 as follows: $102,614,000 to originate loans, $27,769,000 to purchase loans and $20,401,000 to provide consumers unused lines of credit. At June 30, 1996, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $173,551,000 as follows: $94,679,000 to originate loans, $61,264,000 to purchase loans and $17,608,000 to provide consumers unused lines of credit. In addition, at June 30, 1997 and 1996, outstanding commitments from mortgage banking operations to purchase mortgage loan servicing rights totaled $1,284,000 and $9,000, respectively. Loan commitments, which are funded subject to certain limitations, extend over various periods of time. Generally, unused loan commitments are canceled upon expiration of the commitment term as outlined in each individual contract. These outstanding loan commitments to extend credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn upon. The Corporation evaluates each customer's credit worthiness on a separate basis and requires collateral based on this evaluation. Collateral consists mainly of residential family units and personal property. At June 30, 1997 and 1996, the Corporation had approximately $98,299,000 and $126,377,000, respectively, in mandatory forward delivery commitments to sell residential mortgage loans. At June 30, 1997 and 1996, loans sold subject to recourse provisions totaled approximately $31,039,000 and $39,340,000, respectively, which represents the total potential credit risk associated with these particular loans. Such credit risk would, however, be offset by the value of the single-family residential properties which collateralize these loans. The Corporation is subject to a number of lawsuits and claims for various amounts which arise out of the normal course of its business. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Corporation's financial position or results of operations. On September 13, 1994, the Bank commenced litigation against the United States in the United States Court of Federal Claims seeking to recover monetary relief for the government's refusal to honor certain contracts between the Bank and the Federal Savings and Loan Insurance Corporation. The suit alleges that such governmental action constitutes breach of contract and an unlawful taking of property by the United States without just compensation or due process in violation of the Constitution of the United States. The litigation status and process of the multiple legal actions, such as that instituted by the Bank with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank uncertain as to ultimate outcome, and contingent on a number of factors and future events which are beyond the control of the Bank, both as to substance, timing and the dollar amount of damages which may be awarded to the Bank if it finally prevails in this litigation. NOTE 21. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS: RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred savings 401(k) plan covering substantially all employees. The Corporation's matching contributions are equal to 100% of the first 8% of participant contributions. Participants vest immediately in their own contributions. For contributions of the 64 Corporation, participants vest over a five-year period and, thereafter, vest 100% on an annual basis if employed on the last day of each calendar year. Contribution expense was $1,719,000, $1,653,000 and $1,648,000 for fiscal years ended June 30, 1997, 1996 and 1995, respectively. STOCK OPTION AND INCENTIVE PLAN - The Corporation maintains the 1996 Stock Option and Incentive Plan (the 1996 Plan), which was approved by the Corporation's stockholders on November 19, 1996; the 1984 Stock Option and Incentive Plan, as amended (the 1984 Plan); and three stock option and incentive plans assumed in the Railroad merger (collectively referred to as "the Railroad Plans"). These plans permit the granting of stock options, restricted stock awards and stock appreciation rights. Stock options are generally 100% exercisable on the date of grant over a period not to exceed 10 years from the date of grant with the option price equal to market value on the date of grant. However, non-incentive stock options granted to executives in fiscal years 1997 and 1996 vest over three years. Recipients of restricted stock have the usual rights of a shareholder, including the rights to receive dividends and to vote the shares; however, the common stock will not be vested until certain restrictions are satisfied. The term of the 1984 Plan extends to July 31, 2002, and the term of the 1996 Plan to September 11, 2006. At June 30, 1997, the Railroad Plans had only 9,180 options outstanding. The following table presents the activity of the stock options for each of the three fiscal years ended June 30, 1997, and the stock options outstanding at the end of the respective fiscal years:
- ---------------------------------------------------------------------------------------------------------------------------------- Stock Option Option Price Aggregate Shares Per Share Amount - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1994........................................... 599,860 $ 1.67 - $13.13 $ 2,976 Granted............................................................. 93,918 9.65 - 18.21 1,696 Exercised........................................................... (131,610) 1.67 - 13.13 (505) Canceled............................................................ (7,174) 3.78 - 11.65 (65) - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1995........................................... 554,994 1.67 - 18.21 4,102 Granted............................................................. 184,639 25.83 4,770 Exercised........................................................... (143,968) 1.67 - 18.21 (1,191) Canceled............................................................ (2,385) 9.39 - 18.21 (40) - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1996........................................... 593,280 1.67 - 25.83 7,641 Granted............................................................. 216,354 33.25 7,194 Exercised........................................................... (75,686) 1.67 - 25.83 (838) Canceled............................................................ (5,844) 18.21 - 25.83 (121) - ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1997........................................... 728,104 $ 1.67 - $33.25 $13,876 - ---------------------------------------------------------------------------------------------------------------------------------- Exercisable at June 30, 1997........................................... 648,299 $ 1.67 - $33.25 $11,448 - ---------------------------------------------------------------------------------------------------------------------------------- Shares available for future grants at June 30, 1997: 1984 Plan........................................................... 92,900 1996 Plan........................................................... 1,023,000 - ----------------------------------------------------------------------------------------------------------------------------------
65 The following table summarizes information about the Corporation's stock options outstanding at June 30, 1997:
- --------------------------------------------------------------------------------------------------------------------------------- Shares Subject to Outstanding Options Shares Exercisable - --------------------------------------------------------------------------------------- -------------------------------------- Weighted Average Weighted Weighted Stock Option Remaining Average Stock Option Average Range of Shares Contractual Exercise Shares Exercise Exercise Prices Outstanding Life in Years Price Exercisable Price - --------------------------------------------------------------------------------------------------------------------------------- $ 1.67 - $ 2.53 2,811 2.80 $ 1.84 2,811 $ 1.84 3.33 - 4.67 260,235 2.36 3.97 260,235 3.97 6.50 - 9.39 14,803 3.82 8.03 14,803 8.03 18.21 - 25.83 233,901 8.68 23.62 203,496 23.29 33.25 216,354 9.88 33.25 166,954 33.25 - --------------------------------------------------------------------------------------------------------------------------------- $ 1.67 - $33.25 728,104 6.65 $19.06 648,299 $17.66 - ---------------------------------------------------------------------------------------------------------------------------------
On May 14, 1997, non-incentive stock options for 27,000 shares of the Corporation's common stock were granted under the 1996 Plan to directors of the Corporation and Bank. During fiscal years 1997 and 1996, stock options for 189,354 and 184,639 shares, respectively, of the Corporation's common stock were granted under the 1984 Plan to executives and managers of the Corporation. Such grants were in accordance with a management incentive plan providing for these awards pursuant to the attainment of certain operating goals of the Corporation for the respective fiscal years. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its stock option and incentive plans. Accordingly, no compensation cost has been recognized for stock options granted. Had compensation cost of the Corporation's two stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the provisions of SFAS No. 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table. Since July 1, 1995, is the initial phase-in period for the Corporation in applying the provisions of SFAS No. 123, the results indicated are not necessarily representative of the effects on pro forma disclosures of net income and earnings per share since such results exclude stock options granted prior to July 1, 1995.
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Net income: As reported.................................................................................... $44,094 $55,306 Pro forma...................................................................................... 42,237 54,371 Earnings per share: As reported.................................................................................... $ 2.01 $ 2.48 Pro forma...................................................................................... 1.93 2.44 - ---------------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants in fiscal years 1996 and 1997, respectively: dividend yield of 1.05% for the 1996 option grants and .84% for the 1997 grants; expected volatility of 29% for the 1996 option grants and 25% for the 1997 grants; risk-free interest rates of 6.76% for the 1996 option grants and 6.62% for the 1997 grants; and expected lives of six years for the plans for both years. Restricted stock is also granted for awards earned each fiscal year under management incentive plans. On the grant 66 dates of June 30, 1997, 1996 and 1995, the Corporation issued 25,174 shares, 1,746 shares and 42,625 shares, respectively, of restricted stock with an aggregate market value of $935,000, $45,000, and $776,000, respectively. The awards of restricted stock vest 20% on each anniversary of the grant date, provided that the employee has completed the specified service requirement, or earlier if the employee dies or is permanently and totally disabled or upon a change in control. Total deferred compensation on the unvested restricted stock totaled $1,435,000, $1,068,000, and $1,951,000, at June 30, 1997, 1996, and 1995, respectively, and is recorded as a reduction of stockholders' equity. The value of the restricted shares is amortized to compensation expense over the five-year vesting period. Compensation expense applicable to the restricted stock totaled $531,000, $909,000 and $1,173,000 for fiscal years 1997, 1996 and 1995, respectively. POSTRETIREMENT BENEFITS - Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires that the cost of providing postretirement benefits other than pensions be recognized over the employee's service periods rather than on a cash basis. Under SFAS No. 106, the determination of the accrual liability requires a calculation of the accumulated postretirement benefit obligation (APBO). This APBO represents the actuarial present value of postretirement benefits other than pensions to be paid out in the future (such as health care benefits to be paid to retirees) that have been earned as of the end of the year. The Corporation's postretirement benefit plan is unfunded. The following table reconciles the status of the plan with the amounts recognized in the Consolidated Statement of Financial Condition at June 30:
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees................................................................... $ 425 $ 487 $260 Fully eligible active plan participants.................................... 167 120 118 Other active plan participants............................................. 518 766 581 - --------------------------------------------------------------------------------------------------------------------------------- 1,110 1,373 959 Unrecognized prior service cost............................................... 317 -- -- Unrecognized net loss......................................................... (626) (783) (426) - --------------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost included in other liabilities............. $801 $ 590 $533 - ---------------------------------------------------------------------------------------------------------------------------------
The following sets forth the components of the net periodic postretirement benefit cost for the fiscal years ended June 30:
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the fiscal year......................... $ 105 $ 74 $ 61 Interest cost on accumulated postretirement benefit obligation................ 99 69 43 Amortization of net loss...................................................... 40 29 -- - --------------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit expense................................ 244 172 104 - --------------------------------------------------------------------------------------------------------------------------------- Postretirement benefit claims paid for the year, net of retiree contributions of $98, $85 and $72........................... $ 33 $ 115 $126 - ---------------------------------------------------------------------------------------------------------------------------------
67 The weighted average discount rate used to determine the APBO was 7.75% for the fiscal year ended June 30, 1997, and 7.5% for fiscal years ended June 30, 1996 and 1995. The assumed health care cost trend rate used in measuring the APBO as of July 1, 1996, was 8.0% decreasing gradually until it reaches 5.0% in 2008, when it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the APBO as of June 30, 1997, by $121,000 and the aggregate of the service and interest cost components of the net periodic postretirement cost for fiscal year 1997 by $22,000. The Corporation also maintains an unfunded postretirement survivor income plan for certain key executives that provides benefits to beneficiaries based upon the death of such executives and their employment status at the time of death (i.e., normal retirement, termination or death prior to retirement). The Corporation began to recognize these postretirement benefits in fiscal year 1996. At June 30, 1997 and 1996, the accrued postretirement benefit cost included in other liabilities and the net postretirement benefit cost charged to operations totaled $125,000 and $33,000, respectively. The weighted average discount rate used to determine the APBO was 7.75% and 7.5%, respectively, for fiscal years ended June 30, 1997 and 1996, and the assumed annual rate of increase for compensation was 3.0% for fiscal years ended June 30, 1997 and 1996. NOTE 22. FINANCIAL INFORMATION (PARENT COMPANY ONLY): CONDENSED STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------------------------------------------------------- June 30, ASSETS 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Cash.......................................................................................... $ 42,246 $ 12,562 Other assets.................................................................................. 9,311 2,387 Equity in CFC Preferred Trust (1)............................................................. 1,392 -- Equity in Commercial Federal Bank............................................................. 497,882 447,817 - --------------------------------------------------------------------------------------------------------------------------------- Total Assets.................................................................................. $550,831 $462,766 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------------- Liabilities: Other liabilities.......................................................................... $ 2,333 $ 2,339 Unsecured promissory term note............................................................. 26,000 -- Subordinated extendible notes.............................................................. 50,000 -- Junior subordinated deferrable interest debentures (1)..................................... 46,392 -- Senior notes............................................................................... -- 6,900 Subordinated notes......................................................................... -- 40,250 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities............................................................................. 124,725 49,489 Total Stockholders' Equity.................................................................... 426,106 413,277 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity.................................................... $550,831 $462,766 - ---------------------------------------------------------------------------------------------------------------------------------
(1) Equity in CFC Preferred Trust represents the sole beneficial ownership interest in this trust consisting of 55,671 shares of common securities acquired by the Corporation on May 14, 1997. The junior subordinated deferrable interest debentures payable to the CFC Preferred Trust bear interest at 9.375% and are due May 15, 2027. 68
CONDENSED STATEMENT OF OPERATIONS - --------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Revenues: Dividend income from the Bank.............................................. $39,887 $ 9,290 $ 5,660 Interest income............................................................ 1,003 691 600 Expenses: Interest expense........................................................... (7,435) (5,384) (5,310) Operating expenses......................................................... (2,895) (1,742) (576) - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes, extraordinary items and equity in undistributed earnings of subsidiaries....................... 30,560 2,855 374 Income tax benefit............................................................ (3,301) (2,117) (1,882) - --------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items and equity in undistributed earnings of subsidiaries....................... 33,861 4,972 2,256 Extraordinary items - loss on early retirement of debt, net of tax benefit of $316........................................ (583) -- -- - --------------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of subsidiaries................ 33,278 4,972 2,256 Equity in undistributed earnings of subsidiaries.............................. 10,816 50,334 28,925 - --------------------------------------------------------------------------------------------------------------------------------- Net income.................................................................... $44,094 $55,306 $31,181 - ---------------------------------------------------------------------------------------------------------------------------------
69
CONDENSED STATEMENT OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 44,094 $ 55,306 $ 31,181 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary items, net of tax benefit.................................. 583 -- -- Equity in undistributed earnings of subsidiaries......................... (10,816) (50,334) (28,925) Other items, net......................................................... (3,649) 2,123 1,100 --------- --------- --------- Total adjustments...................................................... (13,882) (48,211) (27,825) --------- --------- --------- Net cash provided by operating activities............................ 30,212 7,095 3,356 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of stock of and cash distributions into the Bank..................... (17,157) -- (3,850) Purchase of common securities of CFC Preferred Trust.......................... (1,392) -- -- Other items, net.............................................................. -- -- (245) --------- --------- --------- Net cash used by investing activities................................ (18,549) -- (4,095) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of subordinated extendible notes, net.................. 48,500 -- -- Proceeds from issuance of notes payable....................................... 46,000 -- 4,000 Payment of senior and subordinated notes...................................... (47,150) -- -- Payment of notes payable...................................................... (20,000) (3,000) (1,000) Proceeds from issuance of junior subordinated deferrable interest debentures................................ 46,392 -- -- Payments for debt issue costs................................................. (2,218) -- -- Repurchase of common stock.................................................... (49,324) -- -- Issuance of common stock...................................................... 2,066 2,291 1,334 Payment of cash dividends on common stock..................................... (5,906) (4,370) -- Other items, net.............................................................. (339) -- (271) --------- --------- --------- Net cash provided (used) by financing activities..................... 18,021 (5,079) 4,063 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS: Increase in net cash position................................................. 29,684 2,016 3,324 Balance, beginning of year.................................................... 12,562 10,546 7,222 --------- --------- --------- Balance, end of year.......................................................... $ 42,246 $ 12,562 $ 10,546 - ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest expense........................................................... $ 6,382 $ 4,913 $ 4,816 Income tax payments (refunds), net......................................... 18,873 72,972 (3,670) - ----------------------------------------------------------------------------------------------------------------------------------
70 NOTE 23. SEGMENT INFORMATION: The Corporation and its subsidiaries operate primarily in the savings and loan and mortgage banking industries. Savings and loan operations (financial institution) involve a variety of traditional banking and financial services. Mortgage banking operations (mortgage banking) involve the origination and purchase of mortgage loans, sale of mortgage loans in the secondary mortgage market, servicing of mortgage loans and the purchase and origination of rights to service mortgage loans. Segment information at and for the fiscal years ended June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Interest income: Financial institution..................................................... $ 498,389 $ 483,888 $ 446,747 Mortgage banking.......................................................... 6,661 7,204 7,621 ----------- ----------- ----------- Total................................................................... 505,050 491,092 454,368 ----------- ----------- ----------- Intersegment interest income: Financial institution..................................................... (12,438) (10,115) (6,601) Mortgage banking.......................................................... 9,688 10,201 6,417 ----------- ----------- ----------- (2,750) 86 (184) Intersegment elimination.................................................. 2,750 (86) 184 ----------- ----------- ----------- Total................................................................... -- -- -- ----------- ----------- ----------- Total interest income: Financial institution..................................................... 485,951 473,773 440,146 Mortgage banking.......................................................... 16,349 17,405 14,038 Intersegment elimination.................................................. 2,750 (86) 184 ----------- ----------- ----------- Total................................................................... $ 505,050 $ 491,092 $ 454,368 - ---------------------------------------------------------------------------------------------------------------------------------- Other income: Financial institution - loan servicing fees............................... $ 373 $ 429 $ 146 Financial institution - other income...................................... 29,247 21,918 20,317 Mortgage banking - loan servicing fees.................................... 29,977 27,462 24,585 Mortgage banking - other income (loss).................................... (1,118) (163) 18 ----------- ----------- ----------- Total................................................................... 58,479 49,646 45,066 ----------- ----------- ----------- Intersegment other income: Financial institution - loan servicing fees............................... -- -- -- Financial institution - other income...................................... -- -- -- Mortgage banking - loan servicing fees.................................... 15,971 14,516 12,218 Mortgage banking - other income........................................... -- -- -- ----------- ----------- ----------- 15,971 14,516 12,218 Intersegment elimination.................................................. (15,971) (14,516) (12,218) ----------- ----------- ----------- Total................................................................... -- -- -- ----------- ----------- ----------- Total other income: Financial institution - loan servicing fees............................... 373 429 146 Financial institution - other income...................................... 29,247 21,918 20,317 Mortgage banking - loan servicing fees.................................... 45,948 41,978 36,803 Mortgage banking - other income (loss).................................... (1,118) (163) 18 Intersegment elimination.................................................. (15,971) (14,516) (12,218) ----------- ----------- ------------ Total................................................................... $ 58,479 $ 49,646 $ 45,066 - ----------------------------------------------------------------------------------------------------------------------------------
71
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Operating profit (1): Financial institution..................................................... $ 48,453 $ 63,385 $ 45,664 Mortgage banking.......................................................... 30,390 26,009 14,518 ----------- ----------- ----------- 78,843 89,394 60,182 Less: General corporate expenses................................................ 2,895 1,742 545 Corporate interest expense................................................ 7,435 5,384 5,310 ----------- ----------- ----------- Total................................................................... $ 68,513 $ 82,268 $ 54,327 - --------------------------------------------------------------------------------------------------------------------------------- (1) Operating profit is income before income taxes and extraordinary items. - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets: Financial institution..................................................... $7,083,616 $6,591,381 $6,478,017 Mortgage banking.......................................................... 178,189 171,399 171,415 Eliminations.............................................................. (165,140) (155,110) (79,853) ----------- ----------- ----------- Total................................................................... $7,096,665 $6,607,670 $6,569,579 - --------------------------------------------------------------------------------------------------------------------------------- Additions to premises and equipment: Financial institution..................................................... $ 15,511 $ 6,587 $ 5,863 Mortgage banking.......................................................... 371 1,624 5,378 ----------- ----------- ----------- Total................................................................... $ 15,882 $ 8,211 $ 11,241 - --------------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization: Financial institution..................................................... $ 6,297 $ 5,404 $ 4,568 Mortgage banking.......................................................... 1,515 1,451 1,045 ----------- ----------- ----------- Total................................................................... $ 7,812 $ 6,855 $ 5,613 - ---------------------------------------------------------------------------------------------------------------------------------
The mortgage banking operation originates and sells loans to the Bank. These sales are primarily at par such that the mortgage banking operation records losses equal to the expenses it incurs net of fees collected. Such losses approximating $1,659,000, $986,000 and $1,236,000 were incurred during fiscal years 1997, 1996 and 1995, respectively. All of these losses are deferred by the Bank and amortized over the estimated life of the loans the Bank purchased. NOTE 24. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT: Effective September 30, 1996, the Deposit Insurance Funds Act of 1996 authorized the recapitalization of the Savings Associations Insurance Fund (SAIF) by imposing a one-time special assessment on institutions with SAIF-assessable deposits in order to increase the reserve levels of the SAIF to 1.25% of insured deposits. Institutions were assessed at the rate of .657% based on the amount of their SAIF-assessable deposits as of March 31, 1995. On September 30, 1996, the Corporation recorded an after-tax charge of $17,300,000 ($27,062,000 pre-tax) as a result of such special assessment. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, declining to .18% of insured deposits for the three months ended December 31, 1996, and reduced to .064% of insured deposits effective January 1, 1997. NOTE 25. EXTRAORDINARY ITEMS - LOSS ON EARLY RETIREMENT OF DEBT: In December 1996, the Corporation recognized extraordinary losses of $583,000 (net of income tax benefits totaling $316,000), or $.03 loss per share, primarily as a result of the early retirement of its $40,250,000 10.25% subordinated debt due December 15, 1999, and its $6,900,000 10.0% senior notes due January 31, 1999. The extraordinary losses consisted primarily of the write-off of the related premiums and costs associated with the issuance and redemption of such debt which was retired on December 27, 1996, with the proceeds from the $50,000,000 subordinated extendible notes offering completed December 2, 1996. 72 NOTE 26. QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes the unaudited quarterly results of operations for the last three fiscal years ended June 30:
- --------------------------------------------------------------------------------------------------------------------------------- Quarter Ended June 30 March 31 December 31 September 30 - --------------------------------------------------------------------------------------------------------------------------------- FISCAL 1997: Total interest income......................................... $129,081 $125,436 $127,747 $122,786 Net interest income........................................... 42,792 42,622 42,297 40,292 Provision for loan losses..................................... (2,000) (2,355) (2,108) (1,658) Gain on sales of securities and loans......................... 167 382 122 105 Net income.................................................... 17,060 16,177 14,907 (4,050) Earnings (loss) per share: Income (loss) before extraordinary items................... .78 .74 .71 (.18) Extraordinary items, net of tax benefit.................... -- -- (.03) -- Net income (loss).......................................... .78 .74 .68 (.18) Dividends declared per share.................................. .07 .07 .07 .067 - --------------------------------------------------------------------------------------------------------------------------------- FISCAL 1996: Total interest income......................................... $123,134 $122,899 $122,357 $122,702 Net interest income........................................... 43,490 42,561 38,625 38,099 Provision for loan losses..................................... (1,508) (1,508) (1,508) (1,583) Gain on sales of securities, loans and loan servicing rights.................................. 183 64 318 304 Net income.................................................... 15,844 16,354 11,864 11,244 Earnings per share............................................ .69 .73 .54 .52 Dividends declared per share.................................. .067 .067 .133 -- - --------------------------------------------------------------------------------------------------------------------------------- FISCAL 1995: Total interest income......................................... $120,330 $114,876 $111,913 $107,249 Net interest income........................................... 37,513 37,671 37,697 36,961 Provision for loan losses..................................... (1,583) (1,584) (1,658) (1,583) Gain on sales of securities, loans and loan servicing rights.................................. 426 699 481 177 Accelerated amortization of goodwill.......................... -- -- 10,678 10,679 Net income.................................................... 12,699 15,033 2,181 1,268 Earnings per share............................................ .59 .69 .10 .06 Dividends declared per share.................................. -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------
NOTE 27. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS No. 107), requires that the Corporation disclose estimated fair value amounts of its financial instruments. It is management's belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Corporation as of June 30, 1997 and 1996, as more fully described in the following table. It should be noted that the operations of the Corporation are managed from a going concern basis and not a liquidation basis. As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations. Additionally, a substantial portion of the Corporation's inherent value is the Bank's capitalization and franchise value. Neither of these components have been given consideration in the presentation of fair values which follow. The following presents the carrying value and fair value of the specified assets and liabilities held by the Corporation at June 30, 1997 and 1996. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors. 73
- --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 --------------------------- ------------------------------- Carrying Fair Carrying Fair Value Value Value Value - --------------------------------------------------------------------------------------------------------------------------------- SELECTED ASSETS - --------------------------------------------------------------------------------------------------------------------------------- Cash (including short-term investments).................... $ 55,809 $ 55,809 $ 35,827 $ 35,827 Investment securities...................................... 399,057 397,026 253,043 249,039 Mortgage-backed securities................................. 1,025,763 1,025,695 1,180,046 1,168,240 Loans receivable, net...................................... 5,258,739 5,294,505 4,813,164 4,833,778 Federal Home Loan Bank stock............................... 72,452 72,452 79,113 79,113 - --------------------------------------------------------------------------------------------------------------------------------- SELECTED LIABILITIES - --------------------------------------------------------------------------------------------------------------------------------- Deposits Passbook accounts....................................... 741,994 741,994 623,505 623,505 Market rate savings account............................. 137,892 137,892 159,672 159,672 NOW checking accounts................................... 382,076 382,076 332,233 332,233 Certificates of deposit................................. 3,116,957 3,106,408 3,189,166 3,182,810 --------- --------- --------- --------- Total deposits........................................ 4,378,919 4,368,370 4,304,576 4,298,220 Advances from Federal Home Loan Bank....................... 1,415,506 1,416,074 1,350,290 1,344,122 Securities sold under agreements to repurchase............. 639,294 639,412 380,755 379,585 Other borrowings........................................... 128,982 131,266 58,546 59,886 - --------------------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET INSTRUMENTS - --------------------------------------------------------------------------------------------------------------------------------- Derivative financial instruments........................... 254 (1,023) -- (1,646) Commitments................................................ -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------
The following sets forth the methods and assumptions used in determining the fair value estimates for the Corporation's financial instruments at June 30, 1997 and 1996. Cash and short-term investments: The book value of cash and short-term investments is assumed to approximate the fair value of such assets. Investment securities: Quoted market prices or dealer quotes were used to determine the fair value of investment securities. Mortgage-backed securities: For mortgage-backed securities available for sale and held to maturity the Corporation has utilized quotes for similar or identical securities in an actively traded market, where such a market exists, or has obtained quotes from independent security brokers to determine the fair value of such assets. Loans receivable: The fair value of loans receivable was estimated by discounting the future cash flows using the current market rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans were gathered by homogeneous groups with similar terms and conditions and discounted at derived current market rates or rates at which similar loans would be made to borrowers as of June 30, 1997 and 1996, respectively. The fair value of loans held for sale is determined by outstanding commitments from investors or current investor yield requirements calculated on an aggregate loan basis. In addition, when computing the estimated fair value for all loans, allowances for loan losses have been subtracted from the calculated fair value for consideration of credit issues. Federal Home Loan Bank stock: The fair value of such stock approximates book value since the Corporation is able to redeem this stock with the Federal Home Loan Bank at par value. Deposits: The fair value of savings deposits were determined as follows: (i) for passbook accounts, market rate savings 74 accounts and NOW checking accounts, fair value is determined to approximate the carrying value (the amount payable on demand) since such deposits are immediately withdrawable; (ii) for certificates of deposit, the fair value has been estimated by discounting expected future cash flows by derived current market rates as of June 30, 1997 and 1996, offered on certificates of deposit with similar maturities. In accordance with provisions of SFAS No. 107, no value has been assigned to the Corporation's long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under SFAS No. 107. Advances from Federal Home Loan Bank: The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates as of June 30, 1997 and 1996, for advances with similar terms and remaining maturities. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 1997 and 1996, over the contractual maturity of such borrowings. Other borrowings: Included in other borrowings at June 30, 1997, are subordinated extendible notes and guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures with carrying values of $50,000,000 and $45,000,000, respectively, and at June 30, 1996, subordinated notes and senior notes with carrying values of $40,250,000 and $6,900,000, respectively, with the fair value of such borrowings based on dealer quoted market prices. The fair value of other borrowings, excluding the aforementioned borrowings, was estimated by discounting the expected future cash flows using derived interest rates approximating market as of June 30, 1997 and 1996, over the contractual maturity of such other borrowings. Commitments: The commitments to originate and purchase loans have terms that are consistent with current market terms. Since all outstanding commitments are short-term or adjustable rate, the fair value of the commitments is not significant. Derivative financial instruments: The fair value of the interest rate swap and floor agreements, obtained from market quotes from independent security brokers, is the estimated amount that would be paid to terminate the swap agreements at June 30, 1997 and 1996, respectively, and the estimated amount that would be received to terminate the floor agreements at June 30, 1997. Limitations: It must be noted that fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Corporation's entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Corporation's financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates as of June 30, 1997 and 1996, are not intended to represent the underlying value of the Corporation, on either a going concern or a liquidation basis. NOTE 28. CURRENT ACCOUNTING PRONOUNCEMENTS: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: In June 1996, Statement of Financial Accounting Standards No. 125, entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) was issued. This statement, among other provisions, applies a "financial-components approach" that focuses on control, whereby an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, de-recognizes assets when control has been surrendered, and de-recognizes liabilities when extinguished. SFAS No. 125 provides consistent standards of distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement, effective for transfers and servicing of financial assets and extinguishment of 75 liabilities occurring after December 31, 1996, was applied prospectively. In December 1996, the FASB reconsidered certain provisions of SFAS No. 125 and issued Statement of Financial Accounting Standards No. 127, entitled "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125" (SFAS No. 127), which defers until after December 31, 1997, the effective date of implementation for transactions related to repurchase agreements, dollar roll repurchase agreements, securities lending and similar transactions. All provisions of SFAS No. 125 continue to be applied prospectively, with earlier or retroactive application not permitted. Management of the Corporation does not believe that the adoption of SFAS No. 127 will have a material effect on the Corporation's financial position, liquidity or results of operations. Earnings Per Share: In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, entitled "Earnings Per Share" (SFAS No. 128). This statement establishes standards for computing and presenting earnings per share (EPS) and simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share." SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 and its interpretations and supersedes or amends other accounting pronouncements related to present computations of EPS. The statement replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation with equal prominence of basic and diluted EPS for income from continuing operations and for net income on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The provisions of SFAS No. 128 are effective for financial statements for both interim and annual periods ending after December 15, 1997, with all prior period EPS data restated to conform with SFAS No. 128. The following table reflects basic and diluted EPS pursuant to the provisions of SFAS No. 128 for the three fiscal years ended June 30, 1997:
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended June 30, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items............................................ $ 44,677 $ 55,306 $ 31,181 Extraordinary items, net of tax benefit...................................... (583) -- -- ----------- ----------- ----------- Net income................................................................... $ 44,094 $ 55,306 $ 31,181 - --------------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding used in Basic EPS calculation................................. 21,583,083 21,939,148 21,282,715 Add assumed exercise of outstanding stock options as adjustments for dilutive securities.................................... 321,877 331,566 337,685 ----------- ----------- ----------- Weighted average number of common shares outstanding used in Diluted EPS calculation............................... 21,904,960 22,270,714 21,620,400 - --------------------------------------------------------------------------------------------------------------------------------- Basic EPS: Income before extraordinary items......................................... $ 2.07 $ 2.52 $ 1.47 Extraordinary items, net of tax benefit................................... (.03) -- -- ----------- ----------- ----------- Net income................................................................ $ 2.04 $ 2.52 $ 1.47 ----------- ----------- ----------- Diluted EPS: Income before extraordinary items......................................... $ 2.04 $ 2.48 $ 1.44 Extraordinary items, net of tax benefit................................... (.03) -- -- ----------- ----------- ----------- Net income................................................................ $ 2.01 $ 2.48 $ 1.44 - ---------------------------------------------------------------------------------------------------------------------------------
76 Disclosure of Information About Capital Structure: In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, entitled "Disclosure of Information About Capital Structure" (SFAS No. 129). This statement basically consolidates disclosure requirements found in other previously existing accounting literature regarding capital structure. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997, and since it contains no changes in the disclosure requirements, such adoption will not have a material effect on the Corporation's current capital structure disclosures. Reporting Comprehensive Income: In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 entitled "Reporting Comprehensive Income" (SFAS No. 130). This statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under generally accepted accounting principles bypass reported net income. SFAS No. 130 requires that comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements with the aggregate amount of comprehensive income reported in that same financial statement. SFAS No. 130 permits the statement of changes in stockholders' equity to be used to meet this requirement. Companies are encouraged, but not required, to display the components of other comprehensive income below the total for net income in the statement of operations or in a separate statement of comprehensive income. Companies are also required to display the cumulative total of other comprehensive income for the period as a separate component of equity in the statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997, or July 1, 1998, for the Corporation, with earlier application permitted. Companies are also required to report comparative totals for comprehensive income in interim reports. Management of the Corporation has not determined the period in which to adopt the provisions of this statement which are only of a disclosure nature. Disclosures About Segments of an Enterprise and Related Information: In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 entitled "Disclosures About Segments of an Enterprise and Related Information" (SFAS No. 131). This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and utilizes the "management approach" for segment reporting. The management approach is based on the way that the chief operating decision maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on any manner in which management disaggregates its company such as by products and services, geography, legal structure and management structure. SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and more specific and detailed geographic disclosures especially by countries as opposed to broad geographic regions. This statement also requires descriptive information about the way the operating segments were determined, the products/services provided by the operating segments, the differences between the measurements used in reporting segment information and those used in the general purpose financial statements, and the changes in the measurement of segment amounts from period to period. The provisions of SFAS No. 131 are effective for fiscal years beginning after December 15, 1997, or July 1, 1998, for the Corporation, with earlier application permitted. SFAS No. 131 does not need to be applied to interim statements in the initial year of application but such comparative information will be required in interim statements for the second year. Comparative information for earlier years must be restated in the initial year of application. Management of the Corporation has not determined the period in which to adopt the provisions of this statement which are only of a disclosure nature. 77 NOTE 29: SUBSEQUENT EVENTS - PENDING ACQUISITIONS: Liberty Financial Corporation: On August 18, 1997, the Corporation entered into a reorganization and merger agreement with Liberty Financial Corporation (Liberty), a privately held commercial bank and thrift holding company. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 8,748,500 outstanding shares of Liberty's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing stock price on September 11, 1997, of $44.4375, the transaction would result in the exchange of approximately 2,677,041 shares of the Corporation's common stock with an aggregate value of approximately $118,961,000. At June 30, 1997, Liberty had assets of approximately $620,500,000, deposits of approximately $533,200,000 and stockholders' equity of approximately $41,100,000. Liberty operates 36 branches in Iowa and six in the metropolitan area of Tucson, Arizona. This pending acquisition, which is subject to regulatory approvals and other conditions, is expected to be completed by March 31, 1998. This acquisition is expected to be accounted for as a pooling of interests. Mid Continent Bancshares, Inc.: On September 2, 1997, the Corporation entered into a reorganization and merger agreement with Mid Continent Bancshares, Inc. (Mid Continent), parent company of Mid-Continent Federal Savings Bank. Under the terms of the merger agreement, the Corporation will acquire in a tax-free reorganization all 1,958,250 outstanding shares of Mid Continent's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing price on September 11, 1997, of $44.4375, the transaction would result in the exchange of approximately 1,702,306 shares of the Corporation's common stock with an aggregate value of approximately $75,646,000. At June 30, 1997, Mid Continent had total assets of approximately $408,600,000, deposits of approximately $247,000,000 and stockholders' equity of approximately $38,400,000. Mid Continent operates ten branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, Mid Continent shareholders' approval and other conditions, is expected to close by March 31, 1998. This acquisition is expected to be accounted for as a pooling of interests. First National Bank Shares, LTD: On September 11, 1997, the Corporation entered into a reorganization and merger agreement with First National Bank Shares, LTD (First National), parent company of First United National Bank and Trust Company. Under the terms of the merger agreement, the Corporation will acquire all of the outstanding shares of First National's common stock in exchange for the Corporation's common stock. Based on the Corporation's closing price on September 11, 1997, of $44.4375, the transaction would result in the exchange of approximately 661,905 shares of the Corporation's common stock with a total aggregate value approximating $29,413,000. At August 31, 1997, First National had assets of approximately $153,800,000, deposits of approximately $132,100,000 and stockholders' equity of approximately $10,600,000. First National operates seven branches located in Kansas. This pending acquisition, which is subject to receipt of regulatory approvals, First National shareholders' approval and other conditions, is expected to close during the quarter ending March 31, 1998. This acquisition is expected to be accounted for as a purchase with core value of deposits resulting from this transaction to be amortized on an accelerated basis over a period not to exceed 10 years and goodwill, if any, to be amortized on a straight line basis over a period not to exceed 20 years. 78 MANAGEMENT'S REPORT ON INTERNAL CONTROLS - -------------------------------------------------------------------------------- Management of Commercial Federal Corporation (the Corporation) is responsible for the preparation, integrity, and fair presentation of its published consolidated financial statements and all other information presented in this Annual Report. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on informed judgments and estimates made by Management. Management is responsible for establishing and maintaining an effective internal control structure over financial reporting in conformity with both generally accepted accounting principles and the Office of Thrift Supervision instructions for Thrift Financial Reports. The internal control structure contains monitoring mechanisms and actions are taken to correct any deficiencies identified. There are inherent limitations in the effectiveness of any structure of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control structure can provide only reasonable assurance with respect to financial statements preparation. Further, because of changes in conditions, the effectiveness of an internal control structure may vary over time. Management assessed the Corporation's internal control structure over financial reporting presented in conformity with both generally accepted accounting principles and Thrift Financial Report instructions as of June 30, 1997. This assessment was based on the criteria for effective internal control described in "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, Management believes that the Corporation maintained an effective internal control structure over financial reporting as of June 30, 1997. /s/ William A. Fitzgerald /s/ James A. Laphen William A. Fitzgerald James A. Laphen Chairman of the Board and President, Chief Operating Officer Chief Executive Officer and Chief Financial Officer 79 INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders Commercial Federal Corporation Omaha, Nebraska We have audited the accompanying consolidated statements of financial condition of Commercial Federal Corporation and subsidiaries (the "Corporation") as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. 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, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commercial Federal Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements in fiscal year 1996, the Corporation changed its method of accounting for mortgage servicing rights. /s/ Deloitte & Touche LLP Omaha, Nebraska August 15, 1997 (September 11, 1997 as to Note 29) 80 INVESTOR INFORMATION CORPORATE HEADQUARTERS Commercial Federal Corporation Commercial Federal Tower 2120 S. 72nd Street Omaha, NE 68124 GENERAL COUNSEL Fitzgerald, Schorr, Barmettler, Brennan 1000 Woodmen Tower Omaha, NE 68102 WASHINGTON COUNSEL Housley Kantarian & Bronstein, P.C. 1220 19th Street, N.W. Suite 700 Washington, D.C. 20036 INDEPENDENT AUDITORS Deloitte & Touche LLP 2000 First National Center Omaha, NE 68102 SHAREHOLDER SERVICES AND INVESTOR RELATIONS Shareholders desiring to change the address or ownership of stock, report lost certificates or to consolidate accounts should contact: Transfer Agent Harris Trust & Savings Bank Shareholder Services Division 311 West Monroe P.O. Box A3504 Chicago, IL 60690 Telephone (312) 360-5100 Analysts, investors and others seeking a copy of the Form 10-K without charge or other financial information should contact: Investor Relations Department Commercial Federal Corporation 2120 S. 72nd Street Omaha, NE 68124 Telephone (402) 390-6553 ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday, November 18, 1997. The meeting will be held at the Holiday Inn Central Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C" Meeting Room. Further information with regard to this meeting can be found in the proxy statement. STOCK LISTING Commercial Federal Corporation's common stock is traded on the New York Stock Exchange (NYSE) using the common stock symbol "CFB." The Wall Street Journal publishes daily trading information for the stock under the stock abbreviation "ComrclFed" in the NYSE listings. VISIT COMMERCIAL FEDERAL ON THE INTERNET www.comfedbank.com For press releases, financial information, and services available. 81 EXECUTIVE OFFICERS OF THE CORPORATION WILLIAM A. FITZGERALD Chairman of the Board and Chief Executive Officer JAMES A. LAPHEN President and Chief Operating Officer GARY L. MATTER Senior Vice President, Controller and Secretary JOY J. NARZISI Senior Vice President and Treasurer SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES MARGARET E. ASH Senior Vice President Retail Operations GARY L. BAUGH Senior Vice President State Director - Kansas ROGER L. LEWIS Senior Vice President Marketing JON W. STEPHENSON Senior Vice President Director of Retail Banking TERRY A. TAGGART Senior Vice President State Director - Colorado GARY D. WHITE Senior Vice President Administration and Project Management RONALD A. AALSETH First Vice President Insurance and Brokerage Services R. HAL BAILEY First Vice President Construction Lending MELISSA M. BEUMLER First Vice President Marketing RONALD P. CHEFFER First Vice President Corporate Credit MONTE M. DEERE First Vice President State Director - Oklahoma JOHN J. GRIFFITH First Vice President Specialized Lending ROBERT E. GRUWELL First Vice President Treasury DAVID E. GUNTER, JR. First Vice President Commercial Real Estate MICHAEL J. HOFFMAN First Vice President State Director - Nebraska and Iowa KEVIN C. PARKS First Vice President Internal Audit THOMAS N. PERKINS First Vice President Acquisitions DENNIS R. ZIMMERMAN First Vice President Information Systems 82 BRANCH LOCATIONS NEBRASKA (34) Omaha (17) Lincoln (7) Beatrice Bellevue Columbus Fremont Grand Island Kearney LaVista/Papillion Norfolk North Platte South Sioux City COLORADO (21) Denver (6) Arapahoe County (2) Lakewood (2) Arvada Aurora Broomfield Englewood Ft. Collins (opening Fall 1997) Greeley Jefferson County Longmont Loveland Northglenn Wheat Ridge KANSAS (27) Kansas City (3) Wichita (3) Arkansas City Colby Derby Dodge City Fredonia Garden City Greensburg Hutchinson Iola Kinsley Larned Lawrence Lyndon McPherson Newton Oberlin Osage City Ottawa Topeka Wamego Wellington OKLAHOMA (19) Oklahoma City (5) Ada (2) Ponca City (2) Tulsa (2) Ardmore Bartlesville Bixby Cushing Edmond Enid Norman Seminole IOWA (8) Des Moines (opening Fall 1997) Boone Carroll Harlan Lake City Madrid Manning Ogden Pending Acquisitions: Commercial Federal expects to close its three previously announced acquisitions in fiscal year 1998. The acquisitions will add 59 additional branch locations: Iowa - 36 Kansas - 17 Arizona - 6 83 EX-21 5 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Corporation EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION - -------------------------------------------
Percent State of Parent Company Subsidiaries Owned Incorporation - ------------------------- ------------------------------------ --------- ------------- Commercial Federal Commercial Federal Bank, 100% Nebraska Corporation a Federal Savings Bank CFC Preferred Trust 100% Delaware Commercial Federal Commercial Federal Service 100% Nebraska Bank, a Federal Corporation Savings Bank Commercial Federal Mortgage 100% Nebraska Corporation Commercial Federal Investment 100% Nebraska Services Inc. Commercial Federal Insurance 100% Nebraska Corporation Empire Capital Corporation I 100% Colorado Roxborough Acquisition Corp. 100% Nebraska CFT Company 100% Nebraska Railroad Savings 100% Kansas Service Corporation Tower & Title Escrow Company 80% Nebraska
- -------------------------------------------------------------------------------- EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION(CONTINUED) - ------------------------------------------------------
Percent State of Parent Company Subsidiaries Owned Incorporation - ------------------------- ------------------------------------ --------- ------------- Mid-Central Service Corporation 100% Iowa Community Service Inc. 100% Kansas Commercial Federal Commercial Federal Realty 100% Nebraska Service Corp. Investors Corporation Commercial Federal Affordable 100% Nebraska Housing, Inc. Commercial Federal ComFed Insurance Services 100% British Insurance Corp. Company, Limited Virgin Islands
- -------------------------------------------------------------------------------- Note: All of the material accounts of the above listed companies are consolidated in the Corporation's consolidated financial statements. All significant intercompany balances and transactions are eliminated in consolidation. - -------------------------------------------------------------------------------- Subsidiaries Dissolved During Fiscal Year 1997: - ----------------------------------------------- Commercial Investment Subsidiary, Inc. Trampe and Associates Company Commercial Marketing, Inc. Systems Marketing, Inc. Financial Investment Associates Incorporated Commercial Federal Investment Corporation Commercial Financial Investment Associates, Inc. ESL Corporation CF Woodlands Properties, Inc. Provident Investments, Inc. C.H.E., Inc. Commercial Hospitality, Inc. Commercial Hospitality Enterprises, Inc. Metro Title and Escrow Company, Inc. - -------------------------------------------------------------------------------- EX-23 6 EXHIBIT 23 EXHIBIT 23 Consent of Independent Auditors EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------- INDEPENDENT AUDITORS' CONSENT - ----------------------------- We consent to the incorporation by reference in Registration Statement Nos. 33-36708, 33-05616, 33-39762, 33-31685, 33-60448, 33-21068, 33-63221, 33-63629 and Post-Effective Amendment No. 1 to Registration Statement Nos. 33-01333 and 33-10396 of Commercial Federal Corporation on Form S-8 of our report dated August 15, 1997. (September 11, 1997 as to Note 29), which includes an explanatory paragraph describing the change in method of accounting for mortgage servicing rights in fiscal year 1996, incorporated by reference in the Annual Report on Form 10-K of Commercial Federal Corporation for the year ended June 30, 1997. /s/ Deloitte & Touche LLP Omaha, Nebraska September 25, 1997 EX-27 7 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-01-1996 JUN-30-1997 JUN-30-1997 55,809 0 0 0 215,696 1,209,124 1,207,025 5,258,739 48,467 7,096,665 4,378,919 1,257,608 107,858 926,174 0 0 216 425,890 7,096,665 407,416 97,634 0 505,050 220,186 337,047 168,003 8,121 0 149,848 68,513 44,677 (583) 0 44,094 2.01 2.01 2.57 36,814 0 9,644 0 49,278 11,199 2,257 48,467 10,809 0 37,658
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