-----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, FRILqKbPsbaT3O6+7vRpis60oRz7OS9wgf6QDoK522cQ+YAXm/dOwjLDIK0pH4J/ XOsuZgcudglz/sbYmld+7g== 0000950109-99-003523.txt : 19991227 0000950109-99-003523.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950109-99-003523 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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-K405 SEC ACT: SEC FILE NUMBER: 001-11515 FILM NUMBER: 99718754 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-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS 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, 1999, 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: COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE -------------------------------------- ----------------------- (Title of Each Class) (Name of Each Exchange on Which Registered) Securities registered pursuant to Section 12(g) of the Act: None 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.[ X ] 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 20, 1999, was $1,200,017,631. As of September 20, 1999, there were issued and outstanding 59,362,412 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, 1999 - Parts I, II and IV. 2. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders - Part III. 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. At June 30, 1999, the Corporation incurred interest expense on $50.0 million of subordinated extendible notes, $46.4 million of junior subordinated deferrable interest debentures, $40.0 million of one-year purchase notes from the acquisition of AmerUs Bank ("AmerUs") and an unsecured promissory term note totaling $32.5 million. The $32.5 million unsecured note was paid in full on July 1, 1999, and the $40.0 million of one-year purchase notes were paid in full on July 30, 1999. Both of these notes were repaid from the borrowing of a $72.5 million term note dated July 1, 1999 and due June 30, 2004 and bearing interest adjusted monthly at 100 basis points below the lender's national base rate. Interest is payable monthly on the subordinated extendible notes and quarterly on the junior subordinated deferrable interest debentures. See Note 15 of the Notes to Consolidated Financial Statements in the Corporation's 1999 Annual Report to Stockholders (the "Annual Report") which is incorporated herein by reference, for additional information on the debt of the Corporation. 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 $15.1 million, or $.25 per common share, were declared during fiscal year 1999. 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 1999 the Corporation received, in cash, dividends totaling $73.3 million from the Bank which were made primarily to cover (i) the cash payment of $25.0 million related to the acquisition of Midland First Financial Corporation ("Midland") on March 1, 1999, (ii) common stock cash dividends totaling $17.4 million paid by the parent company to its shareholders during fiscal year 1999, (iii) interest payments totaling $15.2 million on the parent company's debt, (iv) the cash payment of $10.0 million related to the acquisition of AmerUs on July 31, 1998, and (v) principal payments of $5.7 million on the parent company's five-year promissory term note. 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 has transitioned from a thrift institution to a community banking institution offering commercial and consumer banking, mortgage banking and trust and investment services. The Corporation completed three acquisitions in fiscal year 1999 and four acquisitions in fiscal year 1998. These acquisitions, three of which were commercial banks, have allowed the Bank to further expand its banking services, commercial and agricultural loans, business checking, equipment leasing and trust services. In addition, the fiscal year 1999 acquisitions created new customer franchises in Missouri, Minnesota and South Dakota and greatly expanded the Bank's franchises in Iowa, Colorado, Nebraska and Kansas. The Bank has moved from primarily a single-family residential lender to a full service banking institution with branches not only in traditional locations but also in supermarkets and convenience stores, more ATM outlets and expanded services in telephone bill paying and Internet 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 of mortgage loan originators. 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 and commercial 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 and regional economic situations. At June 30, 1999, the Corporation had assets of $12.8 billion and stockholders' equity of $966.9 million, and through the Bank operated 256 branches in Iowa (77), Colorado (44), Nebraska (42), Kansas (41), Oklahoma (21), Missouri (19), Arizona (7), Minnesota (4) and South Dakota (1). The increase in branches over fiscal year 1998 was the result of three acquisitions during fiscal year 1999. Effective September 23, 1999 the Bank entered into an agreement to sell the branch located in Watertown, South Dakota. This was the only branch the Bank had in South Dakota. Such sale is subject to regulatory approval and is anticipated to close in November 1999. The Corporation consummated the acquisitions of AmerUs on July 31, 1998, First Colorado Bancorp, Inc. ("First Colorado") on August 14, 1998, and Midland on March 1, 1999. On a combined basis, these institutions operated 82 branches and had assets of approximately $3.2 billion and deposits of approximately $2.5 billion. These acquisitions provided the Corporation entry into three new states, access to supermarket branches and significant expansion of its presence in the metropolitan areas of Denver, Colorado and Kansas City, Missouri. The accounts and results of operations of AmerUs and Midland are reflected in the Corporation's consolidated financial statements beginning July 31, 1998, and March 1, 1999, respectively, since these acquisitions were accounted for as purchases. The First Colorado acquisition was accounted for under the pooling of interests accounting method and, accordingly, the Corporation's historical consolidated financial statements were restated for all prior periods to include the accounts and results of operations of First Colorado. The Bank is one of the largest retail financial institutions in the Midwest, and, based upon total assets at June 30, 1999, the Corporation was the 11th largest publicly-held thrift institution holding company in the United States. In addition, CFMC serviced a loan portfolio totaling $13.5 billion at June 30, 1999, with approximately $7.5 billion in loans serviced for third parties and $6.0 billion in loans serviced for the Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General" in the Annual Report. The Corporation's strategy for of its existing network growth emphasizes both internal and external growth. Operations focus on increasing deposits, primarily demand accounts and public funds, making loans (primarily consumer, commercial real estate, single-family residential, business lending and agribusiness loans) and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to continue to expand its operations within its market areas through direct marketing efforts aimed at increasing market share and 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 non-interest income. The Corporation's operations are also continually reviewed in order to gain efficiencies to increase productivity and reduce costs. Complementing its strategy of internal growth, the Corporation continues to grow its current franchise through an ongoing program of selective acquisitions of other financial institutions. Acquisition candidates have been, and will continue to be, selected based on the extent to which the candidates can enhance the Corporation's retail presence in both new and underserved markets and enhance the Corporation's existing retail network. See "Acquisitions During Fiscal Year 1999" herein. 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 - ------------------- Acquisitions During Fiscal Year 1999. - ------------------------------------- AmerUs Bank. On July 31, 1998, the Corporation consummated its acquisition of - ------------ AmerUs, a wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a taxable acquisition all of the outstanding shares of the common stock of AmerUs for total consideration of approximately $178.3 million. Such consideration consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One single-family residential mortgage loans and a receivable for income tax benefits) totaling approximately $85.0 million, (ii) cash (as adjusted per the agreement) totaling approximately $53.2 million, and (iii) one-year promissory notes for $40.0 million bearing interest, adjusted monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a federally chartered savings bank headquartered in Des Moines, Iowa and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase accounting adjustments, AmerUs had total assets of approximately $1.3 billion, deposits of approximately $949.7 million and stockholder's equity of approximately $84.8 million. This acquisition was accounted for as a purchase. The one-year promissory notes were paid in full on July 30, 1999. See Note 2 of Notes to Consolidated Financial Statements in the Annual Report for additional information. First Colorado Bancorp, Inc. On August 14, 1998, the Corporation consummated - ---------------------------- its acquisition of First Colorado. The Corporation acquired in a tax-free reorganization all of the outstanding shares of First Colorado's common stock in exchange for 18,278,789 shares of its common stock. Based on the Corporation's closing stock price of $26.375 at August 14, 1998, the total consideration for this acquisition, including cash paid for fractional shares, approximated $482.2 million. An additional requirement of the transaction with First Colorado was the issuance of 1,400,000 shares of First Colorado common stock immediately prior to the consummation of the merger. Such requirement was necessary to cure the taint on the treasury stock of First Colorado so this transaction could be accounted for as a pooling of interests. First Colorado, headquartered in Lakewood, Colorado, was a unitary savings and loan holding company and the parent company of First Federal Bank of Colorado, a federally chartered stock savings bank that operated 27 branches located in Colorado, with 23 branches located in the Denver metropolitan area and four in Colorado's western slope region. At July 31, 1998, First Colorado had assets of approximately $1.6 billion, deposits of approximately $1.2 billion and stockholders' equity of approximately $254.7 million. The acquisition was accounted for as a pooling of interests. See Note 2 of Notes to Consolidated Financial Statements in the Annual Report for additional information. Midland First Financial Corporation. On March 1, 1999, the Corporation - ------------------------------------ consummated its acquisition of Midland, parent company of Midland Bank. The Corporation acquired in a taxable acquisition all of the outstanding shares of Midland's common stock. The total purchase consideration of this acquisition was $83.0 million in cash, including cash to pay off existing Midland debt totaling $5.6 million, the retirement of preferred stock of both Midland and Midland Bank totaling $11.6 million and $810,000 for advisor fees. Midland Bank was a privately-held commercial bank headquartered in Lee's Summit, Missouri that operated eight branches in the greater Kansas City area. At February 28, 1999, Midland had total assets of approximately $399.2 million, deposits of approximately $353.1 million and stockholders' equity of approximately $24.2 million. This acquisition was accounted for as a purchase. See Note 2 of Notes to Consolidated Financial Statements in the Annual Report for additional information. 4 Merger Expenses and Other Nonrecurring Charges. - ----------------------------------------------- During fiscal year 1999 the Corporation incurred merger expenses and other nonrecurring charges totaling approximately $30.0 million. Such amounts for fiscal year 1999 are associated with the First Colorado acquisition totaling $16.0 million and the termination of three employee stock ownership plans totaling $14.0 million acquired in mergers during the past two fiscal years. These employee stock ownership plans were terminated following consummation of the mergers and receipt of determination letters from the Internal Revenue Service to terminate such plans. The merger-related expenses totaling $16.0 million consists of $8.0 million in transition costs as a result of the First Colorado acquisition, $6.7 million in costs to combine operations and conform certain accounting practices, $1.4 million in personnel expenses for severance, retention and other employee related costs and $1.0 million in additional loss reserves to conform First Colorado's loan portfolios to the reserve policies of the Corporation. These expenses were offset by a gain of $1.1 million on the sale of a First Colorado branch that was located in close proximity to another branch of the Bank. Common Stock Repurchase. - ------------------------ Effective April 28, 1999, the Corporation's Board of Directors authorized the repurchase of up to five percent of the Corporation's outstanding common stock during the next 18 months. Such repurchase is expected to approximate 3,000,000 shares of common stock. Repurchases will be made depending upon market conditions and various other factors. Any repurchase generally would be on the open-market, although privately negotiated transactions are also possible. In compliance with Nebraska law, all repurchased shares will be cancelled. During the fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled 1,500,000 shares of its common stock at a cost of approximately $36.2 million. In the first quarter of fiscal year 2000, through September 23, 1999, the Corporation repurchased and canceled an additional 423,500 shares of its common stock at a cost of approximately $9.7 million. Special Meeting of Stockholders. - -------------------------------- At the Special Meeting of Stockholders on July 3, 1998, three proposals were approved. The proposals approved were (i) the First Colorado transaction and an amendment to the Corporation's Articles of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii) an amendment to further increase the number of authorized shares from 70,000,000 to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock Option and Incentive Plan to increase the number of shares available for grant by 2,400,000 shares. Year 2000. - ---------- The year 2000 poses an important business issue regarding how existing application software programs and operating systems can accommodate this date value. Many computer programs that can only distinguish the final two digits of the year are expected to read entries for the year 2000 as the year 1900. Like most financial service providers, the Corporation may be significantly affected by the Year 2000 issue due to the nature of financial information. Software, hardware and equipment both within and outside the Corporation's direct control and with whom the Corporation electronically or operationally interfaces are likely to be affected. If computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations that rely on the data field information, such as interest, payment or due dates and other operating functions, may generate results that could be significantly misstated, and the Corporation could experience a temporary inability to process transactions and engage in normal business activities. All of the significant computer programs of the Corporation that could be affected by this issue are provided by major third party vendors. The Corporation has completed the process of replacing/upgrading its computer systems and programs, as well as most equipment, in order to provide cost- effective and efficient delivery of services to its customers, information to management, and to provide additional capacity for processing information and transactions due to acquisitions. The total cost of the Year 2000 project is estimated to approximate $14.0 million which will be funded through cash flows from operations. Most of the total project cost is expected to be capitalized since it involves the purchase of computer systems, programs and equipment. During fiscal year 1999 approximately $4.4 million was expensed that related to systems conversion costs, internal staff costs, as well as consulting and other Year 2000 expenses. In addition, during fiscal year 1998 the Corporation expensed $4.3 million due to accelerated amortization of certain computer systems and software necessitated by Year 2000 compliance and the related planned systems conversions. The adjusted carrying amount of these computer systems and software was depreciated until their disposal at the date of conversion. 5 The third party vendors have advised the Corporation that all such mission critical computer systems and programs are Year 2000 compliant. The Corporation tested all such systems for Year 2000 compliance before integration into its computer environment. The Corporation scheduled certain operations that began conversions in October 1998. These conversions allowed the Corporation to resolve application and conversion problems that arose and to do further testing to enhance software programs and future conversions. Final conversions that are Year 2000 compliant were completed by the end of fiscal year 1999. Other mission critical systems were tested in conjunction with certain nationwide financial industry test programs. All Year 2000 testing was substantially completed June 30, 1999. In addition, as a financial services institution, the Corporation is under the supervision of federal regulatory agencies that have guidelines and perform ongoing monitoring and evaluation of the Corporation's Year 2000 readiness. The Corporation is also working with non-mainframe software and hardware vendors to determine the extent to which the Corporation's interface systems may be vulnerable to those third parties' failure to remediate their own Year 2000 issues. If the third party vendors are unable to resolve Year 2000 issues in time, the conversion is delayed significantly or problems arise as a result of the conversion, the Corporation would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have significant adverse impact on the financial condition and results of operations of the Corporation. In addition, there can be no assurance that the systems of other companies on which the Corporation's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Corporation's systems, would not have a material adverse effect on the Corporation. The Corporation has developed and tested a Year 2000 contingency plan that addresses, among other issues, critical operations and potential failures thereof, and strategies for business continuation such as contracting with alternative vendors and re-deployment of internal staff as needed in critical areas. The Corporation has also evaluated non-technical systems that rely on imbedded technology in their critical processes so that such systems will continue to operate without interruption. Supervisory Goodwill Lawsuit. - ----------------------------- On September 12, 1994, the Bank and the Corporation 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 that it had entered into with the Bank. The suit alleges that such governmental action constitutes a 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 Corporation and the Bank are pursuing alternative damage claims of up to approximately $230,000,000. The Bank also assumed a lawsuit in the merger with Mid Continent Bancshares, Inc. ("Mid Continent'), a fiscal year 1998 acquisition, against the United States also relating to a supervisory goodwill claim filed by the former Mid Continent. The litigation status and process of these legal actions, as well as that of numerous actions brought by others alleging similar claims with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank (including the Mid Continent claim) uncertain as to their 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 that may be awarded to the Bank and the Corporation if they finally prevail 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, 1999, the Bank exceeded the minimum requirements for the well-capitalized category. As of June 30, 1999, 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. 6 The following presents the Bank's regulatory capital levels and ratios relative to its minimum capital requirements as of June 30, 1999:
Actual Capital Required Capital ------------------ -------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------- OTS Capital Adequacy: Tangible capital $ 880,400 6.97% $ 189,412 1.5% Core capital 890,967 7.05 379,142 3.0 Risk-based capital 957,676 13.70 559,279 8.0 FDICIA Regulations to be Classified Well-Capitalized: Tier 1 leverage capital 890,967 7.05 631,903 5.0 Tier 1 risk-based capital 890,967 12.74 419,459 6.0 Total risk-based capital 957,676 13.70 699,099 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 1999, the Corporation adopted the provisions of the following accounting pronouncements: Statement No. 129 entitled "Disclosure of Information About Capital Structure," Statement No. 130 "Reporting Comprehensive Income," Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," and Statement No. 132 "Employers' Disclosure About Pensions and Other Postretirement Benefits." All of these pronouncements were only of a disclosure nature, and therefore the adoption of these statements did not have a material effect on the Corporation's financial position, liquidity or results of operations. See Notes 1, 21 and 23 and the Consolidated Statement of Comprehensive Income to the Consolidated Financial Statements in the Annual Report for a discussion of these new accounting pronouncements, their effect on the Corporation and implementation of such. Other Information. - ------------------ Additional information concerning the general development of the business of the Corporation during fiscal year 1999 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. Forward Looking Statements. - --------------------------- This document contains or incorporates by reference forward-looking statements that involve inherent risks and uncertainties. The Corporation cautions readers that a number of important factors could cause actual results to differ materially from those in the forward looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the progress of integrating acquisitions, economic conditions, adequacy of allowance for credit losses, levels of charge-offs, the costs or difficulties associated with the resolution of Year 2000 issues on computer systems greater than anticipated, technology changes and competition in the geographic and business areas in which the Corporation conducts its operations. These statements are based on management's current expectations. Actual results in future periods may differ materially from those currently expected because of various risks and uncertainties. 7 MARKET RISK - ----------- The Corporation's Asset Liability Management Committee ("ALCO"), which includes senior management representatives, monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components, consistent with maintaining acceptable levels of changes in the net portfolio value ("NPV") ratio and net interest income. A primary purpose of the Corporation's asset and liability management is to manage interest rate risk to invest effectively 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 the NPV rate and net interest income. The Bank'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 change in the Bank's NPV ratio in the event of hypothetical changes in interest rates. The NPV ratio is defined as the market value of the Bank's capital divided by the market value of its assets. Interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank's assets and liabilities. If estimated changes to the NPV ratio and the sensitivity gap are not within the limits established by the Board of Directors, the Board may direct management to adjust its asset and liability mix to bring the interest rate risk within Board- approved limits. In order to reduce the exposure to interest rate fluctuations, the Corporation has developed strategies to 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, residential construction loans, consumer loans and short-term commercial operating and agricultural loans. 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, 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. On December 1, 1998, the provisions of Thrift Bulletin 13a (TB-13a) became effective. This bulletin requires that the Corporation's Board of Directors set interest rate risk limits that would prohibit the Bank from exhibiting a post- shock NPV ratio and interest rate sensitivity measure of "significant risk" or greater. The Bank's interest rate risk sensitivity is measured by computing estimated changes in the NPV ratio over a range of hypothetical changes in market interest rates. The NPV ratio represents the market value of the Bank's capital (defined as the market value of assets minus the market value of liabilities, with adjustments made for the fair value of interest rate swap, cap, and floor agreements as well as the loan servicing portfolio) divided by the market value of the Bank's assets, and can be thought of as a market value capital ratio. The Corporation's Board of Directors has adopted an interest rate risk policy which establishes a minimum allowable NPV ratio of 7.0% over a range of hypothetical interest rates extending from 300 basis points below current levels to 300 basis points above current levels. In addition, the policy establishes a maximum allowable change in the NPV ratio of 3.0% in the event of an instantaneous and adverse change in interest rates of 200 basis points. The Board limits are more conservative than the limits set by the OTS to maintain a risk rating better than "significant risk." The OTS limits set a minimum NPV ratio of 6.0% at the 200 basis point rate shock level, and a maximum change in the NPV ratio of 4.0%, or 400 basis points, at the same level. 8 The following table presents the projected change in the Bank's NPV ratio for various hypothetical rate shock levels as of June 30, 1999.
- -------------------------------------------------------------------------------------------------------------------------- Hypothetical Market Market Change Change in Value of Value of NPV Board in NPV Board Interest Rates Capital Assets Ratio Limit Ratio Limit - -------------------------------------------------------------------------------------------------------------------------- 300 basis point rise $ 715,383 $11,683,648 6.12% 7.00% (4.85)% 200 basis point rise 933,184 12,001,312 7.78% 7.00% (3.19)% (3.00)% 100 basis point rise 1,155,763 12,323,116 9.38% 7.00% (1.59)% Base scenario 1,388,535 12,661,113 10.97% 7.00% -- 100 basis point decline 1,633,824 12,952,691 12.61% 7.00% 1.64% 200 basis point decline 1,680,213 13,129,818 12.80% 7.00% 1.83% (3.00)% 300 basis point decline 1,539,414 13,293,314 11.58% 7.00% 0.61% - --------------------------------------------------------------------------------------------------------------------------
The preceding table indicates that at June 30, 1999 the Bank's NPV ratio would decrease in the event of an immediate rise in interest rates, while the Bank's NPV ratio would increase in the event of immediate decline in interest rates. At June 30, 1999 the Bank's NPV ratios were within the targets set by the Board of Directors in all rate scenarios except the 300 basis point rise scenario. TheBank was outside the limit set by the Board of Directors for the change in NPV ratio in the 200 basis point rise scenario. Such interest rate sensitivity measures per TB-13a classifies the Bank with a risk rating of "moderate risk." Therefore, at June 30, 1999 the Bank was within the limits set by the OTS to maintain a risk rating of better than "significant risk." The NPV ratio is calculated by the Corporation pursuant to guidelines established by the OTS. The modeling calculation is based on the net present value of discounted estimated cash flows utilizing prepayment assumptions and market rates of interest provided by independent brokers and other public sources as of June 30, 1999, with adjustments made to reflect the shift in interest rates 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 deposit 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. 9 The following table presents the Bank's projected change in net interest income for the various hypothetical changes in interest rates at June 30, 1999 compared to June 30, 1998 and is presented for comparative purposes since the Corporation utilized the market value of portfolio equity last fiscal year.
- ------------------------------------------------------------------------------------------------------------------------------------ June 30, 1999 June 30, 1998 ---------------------------------------------- -------------------------------------------------- Hypothetical Net Interest Net Interest Change in Net Interest Income Percent Net Interest Income Percent Interest Rates Income Change Change Income Change Change - ---------------------------- ---------------------------------------------- -------------------------------------------------- 300 basis point rise $ 263,230 $(108,532) (29.2)% $ 219,531 $ (32,716) (13.0)% 200 basis point rise 304,392 (67,370) (18.1) 237,011 (15,236) (6.0) 100 basis point rise 342,296 (29,466) (7.9) 248,741 (3,506) (1.4) Base Scenario 371,762 -- -- 252,247 -- -- 100 basis point decline 387,498 15,736 4.2 258,150 5,903 2.3 200 basis point decline 388,938 17,176 4.6 264,632 12,385 4.9 300 basis point decline 388,746 16,984 4.6 277,295 25,048 9.9 - ------------------------------------------------------------------------------------------------------------------------------------
The preceding table indicates that the Bank's net interest income sensitivity to rising interest rates has increased at June 30, 1999 compared to June 30, 1998, while the Bank's sensitivity to falling interest rates has decreased for the 200 and 300 basis point scenarios. As of June 30, 1999, both the size and the mix of the Corporation's assets and liabilities have changed as compared to June 30, 1998. These changes are primarily the result of the acquisitions of AmerUs, First Colorado and Midland and the asset/liability strategies implemented by management. The Corporation has also increased its balance of callable investment securities and fixed-rate mortgage assets, leveraged its balance sheet by taking down callable FHLB advances, and expanded its community banking operations with increased emphasis on commercial, agricultural, and consumer loans. 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 $1.3 billion, or 9.88% of the Bank's total assets at June 30, 1999. 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" and Note 16 of Notes to Consolidated Financial Statements for additional information in the Annual Report. 10 LENDING ACTIVITIES - ------------------ General. The Corporation's lending activities focus 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. Emphasis on consumer loans during fiscal years 1999 and 1998 increased substantially over previous fiscal years. Residential construction lending has also increased over fiscal years 1998 and 1997. Residential loan origination activity, including activity through correspondents, was lower for fiscal year 1999 compared to fiscal year 1998 due primarily to a larger volume of loan refinancing activity in fiscal year 1998. 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 256 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, 1999, the Corporation's total loan and mortgage-backed securities portfolio was $10.6 billion, representing over 83.0% of its $12.8 billion of total assets at that date. The carrying value of mortgage-backed securities totaled $1.3 billion at June 30, 1999, representing 12.1% of the Corporation's total loan and mortgage-backed securities portfolio at such date. The Corporation's total loan and mortgage-backed securities portfolio was secured primarily by real estate at June 30, 1999. Commercial real estate and land loans (collectively referred to as "income property loans") are secured by various types of commercial properties including office buildings, shopping centers, warehouses and other income producing properties. Commercial real estate lending increased in fiscal year 1999 and is expected to be a growth area for the Corporation in fiscal year 2000. Management of the Corporation believes that is has a number of potentially productive markets available to it pursuant to its fiscal years 1999 and 1998 acquisitions. The Corporation's single-family residential construction lending activity is primarily attributable to operations in Las Vegas, Nevada, Florida and in its primary market areas. Residential construction lending also operates in Tucson, Arizona, Des Moines and Cedar Rapids, Iowa and Springfield, Missouri, in addition to the Corporation's current markets. Lending operations have continued in fiscal year 1999 in the Dallas/Fort Worth area that began in 1998 on a limited basis. Multi-family residential loans consist of loans secured by various types of properties, including townhomes, condominiums and apartment projects with more than four dwelling units. Agricultural lending began in fiscal year 1998 for the Corporation that was assumed from 1998 acquisitions. The Corporation expects to moderately expand this business line in the markets served by these former institutions and to its contiguous branches. The agricultural lending is primarily for equipment, land and production. At June 30, 1999, agricultural business and agricultural real estate loans totaled $128.2 million. Another line of business acquired from a 1998 acquisition is lease financing that consists of the origination, servicing and securitization of commercial equipment leases. The type of equipment leased consists primarily of office equipment and commercial equipment. 11 The Corporation's primary area of loan production continues to be in 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, 1999, fixed-rate single-family residential loans increased $527.5 million over last fiscal year to $4.320 billion compared to $3.793 billion at June 30, 1998. The adjustable-rate portfolio increased to $2.412 billion at June 30, 1999 compared to $2.152 billion at June 30, 1998. The net changes in both the fixed-rate and adjustable-rate portfolios are due to the loan refinancing activity in fiscal year 1998 and from the AmerUs and Midland acquisitions. 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, in fiscal year 1998 the Corporation initiated commercial and multi-family real estate lending with such loans secured by properties located within the Corporation's primary market areas. This lending activity increased in fiscal year 1999. Such loans, which are subject to prudent credit review and other underwriting standards and collection procedures, are expected to constitute a greater portion of the Corporation's lending business in the future. In addition to real estate loans, the Corporation originates consumer, home improvement, agricultural loans, commercial business and saving account loans through the Corporation's branch and loan office network and direct mail solicitation. Management intends to continue to increase its consumer loan origination activity with strict adherence to prudent underwriting and credit review procedures. Regulatory guidelines generally limit loans and extensions of credit to one borrower. At June 30, 1999, all loans and leases were within the Corporation's limitation of $241.0 million to one borrower. See "Regulation - Limitation on Loans to One Borrower." 12 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, leases and mortgage-backed securities available for sale) as of the dates indicated:
June 30, - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ----------------------- ----------------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent -------- --------- -------- --------- -------- --------- Loan Portfolio - -------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $ 6,268,958 57.8% $ 5,476,608 60.2% $ 5,142,629 57.7% Multi-family residential 182,510 1.7 169,860 1.9 156,127 1.8 Land 105,504 0.9 22,582 0.2 62,944 0.7 Commercial real estate 756,412 7.0 494,325 5.4 499,575 5.6 ---------- --------- ---------- --------- ---------- --------- Total 7,313,384 67.4 6,163,375 67.7 5,861,275 65.8 Construction loans - Single-family residential 241,548 2.2 279,437 3.1 283,271 3.2 Multi-family residential 25,893 0.2 2,979 -- 6,320 0.1 Land -- -- 2,803 -- 10,445 0.1 Commercial real estate 78,908 0.8 40,479 0.5 20,093 0.2 ---------- --------- ---------- --------- ---------- --------- Total 346,349 3.2 325,698 3.6 320,129 3.6 FHA and VA loans 463,437 4.3 468,503 5.1 439,398 4.9 Mortgage-backed securities 1,277,575 11.8 1,083,789 11.9 1,378,162 15.5 ---------- --------- ---------- --------- ---------- --------- Total real estate loans 9,400,745 86.7 8,041,365 88.3 7,998,964 89.8 Consumer, leases and other loans - Home improvement and other consumer loans 1,094,292 10.1 809,671 8.9 760,945 8.5 Savings account loans 19,125 0.2 21,948 0.2 19,516 0.2 Leases 122,704 1.1 73,395 0.8 46,174 0.5 Commercial loans 206,533 1.9 155,617 1.8 79,818 1.0 ---------- --------- ---------- --------- ---------- --------- Total consumer and other loans 1,442,654 13.3 1,060,631 11.7 906,453 10.2 ---------- --------- ---------- --------- ---------- --------- Total loans $10,843,399 100.0% $ 9,101,996 100.0% $ 8,905,417 100.0% ---------- --------- ---------- --------- ---------- --------- June 30, - -------------------------------------------------------------------------------------------------- 1996 1995 ------------------------ ----------------------- (Dollars in Thousands) Amount Percent Amount Percent -------- --------- -------- --------- Loan Portfolio - -------------- Conventional real estate mortgage loans: Loans on existing properties - Single-family residential $ 4,690,580 56.3% $ 4,361,900 54.1% Multi-family residential 146,217 1.8 140,095 1.7 Land 52,279 0.6 42,048 0.5 Commercial real estate 469,901 5.6 398,392 5.0 --------- --------- --------- --------- Total 5,358,977 64.3 4,942,435 61.3 Construction loans - Single-family residential 277,903 3.3 255,731 3.2 Multi-family residential 4,448 0.1 1,380 -- Land 3,115 -- 7,659 -- Commercial real estate 21,678 0.3 13,949 0.2 --------- --------- --------- --------- Total 307,144 3.7 278,719 3.4 FHA and VA loans 395,337 4.7 441,170 5.5 Mortgage-backed securities 1,577,806 18.9 1,896,276 23.5 --------- --------- --------- --------- Total real estate loans 7,639,264 91.6 7,558,600 93.7 Consumer, leases and other loans - Home improvement and other consumer loans 577,661 6.9 406,968 5.0 Savings account loans 16,471 0.2 13,877 0.2 Leases 33,236 0.4 35,902 0.4 Commercial loans 74,265 0.9 52,191 0.7 --------- --------- --------- --------- Total consumer and other loans 701,633 8.4 508,938 6.3 --------- --------- --------- --------- Total loans $ 8,340,897 100.0% $ 8,067,538 100.0% --------- --------- --------- ---------
(Continued on next page) 13 Composition of Loan Portfolio (continued): - -------------------------------------------
June 30, ---------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------------------- (Dollars in Thousands) Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------------- Balance forward of total loans $10,843,399 100.0% $ 9,101,996 100.0% $ 8,905,417 100.0% ===== ===== ===== Add (subtract): Unamortized premiums, net of discounts 10,138 14,161 17,805 Unearned income (22,543) (13,253) * Deferred loan fees (costs), net 11,809 24,178 (3,882) Loans in process (153,124) (112,781) (108,741) Allowance for loan and lease losses (80,419) (64,757) (60,929) Allowance for losses on mortgage-backed securities (322) (419) (678) ----------- ----------- ----------- Loan portfolio $10,608,938 $ 8,949,125 $ 8,748,992 =========== =========== =========== 1996 1995 --------------------------------------------------- Amount Percent Amount Percent --------------------------------------------------- (Dollars in Thousands) Balance forward of total loans $ 8,340,897 100.0% $ 8,067,538 100.0% ====== ====== Add (subtract): Unamortized premiums, net of discounts 16,757 13,364 Unearned income * * Deferred loan fees (costs), net (7,537) (5,461) Loans in process (125,096) (111,425) Allowance for loan and lease losses (59,577) (59,163) Allowance for losses on mortgage-backed securities (913) (2,336) ----------- ----------- Loan portfolio $ 8,164,531 $ 7,902,517 =========== =========== - -------------------------------------------------------------------------------------------------------------------------------
* Not restated from a fiscal year 1998 acquisition accounted for as a pooling of interests. For additional information regarding the Corporation's loan and lease portfolio and mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated Financial Statements in the Annual Report. 14 The table below sets forth the geographic distribution of the Corporation's total real estate loan portfolio (excluding mortgage-backed securities, consumer loans, leases, and other loans, and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees, unearned income and allowance for loan and lease losses) as of the dates indicated:
June 30, ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------------------- --------------------- --------------------- -------------------- --------------------- State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent - ------------- ---------- --------- --------- ---------- --------- ---------- --------- --------- --------- ---------- (Dollars in Thousands) Colorado $ 1,686,667 20.8% $ 1,710,256 24.6% $ 1,660,721 25.1% $ 1,569,553 25.9% $ 1,487,547 26.3% Nebraska 1,014,198 12.5 985,906 14.2 937,025 14.2 929,982 15.3 836,054 14.8 Kansas 860,740 10.6 678,734 9.8 557,657 8.4 510,159 8.4 443,428 7.8 Iowa 737,677 9.1 676,099 9.7 618,177 9.3 500,986 8.3 455,741 8.1 Oklahoma 382,474 4.7 318,198 4.6 264,710 4.0 229,563 3.8 211,984 3.7 Missouri 329,985 4.1 185,282 2.7 175,900 2.7 181,174 3.0 191,019 3.4 Arizona 253,480 3.1 180,740 2.6 155,315 2.4 108,972 1.8 98,122 1.7 California 247,835 3.0 148,401 2.1 195,114 2.9 230,412 3.8 223,890 3.9 Florida 242,972 3.0 123,528 1.8 116,881 1.8 111,770 1.8 100,533 1.8 Georgia 232,128 2.9 227,971 3.3 235,665 3.6 217,957 3.6 202,331 3.6 Virginia 206,814 2.5 161,793 2.3 140,498 2.1 123,806 2.0 111,081 2.0 Texas 184,313 2.3 158,614 2.3 187,189 2.8 204,339 3.4 226,132 4.0 Maryland 183,460 2.2 157,180 2.3 138,886 2.1 112,160 1.9 100,768 1.8 Nevada 160,643 2.0 130,159 1.9 109,475 1.7 80,696 1.3 51,874 0.9 Illinois 131,098 1.6 111,142 1.6 92,381 1.4 79,626 1.3 78,088 1.4 Ohio 122,146 1.5 93,325 1.3 76,049 1.1 47,396 0.8 47,851 0.9 North Carolina 118,207 1.4 60,634 0.9 69,465 1.0 31,601 0.5 23,260 0.4 Washington 93,956 1.2 91,670 1.3 91,054 1.4 64,967 1.1 55,947 1.0 Minnesota 92,964 1.1 62,765 0.9 63,885 1.0 42,144 0.7 32,866 0.6 Alabama 90,675 1.1 50,285 0.7 37,653 0.6 39,544 0.7 38,171 0.7 New Jersey 82,068 1.0 98,061 1.4 107,022 1.6 113,824 1.9 119,223 2.1 Connecticut 71,696 0.9 64,975 0.9 72,154 1.1 75,946 1.3 81,418 1.4 Indiana 66,727 0.8 40,357 0.6 34,689 0.5 27,191 0.4 25,048 0.4 Massachusetts 62,233 0.8 55,902 0.8 68,061 1.0 44,300 0.7 45,233 0.8 Pennsylvania 55,130 0.7 59,083 0.8 68,728 1.0 59,943 1.0 53,421 0.9 Utah 39,336 0.5 25,444 0.4 20,729 0.3 18,815 0.3 15,587 0.2 New York 39,146 0.5 38,382 0.5 48,395 0.7 38,794 0.6 40,532 0.7 Michigan 29,505 0.4 38,495 0.5 46,762 0.7 46,650 0.8 45,865 0.8 Other States 304,897 3.7 224,195 3.2 230,562 3.5 219,188 3.6 219,310 3.9 ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ $ 8,123,170 100.0% $ 6,957,576 100.0% $ 6,620,802 100.0% $ 6,061,458 100.0% $ 5,662,324 100.0% ============ ====== ============ ====== ============ ====== ============ ====== ============ ======
15 The following table presents the composition of the Corporation's total real estate portfolio (excluding mortgage-backed securities, consumer loans, leases, and other loans, and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees, unearned income and allowance for loan and lease losses) by state and property type at June 30, 1999:
Conventional FHA/VA Residential Residential Multi- Land Sub Commercial % of State 1-4 Units Loans Family Loans Total Loans Total Total - ------------- ------------- ----------- ---------- ---------- ---------- ----------- ----------- -------- (Dollars in Thousands) Colorado $1,354,606 $ 12,646 $ 69,873 $ 9,438 $1,446,563 $ 240,104 $1,686,667 20.8% Nebraska 858,895 65,645 17,938 14,636 957,114 57,084 1,014,198 12.5 Kansas 582,144 138,430 16,698 1,884 739,156 121,584 860,740 10.6 Iowa 527,411 17,190 40,194 38,741 623,536 114,141 737,677 9.1 Oklahoma 312,149 27,943 13,423 334 353,849 28,625 382,474 4.7 Missouri 184,907 20,130 19,333 2,974 227,344 102,641 329,985 4.1 Arizona 166,676 9,069 5,002 23,445 204,192 49,288 253,480 3.1 California 234,201 5,935 228 796 241,160 6,675 247,835 3.0 Florida 227,068 7,821 -- -- 234,889 8,083 242,972 3.0 Georgia 216,711 15,381 -- -- 232,092 36 232,128 2.9 Virginia 185,642 21,172 -- -- 206,814 -- 206,814 2.5 Texas 133,487 13,876 12,887 34 160,284 24,029 184,313 2.3 Maryland 149,981 33,479 -- -- 183,460 -- 183,460 2.2 Nevada 81,519 3,593 8,736 11,761 105,609 55,034 160,643 2.0 Illinois 120,742 8,025 -- -- 128,767 2,331 131,098 1.6 Ohio 115,389 5,590 579 381 121,939 207 122,146 1.5 North Carolina 113,981 2,205 -- -- 116,186 2,021 118,207 1.4 Washington 81,403 9,084 -- 397 90,884 3,072 93,956 1.2 Minnesota 87,349 4,150 -- 371 91,870 1,094 92,964 1.1 Alabama 78,885 11,790 -- -- 90,675 -- 90,675 1.1 New Jersey 81,490 578 -- -- 82,068 -- 82,068 1.0 Connecticut 71,588 108 -- -- 71,696 -- 71,696 0.9 Indiana 57,223 8,349 -- -- 65,572 1,155 66,727 0.8 Massachusetts 62,149 84 -- -- 62,233 -- 62,233 0.8 Pennsylvania 53,643 1,487 -- -- 55,130 -- 55,130 0.7 Utah 36,327 3,009 -- -- 39,336 -- 39,336 0.5 New York 36,459 258 -- -- 36,717 2,429 39,146 0.5 Michigan 26,801 2,397 -- -- 29,198 307 29,505 0.4 Other States 271,680 14,013 3,512 312 289,517 15,380 304,897 3.7 ------------ ---------- ---------- ---------- ---------- ----------- ----------- -------- Total $6,510,506 $ 463,437 $ 208,403 $ 105,504 $7,287,850 $ 835,320 $8,123,170 100.0% ============ ========== ========== ========== ========== =========== =========== ======== % of Total 80.1% 5.7% 2.6% 1.3% 89.7% 10.3% 100.0% ==== === === === ==== ==== =====
16 Contractual Principal Repayments. The following table sets forth certain - -------------------------------- information at June 30, 1999, regarding the dollar amount of all loans, leases 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 loans, leases and mortgage-backed securities, management believes that the following table will bear little resemblance to what will be the actual repayments of the loans, leases and mortgage-backed securities portfolios. Loan and lease balances have not been reduced for (i) unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and allowance for loan and lease losses or (ii) nonperforming loans and leases.
- ------------------------------------------------------------------------------------------------------------------------------------ Due During the Year Ended June 30, - ------------------------------------------------------------------------------------------------------------------------------------ After 2000 2001-2004 2004 Total ----------------- --------------- ------------ --------------------- Principal Repayments (In Thousands) - -------------------- Real estate loans: Single-family residential (1) - Fixed-rate $ 131,296 $ 792,176 $ 3,396,655 $ 4,320,127 Adjustable-rate 76,749 345,742 1,989,777 2,412,268 Multi-family residential, land and commercial real estate - Fixed-rate 48,136 206,703 172,008 426,847 Adjustable-rate 37,992 150,686 428,901 617,579 ----------- ----------- ----------- ----------- 294,173 1,495,307 5,987,341 7,776,821 ----------- ----------- ----------- ----------- Construction loans: Fixed-rate 82,767 -- -- 82,767 Adjustable-rate 242,438 21,144 -- 263,582 ----------- ----------- ----------- ----------- 325,205 21,144 -- 346,349 ----------- ----------- ----------- ----------- Mortgage-backed securities: Fixed-rate 47,362 102,223 653,076 802,661 Adjustable-rate 9,453 44,681 420,780 474,914 ----------- ----------- ----------- ----------- 56,815 146,904 1,073,856 1,277,575 ----------- ----------- ----------- ----------- Consumer, other loans and leases: Fixed-rate 207,660 640,743 391,112 1,239,515 Adjustable-rate 30,269 97,633 75,237 203,139 ----------- ----------- ----------- ----------- 237,929 738,376 466,349 1,442,654 ----------- ----------- ----------- ----------- Principal repayments $ 914,122 $ 2,401,731 $ 7,527,546 $10,843,399 =========== =========== =========== =========== - ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans. 17 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, leases and mortgage-backed securities due after June 30, 2000 (July 1, 2000 and thereafter), which have fixed interest rates and those which have adjustable interest rates. Such loans, leases 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 and lease losses or (ii) nonperforming loans and leases.
Adjustable Fixed-Rate Rate Total ----------------------------------------------------- (Dollars In Thousands) Real estate loans: Single-family residential $4,188,831 $2,335,519 $6,524,350 Multi-family residential, land and commercial 378,711 579,587 958,298 Construction loans -- 21,144 21,144 Mortgage-backed securities 755,299 465,461 1,220,760 Consumer, other loans and leases 1,031,855 172,870 1,204,725 ---------- ---------- ---------- Principal repayments due after June 30, 2000 $6,354,696 $3,574,581 $9,929,277 ========== ========== ==========
18 LOAN ORIGINATIONS - ----------------- Residential Loans. The Corporation, through its 256 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. 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 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 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, 1999, approximately .74%, or $47.6 million, of the Corporation's residential real estate loan portfolio was 90 days or more delinquent. See "Asset Quality" herein. Residential Construction Loans. During fiscal years 1999, 1998 and 1997, the - ------------------------------ Corporation originated $475.1 million, $350.5 million and $285.1 million, respectively, of residential construction loans. The Corporation conducts its single-family residential construction lending operations predominantly in its primary nine-state market area, Florida, Las Vegas, Nevada, and Dallas/Fort Worth, Texas. The residential construction lending operations, which loans are subject to prudent credit review and other underwriting standards and procedures, are expected to increase from fiscal year 1999. At June 30, 1999, approximately .87%, or $2.3 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. 19 Commercial Real Estate and Land Loans. The Corporation originated commercial - ------------------------------------- real estate loans totaling $280.7 million, $191.2 million and $90.5 million, respectively, during fiscal years 1999, 1998 and 1997. 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. At June 30, 1999, approximately 1.2%, or $11.4 million 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 $3.831 billion at June 30, 1999, compared to $940.8 million of such loans outstanding at June 30, 1999. 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. Consumer loans originated by the Corporation are primarily second mortgage loans, loans to depositors on the security of their savings accounts and loans secured by automobiles. The Corporation has increased its secured consumer lending activities in order to meet its customers' financial needs and will continue to increase 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, 1999, approximately .42%, or $4.5 million, of the Corporation's consumer loans are 90 days or more delinqu ent. See "Asset Quality" herein. 20 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, 1999, 1998 and 1997, the aggregate principal balance of these bulk purchased loans associated with such restructuring was $286.4 million, $388.5 million and $494.6 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, 1999, 1998 and 1997, $6.5 million, $8.5 million and $10.8 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, 1999, 1998 and 1997, $12.6 million, $15.4 million and $18.3, respectively, of these purchased loans were past due 90 days or more. To the extent opportunities to make similar bulk purchases of discounted 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 1999, 1998 and 1997, the Corporation purchased $618.8 million, $232.4 million and $300.2 million, respectively, of other loan packages not associated with the aforementioned restructuring efforts. 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 1999, 1998 and 1997, the Corporation sold an aggregate of $2.0 billion, $1.2 billion and $871.0 million, respectively, in mortgage loans resulting in net gains of $3.4 million, $3.1 million and $2.1 million, respectively, in fiscal years 1999, 1998 and 1997. Of the amount of mortgage loans sold during fiscal year 1999, $1.9 billion were sold in the secondary market, of which 36.5% were converted into GNMA securities, 60.2% 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, 1999, the carrying value of loans held for sale totaled $104.3 million. The net gains recorded in fiscal years 1999 and 1998 are attributable to the relatively stable interest rate environments over the respective periods. 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, 1999, the remaining balance of such loans sold with recourse totaled $13.9 million. 21 Set forth below is a table showing the Corporation's loan, lease and mortgage-backed securities activity for the three fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (In Thousands) Loans originated: Real estate loans- Residential loans $1,287,556 $1,476,982 $1,076,812 Construction loans 475,073 350,475 285,060 Commercial real estate and land loans 280,723 191,167 90,459 Consumer loans and leases 996,948 795,226 626,534 ---------- ---------- ---------- Loans and leases originated $3,040,300 $2,813,850 $2,078,865 ========== ========== ========== Loans purchased: Conventional mortgage loans- Residential loans $2,323,781 $1,276,846 $ 833,893 Bulk loan purchases 618,814 232,353 300,212 Mortgage-backed securities 664,665 40,758 60,811 ---------- ---------- ---------- Loans purchased $3,607,260 $1,549,957 $1,194,916 ========== ========== ========== Loans securitized: Conventional mortgage loans securitized into mortgage-backed securities $ 20,773 $ 161,189 $ 46,165 ========== ========== ========== Acquisitions: Residential real estate loans $ 560,521 $ 39,469 $ 83,413 Consumer and other loans 616,755 73,703 51,639 Mortgage-backed securities 87,231 17,054 36,194 ---------- ---------- ---------- Loans from acquisitions $1,264,507 $ 130,226 $ 171,246 ========== ========== ========== Loans sold: Conventional mortgage loans $1,955,384 $1,175,152 $ 870,997 Mortgage-backed securities 205,904 118,705 98,797 ---------- ---------- ---------- Loans sold $2,161,288 $1,293,857 $ 969,794 ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------
22 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, 1999, the Bank's mortgage banking subsidiary was servicing approximately 122,800 loans and participations for others with principal balances aggregating $7.449 billion, compared to 125,900 loans (excluding loans serviced by First Colorado) with principal balances totaling $7.240 billion at June 30, 1998. At June 30, 1999, adjustable-rate mortgage loans represented 12.8% 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 .53% per annum on the declining principal balances of the loans. The average service fee collected by the Corporation was .39% and .41%, respectively, for fiscal years 1999 and 1998. 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, 1999, was 7.48% compared to 7.80% at June 30, 1998. At June 30, 1999, approximately 95.6% 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 1999, the average amount of funds advanced by the Corporation pursuant to servicing agreements was approximately $2.5 million. 23 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. In addition to interest earned on loans, the Corporation receives loan origination fees for originating certain loans. These fees are a percentage of the principal amount of the mortgage loan and are charged to the borrower. Loan Commitments. At June 30, 1999, the Corporation had issued commitments of - ---------------- $771.8 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, 1999. 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. 24 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 loan balance increased to $9.7 million at June 30, 1999, compared to $4.3 million at June 30, 1998 but remains low compared to fiscal years ended 1997, 1996 and 1995. The increase at June 30, 1999 is due primarily to the addition of 13 loans classified commercial troubled debt restructurings. The Corporation's nonperforming assets totaling $101.8 million increased by $30.4 million, or 42.5%, at June 30, 1999, compared to June 30, 1998, primarily as a result of net increases of $20.7 million in nonperforming loans and leases, $5.4 million in troubled debt restructurings and $4.3 million in real estate. These increases are due to the AmerUs and Midland acquisitions and to growth in the respective loan portfolios. 25 The following table sets forth information with respect to the Bank's nonperforming assets at June 30 as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Loans and leases accounted for on a nonaccrual basis: (1) Real estate - Residential $ 49,891 $ 43,212 $ 37,506 $ 38,164 $ 32,593 Commercial 11,390 1,369 905 2,649 1,053 Consumer, other loans and leases 8,734 4,785 4,322 1,660 857 -------- -------- -------- -------- -------- Total 70,015 49,366 42,733 42,473 34,503 -------- -------- -------- -------- -------- Accruing loans which are contractually past due 90 days or more -- -- 894 144 88 -------- -------- -------- -------- -------- Total nonperforming loans and leases 70,015 49,366 43,627 42,617 34,591 -------- -------- -------- -------- -------- Real estate: Commercial 7,657 8,465 9,631 10,970 12,577 Residential 14,384 8,821 9,759 5,014 4,785 Other -- 480 147 253 114 -------- -------- -------- -------- -------- Total 22,041 17,766 19,537 16,237 17,476 -------- -------- -------- -------- -------- Troubled debt restructurings: (2) Commercial 9,534 3,524 9,489 14,533 22,461 Residential 195 778 1,126 1,052 1,944 -------- -------- -------- -------- -------- Total 9,729 4,302 10,615 15,585 24,405 -------- -------- -------- -------- -------- Nonperforming assets $101,785 $ 71,434 $ 73,779 $ 74,439 $ 76,472 ======== ======== ======== ======== ======== Nonperforming loans and leases to total loans and leases (3) 0.73% 0.62% 0.58% 0.63% 0.56% Nonperforming assets to total assets 0.80% 0.69% 0.73% 0.80% 0.85% - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for loan and lease losses: Loans and leases $ 73,916 $ 56,295 $ 50,120 $ 46,812 $ 43,883 Bulk purchased loans (4) 6,503 8,462 10,809 12,765 15,280 -------- -------- -------- -------- -------- Total $ 80,419 $ 64,757 $ 60,929 $ 59,577 $ 59,163 ======== ======== ======== ======== ======== Allowance for bulk purchased loan losses to bulk purchased loans (4) 2.27% 2.18% 2.19% 2.22% 2.18% Allowance for loan and lease losses to total loans and leases (less bulk purchased loans) 0.80% 0.74% 0.71% 0.76% 0.80% Allowance for loans and lease losses to total loans and leases (3) 0.84% 0.81% 0.81% 0.88% 0.96% Allowance for loan and lease losses to total nonperforming assets 79.01% 90.65% 82.58% 80.03% 77.37% Allowance for loan and lease losses to total nonperforming loans and leases (less nonperforming bulk purchased loans) (5) 128.74% 165.64% 197.89% 188.63% 261.35% - ------------------------------------------------------------------------------------------------------------------------------------
(Continued on next page) 26 (1) During fiscal years 1997 and 1996, the Corporation recorded interest income totaling $49,000 and $51,000, respectively, on accruing loans contractually past due 90 days or more. During fiscal years 1999 and 1998, no interest income was recorded. Had these nonaccruing 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 totaling $4.2 million, $4.3 million, $3.7 million, $3.3 million and $1.9 million (excluding acquisitions during fiscal years 1999 and 1998 accounted for as pooling of interests), respectively, during fiscal years 1999, 1998, 1997, 1996 and 1995. (2) During fiscal years 1999, 1998, 1997, 1996 and 1995, the Corporation recognized interest income on loans classified as troubled debt restructurings aggregating $470,000, $380,000, $852,000, $1.3 million and $1.7 million (excluding First Colorado), respectively, whereas under their original terms the Corporation would have recognized interest income of $475,000, $499,000, $1.1 million, $1.6 million and $1.9 million (excluding First Colorado), respectively. At June 30, 1999, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring. (3) Based on the total balance of loans and leases receivable (before any reduction for unamortized discounts net of premiums, undisbursed loan proceeds, deferred loan fees and allowance for loan and lease losses) at the respective dates. (4) At June 30, 1999, 1998, 1997, 1996 and 1995, $6.5 million, $8.5 million, $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 $286.4 million, $388.5 million, $494.6 million, $574.4 million and $701.9 million, respectively, at June 30, 1999, 1998, 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. (5) Nonperforming bulk purchased loans approximating $12.6 million, $15.4 million, $18.3 million, $17.8 million, and $17.8 million, respectively, at June 30, 1999, 1998, 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 $30.4 million increase in nonperforming assets during the fiscal year ended June 30, 1999, compared to June 30, 1998 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 and leases at June 30 was as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- State (In Thousands) - ----- Kansas $15,552 $ 6,030 $ 2,973 $ 2,496 $ 861 Iowa 6,111 4,013 3,477 2,052 989 Florida 4,356 1,502 1,389 891 1,553 California 3,988 3,377 3,206 4,624 3,758 Oklahoma 3,568 3,178 2,303 1,496 1,019 Missouri 3,241 1,944 2,402 2,018 1,864 Georgia 2,752 2,127 2,601 3,389 2,559 Maryland 2,712 2,258 1,623 1,548 743 Colorado 2,646 4,065 2,717 5,131 4,034 Nebraska 2,455 2,595 2,629 2,352 2,037 Ohio 1,818 722 342 348 178 Virginia 1,691 1,479 656 880 446 Nevada 1,651 1,198 438 648 271 New Jersey 1,414 1,277 1,060 1,069 1,680 Texas 1,378 2,028 3,274 3,290 3,601 Illinois 1,325 1,579 1,754 1,158 1,234 North Carolina 907 293 392 205 455 Alabama 863 1,307 510 517 381 Pennsylvania 844 852 855 663 715 Michigan 725 310 142 628 125 Washington 690 182 449 647 745 New York 686 671 606 447 855 Connecticut 605 752 860 739 643 Minnesota 590 1,004 610 117 113 Arizona 450 1,195 973 469 596 Other States 6,997 3,428 5,386 4,795 3,136 ------- ------- ------- ------- ------- Nonperforming loans and leases $70,015 $49,366 $43,627 $42,617 $34,591 ======= ======= ======= ======= ======= - ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases totaled $70.0 million at June 30, 1999, and consisted of 1,552 loans with an average balance of $45,113. Such loans and leases consisted of $11.4 million (16 loans) collateralized by commercial real estate, $47.6 million (836 loans) collateralized by residential real estate, $2.3 million (28 loans) collateralized by residential construction real estate, $4.5 million (482 loans) of consumer loans, $2.5 million (164 loans) of commercial and other operating loans and leases and $1.7 million (26 loans) of agribusiness loans. 28 The geographic concentration of nonperforming real estate at June 30 was as follows:
- -------------------------------------------------------------------------------- State 1999 1998 1997 1996 1995 - ----- -------- -------- -------- -------- -------- (In Thousands) Missouri $ 4,811 $ 465 $ 522 $ 125 $ 262 Colorado 2,768 2,825 6,589 7,841 11,523 Iowa 2,372 1,345 1,129 834 609 Illinois 2,069 373 13 185 90 Kansas 1,809 1,876 873 64 234 Oklahoma 1,292 1,299 509 384 391 Nebraska 1,196 5,417 5,565 5,356 5,770 Florida 1,180 297 277 312 197 California 1,098 52 1,382 187 109 Ohio 678 -- -- -- -- Nevada 657 138 603 -- -- Minnesota 627 456 13 -- -- Arizona 582 -- -- 128 77 Maryland 471 1,315 436 190 33 Indiana 395 29 -- 271 -- Pennsylvania 377 111 102 116 326 Georgia 301 140 933 187 510 New Jersey 122 317 240 270 280 Texas 85 445 220 1,608 999 Other states 2,224 1,338 1,478 1,289 543 Unallocated reserves (3,073) (472) (1,347) (3,110) (4,477) -------- -------- -------- -------- -------- Nonperforming real estate $ 22,041 $ 17,766 $ 19,537 $ 16,237 $ 17,476 ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
At June 30, 1999, total nonperforming real estate totaling $22.0 million (521 properties) consisted of residential real estate totaling $14.4 million (495 properties) or 65.3% of the total and commercial real estate totaling $7.6 million (26 properties). The Corporation's nonperforming commercial real estate at June 30, 1999 is located primarily in Missouri, Colorado, Kansas and Iowa. 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, consumer loans and leases. 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 commercial real estate loans and loans modified in a troubled debt restructuring which, after July 1, 1994, are considered impaired. 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, 1999, the Corporation had impaired loans totaling $30.5 million, net of specific reserves, of which $6.1 million were classified as troubled debt restructurings and included in the Corporation's $9.7 million balance as shown in the table for nonperforming assets. At June 30, 1998, impaired loans totaled approximately $3.4 million. 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, 1999, pursuant to reporting on the quarterly thrift financial report, the Corporation had $118.5 million in assets classified as special mention, $135.7 million in assets classified as substandard, $1.4 million in assets classified as doubtful and no assets classified 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, 1999, are classified as either substandard or loss pursuant to applicable asset classification standards. Of the Corporation's loans and leases which were not classified at June 30, 1999, there were no loans or leases 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 or lease 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, lease 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 and lease 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 lease 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, lease and real estate balances, as appropriate, when general and economic conditions warrant a change in the value of these loans, leases 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, lease 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 leases 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, lease or real estate value weakness. Accordingly, these types of loans, leases and real estate are assigned a credit risk rating ranging from one (excellent) to six (loss). Loans, leases 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, leases 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, leases or real estate. 30 It is management's responsibility to maintain a reasonable allowance for loan and lease losses applicable to all categories of loans and leases through periodic charges to operations. The Corporation employs a systematic methodology to determine the amount of general loan and lease losses, in addition to specific valuation allowances, to be recorded as a percentage of the respective loan and lease 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 Classified special mention 2.00 90 days delinquent (or classified substandard) 12.50 Commercial real estate loans: Current 1.00 Classified special mention 2.00 90 days delinquent (or classified substandard) 10.00 Commercial operating loans: Current 1.00 Classified special mention 2.00 90 days delinquent (or classified substandard) 10.00 Agricultural 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.) Leases: Current 2.00 90 days delinquent (or classified substandard) 30.00 Credit card/taxsaver: Current credit card 3.00 Current taxsaver .50 90 days delinquent (or classified substandard) 20.00 120 days delinquent 100.00 - -------------------------------------------------------------------------------- As appropriate, management of the Corporation attempts to ensure that the Corporation's reserves are in general compliance with previously established regulatory examination guidelines. 31 Allowance for Losses on Loans and Leases. The allowance for loan and lease - ---------------------------------------- losses is based upon management's continuous evaluation of the collectibility of outstanding loans and leases, which takes into consideration such factors as changes in the composition of the loan and lease 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 leases 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. Management determines each element of the allowance through either the application of loss percentages to homogeneous groups of loans and leases, or the application of specific reserves to individual loans and leases based on loss exposure. Homogeneous groups of loans and leases include like type loans and leases with similar risk ratings or payment status. Loss percentages applied to the homogeneous groups are determined through an analysis of the company's loss history with respect to the individual loan groups. The loss results are tracked quarterly, with adjustment made to loss allocations when deemed necessary. Significant commercial real estate, commercial operating, agricultural, and construction loans are evaluated individually by the credit review group to determine an appropriate credit risk rating. Based on the assigned credit risk rating, a reserve allocation percentage is applied to the loan amount. Specific reserves may also be established based on the degree of exposure present. Residential loans, consumer loans, and commercial leases are evaluated as individual groups based on payment status. The allocated portion of the allowance is determined by applying the loss percentages to the graded and ungraded loans and leases, after consideration of the established specific reserves. The unallocated portion is determined by subtracting the allocated portion of any credit allowances for purchased package loans from the allowance balance. The periodic loss analysis serves as a self-correcting mechanism as provisions are targeted to meet actual losses, and are adjusted as losses change. 32 The Corporation's policy is to charge-off loans or leases or portions thereof against the allowance for loan and lease losses in the period in which loans or leases 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 and lease 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 carrying value of the real estate. During fiscal years 1999 and 1998, consumer loan charge-offs, net of recoveries, totaled $9.7 million and $9.6 million, respectively, compared to $10.1 million during fiscal year 1997. Consumer loan balances increased to $1.113 billion at June 30, 1999, compared to $831.6 million and $780.5 million, respectively, at June 30, 1998 and 1997. Net consumer loan charge-offs of the Corporation reflect the overall increase in its consumer loan portfolio. Management does not anticipate increases in the loan loss provisions or in net charge-offs for consumer loans in fiscal 2000 to be any greater than in the last three fiscal years. In addition, management expects the same approximate net amount of charge-offs by loan category during fiscal year 2000 compared to the actual net charge-off results for fiscal year 1999. The loan and lease loss provision decreased during fiscal year 1999 compared to 1998 due primarily to nonrecurring loss reserves totaling $3.9 million recorded in fiscal year 1998 to conform the reserve positions of fiscal 1998 pooled acquisitions to the policies of the Corporation compared to $1.0 million for fiscal year 1999. Although management believes that the Corporation's allowance for loan and lease 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 and leases 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. 33 The following table sets forth the activity in the Bank's allowance for loan and lease losses for the fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in Thousands) Allowance for losses on loans and leases at beginning of year $ 64,757 $ 60,929 $ 59,577 $ 59,163 $ 54,627 -------- -------- -------- -------- -------- Loans and leases charged-off: Single-family residential (2,542) (2,838) (2,535) (1,347) (1,304) Multi-family residential and commercial real estate (71) -- (300) (214) (842) Consumer, leases and other (13,147) (11,319) (12,597) (5,387) (2,199) -------- -------- -------- -------- -------- Loans and leases charged-off (15,760) (14,157) (15,432) (6,948) (4,345) -------- -------- -------- -------- -------- Recoveries: Single-family residential 210 254 101 267 291 Multi-family residential and commercial real estate -- 2,822 297 56 1,090 Consumer, leases and other 3,464 1,740 2,474 894 720 -------- -------- -------- -------- -------- Recoveries 3,674 4,816 2,872 1,217 2,101 -------- -------- -------- -------- -------- Net loans and leases charged-off (12,086) (9,341) (12,560) (5,731) (2,244) -------- -------- -------- -------- -------- Provision charged to operations 12,400 13,853 13,427 6,716 7,119 -------- -------- -------- -------- -------- Activity of combining companies to convert to June 30 fiscal year -- 390 475 -- (116) Allowances acquired in acquisitions 17,307 1,273 1,966 1,944 1,818 Change in estimate of allowance for bulk purchased loans (1,959) (2,324) (1,878) (2,273) (1,705) Charge off to allowance for bulk purchased loans -- (23) (78) (242) (336) -------- -------- -------- -------- -------- Allowances for losses on loans and leases at end of year $ 80,419 $ 64,757 $ 60,929 $ 59,577 $ 59,163 ======== ======== ======== ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net loans and leases charged-off to average loans and leases outstanding during the year 0.14% 0.12% 0.18% 0.09% 0.04% - ------------------------------------------------------------------------------------------------------------------------------------
34 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) in each calendar quarter of at least 4.0% of its net withdrawable deposits plus short-term borrowings or 4.0% of the average daily balance of its net withdrawable accounts plus short-term borrowings during the preceding quarter. The Corporation's general policy is to invest primarily in short-term liquid assets in compliance with these regulatory requirements. As of June 30, 1999, the Corporation had total average liquid assets of $1.146 billion, which consisted of $273.3 million in cash and $872.6 million in agency-backed securities. The Corporation's liquidity ratio was 11.69% as of June 30, 1999. 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:
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Investment securities held to maturity: U.S. Treasury and other Government agency obligations $755,195 $465,359 $486,909 Obligations of states and political subdivisions 49,857 48,571 14,068 Other securities 57,708 18,258 19,182 -------- -------- -------- Total investment securities held to maturity 862,760 532,188 520,159 Interest-earning cash on deposit (federal funds) 39,585 62,886 18,965 -------- -------- -------- Total Investments $902,345 $595,074 $539,124 ======== ======== ========
35 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, 1999:
- ------------------------------------------------------------------------------------------------------------------------------------ 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) U.S. Treasury and other Government agency obligations $ 20,526 5.33% $ 11,926 5.97% $ 59,866 6.73% States and political subdivisions 4,973 4.67 10,971 4.38 24,311 4.93 Other debt securities 6,589 6.61 1,901 5.63 7,579 7.82 --------- -------- ---------- -------- --------- -------- Total $ 32,088 5.49% $ 24,798 5.24% $ 91,756 6.34% ========= ======== ========== ======== ========= ========
More Than Ten Years Total ---------------------- ---------------------------------------- Amortized Average Amortized Market Average Cost Yield Cost Value Yield --------- ------- --------- ------- ---------- U.S. Treasury and other Government agency obligations $ 662,877 6.66% $ 755,195 $ 739,554 6.62% States and political subdivisions 9,602 6.59 49,857 49,543 5.10 Other debt securities 41,639 6.85 57,708 57,708 6.91 --------- -------- --------- --------- -------- Total $714,118 6.67% $ 862,760 $ 846,805 6.53% ========= ======== ========= ========= ======== - ------------------------------------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's investment securities held to maturity, see Note 3 to Consolidated Financial Statements in the Annual Report. 36 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, 1999, deposits made up 65.8% of total interest-bearing liabilities compared to 69.9% at June 30, 1998. 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 franchise through an ongoing program of selective acquisitions of other financial institutions. During fiscal years 1999 and 1998 the Corporation consummated the acquisitions of seven financial institutions. See Note 2 to the Consolidated Financial Statements for additional information on these acquisitions. These acquisitions presented the Corporation with the opportunity to further expand its retail network in the Iowa, Nebraska, Kansas, and Colorado markets and to enter the Missouri, Minnesota and South Dakota markets, as well as to increase its earnings potential by increasing its mortgage and consumer loan volumes funded primarily 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 1999, NOW accounts increased $156.9 million, from $880.0 million at June 30, 1998, to $ 1.037 billion at June 30, 1999. At June 30, 1999 non-interest bearing deposits totaled $541.2 million, or 7.1% of total deposits, compared to $405.1 million, or 6.2% at June 30, 1998, an increase of $136.1 million. As a community bank, the Corporation has increased its non-interest bearing NOW accounts and plans to increase such non-interest bearing accounts in the future. In addition, the Corporation intends to continue pricing its certificates of deposit products at rates that minimize the Corporation's total costs of funds. The competition for certificates of deposit is very strong in a market of shrinking funds as individuals continually seek the most attractive investment alternatives available. 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 at June 30, 1999, represented 59.7% (or $4.6 billion) of total deposits compared to 61.7% at June 30, 1998 (or $4.0 billion). The Corporation offers certificate accounts with terms ranging from one month to 120 months. Excluding deposits acquired in acquisitions, total deposits decreased $211.1 million during fiscal year 1999 compared to $212.9 million during fiscal year 1998. This net decrease is primarily a result of depositors leaving for higher interest rates for more attractive investment alternatives. Including such acquisitions, total deposits decreased $31.2 million during fiscal year 1998 and increased $ 1.097 billion during fiscal year 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 12 in the Notes to Consolidated Financial Statements in the Annual Report for additional information. 37 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, 1999 June 30, 1998 June 30, 1997 --------------------------------- ------------------------------------ ---------------------- % of Increase % of Increase % of Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits -------- ---------- ---------- -------- ---------- ---------- -------- ---------- (Dollars in Thousands) Passbook accounts $1,137,282 14.9% $ 146,286 $ 990,996 15.1% $ (32,092) $1,023,088 15.5% NOW accounts 1,036,921 13.5 156,920 880,001 13.4 200,216 679,785 10.3 Market rate savings 909,233 11.9 268,746 640,487 9.8 176,177 464,310 7.1 Certificates of deposit 4,571,979 59.7 525,256 4,046,723 61.7 (375,489) 4,422,212 67.1 --------- ------- ---------- --------- ------- --------- --------- ----- Total Deposits $7,655,415 100.0% $1,097,208 $6,558,207 100.0% $ (31,188) $6,589,395 100.0% --------- ------- ---------- --------- ------- --------- --------- --------
38 The following table shows the composition of average deposit balances and average rates for the fiscal years indicated: - --------------------------------------------------------------------------------
1999 1998 1997 ------------------------ ----------------------- ------------------------ Average Avg. Average Avg. Average Avg. Balance Rate Balance Rate Balance Rate --------- ------ -------- ------ --------- ------ (Dollars in Thousands) Passbook accounts $1,125,632 3.70% $1,012,228 3.93% $ 867,831 3.91% NOW accounts 1,020,345 1.20 820,819 1.23 652,869 1.57 Market rate savings 745,265 3.62 521,421 3.51 468,001 3.67 Certificates of deposit 4,497,729 5.38 4,223,217 5.81 4,473,809 5.68 ---------- ------ ---------- ------ ---------- ------ Average deposit accounts $7,388,971 4.37% $6,577,685 4.77% $6,462,510 4.88% ========== ====== ========== ====== ========== ======
- -------------------------------------------------------------------------------- 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: - -------------------------------------------------------------------------------- 1999 1998 1997 -------- -------- -------- (In Thousands) Rate ---- Less than 3.00% $ 6,555 $ 4,894 $ 7,238 3.00% - 3.99% 73,342 7,858 6,384 4.00% - 4.99% 1,816,539 371,298 368,091 5.00% - 5.99% 2,310,800 2,983,982 2,932,968 6.00% - 6.99% 307,487 622,235 962,012 7.00% - 7.99% 53,311 51,282 127,311 8.00% - 8.99% 3,488 4,273 12,894 9.00% and over 457 901 5,314 ---------- ---------- ---------- Certificates of deposit $4,571,979 $4,046,723 $4,422,212 ========== ========== ========== - -------------------------------------------------------------------------------- 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 1999 1998 1997 -------------------------------- ---------- ---------- ---------- (In Thousands) Three months or less $482,996 $160,536 $128,530 Over three through six months 124,793 87,625 58,389 Over six through twelve months 143,127 100,087 71,510 Over twelve months 41,427 89,463 85,936 -------- -------- -------- Total $792,343 $437,711 $344,365 ======== ======== ======== - -------------------------------------------------------------------------------- 39 Borrowings. The Corporation has also relied upon other borrowings, primarily - ---------- advances from the FHLB, as additional sources of funds. Advances from the FHLB 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, 1999, the Corporation had pledged $3.4 billion of its real estate loans and held FHLB stock of $194.1 million. At June 30, 1999, the Corporation had advances totaling approximately $3.6 billion from the FHLB at interest rates ranging from 3.86% to 8.31% and at a weighted average rate of 5.05%. At June 30, 1998, such advances from the FHLB totaled $2.4 billion at a weighted average rate of 5.69%. Fixed-rate advances totaling $3.0 billion at June 30, 1999 with a weighted average rate of 4.85% are convertible into adjustable-rate advances at the option of the FHLB with call dates ranging from July 1999 to March 2003. Such convertible advances consist primarily of amounts totaling $316,000,000 with scheduled maturities due over two years to three years and $2.7 billion with maturities due over five years. The Corporation also borrows funds under repurchase agreements. During fiscal years 1999 and 1998 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 arc 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, 1999, the Corporation's repurchase agreements aggregated $128.5 million at an average rate of 5.72%. The Corporation's repurchase agreements were collateralized by $123.6 million and $16.4 million, respectively, of mortgage-backed securities and investment securities at June 30, 1999. At June 30, 1999, these repurchase agreements had $3.5 million that matured overnight with the remaining balance of $125.0 million had maturities ranging from November 1999 to September 2000 with a weighted average maturity of 213 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, ------------------------------------ 1999 1998 1997 -------- -------- -------- (In Thousands) Balance at end of year $128,514 $334,294 $639,294 Maximum month-end balance $334,294 $639,294 $696,318 Average balance $209,111 $501,979 $591,288 Weighted average interest rate during the year 5.94% 6.08% 6.19% Weighted average interest rate at end of year 5.72% 5.96% 6.04% - ---------------------------------------------------------------------------------------
For further information regarding the Corporation's FHLB advances, securities sold under agreements to repurchase and other borrowings, see Notes 13, 14 and 15 to Notes to the Consolidated Financial Statements in the Annual Report. 40 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 the Corporation 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 Quicken Lite 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, 1999, there were 240 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, SHAZAM, CIRRUS and NETS. 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, 1999, the Bank was authorized to invest up to $379.4 million in the stock of, or loans to, service corporations (based upon the 3.0% limitation). As of June 30, 1999, the Bank's investment in capital stock in its service corporations and their wholly-owned subsidiaries was $8.5 million plus unsecured loans totaling $264,000 for a net investment of $8.7 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 two subsidiaries, Commercial Federal Service Corporation and First Savings Investment Corporation, engaged in activities not permissible for national banks. Investments in such subsidiaries must be 100% deducted from capital. See "Regulation -- Regulatory Capital Requirements." At June 30, 1999, the total investment in such subsidiaries was $6.3 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, 1999, the Bank had twelve wholly-owned subsidiaries, three of which own and operate certain real estate properties of the Bank. As such, these subsidiaries are considered engaged in permissible activities and do not require deductions from capital as discussed above. CFMC was approved by the OTS in 1994 to be classified as an "operating subsidiary" and as such, CFMC ceased to be subject to the regulatory investment in service corporation. Liberty Leasing Company is also an operating subsidiary. The remaining wholly owned subsidiaries, exclusive of CFMC and Liberty Leasing Company, are classified as service corporations. Descriptions of the principal active subsidiaries of the Bank follow. See Exhibit 21 "Subsidiaries of the Corporation" herein for a complete listing of all subsidiaries of the Corporation. 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, 1999, CFMC serviced 79,100 loans for the Bank and 122,800 loans for others. See "Loan Originations -- Loan Servicing." 41 Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers customers - ------------------------------------------------------ discount brokerage services through INVEST, a service of INVEST Financial Corporation ("IFC"), in 48 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. CFIS also offers these same services through Financial Network Investment Corporation ("FNIC") in 14 branches. FNIC operations were added to CFIS as a result of the AmerUs acquisition. 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 (including property and casualty), 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." Tower Title & Escrow Company ("TTE"). TTE was formed in 1996 with operations - ------------------------------------- consisting of escrow closings, title insurance and title searches. TTE services the Corporation's loan production process and offers its services to other lending institutions. EMPLOYEES - --------- At June 30, 1999, the Corporation and its wholly-owned subsidiaries had 3,631 employees (3,438 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 discounts on loan fees 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, 1999, refer to Part 11.1 -- 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, consumer and commercial 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 Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri, Arizona, Minnesota and South Dakota and, for loan originations, includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri, Arizona, Minnesota, South Dakota, Florida and Las Vegas, Nevada (primarily residential construction lending). Management believes that the Corporation's extensive branch network has enabled the Corporation to compete effectively for deposits and loans against 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, consumer and commercial 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. See "Regulation -- Proposed Legislative and Regulatory Changes." 42 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 within this "Regulation" section 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 June 1, 1997, permitted commercial banks interstate branching that has resulted 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. PROPOSED LEGISLATIVE AND REGULATORY CHANGES - ------------------------------------------- The U.S. Congress is in the process of drafting legislation which may have a profound effect on the financial services industry. In January 1999 legislation was reintroduced in both houses of the U.S. Congress restructuring the activities and regulations oversight of the financial services industry. The stated purposes of this legislation are to enhance consumer choices in the financial services marketplace, level the playing field among providers of financial services and increase competition. This legislation would also permit affiliations between commercial banks, securities firms, insurance companies and, subject to certain limitations, other commercial enterprises allowing holding companies to offer new services and products. In particular, the legislation would repeal the Glass-Steagall Act prohibitions on banks affiliating with securities firms, and thereby allow holding companies to engage in securities underwriting and dealing without limits and to sponsor and act as a distributor for mutual funds. The legislation also (i) would remove the Bank Holding Company Act's prohibitions on insurance underwriting, allowing holding companies to underwrite and broker any type of insurance product, (ii) calls for a new regulatory framework for financial institutions and their holding companies and (iii) preserves the thrift charter and all existing thrift powers. The Senate version (S. 900) was approved by the Senate on May 6, 1999. The House Version (H.R. 10) was approved by the House on July 1, 1999. A conference committee has been appointed to reconcile the differences between the two bills. The two versions differ principally with respect to the powers of operating subsidiaries, permissible activities of well-managed holding companies and restrictions on nonfinancial activities of unitary thrift holding companies. At this time, it is unknown how the legislation will be modified, or if enacted, what form the final version of the legislation might take and how it will affect the Corporation's and the Bank's business and operations and competitive environment. 43 REGULATORY CAPITAL REQUIREMENTS - ------------------------------- At June 30, 1999, 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, 1999:
- ------------------------------------------------------------------------------------------------------------------------------- Dollars in Thousands Actual Requirement Excess - ------------------------------------------------------------------------------------------------------------------------------- Bank's stockholder's equity $ 1,129,851 Less unrealized holding gain on securities available for sale, net 9,562 Less intangible assets (252,676) Less investments in non-includable subsidiaries (6,337) - ------------------------------------------------------------------------------------------------------------------------------------ Tangible capital $ 880,400 $ 189,412 $ 690,988 - ------------------------------------------------------------------------------------------------------------------------------------ Tangible capital to adjusted assets (1) 6.97% 1.50% 5.47% - ------------------------------------------------------------------------------------------------------------------------------------ Tangible capital $ 880,400 Plus certain restricted amounts of other intangible assets 10,567 - ------------------------------------------------------------------------------------------------------------------------------------ Core capital (Tier 1 capital) $ 890,967 $ 379,142 $ 511,825 - ------------------------------------------------------------------------------------------------------------------------------------ Core capital to adjusted assets (2) 7.05% 3.00% 4.05% - ------------------------------------------------------------------------------------------------------------------------------------ Core capital $ 890,967 Plus general loan loss allowances 66,714 Less amount of land loans and non-residential construction loans in exess of an 80.0% loan-to-value ratio and other assets required to be deducted (5) - ------------------------------------------------------------------------------------------------------------------------------------ Risk-based capital (Total capital) $ 957,676 $ 559,279 $ 398,397 - ------------------------------------------------------------------------------------------------------------------------------------ Risk-based capital to risk-weighted assets (3) 13.70% 8.00% 5.70% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Based on adjusted total assets totaling $12,627,493. (2) Based on adjusted total assets totaling $12,638,059. (3) Based on risk-weighted assets totaling $6,990,985. - ------------------------------------------------------------------------------------------------------------------------------------
44 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five regulatory capital categories: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized; and authorized banking regulatory agencies to take prompt corrective action with respect to institutions in the three undercapitalized categories. These corrective actions become increasingly more stringent as an institution's regulatory capital declines. In addition, the OTS has adopted a prompt corrective action rule under which a savings 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, 1999, 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 7.05% 12.74% 13.70% 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 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 a Composite 1 under the regulatory CAMELS examination rating system). For purposes of these regulations, Tier 1 capital has the same definition as core capital. See "Regulation -- 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. Purchased mortgage servicing rights may be included in tangible capital to the extent they are permitted to be included within the calculation of core capital. 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 purchased mortgage servicing rights and purchased credit relationships to the extent described below are permitted to be included in core capital. Purchased mortgage servicing rights and certain qualifying intangible assets may be included in the calculation of core capital, subject to a maximum aggregate limitation of the lesser of (i) 100% of the amount of core capital computed before the deduction for any disallowed qualifying intangible assets or mortgage servicing rights; and (ii) the lesser of 90% of their fair market value or 100% of the remaining unamortized book value. In addition, a sublimit applies for purchased credit card relationships equal to the lesser of (i) 25% of the amount of core capital computed before the deduction of any disallowed qualifying intangible assets and (ii) the lesser of 90% of the fair market value of such credit card relationships and 100% of the unamortized book value of such relationships. The Bank's core capital of $891.0 million at June 30, 1999, includes no qualifying supervisory goodwill and $10.6 million of restricted amounts of certain intangible assets (core value of deposits). 45 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 exempt 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, 1999, the Bank had approximately $6.3 million of debt and equity invested in two subsidiaries which are engaged in activities not permissible for national banks that was deducted from capital. See "Business -- Subsidiaries." 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 loan and lease loss allowances. Allowances for loan and lease losses includable in capital are includable only up to 1.25% of risk-weighted assets and totaled $66.7 million at June 30, 1999. In addition, equity investments, reciprocal holdings of depositor's institutional capital instruments, 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 $5,000 at June 30, 1999, which was deducted from capital in accordance with applicable regulations. 46 The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of every on-balance-sheet asset and the credit-equivalent amount of every 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, and the book value of FHLB stock are assigned a 20.0% risk weight. Single-family first mortgage loans not more than 90 days past due with loan-to-value ratios at origination not exceeding 80.0%, multi-family mortgage loans (maximum 36 dwelling units) with loan-to-value ratios not exceeding 80.0% and average annual occupancy rates over 80.0%, that were in existence on March 18, 1994 and continue to satisfy these criteria, certain other multi-family mortgage loans 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 single-family, multi-family and 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 requirements 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 information filed with the institution's Thrift Financial Report two quarters earlier. The Bank has determined that, on the basis of current financial data, it will not be deemed to have more than a normal level of interest rate risk under the rule and therefore will not be required to increase its total capital as a result of the rule. 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 " Regulation - --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. 47 FEDERAL HOME LOAN BANK SYSTEM - ----------------------------- The Bank is a member of the FHLB System. The FHLB System consists of 12 regional Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. 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 FHLB 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. Pursuant to acquisitions the last two fiscal years, the Bank acquired advances from the FHLB of Des Moines. Except for these acquired FHLB advances from the Des Moines district, the Bank has not borrowed additional advances from this district the last two fiscal years. At June 30, 1999 the Bank had advances of $3.6 billion from the FHLB of Topeka and Des Moines. As a member of the FHLB, the Bank is required to acquire and hold shares of capital stock in the FHLB 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. The Bank was in compliance with this requirement at June 30, 1999, with an investment in FHLB stock totaling $194.1 million compared to a required amount of $181.6million. During fiscal years 1999, 1998 and 1997 the Bank received dividend income from its investment in FHLB stock totaling $10.8 million, $8.4 million and $5.6 million, respectively. LIQUIDITY REQUIREMENTS - ---------------------- Federal regulations require savings associations to maintain an average daily balance of liquid 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) in each calendar quarter of not less than 4.0% of its net withdrawable deposits plus short-term borrowings or 4.0% of the average daily balance of its net withdrawable accounts plus short term borrowings during the preceding quarter. In addition to meeting this minimum requirement, each savings association is required to maintain sufficient liquidity to ensure its safe and sound operations. Monetary penalties may be imposed for failure to meet liquidity requirements. The average liquidity ratio of the Bank as of June 30, 1999, was 11.69%. 48 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 the HOLA, 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 (including homes equity loans), (ii) stock in an FHLB and (iii) loans for educational purposes, loans to small businesses and loans made through credit cards or credit card accounts. In addition, subject to a 20.0% of portfolio assets limit, savings institutions are able to treat as Qualified Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans originated for sale and sold within 90 days of origination, (ii) 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, (iii) 200.0% of loans for the purchase or construction of churches, schools, nursing homes and hospitals, other than those covered in (ii) and loans for the improvement and upkeep of such properties, (iv) loans for personal family or household purposes, (v) shares of stock issued by the FHLMC or the FNMA and (vi) investments in the capital stock of or obligation of, any security issued by any service corporation if such service corporation derives at least 80% of its annual gross revenues from activities directly related to purchasing, financing , constructing, improving or repairing domestic residential real estate or manufactured housing. 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, 1999, approximately 82.97% 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. 49 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 must submit notice to the OTS prior to making a capital distribution if (i) they would not be well capitalized after the distribution, (ii) the distribution would result in the retirement of any of the association's common or preferred stock or debt counted as its regulatory capital, or (iii) the association is a subsidiary of a holding company. A savings association must make application to the OTS to pay a capital distribution if (i) the association would not be adequately capitalized following the distribution, (ii) the association's total distributions for the calendar year exceeds the association's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (iii) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. Under these regulations, at June 30, 1999, the Bank is permitted to pay an aggregate amount of approximately $113.8 million in capital distributions. 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 "Regulation -- Prompt Corrective Regulatory Action." 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. 50 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 a risk-based deposit insurance assessment system under which the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC which is determined by the institution's capital level and supervisory evaluations. Institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period. Well capitalized institutions are institutions satisfying the following capital ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions are institutions that do not meet the standards for well capitalized institutions but which satisfy the following capital ratio standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Undercapitalized institutions consist of institutions that do not qualify as either "well capitalized" or "adequately capitalized." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. Subgroup A consists of financially sound institutions with only a few minor weaknesses. Subgroup B consists of institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration of the institution and increased risk of loss to the deposit insurance fund. Subgroup C consists of institutions that pose a substantial probability of loss to the deposit insurance fund unless effective corrective action is taken. The FDIC's assessment schedule for SAIF deposit insurance mandates the assessment rate for well-capitalized institutions with the highest supervisory ratings be reduced to zero and institutions in the lower risk assessment classification 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 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 proceedings of deposit insurance. 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, and 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 subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2.0% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the savings association is meeting the Tier 1 capital requirement for state non-member banks of 4.0% of total assets for all but the most highly rated state non-member banks. 51 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 Corporation) 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. Section 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, directors and principal shareholders 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. 52 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. Since August 1993, the OTS has had revised guidance outstanding 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 has not had 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. 53 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) 50.0% of the portfolio that is classified doubtful, (b) 15.0% 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 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. 54 Under OTS regulations implementing the prompt corrective action provisions of FDICIA, the OTS measures a savings institution's capital adequacy on the basis of its total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). A savings institution that is not subject to an order or written directive to meet or maintain a specific capital level is deemed "well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized" savings institution is a savings institution that does not meet the definition of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a composite 1 regulatory CAMELS 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 regulatory CAMELS 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 regulatory CAMELS rating category. The Bank is classified as "well capitalized" under the OTS regulations. STANDARDS FOR SAFETY AND SOUNDNESS - ---------------------------------- 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. The final rule and the guidelines took effect on August 9, 1995. The guidelines require savings associations to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the association's business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings associations should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the OTS determines that a savings association is not in compliance with the safety and soundness guidelines, it may require the association to submit an acceptable plan to achieve compliance with the guidelines. A savings association must submit an acceptable compliance plan to the OTS within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the association to regulatory sanctions. Management believes that the Bank meets substantially all the standards adopted in these interagency guidelines. 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. 55 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 $46.5 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, 1999, the Bank met its reserve requirements. LIMITATIONS ON LOANS TO ONE BORROWER - ------------------------------------ Under applicable law, with certain limited exceptions, loans and extensions of credit to a person outstanding at one time shall not exceed 15.0% of a savings association's unimpaired capital and surplus (defined as an association's core and supplementary capital, plus the balance of its allowance for loan and lease losses not included in its supplementary capital). Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10.0% of unimpaired capital and surplus. Savings associations are further permitted to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of the OTS, in an amount not to exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to develop residential housing provided (i) the purchase price of each single-family dwelling in the development does not exceed $500,000 (ii) the savings association is in compliance with its fully phased-in capital standards, (iii) the loans comply with applicable loan-to-value requirements, (iv) the aggregate amount of loans made under this authority does not exceed 150.0% of unimpaired capital and surplus and (v) the savings association is, and continues to be, in compliance with its fully phased in capital requirements. At June 30, 1999, the Bank's loan to one borrower limitation was $241.0 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 $3.8 billion. At June 30, 1999 the Bank's nonresidential real property loans totaled $940.8 million. 56 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 "Regulation -- Qualified Thrift Lender Test." If the Corporation were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Corporation would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL test, the activities of the Corporation and any of its subsidiaries (other than the Bank or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by, the OTS, other than: (i) furnishing or performing management services for a subsidiary savings institution; (ii) conducting an insurance agency or escrow business; (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. 57 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. 58 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. 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 $191,000 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." 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, 1999, the amount of these reserves totaled approximately $105,266,000 with an unrecognized deferred tax liability approximating $38,527,000. 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. During fiscal year 1998, the Internal Revenue Service completed its examination of the Corporation's consolidated federal income tax returns through June 30, 1995. Such examination had no effect on the Corporation's results of operations for fiscal year 1998. 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 (which is filed separately) 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. The Corporation also pays franchise or state income taxes in a number of jurisdictions in which the Corporation or its subsidiaries conduct business. For further information regarding federal income taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated Financial Statements. 59 Item 2. Properties - -------------------------------------------------------------------------------- At June 30, 1999, the Corporation conducted business through 256 branch offices in nine states: Iowa (77), Colorado (44), Nebraska (42), Kansas (41), Oklahoma (21), Missouri (19), Arizona (7), Minnesota (4) and South Dakota (1). See Item 1. Business - "Recent Developments - Acquisitions Consummated." At June 30, 1999, the Corporation owned the buildings for 152 of its branch offices and leased the remaining 104 offices under leases expiring (not assuming exercise of renewal options) between July 1999 and August 2031. The Corporation has 240 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma, Iowa, Arizona Missouri, Minnesota and South Dakota. At June 30, 1999, the total net book value of land, office properties and equipment owned by the Corporation was $185.3 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 - -------------------------------------------------------------------------------- None; no matters were submitted during the fourth quarter of fiscal year 1999. 60 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 34 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, 1995 through 1999 is included in the "Selected Consolidated Financial Data" section appearing on pages 14 and 15 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 1999 compared to fiscal year 1998 and fiscal year 1998 compared to fiscal year 1997 are included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section appearing on pages 16 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. In addition, included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section under the sub-section "Asset/Liability Management" on pages 18 through 20 of the Annual Report is additional information incorporated by reference. Item 8. Financial Statements and Supplementary Data - -------------------------------------------------------------------------------- The "Independent Auditors' Report," "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements" set forth on pages 36 through 82 of the Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures - -------------------------------------------------------------------------------- None. 61 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 1999 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, 1999, are as follows: Age at Current Position(s) as of Name June 30, 1999 June 30, 1999 - ---- ------------- ------------------------- William A. Fitzgerald 61 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank James A. Laphen 51 President, Chief Operating Officer and Chief Financial Officer of the Corporation and the Bank Gary L. Matter 54 Senior Vice President, Controller and Secretary of the Corporation and Executive Vice President, Controller and Secretary of the Bank Joy J. Narzisi 44 Senior Vice President, Treasurer and Assistant Secretary of the Corporation and Executive Vice President, Treasurer and Assistant Secretary of the Bank Roger L. Lewis 49 Executive Vice President and Assistant Secretary of the Bank Russell G. Olson 45 Executive Vice President of the Bank Gary D. White 54 Executive 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 was named Executive Vice President of the Bank and Director of - -------------- Finance in April 1998. Mr. Matter, a Senior Vice President of the Corporation and 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. 62 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 Executive Vice President of the Bank and Director of Lending/Asset Management in April 1998. 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. Roger L. Lewis was named Executive Vice President of the Bank in April 1998. Mr. - -------------- Lewis, Assistant Secretary of the Bank, joined the Bank in 1986 as Vice President and Director of Public Relations until he was named First Vice President and Director of Marketing in March 1988. Mr. Lewis was named a Senior Vice President in 1996. Prior to joining Commercial Federal, Mr. Lewis was Vice President and Communications Director for Omaha National Bank. Russell G. Olson was named Executive Vice President of the Bank and Director of - ---------------- Commercial Banking in April 1998. Mr. Olson joined the Bank in February 1998 as Senior Vice President pursuant to the acquisition of Liberty Financial Corporation of West Des Moines, Iowa, where he was President and Chief Executive Officer. Gary D. White was named Executive Vice President and Director of Corporate - ------------- Services in April 1998. Previous positions held include Senior Vice President for Administration and Special Projects in February 1997, Director of Nebraska/Iowa in July 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. 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. 63 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) Independent Auditors' Report (b) Consolidated Statement of Financial Condition at June 30, 1999 and 1998 (c) Consolidated Statement of Operations for the Years Ended June 30, 1999, 1998 and 1997 (d) Consolidated Statement of Comprehensive Income for the Years Ended June 30, 1999, 1998 and 1997 (e) Consolidated Statement of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997 (f) Consolidated Statement of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997 (g) Notes to Consolidated Financial Statements (2.) Financial Statement Schedules: All financial statement schedules have been omitted as the required information is not applicable, not required or is included in the consolidated financial statements or related notes thereto included in Item 8. (3.) Exhibits: 3.1 Articles of Incorporation of Registrant, as amended and restated (incorporated by reference to the Registrant's Current Report on Form 8-K dated July 3, 1998) 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. 33-00330) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Harris Trust and Savings Bank, as amended (incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarterly Period Ended September 30, 1998) 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 Agreements entered into with Executive Vice Presidents, Senior Vice Presidents and First Vice Presidents (incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589) 64 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 Employee Agreement with James A. Laphen dated June 1, 1997 (incorporated by reference to the Registrant's Form 10-K for the fiscal year ended June 30, 1997 - File No. 1-11515) 10.11 Commercial Federal Corporation 1996 Stock Option and Incentive Plan as Amended (incorporated by reference to the Registrant's Form S-8 Registration Statement Nos. 333-20739 and 333-58607) 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) 10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan (incorporated by reference to the Registrant's Post- Effective Amendment No. 1 to Form S-4 under cover of Form S-8 -File No. 333-42817) 10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan (incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of Form S-8 -File No. 333-45613) 10.16 First Colorado Bancorp, Inc. 1992 Stock Option Plan and First Colorado Bancorp, Inc. 1996 Stock Option Plan (incorporated by reference to the Registrant's Post- Effective Amendment No. 1 to Form S-4 under cover of Form S-8; File No. 333-49967) 10.17 Employment Agreement with Russell G. Olson dated February 10, 1999 (filed herewith) 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1999 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith) 65 (B.) Reports on Form 8-K: On May 4 1999, the Corporation filed a Form 8-K regarding a common stock repurchase program. Effective April 28, 1999, the Corporation's Board of Directors authorized the repurchase of up to five percent of the Corporation's outstanding common stock during the next 18 months. Such repurchase is expected to approximate 3,000,000 shares of common stock. Repurchases will be made at any time and in any amount, depending upon market conditions and various other factors. Any repurchase generally would be on the open-market, although privately negotiated transactions are also possible. In compliance with Nebraska law, all repurchased shares will be cancelled. On May 14, 1999, the Corporation filed a Form 8-K regarding the resignation of board member W. A. Krause effective May 10, 1999. (C.) Exhibits to this Form 10-K are attached or incorporated by reference as stated above. (D.) No financial statement schedules required by Regulation S-X 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 1999 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. 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMERCIAL FEDERAL CORPORATION Date: September 27, 1999 By: /s/ William A. Fitzgerald ------------------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: Date: September 27, 1999 By: /s/ William A. Fitzgerald ------------------------------------- William A. Fitzgerald Chairman of the Board and Chief Executive Officer Principal Financial Officer: Date: September 27, 1999 By: /s/ James A. Laphen ------------------------------------- James A. Laphen President, Chief Operating Officer and Chief Financial Officer Principal Accounting Officer: Date: September 27, 1999 By: /s/ Gary L. Matter ------------------------------------- Gary L. Matter Senior Vice President, Controller and Secretary Directors: Date: September 27, 1999 By: /s/ Talton K. Anderson ------------------------------------- Talton K. Anderson Director 67 Date: September 15, 1999 By: /s/ Michael P. Glinsky ------------------------------------- Michael P. Glinsky Director Date: September 15, 1999 By: /s/ Robert F. Krohn ------------------------------------- Robert F. Krohn Director Date: September 27, 1999 By: /s/ Carl G. Mammel ------------------------------------- Carl G. Mammel Director Date: September --, 1999 By: ------------------------------------- Sharon G. Marvin Director Date: September 27, 1999 By: /s/ Robert S. Milligan ------------------------------------- Robert S. Milligan Director Date: September 27, 1999 By: /s/ James P. O'Donnell ------------------------------------- James P. O'Donnell Director Date: September 27, 1999 By: /s/ Robert D. Taylor ------------------------------------- Robert D. Taylor Director Date: September 27, 1999 By: /s/ Aldo J. Tesi ------------------------------------- Aldo J. Tesi Director 68 INDEX TO EXHIBITS Exhibit Number Identity of Exhibits - ------ -------------------- 3.1 Articles of Incorporation of Registrant, as amended and restated (incorporated by reference to the Registrant's Current Report on Form 8-K dated July 3, 1998) 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. 33-00330) 4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Harris Trust and Savings Bank, as amended (incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarterly Period Ended September 30, 1998) 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 Agreements entered into with Executive Vice Presidents, 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 Employee Agreement with James A. Laphen dated June 1, 1997 (incorporated by reference to the Registrant's Form 10-K for the fiscal year ended June 30, 1997 - File No. 1-11515) 10.11 Commercial Federal Corporation 1996 Stock Option and Incentive Plan as Amended (incorporated by reference to the Registrant's Form S-8 Registration Statement Nos. 333-20739 and 333-58607) 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) 10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan (incorporated by reference to the Registrant's Post-Effective Amendment No.1 to Form S-4 under cover of Form S-8 - File No. 333-42817) 10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan (incorporated by reference to the Registrant's Post-Effective Amendment No.1 to Form S-4 under cover of Form S-8-File No. 333-45613) 10.16 First Colorado Bancorp, Inc. 1992 Stock Option Plan and First Colorado Bancorp, Inc. 1996 Stock Option Plan (incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of Form S-8; File No. 333-49967) 10.17 Employment Agreement with Russell G. Olson dated February 10, 1999 (filed herewith). 13 Commercial Federal Corporation Annual Report to Stockholders for the Fiscal Year Ended June 30, 1999 (filed herewith) 21 Subsidiaries of the Corporation (filed herewith) 23 Consent of Independent Auditors (filed herewith) 27 Financial Data Schedules (filed herewith) EX-10.17 2 EMPLOYMENT AGREEMENT WITH RUSSELL G. OLSON Exhibit 10.17 Employment Agreement with Russell G. Olson dated February 10, 1999 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT ("Agreement") is entered into as of the 10th day of ------ February, 1999, by and between COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK - -------- (the "Bank"), referred to herein sometimes as the "Employer," and RUSSELL G. OLSON ("Olson"). R E C I T A L S: --------------- A. Olson has agreed to become a key member of the senior management of the Bank and to devote substantial skill to the affairs of the Bank, and the Board of Directors of the Bank (the "Board") wishes to retain his services under the terms of this Agreement. B. It is in the best interest of the Bank to provide an inducement to Olson to accept employment under the terms of this Agreement. NOW, THEREFORE, the Bank and Olson hereby agree to the following terms of employment: 1. Employment. The Employer agrees to employ Olson and Olson agrees to be ---------- employed in the capacity as Executive Vice President of the Bank for a period of one (1) year beginning the date of this Agreement. The Board will review this Agreement annually to consider additional one (1) year extensions. 2. Time and Effort. Olson 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 Olson a base salary at a rate no less than Two Hundred Fifty-Two Thousand Three Hundred Sixty Dollars ($252,360.00) per year. The base salary may be increased from time to time as the Board may approve. b. Olson 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 Board, 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 Olson's employment at any time upon thirty (30) days notice. However, if the Employer terminates Olson's employment at any time during the term of this Agreement for any reason other than cause, as defined herein, Olson will receive all compensation and benefits detailed in Section 3 through the effective date of termination, together with a severance payment equal to twelve (12) months base salary. Such amount shall be payable monthly beginning on the first day of the month following the month in which such termination occurs. b. Olson shall have no right to receive such severance payment if his employment is terminated for cause. Termination for cause shall mean termination because of Olson'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. --------------------- a. If Olson 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. ss. 1818(e)(3) and (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 Olson 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 Olson 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. ss. 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. 2 6. Disability, Death, Retirement. If Olson 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 Olson. If Olson 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 Olson 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 Olson'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 Olson's incapacity due to physical or mental illness, unless within thirty (30) days thereafter Olson shall have returned to the full-time performance of his duties. 7. Agreement Not to Compete. Should Olson's employment be terminated ------------------------ hereunder for any reason, either voluntarily or involuntarily, Olson agrees that he will not, for a period of one (1) year from the date of such termination, in any capacity, whether as an employee, employer, stockholder, officer, director, partner, associate, consultant, advisor, proprietor, or in any other manner, engage in or have any interest in, direct or indirect, any business in direct competition with the Bank within any service area served by the Bank as of the date of such termination. Olson further agrees during such period that he will not in any manner solicit or interfere with the business, goodwill, or customers of the Bank. Olson further acknowledges that all information pertaining to the business or the customers of the Bank are the property of the Bank, and Olson agrees that he will not, at any time after termination of employment, divulge or communicate any such information to any person or business organization without the express authorization of the Bank. Should Olson violate the terms of this Paragraph 7, the parties agree that in addition to any other remedy available at law and equity, the Bank may cease the payment of any severance payments otherwise due under Paragraph 4 hereof as of the date of such breach. 8. 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 unenforce-ability shall not affect the other portions of this Agreement and that the remaining covenants, 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. 3 9. 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. 10. Change of Control. The parties hereto have, in addition to this ----------------- Agreement, entered into a Change of Control Agreement. To the extent that Olson receives a severance payment under this Agreement, such amount shall reduce the amount to which Olson 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. ss. 1828(k) or regulations or orders issued thereunder and applicable to and binding upon the Bank. 12. Prior Agreements. The parties acknowledge that this Agreement ---------------- supersedes all prior agreements with respect to the subject matter hereof, including specifically that certain agreement between Liberty Financial Corporation and Olson dated January 1, 1997. The parties acknowledge that Olson will be given the company automobile provided for in Paragraph 6A of such agreement. Olson will be reimbursed for business use of his automobile under the Bank's policies. The parties further acknowledge that Olson will have received from Liberty Financial Corporation the amounts due as a golden parachute payment under Paragraph 9 of such agreement, in cash or other good funds. The parties further acknowledge that the Employer may elect to relocate Olson, in which case the Employer will pay moving expenses as provided to executive officers under its policies in effect as of the date of such transfer. 13. 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 BANK, A FEDERAL SAVINGS BANK By /s/ James A. Laphen ------------------------------------- James A. Laphen, President /s/ Russell G. Olson ------------------------------------- RUSSELL G. OLSON 4 EX-13 3 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 Annual Report to Stockholders for the Fiscal Year Ended June 30, 1999 - -------------------------------------------------------------------------------- Commercial Federal Corporation - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] WE WERE READY FOR BUSINESS THEN. AND WE'RE READY FOR A new century NOW. - -------------------------------------------------------------------------------- [GRAPHIC APPEARS 1999 HERE] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BUILDING ON A HERITAGE OF SUCCESSFUL GROWTH TO ENHANCE SHAREHOLDER VALUE, CUSTOMER SERVICE AND EMPLOYEE SUCCESS. - -------------------------------------------------------------------------------- AS WE ENTER INTO THE NEW CENTURY, OUR PRIMARY OBJECTIVES WILL BE TO: Build a powerful and profitable community banking franchise throughout the Midwest, rank in the upper quartile of our industry in financial performance and provide shareholders with the return they expect on their investment. Provide customers with the means to bank when, where and how they choose. Foster a work environment that promotes professional growth for all employees, recognizes and rewards excellent personal and team performance in achieving corporate goals and offers flexibility in meeting individual employee needs. CONTENTS - -------------------------------------------------------------------------------- Financial Highlights ...................................................... 1 Letter to Shareholders .................................................... 2 Financial Information ..................................................... 13 Board, Executive Officers and Senior Management ...........................83-84 Investor Information (inside back cover) -1- Financial Highlights
Amounts in Thousands Except Per Share Data FOR THE YEAR 1999 1998 - ------------------------------------------------------------------------------------------------------- Interest income ................................................. $ 839,354 $ 757,688 Net interest income after provision for loan and lease losses ... 319,933 266,446 Other income .................................................... 101,535 97,521 General and administrative expenses (1) ......................... 250,114 216,384 Amortization of intangible assets ............................... 15,702 7,814 Provision for income taxes ...................................... 63,260 52,356 Net income ...................................................... 92,392 87,413 Earnings per common share: Basic ........................................................ 1.55 1.55 Diluted ...................................................... 1.54 1.52 Dividends declared per common share ............................. .25 .212 Return on average assets (2) .................................... .77% .85% Return on average equity (2) .................................... 9.95% 10.96% Average stockholders' equity to average total assets ............ 7.79% 7.76% General and administrative expenses divided by average assets (2) 2.10% 2.10% - ------------------------------------------------------------------------------------------------------- AT JUNE 30 - ------------------------------------------------------------------------------------------------------- Total assets .................................................... $ 12,775,462 $ 10,399,229 Investment and mortgage-backed securities ....................... 2,229,116 1,765,153 Loans and leases receivable, net ................................ 9,326,393 7,857,276 Deposits ........................................................ 7,655,415 6,558,207 Other borrowings ................................................ 3,986,138 2,824,150 Stockholders' equity ............................................ 966,883 861,195 Book value per common share ..................................... 16.22 14.67 Tangible book value per common share ............................ 11.98 13.35 Stock market price .............................................. 23.19 31.63 Nonperforming assets to total assets ............................ .80% .69% Net yield on interest-earning assets ............................ 2.95% 2.99% - ------------------------------------------------------------------------------------------------------- Regulatory capital ratios of the Bank: Tangible capital ............................................. 6.97% 7.88% Core capital (Tier 1 capital) ................................ 7.05% 7.99% Risk-based capital - Tier 1 capital ............................................. 12.74% 14.58% Total capital .............................................. 13.70% 15.49% - -------------------------------------------------------------------------------------------------------
(1) Includes on a pre-tax basis $30.1 million and $25.2 million in merger-related and other nonrecurring charges for fiscal years 1999 and 1998, respectively. (2) Return on average assets and return on average stockholders' equity for fiscal year 1999 are 1.00% and 12.86%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $27.1 million. Return on average assets and return on average stockholders' equity for fiscal year 1998 are 1.06% and 13.65%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $21.5 million. General and administrative expenses divided by average assets for fiscal year 1999 is 1.85% excluding the merger-related and other nonrecurring charges totaling $30.1 million on a pre-tax basis. General and administrative expenses divided by average assets for fiscal year 1998 is 1.86% excluding the merger-related and other nonrecurring charges totaling $25.2 million on a pre-tax basis. Commercial Federal Corporation - -2- TO OUR shareholders [PHOTO APPEARS HERE] William A. Fitzgerald, James A. Laphen - -------------------------------------------------------------------------------- THE PRIME OBJECTIVE AS WE BUILD COMMERCIAL FEDERAL'S FUTURE IS TO CONTINUE TO FOCUS ON LONG-TERM SUSTAINABLE GROWTH IN EARNINGS PER SHARE. WE INTEND TO ENHANCE THE VALUE OF OUR FRANCHISE THROUGH THE GROWTH OF OUR EXISTING RETAIL NETWORK, ADDING DE NOVO BRANCHES AND SELECTIVE ACQUISITIONS THAT ARE ACCRETIVE TO OUR EARNINGS. WE WILL CONTINUE TO UTILIZE FAST FORWARD, OUR SALES DEVELOPMENT PROCESS, TO PROFITABLY EXPAND EXISTING CUSTOMER RELATIONSHIPS WITHIN OUR CURRENT ACCOUNT BASE AND TO GROW OUR RELATIONSHIPS WITH NEW CUSTOMERS. ALSO, WE ARE CONTINUING TO BE PROACTIVE IN EVALUATING OUR ON-GOING OPERATIONS AS WE LOOK TO GAIN EFFICIENCIES THAT WILL ENHANCE SHAREHOLDER VALUE. - -------------------------------------------------------------------------------- -3- - -------------------------------------------------------------------------------- GROWTH The Company has achieved considerable growth in all its activities: we have acquired more branches, increased the number of households served and added the necessary expertise to direct our transition to a Community Bank. During fiscal year 1999, we significantly expanded our customer franchise in Iowa, Colorado, Nebraska and Kansas, and began to serve customers in Missouri, Minnesota and South Dakota, with the completion of three acquisitions. The Company acquired AmerUs Bank, headquartered in Des Moines, Iowa, First Colorado Bancorp, Inc., parent company of First Federal Bank of Colorado, headquartered in Lakewood, Colorado, and Midland First Financial Corporation, parent company of Midland Bank, headquartered in Lee's Summit, Missouri. These acquisitions operated 82 branches, and had approximately $3.2 billion in assets and approximately $2.5 billion in deposits. As of June 30, 1999, the Company had 256 branches in nine states: Iowa (77), Colorado (44), Nebraska (42), Kansas (41), Oklahoma (21), Missouri (19), Arizona (7), Minnesota (4) and South Dakota (1). Each of these markets provides the Company with growth opportunities to help make our franchise stronger. We have now grown to 256 branches with $12.8 billion in assets. We now serve over 703,000 households. What's more, we have expanded our franchise in what is projected to be one of the strongest growth markets, with population and estimated average household income growth among the highest in the country. Fiscal year 1999 was a year of challenge and opportunity for Commercial Federal Corporation. The completion of the acquisitions from 1998 and the subsequent integration of those acquisitions, while converting to a totally new Y2K compliant data processing system, could not have been accomplished without the hard work and talent of our staff. We'd like to thank them for providing the best possible service to our customers each and every working day. Our new corporate vision, "Customer-Centered, Employee-Driven," underlines their commitment to the continued success of our business. As we start fiscal 2000, we have renewed our commitment to customer service and to enhancing your Company's franchise and shareholder value. EARNINGS Commercial Federal reported record operating earnings for the seventh consecutive year. Operating earnings reflect the Company's ability to generate income from its core banking business, without the effect of any one-time or nonrecurring items. Commercial Federal reported operating earnings of $119.5 million, or $1.99 per diluted share, for the fiscal year ended June 30, 1999. This represents a 10 percent increase - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - -4- [2 BAR GRAPHS APPEAR HERE] - -------------------------------------------------------------------------------- compared with 1998 fiscal year operating earnings of $108.9 million, or $1.89 per diluted share. The Company's return on average equity was 12.9 percent, while return on average assets was 1.00 percent for fiscal 1999. Reported net income for fiscal 1999 - which includes the effect of nonrecurring income and expenses - was $92.4 million, or $1.54 per diluted share. These results were affected primarily by merger-related and other nonrecurring charges, which totaled $30.0 million pretax ($27.1 million after-tax, or $.45 per diluted share) associated primarily with the Company's acquisition of First Colorado Bancorp, Inc. and the termination of the employee stock ownership plans (ESOP) acquired by the Company. The Company's fiscal year 1998 reported net income was $87.4 million, or $1.52 per diluted share. These results include merger-related and other nonrecurring charges which amounted to an after-tax charge of $21.5 million, or $.37 per diluted share. Fiscal year 1999 cash operating earnings were equivalent to $2.19 per diluted share compared to $1.98 per diluted share for fiscal 1998. Cash operating earnings represent operating earnings excluding the amortization expense of intangible assets, net of applicable income taxes. Core profitability is closely tied to net interest income - the difference between what is earned on interest-earning assets and what is paid on interest-earning liabilities - as well as income derived from non-interest sources such as retail fees and charges and loan servicing fees. In fiscal 1999, net interest income and net interest rate spreads continued to increase. Net interest income, after provision for losses, for fiscal 1999 was $319.9 million, up from $266.4 million for the prior year. The net yield on interest earning assets for fiscal 1999 was 2.99 percent, compared to 2.88 percent for fiscal 1998. The Company's strategic management of its cost of funds and the positive impact of acquisitions led to the improvements. Growth was also experienced in non-interest income during the fiscal year. Total non-interest income increased to $101.5 million in fiscal 1999, compared with $97.5 million the prior year. Our loan servicing portfolio increased to $13.5 billion, of which $7.4 billion were serviced for others. INCREASING CUSTOMER RELATIONSHIPS Adding new customers while increasing the services used by existing customers are key elements in building the value of our banking franchise for our shareholders. Both objectives are met through external and internal marketing and sales/service efforts. Advertising campaigns are aimed at acquiring new customers through two lead products - checking - -------------------------------------------------------------------------------- -5- - -------------------------------------------------------------------------------- and consumer loans. Direct mail and other direct marketing techniques are geared to increasing customer relationships once that household has joined Commercial Federal. During fiscal 1999, excluding the impact of acquisitions, Commercial Federal added 84,400 new households throughout our franchise, up 71 percent from 49,400 added in fiscal 1998. Total households served within our branch market areas reached 604,700 through both acquisitions and new household growth by year-end, up 50 percent from the prior year. Total households served nationwide reached 703,000. We established 156,100 new service relationships within those households, a 58 percent increase over the prior year. We increased the number of households with checking accounts by 60 percent to 291,000, through both new account growth and our various acquisitions. This growth in checking households is significant because consumers normally consider the bank where they have their checking account to be their "primary" bank for additional services. Once customers establish an initial relationship, our objective is to deepen that relationship by providing them with multiple services. FAST FORWARD, our sales development process, has been in full force now for three years and has made a significant impact on household relationship growth. FAST FORWARD focuses on the fact that outstanding customer service comes from working proactively and cooperatively with customers to discover their financial needs and then matching our services with those needs. The relationship-building strategies derived from the FAST FORWARD process since its introduction at Commercial Federal has resulted in an average 31 percent increase in daily sales of "core" financial products by personal bankers and an average 69 percent increase in total daily sales activity. In addition, this proactive effort to uncover customer needs has led to increased teamwork and referral efforts among employees involved in our retail, commercial, mortgage and INVEST operations. YEAR 2000 The Company is Year 2000 compliant. We have been working diligently to assure a smooth transition into the next century. We have completed testing of our mission-critical computer systems and contingency planning for those systems in accordance with the timetables established by federal banking regulators. Maintaining our customer's confidence is a top priority. INTERNET BANKING Commercial Federal is currently working to provide home banking via the Internet through our website - www.comfedbank.com. The delivery of services - -------------------------------------------------------------------------------- [2 LINE GRAPHS APPEAR HERE] - -6- [2 BAR GRAPHS APPEAR HERE] - -------------------------------------------------------------------------------- via the Internet continues our commitment to make banking easy and convenient for our customers. It is anticipated that our online banking services will be fully operational in January 2000. COMMUNITY INVESTMENT Commercial Federal has long championed a strong commitment to increasing housing opportunities in the cities, towns and neighborhoods it serves. Over the past year, we've provided both technical and financial resources to numerous affordable housing projects. These efforts have resulted in new housing opportunities for the elderly, farm workers, those with special needs and homeless populations. One such project dealt with the rehabilitation of 30 housing units in a distressed area of Omaha. The project, in collaboration with New Creations, Inc. and the Sienna Francis House, provides formerly homeless people, most of whom are recovering from chemical addictions, the needed preparation to live in homes on their own. People are eligible to live in the apartments if they complete a recovery program at one of several area facilities. The project allows people to live with their families, which is a major factor in motivating them to complete the recovery programs. Tenants must also either have a job or have a strong lead on employment. By giving people a decent place to live and providing the support services and counseling they need to get back on track, this project has given them hope for a brighter future. The long-term plan is to place a portion of the rental fee into a fund to be used by the tenants to rent their own apartments or purchase a home. Commercial Federal worked with the City of Omaha and the Equity Fund of Nebraska on financing this project. In addition to providing a permanent loan for this project, Commercial Federal participated through the Equity Fund as an investor in the project's low-income housing tax credits. Commercial Federal also provided a Federal Home Loan Bank Affordable Housing Program subsidy to the project. This project is just one example of how Commercial Federal has partnered with a non-profit group or organization to bring continuity and stability to a neighborhood. It is through partnerships such as these that Commercial Federal seeks to advance the quality of the social and economic life of the communities we serve. STOCK BUYBACK The Company announced a share repurchase plan on April 29, 1999, authorizing the Company to repurchase, from time to time, up to 5% of Commercial - -------------------------------------------------------------------------------- -7- - -------------------------------------------------------------------------------- Federal's outstanding common stock, or approximately 3 million shares. In the quarter ended June 30, 1999, 1.5 million shares were repurchased at an average price of $24.11. GOODWILL Commercial Federal's goodwill lawsuits are still pending at this time. In the goodwill lawsuit from the Mid Continent Bancshares acquisition, the government has admitted liability, but discussions concerning a possible settlement are on hold. We believe it is possible that Commercial Federal's lawsuit, to determine the government's liability, could be heard by the courts in early 2000. Although the outcome of the lawsuits cannot be predicted, we are pursuing alternative damage claims of up to approximately $230 million. NEW CORPORATE HEADQUARTERS Construction of new corporate headquarters was announced during May with construction slated to begin in the fall of 1999 and completion anticipated by the end of 2000. The new headquarters will improve operational efficiencies to support the growth of the franchise. Employees from 11 locations in Omaha will move to the new headquarters building. This is an opportunity to combine our support units and management operations in one central location. The new headquarters will provide an opportunity for improved communication, strengthening the customer-oriented service that distinguishes Commercial Federal. A HERITAGE OF ADDING VALUE Commercial Federal was founded in 1887 in Omaha, Nebraska. There have been many changes in the banking business since those early years. As we prepare to start a new century, we will continue to look for new ways to enhance shareholder value by meeting the needs of our customers. We will continue to provide our customers with the means to bank When, Where and How they choose. Above all, we look forward to providing them with the best possible service. As long as we remain committed to serving our customers, we will continue to earn their confidence and reach our ultimate destination of 100% customer satisfaction day in, day out. The Board of Directors, management and employees of Commercial Federal remain focused on the objective of further enhancing the value of your investment in the Company. We look forward to meeting the challenges ahead and taking advantage of opportunities that will add value. We thank you, our fellow shareholders, for your confidence and continued support. /s/ William A. Fitzgerald /s/ James A. Laphen William A. Fitzgerald James A. Laphen Chairman of the Board and Chief Executive Officer President and Chief Operating Officer
- -------------------------------------------------------------------------------- [PHOTO APPEARS HERE] COMMERCIAL FEDERAL - ---------------------------------- CUSTOMER PROFILE Location: OMAHA, NEBRASKA ------------------------ BOGGESS FAMILY / CHECKING ACCOUNTS CONSUMER LOAN [GRAPHIC MORTGAGE LOAN APPEARS HERE] SAVINGS ACCOUNTS AM|PM -9- AS A COMMUNITY BANK, WE CARE ABOUT OUR CUSTOMERS. AFTER ALL, THEY'RE OUR neighbors, TOO. - -------------------------------------------------------------------------------- A smile at the counter. A FRIENDLY greeting. People who know their customers by name. Many banks act like this kind of personal service disappeared a long time ago. But at Commercial Federal, we're doing everything we can to make sure it never does. So we LISTEN to our customers' suggestions and promptly act upon them. We make sure our customers can bank whenever, wherever and however they choose. For example, banking on a Sunday at the supermarket. Or paying bills from home using our telephone banking service. Of course, in times of trouble, the communities we serve can always depend on our SUPPORT. In the past year, we established emergency relief funds to aid those stricken by tornadoes and school violence. And we've kept the good times rolling by funding events such as free concerts. After all, keeping our customers HAPPY is what Commercial Federal is all about. - -------------------------------------------------------------------------------- CONVENIENT SERVICE RETAIL BRANCHES COMMUNITY SUPPORT - -------------------------------------------------------------------------------- INTERNET BANKING Coming soon in 2000, customers will have direct [GRAPHIC access to account information from their home or APPEARS office computer. HERE] WE'RE FOCUSED ON THE business OF BANKING. AND WE SEE GREAT THINGS JUST AHEAD. - -------------------------------------------------------------------------------- Two years ago, Commercial Federal Bank was the 14th largest publicly-held thrift in the U.S. Today, we're the 11th largest with $12.8 BILLION in assets and 256 branches in nine states. Targeted acquisitions have fueled our growth and added to our banking expertise. As a result, we now offer more BANKING services than ever before. Including personal checking and savings accounts, business accounts, home mortgages, plus personal, business and agricultural loans. We're also making it easier than ever for our customers to reach us, with new retail locations, new ATMs, 24/7 phone banking and, early next year, Internet banking. How are CUSTOMERS responding? Well, in the last fiscal year we've opened more than 86,000 new checking accounts. And established over 156,000 account RELATIONSHIPS with new households. We're quickly becoming the bank of choice in all the communities we serve. Because we're focused on our customers' needs. - -------------------------------------------------------------------------------- DIVERSIFIED SERVICES NEW CUSTOMERS STRONGER RELATIONSHIPS - -------------------------------------------------------------------------------- [GRAPHIC Y2K COMPLIANT By July 1, 1999, we had already passed every test APPEARS for Year 2000 compliance. Roll on, the new millennium. HERE] [GRAPHIC APPEARS HERE] COMMERCIAL FEDERAL ------------------------------------ CUSTOMER PROFILE Location: JoMax GREAT BEND, KANSAS -------------------------- MAX NICHOLS / BUSINESS CHECKING PAYROLL ACCOUNTS [GRAPHIC OPERATING ACCOUNTS APPEARS HERE] BUSINESS LOANS AM|PM [GRAPHIC APPEARS HERE] COMMERCIAL FEDERAL - ---------------------------------------- CUSTOMER PROFILE Location: Mondo's WEST DES MOINES, IOWA ------------------------------ JIM MONDANARO / CHECKING & SAVINGS COMMERCIAL LOANS [GRAPHIC MERCHANT SERVICES APPEARS HERE] LINE OF CREDIT-BUSINESS/PERSONAL AM|PM NO RED TAPE. NO RUNAROUND. NO WAITING ON decisions FROM HEADQUARTERS. - -------------------------------------------------------------------------------- The last thing anyone wants is a bank that moves in slow motion. But all too often, that's what happens when banks reach a certain size. Management becomes LAYERED. Decisions get deferred. And service slow-w-w-s down. Fortunately, that's not the case at Commercial Federal. We've EMPOWERED our employees to solve customer problems on their own. In fact, we're committed to serving our customers' needs at first contact at least 95% of the time. It's a unique "customer-centered, employee-driven" policy that makes a big difference. Because our employees know it's within their power to provide outstanding SERVICE, they're eager to provide it. Which, of course, makes our customers very happy. - -------------------------------------------------------------------------------- EMPOWERED EMPLOYEES IMMEDIATE DECISIONS SATISFIED CUSTOMERS -13-
FINANCIAL INFORMATION - ---------------------------------------------------------------------------------------------------------------- Selected Consolidated Financial Data....................................................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16 Management's Report on Internal Controls................................................................... 36 Independent Auditors' Report............................................................................... 36 Consolidated Statement of Financial Condition.............................................................. 37 Consolidated Statement of Operations....................................................................... 38 Consolidated Statement of Comprehensive Income............................................................. 39 Consolidated Statement of Stockholders' Equity............................................................. 40 Consolidated Statement of Cash Flows....................................................................... 42 Notes to Consolidated Financial Statements................................................................. 44 - ----------------------------------------------------------------------------------------------------------------
- -14-
SELECTED CONSOLIDATED FINANCIAL DATA For the Year Ended June 30, ----------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) 1999 1998(1) 1997(1) 1996(1) 1995(1) - ------------------------------------------------------------------------------------------------------------------------------------ Interest income................................. $ 839,354 $ 757,688 $ 717,592 $ 673,470 $ 604,647 Interest expense................................ 507,021 477,389 453,969 437,443 384,127 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income............................. 332,333 280,299 263,623 236,027 220,520 Provision for loan and lease losses............. (12,400) (13,853) (13,427) (6,716) (7,119) Loan servicing fees............................. 34,481 34,784 35,190 32,522 29,442 Retail fees and charges......................... 36,740 30,284 26,198 21,207 16,939 Real estate operations.......................... (1,674) 1,894 1,314 1,376 2,262 Gain (loss) on sales of loans................... 3,423 3,092 2,142 1,940 (760) Gain (loss) on sales of securities, net......... 4,376 3,765 510 (294) 131 Gain on sales of loan servicing rights.......... - 380 - 452 5,480 Other operating income.......................... 24,189 23,322 15,914 13,392 10,875 General and administrative expenses (2)......... 250,114 216,384 213,410 170,707 152,797 Amortization of intangible assets (3)........... 15,702 7,814 11,235 10,479 32,925 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and extraordinary items........................... 155,652 139,769 106,819 118,720 92,048 Provision for income taxes...................... 63,260 52,356 37,980 39,887 36,863 - ------------------------------------------------------------------------------------------------------------------------------------ Income before extraordinary items............... 92,392 87,413 68,839 78,833 55,185 Extraordinary items, net (4).................... - - (583) - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income...................................... $ 92,392 $ 87,413 $ 68,256 $ 78,833 $ 55,185 ==================================================================================================================================== Diluted earnings per share: Income before extraordinary items............. $ 1.54 $ 1.52 $ 1.17 $ 1.28 $ .91 Extraordinary items, net (4).................. - - (.01) - - - ------------------------------------------------------------------------------------------------------------------------------------ Net income.................................... $ 1.54 $ 1.52 $ 1.16 $ 1.28 $ .91 ==================================================================================================================================== Dividends declared per common share............. $ .250 $ .212 $ .185 $ .178 $ - - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average diluted common shares outstanding............................ 60,126,846 57,685,281 59,093,615 61,409,356 60,622,330 - ------------------------------------------------------------------------------------------------------------------------------------ Other data: Net interest rate spread...................... 2.85% 2.62% 2.58% 2.45% 2.45% Net yield on interest-earning assets.......... 2.99% 2.88% 2.86% 2.72% 2.68% Return on average assets (5).................. .77% .85% .70% .87% .64% Return on average equity (5).................. 9.95% 10.96% 9.18% 13.34% 10.84% Dividend payout ratio (6)..................... 16.23% 13.95% 15.95% 13.91% - Total number of branches at end of period..... 256 195 190 175 154 - ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION -15- SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
For the Year Ended June 30, ----------------------------------------------------------------------------------- (Dollars in Thousands Except Per Share Data) 1999 1998(1) 1997(1) 1996(1) 1995(1) - --------------------------------------------------------------------------------------------------------------------------------- Total assets............................... $12,775,462 $10,399,229 $10,040,596 $ 9,330,187 $ 8,945,398 Investment securities (7).................. 946,571 673,304 622,240 528,115 505,803 Mortgage-backed securities (8)............. 1,282,545 1,091,849 1,388,940 1,590,907 1,913,667 Loans and leases receivable, net (9)....... 9,326,393 7,857,276 7,360,481 6,573,624 5,988,850 Intangible assets.......................... 252,677 77,186 58,166 44,453 41,933 Deposits................................... 7,655,415 6,558,207 6,589,395 6,304,620 5,862,929 Advances from Federal Home Loan Bank....... 3,632,241 2,379,182 1,719,841 1,643,160 2,039,300 Securities sold under agreements to repurchase................. 128,514 334,294 639,294 380,755 208,373 Other borrowings........................... 225,383 110,674 161,314 92,562 86,328 Stockholders' equity....................... 966,883 861,195 764,066 756,443 542,984 Book value per common share 16.22 14.67 13.08 12.19 8.98 Tangible book value per common share (10).. 11.98 13.35 12.08 11.48 8.29 Regulatory capital ratios of the Bank: Tangible capital......................... 6.97% 7.88% 7.40% 7.27% 5.98% Core capital (Tier 1 capital)............ 7.05% 7.99% 7.53% 7.46% 6.24% Risk-based capital - Tier 1 capital................... 12.74% 14.58% 14.37% 14.32% 13.20% Total capital.................... 13.70% 15.49% 15.25% 15.19% 14.15% - ---------------------------------------------------------------------------------------------------------------------------------
(1) On August 14, 1998, the Corporation consummated its acquisition of First Colorado Bancorp, Inc. (First Colorado). The First Colorado 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 this acquisition to include the accounts and results of operations of First Colorado. (2) Includes merger-related and other nonrecurring charges, the Savings Association Insurance Fund (SAIF) special assessment, and expenses associated with the 1997 common stock repurchase and the 1995 proxy contest. These amounts totaled $30.1 million, $25.2 million, $38.3 million and $5.5 million on a pre-tax basis for fiscal years 1999, 1998, 1997 and 1996, respectively. (3) Includes accelerated amortization of goodwill totaling $21.4 million in fiscal year 1995. (4) Represents the loss on early retirement of debt, net of income tax benefits. (5) Return on average assets (ROAA) and return on average stockholders' equity (ROAE) for fiscal year 1999 are 1.00% and 12.86%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $27.1 million. ROAA and ROAE for fiscal year 1998 are 1.06% and 13.65%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $21.5 million. ROAA and ROAE for fiscal year 1997 are .97% and 12.58%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $25.1 million associated with the SAIF special assessment, the repurchase of 2,812,725 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. ROAA and ROAE for fiscal year 1996 are .92% and 14.05%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $4.2 million associated with the Railroad Financial Corporation merger, the SAIF special assessment (incurred in fiscal year 1996 as a result of the pooling of interests accounting method applied to the Mid Continent Bancshares, Inc. merger) and the Corporation's 1995 proxy contest. ROAA and ROAE for fiscal year 1995 are .89% and 15.03%, respectively, excluding the accelerated amortization of goodwill totaling $21.4 million. (6) Represents dividends declared per share divided by net income per dilutive share. The Corporation established a quarterly common stock cash dividend policy on October 4, 1995, and paid its first dividend on October 31, 1995. (7) Includes investment securities available for sale totaling $83.8 million, $141.1 million, $102.1 million, $144.4 million and $105.1 million, respectively, at June 30, 1999, 1998, 1997, 1996 and 1995. (8) Includes mortgage-backed securities available for sale totaling $419.7 million, $171.4 million, $285.3 million, $371.7 million and $186.3 million, respectively, at June 30, 1999, 1998, 1997, 1996 and 1995. (9) Includes loans and leases held for sale totaling $104.3 million, $290.4 million, $84.4 million, $105.9 million and $136.6 million, respectively, at June 30, 1999, 1998, 1997, 1996 and 1995. (10) Calculated by dividing stockholders' equity, reduced by the amount of intangible assets, by the number of shares of common stock outstanding at the respective dates. - -16- - -------------------------------------------------------------------------------- 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 11th largest publicly held thrift holding company in the United States. The Bank, a thrift chartered institution, has transitioned to a community banking institution, offering commercial and consumer banking, mortgage banking, and trust and investment services. The Corporation completed three acquisitions in fiscal year 1999 and four acquisitions in fiscal year 1998. These acquisitions, three of which were commercial banks, allowed the Bank to further expand its banking services, commercial and agricultural loans, business checking, equipment leasing and trust services. In addition, the fiscal year 1999 acquisitions created new customer franchises in Missouri, Minnesota and South Dakota and greatly expanded the Bank's franchises in Iowa, Colorado, Nebraska and Kansas. The Bank has moved from primarily a single-family residential lender to a full service banking institution with branches not only in traditional locations but also in supermarkets and convenience stores, increased ATM outlets and expanded services in telephone bill paying and Internet banking. At June 30, 1999, the Corporation, headquartered in Omaha, Nebraska, operated 256 branches with 77 located in Iowa, 44 in Colorado, 42 in Nebraska, 41 in Kansas, 21 in Oklahoma, 19 in Missouri, seven in Arizona, four in Minnesota and one in South Dakota. Throughout its 112 year history, the Corporation has emphasized customer service. To serve its customers, the Corporation conducts community banking operations through its branch network, and loan origination activities through its branches, 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. The Corporation's strategy for growth of its existing retail network emphasizes both internal and external growth. Operations focus on increasing deposits, primarily demand accounts and public funds, making loans (primarily consumer, commercial real estate, single-family residential, business lending and agribusiness loans) and providing customers with a full array of financial products and a high level of customer service. As part of its long-term strategic plan, the Corporation intends to continue to expand its operations within its market areas through direct marketing efforts aimed at increasing market share and 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 noninterest income. The Corporation's operations are also continually reviewed in order to gain efficiencies to increase productivity and reduce costs. Complementing its strategy of internal growth, the Corporation continues to grow its current franchise through an ongoing program of selective acquisitions of other financial institutions. Acquisition candidates have been, and will continue to be, selected based on the extent to which the candidates can expand the Corporation's retail presence in both new and underserved markets and enhance the Corporation's existing retail network. Accordingly, during fiscal year 1999, the Corporation consummated the acquisitions of three financial institutions: AmerUs Bank (AmerUs) on July 31, 1998, First Colorado Bancorp, Inc. (First Colorado) on August 14, 1998, and Midland First Financial Corporation (Midland) on March 1, 1999. On a combined basis, these institutions operated 82 branches and had assets of approximately $3.2 billion and deposits of approximately $2.5 billion. These acquisitions provided the Corporation entry into three new states, access to supermarket branches and significant expansion of its presence in the metropolitan areas of Denver, Colorado and Kansas City, Missouri. The accounts and results of operations of AmerUs and Midland are reflected in the Corporation's consolidated financial statements beginning July 31, 1998, and March 1, 1999, respectively, since these acquisitions were accounted for as purchases. The First Colorado acquisition was accounted for under the pooling of interests accounting method and, accordingly, the Corporation's historical consolidated financial statements were restated for all prior periods to include the accounts and results of operations of First Colorado. Net income for fiscal year 1999 was $92.4 million, or $1.54 per diluted share, compared to net income of $87.4 million, or $1.52 per diluted share for fiscal year 1998, and $68.3 million, or $1.16 per diluted share for fiscal year 1997. Fiscal year 1999 net income was reduced by an after-tax charge of $27.1 million, or $.45 per diluted share ($30.0 million pre-tax) associated primarily with the First Colorado acquisition and the termination of employee stock ownership plans acquired in the mergers of three financial institutions the past two fiscal years. Fiscal year 1998 net income was reduced by an after-tax charge of $21.5 million, or $.37 per diluted share, - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -17- - -------------------------------------------------------------------------------- ($29.7 million pre-tax), associated with merger-related expenses and other nonrecurring charges. The Corporation incurred these expenses due to the Corporation's fiscal year 1998 acquisitions and the accelerated amortization of certain computer systems and software necessitated by Year 2000 compliance and the related planned systems conversions. Fiscal year 1997 net income was affected by an after-tax charge of $23.1 million, or $.39 per diluted share, ($36.1 million pre-tax), as a result of the Corporation's share of the one-time industry-wide special assessment to recapitalize the Savings Association Insurance Fund (SAIF), and after-tax charges totaling $2.1 million ($.03 per diluted share) primarily from the expenses incurred in repurchasing 2,812,725 shares of the Corporation's common stock and the extraordinary losses on early retirement of debt. Operating earnings, which excludes the effect of merger-related expenses and other nonrecurring charges, totaled $119.5 million, or $1.99 per diluted share, for fiscal year 1999 compared to $108.9 million, or $1.89 per diluted share, for fiscal year 1998 and $93.5 million, or $1.58 per diluted share, for fiscal year 1997. Fiscal year 1999 cash operating earnings totaled $131.9 million ($2.19 per diluted share) compared to $114.2 million ($1.98 per diluted share) for fiscal year 1998 and $101.0 million ($1.71 per diluted share) for fiscal year 1997. Cash operating earnings are operating earnings less the effect of the amortization of intangible assets, net of applicable income taxes. Management believes that cash operating earnings are a significant measure of a company's performance, and reflect the Corporation's ability to generate capital that could be leveraged for future growth. The statements in this management's discussion and analysis of financial condition and results of operations that are not historical fact are forward-looking statements that involve inherent risks and uncertainties. The Corporation cautions readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include fluctuations in interest rates, inflation, government regulations, the progress of integrating acquisitions, economic conditions, adequacy of allowance for credit losses, the costs or difficulties associated with the resolution of Year 2000 issues on computer systems greater than anticipated, technology changes and competition in the geographic and business areas in which the Corporation conducts its operations. These statements are based on management's current expectations. Actual results in future periods may differ materially from those currently expected because of various risks and uncertainties. ACQUISITIONS DURING FISCAL YEAR 1999 - -------------------------------------------------------------------------------- On July 31, 1998, the Corporation consummated its acquisition of AmerUs, a wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a taxable acquisition all of the outstanding shares of the common stock of AmerUs for total consideration of approximately $178.3 million. Such consideration consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One single-family residential mortgage loans and a receivable for income tax benefits) totaling approximately $85.0 million, (ii) cash, as adjusted per the agreement, totaling approximately $53.2 million, and (iii) one-year promissory notes for $40.0 million bearing interest, adjusted monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a federally chartered savings bank headquartered in Des Moines, Iowa and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase accounting adjustments, AmerUs had total assets of approximately $1.3 billion, deposits of approximately $949.7 million and stockholder's equity of approximately $84.8 million. This acquisition was accounted for as a purchase. The one-year promissory notes were paid in full on July 30, 1999. On August 14, 1998, the Corporation consummated its acquisition of First Colorado. The Corporation acquired in a tax-free reorganization all of the outstanding shares of First Colorado's common stock in exchange for 18,278,789 shares of its common stock. Based on the Corporation's closing stock price of $26.375 at August 14, 1998, the total consideration for this acquisition, including cash paid for fractional shares, approximated $482.2 million. An additional requirement of the transaction with First Colorado was the issuance of 1,400,000 shares of First Colorado common stock immediately prior to the consummation of the merger. Such requirement was necessary to cure the taint on the treasury stock of First Colorado so such transaction could be accounted for as a pooling of interests. First Colorado, headquartered in Lakewood, Colorado, was a unitary savings and loan holding company and the parent company of First Federal Bank of Colorado, a federally chartered stock savings bank that operated 27 branches located in Colorado, with 23 branches located in the Denver metropolitan area and four in Colorado's western slope region. At July 31, 1998, First Colorado had assets of approximately $1.6 billion, deposits of approximately $1.2 billion and stockholders' equity of approximately $254.7 million. The acquisition was accounted for as a pooling of interests. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -18- - -------------------------------------------------------------------------------- On March 1, 1999, the Corporation consummated its acquisition of Midland, parent company of Midland Bank. The Corporation acquired in a taxable acquisition all of the outstanding shares of Midland's common stock. The total purchase consideration of this acquisition was $83.0 million in cash, including cash to pay off existing Midland debt totaling $5.6 million, the retirement of preferred stock of both Midland and Midland Bank totaling $11.6 million and $810,000 for advisor fees. Midland Bank was a privately-held commercial bank headquartered in Lee's Summit, Missouri that operated eight branches in the greater Kansas City area. At February 28, 1999, Midland had total assets of approximately $399.2 million, deposits of approximately $353.1 million and stockholders' equity of approximately $24.2 million. This acquisition was accounted for as a purchase. MERGER EXPENSES AND OTHER NONRECURRING CHARGES - -------------------------------------------------------------------------------- During fiscal year 1999 the Corporation incurred merger expenses and other nonrecurring charges totaling approximately $30.0 million. Such amounts for fiscal year 1999 are associated with the First Colorado acquisition totaling $16.0 million and the termination of three employee stock ownership plans totaling $14.0 million acquired in mergers during the past two fiscal years. These employee stock ownership plans were terminated following consummation of the mergers and receipt of determination letters from the Internal Revenue Service to terminate such plans. The merger-related expenses totaling $16.0 million consists of $8.0 million in transition costs as a result of the First Colorado acquisition, $6.7 million in costs to combine operations and conform certain accounting practices, $1.4 million in personnel expenses for severance, retention and other employee related costs and $1.0 million in additional loss reserves to conform First Colorado's loan portfolios to the reserve policies of the Corporation. These expenses were offset by a gain of $1.1 million on the sale of a First Colorado branch that was located in close proximity to another branch of the Bank. During fiscal year 1998, the Corporation also incurred merger expenses and other nonrecurring charges totaling $29.7 million due to three fiscal year acquisitions ($25.4 million) and the accelerated amortization of certain computer systems necessitated by Year 2000 compliance and the related planned systems conversions ($4.3 million). In fiscal year 1998 the Corporation finalized its plans for systems conversions and Year 2000 compliance resulting in a reduction in the estimated useful lives of such computer systems and software. The merger-related expenses totaling $25.4 million consisted of $9.0 million in transition costs as a result of the three acquisitions, $7.0 million in personnel expenses for severance, retention and other employee related costs, $4.9 million in costs to combine operations and conform certain accounting practices and $4.5 million in additional loss reserves primarily to conform the acquired loan portfolios and leasing operations to the reserve policies of the Corporation. COMMON STOCK REPURCHASE - -------------------------------------------------------------------------------- Effective April 28, 1999, the Corporation's Board of Directors authorized the repurchase of up to five percent of the Corporation's outstanding common stock during the next 18 months. Such repurchase is expected to approximate 3,000,000 shares of common stock. Repurchases will be made depending upon market conditions and various other factors. Any repurchase generally would be on the open-market, although privately negotiated transactions are also possible. In compliance with Nebraska law, all repurchased shares will be cancelled. During the fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled 1,500,000 shares of its common stock at a cost of approximately $36.2 million. SPECIAL MEETING OF STOCKHOLDERS - -------------------------------------------------------------------------------- At the Special Meeting of Stockholders on July 3, 1998, three proposals were approved. The proposals approved were (i) the First Colorado transaction and an amendment to the Corporation's Articles of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii) an amendment to further increase the number of authorized shares from 70,000,000 to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock Option and Incentive Plan to increase the number of shares available for grant by 2,400,000. 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 interest rate sensitive - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -19- - -------------------------------------------------------------------------------- assets maturing or repricing during a specified period exceed the interest rate sensitive liabilities maturing or repricing during the same period, and is considered negative when the interest rate sensitive liabilities maturing or repricing during a specified period exceed the interest rate sensitive assets maturing or repricing during the same 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. Similarly, 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 the liabilities 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 connection with its asset/liability management program, the Corporation has interest rate swap agreements with other counterparties under terms that provide for 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's level of such swap agreements was a notional principal amount of $215.0 million at June 30, 1999 and 1998, compared to $135.0 million at June 30, 1997. For fiscal years 1999, 1998 and 1997, the Corporation recorded $2.8 million, $1.9 million and $916,000, respectively, in net interest expense from its interest rate swap agreements. The swap agreements have maturities ranging from March 2000 to June 2001. See Note 16 to the Consolidated Financial Statements for additional information on the Corporation's swap agreements. The following table represents management's projected maturity and repricing of the Bank's interest-earning assets and interest-bearing liabilities at June 30, 1999. The amounts of interest-earning assets, interest-bearing liabilities and interest rate swap agreements presented which mature or reprice within a particular period were determined in accordance with the contractual terms and expected behavior of such assets, liabilities and interest rate swap agreements. Adjustable-rate loans and mortgage-backed securities are included in the period in which they are first scheduled to adjust and not in the period in which they mature. All loans and mortgage-backed securities are adjusted for prepayment rates based on information from independent brokers and the Bank's historical prepayment experience. Fixed-rate passbook deposits, negotiable order of withdrawal (NOW) accounts and non-indexed money market accounts are assumed to reprice or mature according to the decay rates as defined by regulatory guidelines. Indexed money market rate deposits are deemed to reprice or mature within the one-year category. 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 actual experience differs from the assumptions used. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -20-
- --------------------------------------------------------------------------------------------------------------- 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) ........... $ 261,024 $ 445,292 $ 1,160,636 $3,150,489 $ 5,017,441 Other loans (2) ......................... 1,693,053 1,895,973 1,423,966 610,895 5,623,887 Investments (3) ......................... 340,935 10,138 31,035 839,787 1,221,895 - --------------------------------------------------------------------------------------------------------------- Interest-earning assets ............... 2,295,012 2,351,403 2,615,637 4,601,171 11,863,223 - --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits ........................ 940,971 399,815 704,687 1,037,963 3,083,436 Other time deposits ..................... 1,854,558 1,850,439 757,918 109,064 4,571,979 Borrowings (4) .......................... 366,490 636,737 1,262,735 1,672,777 3,938,739 Impact of interest rate swap agreements . (215,000) 75,000 140,000 - - - --------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities .......... 2,947,019 2,961,991 2,865,340 2,819,804 11,594,154 - --------------------------------------------------------------------------------------------------------------- Gap position ............................... (652,007) (610,588) (249,703) 1,781,367 269,069 - --------------------------------------------------------------------------------------------------------------- Cumulative gap position .................... $ (652,007) $(1,262,595) $(1,512,298) $ 269,069 $ 269,069 =============================================================================================================== Gap as a percentage of the Bank's total assets .................................. (5.10)% (4.78)% (1.96)% 13.95% 2.11% Cumulative gap as a percentage of the Bank's total assets ..................... (5.10)% (9.88)% (11.84)% 2.11% 2.11% - ---------------------------------------------------------------------------------------------------------------
(1) Includes conventional single-family and multi-family mortgage loans and mortgage-backed securities. (2) 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. (3) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of $194.1 million. (4) Includes advances from the Federal Home Loan Bank, securities sold under agreements to repurchase and other borrowings. - -------------------------------------------------------------------------------- The Bank's one-year cumulative gap is a negative $1.3 billion, or 9.88% of the Bank's total assets at June 30, 1999, contrasted to a negative $1.1 billion, or 12.26% of the Bank's total assets at June 30, 1998. The interest rate risk policy of the Bank authorizes a liability sensitive one-year cumulative gap not to exceed 10.0%. The one-year cumulative gap at June 30, 1998, was within policy guidelines on a pro forma basis after considering the AmerUs and First Colorado acquisitions. RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Net income for fiscal year 1999 was $92.4 million, or $1.54 per diluted share ($1.55 per basic share). These results compare to net income for fiscal year 1998 of $87.4 million, or $1.52 per diluted share ($1.55 per basic share) and to net income for fiscal year 1997 of $68.3 million, or $1.16 per diluted share ($1.17 per basic share), including an after-tax loss on early retirement of debt totaling $583,000, or $.01 loss per share. The Corporation's emphasis on increasing non-interest income, consumer lending and the promotion of community banking 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 and investment securities and loan servicing rights and (ii) amortization expense of intangible assets, core earnings totaled $197.0 million for fiscal year 1999 compared to $173.2 million and $155.9 million, respectively, for fiscal years 1998 and 1997. On a percentage basis, core earnings for fiscal year 1999 increased 13.8% over fiscal year 1998, and 11.1% for fiscal year 1998 over 1997. These increases in core earnings resulted primarily from increases in net interest income, retail fees and charges and other non-interest operating income. The increase in net income for fiscal year 1999 compared to 1998 is primarily due to net increases of $53.5 million in net interest income after provision for losses and $4.0 million in total other operating income. These increases to net income were partially offset by net increases of $33.7 million in total general and administrative expenses (including an increase of $11.9 million in merger expenses), $7.9 million in amortization of intangible assets and $10.9 million in the provision for income taxes. The increase in net income for fiscal year 1998 compared to 1997 is primarily due to the $36.1 million nonrecurring Federal deposit insurance special assessment recorded in - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -21- - -------------------------------------------------------------------------------- fiscal year 1997, a net increase of $16.3 million in net interest income after provision for losses, an increase of $16.3 million in total other operating income, a net reduction of $3.4 million in amortization expense of intangible assets and the extraordinary loss on early retirement of debt totaling $583,000 recorded in fiscal year 1997. These increases to net income were partially offset by net increases of $39.0 million in general and administrative expenses (including $25.2 million in merger-related expenses and other nonrecurring charges) and $14.4 million in the provision for income taxes. NET INTEREST INCOME AND INTEREST RATE SPREAD - -------------------------------------------------------------------------------- Net interest income was $332.3 million for fiscal year 1999 compared to $280.3 million for fiscal year 1998, an increase of $52.0 million, or 18.6%; and compared to $263.6 million for fiscal year 1997. 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 2.84%, 2.78% and 2.55%, respectively, at June 30, 1999, 1998 and 1997, an increase of six basis points comparing the interest rate spread at June 30, 1999, to the interest rate spread at June 30, 1998, and an increase of 23 basis points comparing the spreads at June 30, 1998, to June 30, 1997. In addition, during fiscal years 1999, 1998 and 1997, interest rate spreads were 2.85%, 2.62% and 2.58%, respectively, representing an increase of 23 basis points comparing the interest rate spread during fiscal year 1999 to fiscal year 1998 and an increase of four basis points comparing the spread during fiscal year 1998 to 1997. The net yield on interest-earning assets during fiscal years 1999, 1998 and 1997 was 2.99%, 2.88% and 2.86%, respectively, representing an increase of 11 basis points comparing fiscal year 1999 to 1998 and an increase of two basis points comparing fiscal year 1998 to 1997. Net interest income for fiscal year 1999 increased over fiscal year 1998 primarily due to average interest-earning assets increasing $1.4 billion to $11.1 billion for fiscal year 1999 compared to $9.7 billion for fiscal year 1998 and the 44 basis point reduction in interest rates on interest-bearing liabilities over the respective fiscal years. Such increases were partially offset by a net increase of $1.5 billion in average interest-bearing liabilities to $10.8 billion for fiscal year 1999 compared to $9.3 billion for fiscal year 1998 and the 21 basis point decrease in interest rates on interest-earning assets over the respective fiscal years. The increases in the average balances are due to the acquisitions of AmerUs on July 31, 1998, and Midland on March 1, 1999. Contributing to the 23 basis point increase in the fiscal year 1999 interest rate spread over 1998 is the reduction in the cost of long-term callable advances from the Federal Home Loan Bank (FHLB). In the fiscal year 1999 flat yield curve environment, the Corporation increased its borrowing of long term fixed-rate FHLB advances that are convertible at the option of the FHLB into adjustable-rate advances. These advances were borrowed in lieu of other short-term funding alternatives and decreased the rate on FHLB advances by 63 basis points for fiscal year 1999 over 1998. 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. The net interest rate spread increased four basis points during fiscal year 1998 to 2.62% from 2.58% for fiscal year 1997. The reduction in interest rates on interest-bearing liabilities (5.15% for fiscal year 1998 compared to 5.21% for fiscal year 1997), the acquisitions of First National Bank Shares, LTD (First National) on January 30, 1998, Heritage Financial, Inc. (Heritage) on October 1, 1996, and Investors Federal Savings (Investors) on May 1, 1997, and internal growth contributed to the improvements in the interest rate spreads for fiscal year 1998 compared to 1997. Net interest income increased over fiscal year 1997 primarily due to average interest-earning assets increasing $535.9 million to $9.7 billion for fiscal year 1998 compared to $9.2 billion for fiscal year 1997 and the reduction in interest rates on interest-bearing liabilities over the respective fiscal years. Such increases were partially offset by a net increase of $545.7 million in average interest-bearing liabilities to $9.3 billion for fiscal year 1998 compared to $8.7 billion for fiscal year 1997 and a two basis points decrease in interest rates on interest-earning assets from 7.79% during fiscal year 1997 compared to 7.77% during 1998. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -22- - -------------------------------------------------------------------------------- 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, -------------------------- ------------------------- 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------- Weighted average yield on: Loans and leases .................... 7.85% 8.13% 8.18% 7.70% 7.95% 8.14% Mortgage-backed securities .......... 6.25 6.34 6.50 6.31 6.68 6.69 Investments ......................... 6.54 6.76 6.70 6.45 6.58 6.33 - --------------------------------------------------------------------------------------------- Interest-earning assets ........... 7.56 7.77 7.79 7.41 7.69 7.79 - --------------------------------------------------------------------------------------------- Weighted average rate paid on: Savings deposits .................... 2.80 2.90 3.09 2.88 2.84 3.09 Other time deposits ................. 5.38 5.81 5.68 5.17 5.49 5.76 Advances from FHLB .................. 5.26 5.89 5.84 5.05 5.69 5.98 Securities sold under agreements to repurchase ..................... 5.94 6.08 6.19 5.72 5.96 6.04 Other borrowings .................... 8.10 9.73 9.91 7.27 8.75 8.70 - --------------------------------------------------------------------------------------------- Interest-bearing liabilities ...... 4.71 5.15 5.21 4.57 4.91 5.24 - --------------------------------------------------------------------------------------------- Net interest rate spread ............... 2.85% 2.62% 2.58% 2.84% 2.78% 2.55% - --------------------------------------------------------------------------------------------- Net yield on interest-earning assets ... 2.99% 2.88% 2.86% 2.95% 2.99% 2.76% - ---------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -23- - -------------------------------------------------------------------------------- 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 $63.6 million, $48.5 million and $44.4 million, respectively, for fiscal years 1999, 1998 and 1997 as interest-earning assets at a yield of zero percent:
Year Ended June 30, ------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans and leases ... $8,933,834 $700,911 7.85% $7,629,067 $619,851 8.13% $6,974,724 $570,788 8.18% Mortgage-backed securities ....... 1,231,838 77,039 6.25 1,280,279 81,168 6.34 1,534,417 99,661 6.50 Investments ........ 939,179 61,404 6.54 838,921 56,669 6.76 703,263 47,143 6.70 - ------------------------------------------------------------------------------------------------------------------- Interest-earning assets ........... 11,104,851 839,354 7.56 9,748,267 757,688 7.77 9,212,404 717,592 7.79 - ------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities: Savings deposits ... 2,891,242 80,832 2.80 2,354,468 68,204 2.90 1,988,701 61,375 3.09 Other time deposits. 4,497,729 242,026 5.38 4,223,217 245,548 5.81 4,473,809 254,228 5.68 Advances from FHLB . 3,000,837 157,787 5.26 2,061,056 121,414 5.89 1,543,583 90,088 5.84 Securities sold under agreements to repurchase .... 209,111 12,419 5.94 501,979 30,533 6.08 591,288 36,615 6.19 Other borrowings ... 172,379 13,957 8.10 120,106 11,690 9.73 117,709 11,663 9.91 - ------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities ...... 10,771,298 507,021 4.71 9,260,826 477,389 5.15 8,715,090 453,969 5.21 - ------------------------------------------------------------------------------------------------------------------- Net earnings balance .. $ 333,553 $ 487,441 $ 497,314 Net interest income ... $332,333 $280,299 $263,623 Interest rate spread .. 2.85% 2.62% 2.58% - ------------------------------------------------------------------------------------------------------------------- Net yield on interest- earning assets ... 2.99% 2.88% 2.86% - -------------------------------------------------------------------------------------------------------------------
The Corporation's net earnings balance (the difference between average interest-bearing liabilities and average interest-earning assets) decreased $153.9 million during fiscal year 1999 compared to 1998 and decreased $9.9 million during fiscal year 1998 compared to 1997. The ratio of average interest-earning assets to average interest-bearing liabilities was 103.1% during fiscal year 1999 compared to 105.3% and 105.7%, respectively, during fiscal years 1998 and 1997. The decrease in the net earnings balance for fiscal year 1999 compared to 1998 is primarily due to (i) the acquisition of AmerUs that was financed by $40.0 million of one year notes, in part by the $45.0 million unsecured term note due July 31, 2003, and by the outlay of existing cash, (ii) the acquisition of Midland that was financed entirely by existing cash and (iii) the repurchase of 1,500,000 shares of the Corporation's common stock paid in cash. The fiscal year 1998 decrease in the net earnings balance compared to 1997 is primarily due to cash outlays for the purchase of treasury stock (from the merger with First Colorado accounted for as a pooling of interests) partially offset by the acquisitions of First National (which was acquired through the issuance of common stock), Heritage (which was acquired, in part, through the issuance of common stock), Investors and net internal growth with earnings retention. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -24- - -------------------------------------------------------------------------------- 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, 1999 Compared to 1998 1998 Compared to 1997 ----------------------------------- ---------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to (In Thousands) Volume Rate Total Volume Rate Total - --------------------------------------------------------------------------------------------------------------- Interest income: Loans and leases ............. $106,775 $(25,715) $81,060 $ 53,191 $(4,128) $49,063 Mortgage-backed securities ... (3,040) (1,089) (4,129) (16,162) (2,331) (18,493) Investments .................. 6,601 (1,866) 4,735 9,161 365 9,526 - --------------------------------------------------------------------------------------------------------------- Interest income ............ 110,336 (28,670) 81,666 46,190 (6,094) 40,096 - --------------------------------------------------------------------------------------------------------------- Interest expense: Savings deposits ............. 14,772 (2,144) 12,628 10,769 (3,940) 6,829 Other time deposits .......... 15,407 (18,929) (3,522) (14,473) 5,793 (8,680) Advances from FHLB ........... 50,549 (14,176) 36,373 30,476 850 31,326 Securities sold under agreements to repurchase .............. (17,409) (705) (18,114) (5,442) (640) (6,082) Other borrowings ............. 4,472 (2,205) 2,267 235 (208) 27 - --------------------------------------------------------------------------------------------------------------- Interest expense ........... 67,791 (38,159) 29,632 21,565 1,855 23,420 - --------------------------------------------------------------------------------------------------------------- Effect on net interest income ... $ 42,545 $ 9,489 $52,034 $ 24,625 $(7,949) $16,676 - ---------------------------------------------------------------------------------------------------------------
The net improvement due to changes in volume between fiscal years 1999 and 1998 reflect the net growth from the acquisitions of AmerUs and Midland. The net improvement due to changes in rate is primarily due to decreases in rates on certificates of deposits and FHLB advances. The net improvements due to changes in volume between fiscal years 1998 and 1997 reflect the net growth the Corporation has experienced, both internally and from acquisitions. The net decrease due to changes in rates between fiscal years 1998 and 1997 is primarily due to increases in rates on interest-bearing liabilities, primarily certificates of deposits. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -25- - -------------------------------------------------------------------------------- PROVISION FOR LOAN AND LEASE LOSSES AND REAL ESTATE OPERATIONS - -------------------------------------------------------------------------------- The Corporation recorded loan loss provisions of $12.4 million, $13.9 million and $13.4 million in fiscal years 1999, 1998 and 1997, respectively. For fiscal years 1999 and 1998 loss reserves totaling $1.0 million and $3.9 million, respectively, were recorded to conform the reserve portions of pooled acquisitions to the policies of the Corporation. Excluding these reserves, the loan loss provisions totaled $11.4 million for fiscal year 1999, an increase of approximately $1.4 million, compared to $10.0 million for fiscal year 1998. Such increase is primarily due to additional general reserves recorded to cover consumer loan losses. The loan and lease loss provision increased during fiscal year 1998 compared to 1997 due primarily to the net increase in the total loan and lease portfolio at June 30, 1998, compared to 1997, and to additional nonrecurring loss reserves recorded in fiscal year 1998 to conform the reserve positions of the fiscal 1998 acquisitions to the policies of the Corporation. At June 30, 1999, the Corporation's residential loan portfolio totaling $7.3 billion is secured by properties located in Colorado (20%), Nebraska (13%) and Kansas (10%) and the remaining 57% in 47 other states. At June 30, 1998, the balance of such loans totaled $6.4 billion and were secured by residential properties located primarily in Colorado (24%), Nebraska (15%), Kansas (10%) and the remaining 51% in 47 other states. The commercial real estate loan portfolio at June 30, 1999, totaling $835.3 million is secured by properties located in Colorado (29%), Kansas (15%), Iowa (14%) and the remaining 42% in 22 other states. At June 30, 1998, commercial real estate loans totaled $534.8 million and were secured by properties located in Colorado (34%), Iowa (29%), Nebraska (9%) and the remaining 28% in 13 other states. The allowance for loan and lease losses is based upon management's continuous evaluation of the collectibility of outstanding loans and leases, which takes into consideration such factors as changes in the composition of the loan and lease portfolios 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 leases and of the overall portfolio quality and real estate market conditions in the Corporation's lending areas. The Corporation recorded a net loss from real estate operations in fiscal year 1999 totaling $1.7 million and net income of $1.9 million and $1.3 million in fiscal years 1998 and 1997, 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 net decrease in real estate operations for fiscal year 1999 compared to 1998 is due primarily to a decrease in net gains on dispositions of real estate totaling $1.5 million, a net increase in operating expenses of approximately $600,000 and a net increase in provisions for real estate losses. The $580,000 increase in real estate operations for fiscal year 1998 compared to 1997 is primarily due to the level of sales activity. 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. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -26- - -------------------------------------------------------------------------------- Nonperforming assets are monitored on a regular basis by the Corporation's internal credit review and problem asset groups. Nonperforming assets increased by $30.4 million, or 42.5%, at June 30, 1999, compared to June 30, 1998, primarily as a result of net increases of $20.7 million in nonperforming loans, $5.4 million in troubled debt restructurings and $4.3 million in real estate. Nonperforming assets at June 30 are summarized as follows:
(Dollars in Thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Nonperforming loans and leases (1) Residential real estate ............................................. $ 49,891 $43,212 $38,400 Commercial real estate .............................................. 11,390 1,369 905 Consumer ............................................................ 4,859 2,651 2,557 Leases and other loans .............................................. 3,875 2,134 1,765 - --------------------------------------------------------------------------------------------------------------- Total ............................................................. 70,015 49,366 43,627 - --------------------------------------------------------------------------------------------------------------- Real estate (2) Commercial .......................................................... 7,657 8,465 9,631 Residential ......................................................... 14,384 8,821 9,759 Other ............................................................... - 480 147 - --------------------------------------------------------------------------------------------------------------- Total ............................................................. 22,041 17,766 19,537 - --------------------------------------------------------------------------------------------------------------- Troubled debt restructurings (3) Commercial .......................................................... 9,534 3,524 9,489 Residential ......................................................... 195 778 1,126 - --------------------------------------------------------------------------------------------------------------- Total ............................................................. 9,729 4,302 10,615 - --------------------------------------------------------------------------------------------------------------- Total nonperforming assets ............................................. $101,785 $71,434 $73,779 - --------------------------------------------------------------------------------------------------------------- Nonperforming loans and leases to total loans and leases ............... .73% .62% .58% Nonperforming assets to total assets ................................... .80% .69% .73% - --------------------------------------------------------------------------------------------------------------- Allowance for loan and lease losses: Loans and leases (4) ................................................ $ 73,916 $56,295 $50,120 Bulk purchased loans (5) ............................................ 6,503 8,462 10,809 - --------------------------------------------------------------------------------------------------------------- Total ............................................................. $ 80,419 $64,757 $60,929 - --------------------------------------------------------------------------------------------------------------- Allowance for loan and lease losses to total loans and leases .......... .84% .81% .81% Allowance for loan and lease losses to total nonperforming assets ...... 79.01% 90.65% 82.58% - ---------------------------------------------------------------------------------------------------------------
(1) Nonperforming loans and leases 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, 1999 and 1998, there were no accruing loans contractually past due 90 days or more. At June 30, 1997, there were $894,000 of 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 $9.5 million, $4.4 million and $4.7 million, respectively, at June 30, 1999, 1998 and 1997. (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 $75,000, $97,000 and $77,000, respectively, at June 30, 1999, 1998 and 1997, 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 $286.4 million, $388.5 million and $494.6 million, respectively, at June 30, 1999, 1998 and 1997. These allowances are available only to absorb losses associated with respective bulk purchased loans, and are not available to absorb losses from other loans. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -27- - -------------------------------------------------------------------------------- Nonperforming loans and leases at June 30, 1999, increased $20.7 million compared to 1998 primarily due to increases of $10.0 million, $6.7 million, $2.2 million and $1.8 million, respectively, in delinquent commercial real estate, residential real estate, consumer loans and other loans. The increases are due to the AmerUs and Midland acquisitions and to growth in the respective portfolios. Nonperforming loans and leases at June 30, 1998, increased $5.7 million compared to June 30, 1997, primarily due to an increase of $4.8 million in delinquent residential real estate from growth in the portfolio. The net increase of $4.3 million in real estate at June 30, 1999, compared to 1998 is due primarily to a net increase of $5.6 million in residential real estate offset by a net decrease of $808,000 in commercial real estate. Such net increase is due primarily to real estate acquired from the AmerUs and Midland acquisitions partially offset by real estate sales. The net decrease of $1.8 million in real estate at June 30, 1998, compared to June 30, 1997, is due primarily to net decreases totaling $1.2 million and $938,000, respectively, in commercial and residential real estate offset by a net increase totaling $333,000 in other real estate. The decreases in commercial and residential real estate are due in part to the sale of commercial real estate acquired in the First Colorado acquisition totaling approximately $1.1 million and the sale of residential real estate of approximately $12.7 million, partially offset by foreclosures totaling $12.3 million. Real estate is located primarily in Missouri and Colorado at June 30, 1999, and, before allowance for losses, totaled $4.8 million and $2.8 million, respectively. At June 30, 1998, real estate was located primarily in Nebraska and Colorado and totaled $5.4 million and $2.8 million, respectively, before allowance for losses. Troubled debt restructurings increased $5.4 million at June 30, 1999, compared to June 30, 1998, due to the addition of 13 loans classified as commercial troubled debt restructurings totaling approximately $16.1 million offset primarily by the reclassifications of $7.1 million (to nonperforming loan status) and $1.6 million (to current loan status) and payoffs totaling approximately $1.9 million. Troubled debt restructurings decreased $6.3 million at June 30, 1998, compared to June 30, 1997, due primarily to decreases of $6.0 million and $348,000, respectively, in commercial and residential real estate loans. The decrease in commercial real estate includes the payoff of $4.2 million in loans during fiscal year 1998 and the reclassification of $1.4 million in loans to current status. The ratio of nonperforming loans and leases to total loans and leases increased to .73% at June 30, 1999, based on loan and lease balances of $9.6 billion, compared to .62% and .58%, respectively, at June 30, 1998 and 1997, which were based on loan and lease balances of $8.0 billion and $7.5 billion. This ratio at June 30, 1999, increased compared to 1998 and June 30, 1998, compared to 1997, due to net increases in nonperforming loans and leases, primarily delinquent residential and commercial loans, partially offset by increases in the total balance of loans and leases. Increasing nonperforming assets accounts for the .80% ratio for nonperforming assets to total assets at June 30, 1999, compared to .69% at June 30, 1998, even though total assets also increased. The ratio of .69% for nonperforming assets to total assets decreased at June 30, 1998, compared to 1997 due to the decrease in total nonperforming assets combined with an increase in total assets. The total allowance for loan and lease losses increased to $80.4 million at June 30, 1999, compared to $64.8 million at June 30, 1998, due primarily to increases in allowances acquired in purchase acquisitions partially offset by decreases in allowances for bulk purchased loans due to loan repayments for such loans. The total allowance increased to $64.8 million at June 30, 1998, compared to $60.9 million at June 30, 1997, due to a lower level of net charge-offs for 1998 compared to 1997 and the decrease in allowances for bulk purchased loans. The percentage of allowance for loan and lease losses to total loans and leases at June 30, 1999, of .84% increased compared to .81% at June 30, 1998, and was unchanged at June 30, 1998, compared to 1997. The increase comparing June 30, 1999, to 1998 is due primarily to the net increase in the allowance for loan and lease losses. The total allowance for loan and lease losses to total nonperforming assets decreased to 79.01% at June 30, 1999, compared to 90.65% at June 30, 1998, due primarily to the increase in total nonperforming assets partially offset by the increase in the allowance for loan and lease losses. The total allowance for loan and lease losses to total nonperforming assets increased at June 30, 1998, compared to 82.58% at June 30, 1997, due primarily to the increase in the allowance for loan and lease losses. NON-INTEREST INCOME - -------------------------------------------------------------------------------- LOAN SERVICING FEES Loan servicing fees totaled $34.5 million, $34.8 million and $35.2 million for fiscal years 1999, 1998 and 1997, respectively. The amount of revenue generated from loan servicing fees, and changes in comparing fiscal years, is primarily due to the average size of the Corporation's portfolio of mortgage loans serviced for other institutions and the level of rates for service fees collected. The decreases in loan servicing fees comparing fiscal year 1999 to 1998, and fiscal year 1998 to 1997, are primarily due to slightly lower average service fee rates collected for the respective years. The portfolio of mortgage loans serviced for other institutions totaled $7.4 billion, $7.2 billion and $7.5 billion at June 30, 1999, 1998 and 1997, respectively. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -28- - -------------------------------------------------------------------------------- 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 $36.7 million, $30.3 million and $26.2 million for fiscal years 1999, 1998 and 1997, 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, transaction fees for personal checking and automatic teller machine services. The net increase for fiscal year 1999 compared to 1998 primarily results from the AmerUs and Midland acquisitions, accounted for as purchases and included in operations since their respective dates of consummation, which together contributed approximately $3.6 million in retail fees and charges for fiscal year 1999. Also contributing to such increases is a greater 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 increased retail customer deposit base. The net increase of $4.1 million for fiscal year 1998 compared to 1997 is primarily a result of the increased focus to cross-sell products and generate fees from the Corporation's sales development programs. GAIN ON SALES OF LOANS During fiscal years 1999, 1998 and 1997, the Corporation sold loans to third parties through its mortgage banking operations totaling approximately $2.0 billion, $1.2 billion and $871.0 million, respectively, resulting in net pre-tax gains of $3.4 million, $3.1 million and $2.1 million, respectively, for fiscal years 1999, 1998 and 1997. 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 1999, 1998 and 1997 are attributable to the relatively stable interest rate environments over the respective periods. GAIN ON SALES OF SECURITIES During fiscal years 1999, 1998 and 1997, the Corporation sold securities available for sale resulting in pre-tax gains of $4.4 million, $3.8 million and $510,000, respectively, on sales of $235.6 million, $137.6 million and $153.1 million, respectively. Mortgage-backed securities accounted for most of the activity with pre-tax gains of $3.9 million, $2.5 million and $476,000, respectively, recorded in fiscal years 1999, 1998 and 1997. OTHER OPERATING INCOME Other operating income totaled $24.2 million, $23.7 million and $15.9 million for fiscal years 1999, 1998 and 1997, respectively. The major components of other operating income are brokerage commissions, credit life and disability commissions, insurance commissions and leasing operations. Brokerage commission income totaled $9.2 million, $5.3 million and $4.1 million, respectively, for fiscal years 1999, 1998 and 1997. Brokerage commission income increased for fiscal year 1999 compared to 1998 primarily as a result of the AmerUs acquisition and by $1.2 million for fiscal year 1998 compared to 1997 due to significant growth in the volume of customer transactions for 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 more qualified staff also contributed to these increases. Insurance commission income totaled $2.8 million, $3.2 million and $3.5 million, respectively, for fiscal years 1999, 1998 and 1997. The decreases in insurance commission income over the last two fiscal years are due primarily to increased competition, and decreases in property and casualty insurance and net reinsurance operations. Credit life and disability commission income totaled $2.0 million, $2.0 million and $2.3 million, respectively, for fiscal years 1999, 1998 and 1997. Commission income from credit life and disability is directly related to consumer loan volume. However, credit life and disability commission income from leasing activity continues to decrease. Such decrease accounts for the decline comparing fiscal year 1998 to 1997 and is the reason credit life and disability commission income is unchanged comparing fiscal year 1999 to 1998. Origination and service fees from leasing operations totaled $618,000, $3.6 million and $3.9 million, respectively, for fiscal years 1999, 1998 and 1997. The net decrease in leasing operations comparing fiscal year 1999 to 1998 is due to the Corporation significantly curtailing leasing operations. The net decrease comparing fiscal year 1998 to 1997 is primarily due to - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -29- - -------------------------------------------------------------------------------- nonrecurring charges totaling $597,000 recorded in fiscal year 1998 for certain reserves on leasing operations. Other operating income includes miscellaneous items that can fluctuate significantly from year to year. Such amounts totaled approximately $9.6 million, $9.6 million and $2.1 million, respectively, for fiscal years 1999, 1998 and 1997. NON-INTEREST EXPENSE - -------------------------------------------------------------------------------- GENERAL AND ADMINISTRATIVE EXPENSES Total general and administrative expenses totaled $250.1 million, $216.4 million and $213.4 million for fiscal years 1999, 1998 and 1997, respectively. Excluding merger-related expenses and certain other nonrecurring charges, general and administrative expenses totaled $220.0 million, $191.2 million and $175.0 million, respectively, for fiscal years 1999, 1998, and 1997. Overall, general and administrative expenses remained at consistent levels as illustrated by the efficiency ratio. The efficiency ratio is defined as general and administrative expenses divided by core revenue which is the sum of (i) net interest income before provision for loan and lease losses, (ii) loan servicing fees, (iii) retail fees and charges and (iv) other operating income. The Corporation's efficiency ratio for fiscal year 1999 is 51.6%, excluding certain merger-related and nonrecurring charges totaling $30.1 million. This ratio compares to 51.8% for fiscal year 1998, excluding certain merger-related and nonrecurring charges totaling $25.2 million. The ratio is 51.4% for fiscal year 1997, excluding the $36.1 million SAIF special assessment and the nonrecurring expenses totaling $2.3 million associated with the repurchase of 2,812,725 shares of the Corporation's common stock. The efficiency ratio is lower for fiscal year 1999 compared to 1998, even though operating expenses increased approximately $28.8 million after adjusting for the aforementioned nonrecurring expenses for both fiscal years, due to core revenue increasing in fiscal year 1999. The net increase of $33.7 million in general and administrative expenses for fiscal year 1999 compared to 1998 is primarily due to net increases in the merger expenses category of $11.9 million, compensation and benefits of $10.7 million, occupancy and equipment of $8.2 million, other expenses of $6.9 million, advertising of $1.3 million and regulatory insurance and assessments of $688,000. These increases were slightly offset by a net decrease of $5.9 million in data processing. Such net increase comparing the two fiscal years is primarily due to the current fiscal year merger expenses totaling $30.1 million associated with the First Colorado acquisition and the termination of three employee stock ownership plans compared to the $20.9 million of merger expenses recorded in fiscal year 1998. The AmerUs and Midland acquisitions, which were accounted for under the purchase method of accounting, contributed a net increase of approximately $16.1 million in general and administrative expenses for fiscal year 1999 over 1998. These acquisitions result in increased personnel wages and benefits and costs of operating additional branches, as well as other expenses incurred on an indirect basis attributable to these acquisitions. The net decrease in data processing for fiscal year 1999 compared to 1998 is due to accelerated amortization totaling $4.3 million recorded in fiscal year 1998 for certain computer systems and software necessitated by the Year 2000 compliance and the related planned systems conversions. Merger expenses totaling $16.1 million associated with the First Colorado acquisition consisted of $8.0 million in transaction costs, such as fees for investment banking, accounting and legal, $6.7 million in costs to combine operations and $1.4 million in severance and other termination costs. The remaining amount of the merger expenses totaled $14.0 million and related to the termination of three employee stock ownership plans acquired in mergers the past two fiscal years. Such amount represents the market value of unallocated shares distributed to plan participants upon the termination of these employee stock ownership plans. The net increase of approximately $39.0 million in general and administrative expenses for fiscal year 1998 compared to 1997, excluding the deposit insurance special assessment totaling $36.1 million, is partially attributable to nonrecurring expenses totaling $25.2 million consisting of merger expenses totaling $18.0 million, the accelerated amortization of certain computer systems and software necessitated by Year 2000 compliance and the related planned systems conversions totaling $4.3 million and expenses totaling $2.9 million to conform accounting practices of certain operations of three pooled acquisitions to the Corporation's policies. The merger expenses consist of $9.0 million in transaction costs, such as fees for investment banking, accounting and legal, $6.5 million in severance and other termination costs and $2.5 million in expenses to combine operations. Other expenses incurred in fiscal year 1998 compared to 1997 include increased marketing costs for checking accounts and related products and for consumer loans, increased occupancy and equipment, compensation and benefits and other operating expenses from acquisitions and branch expansion. The decrease in regulatory insurance and assessments of $5.4 million is substantially due to the revised rate structure on insured deposits adopted by the Federal Deposit Insurance Corporation after the recapitalization of the SAIF. The Corporation's annual deposit insurance rate in effect prior to this recapitalization - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -30- - -------------------------------------------------------------------------------- was .23% of insured deposits reduced to .064% of insured deposits effective January 1, 1997, and thereafter. INTANGIBLE ASSETS Total amortization expense of intangible assets for fiscal years 1999, 1998 and 1997 was $15.7 million, $7.8 million and $11.2 million, respectively. The net increase in amortization expense of intangible assets for fiscal year 1999 compared to 1998 is primarily due to the AmerUs and Midland acquisitions consummated this fiscal year. The amortization expense of intangible assets associated with these two acquisitions totaled $7.8 million for fiscal year 1999. The net decrease in amortization expense of intangible assets for fiscal year 1998 compared to 1997 is primarily due to the reduction totaling $3.2 million in amortization expense of core value of deposits from amounts that were fully amortized as of April 1997 and the reduction in core value of deposits amortized on an accelerated basis. Offsetting these decreases is an increase totaling $806,000 due to amortization expense resulting from the First National acquisition consummated January 30, 1998. PROVISION FOR INCOME TAXES - -------------------------------------------------------------------------------- For fiscal years 1999, 1998 and 1997 the provision for income taxes totaled $63.3 million, $52.4 million and $38.0 million, respectively. The effective tax rates for fiscal years 1999, 1998 and 1997 were 40.6%, 37.5% and 35.6%, respectively. The effective tax rate varied from the statutory rate of 35.0% for fiscal years 1999 and 1998 due to the nondeductibility of certain merger-related expenses and other nonrecurring charges. A significant nondeductible merger-related expense for fiscal year 1999 is the $14.0 million associated with the termination of the employee stock ownership plans acquired in mergers. For the three fiscal years ended June 30, 1999, the effective tax rates also vary from the statutory rate due to the nondeductibility of amortization of intangible assets in relation to the level of taxable income for the respective fiscal years. EXTRAORDINARY ITEMS - -------------------------------------------------------------------------------- In fiscal year 1997 the Corporation recognized extraordinary losses of $583,000 (net of income tax benefits totaling $316,000), or $.01 loss per diluted share, primarily as a result of the early retirement of the $40.25 million 10.25% subordinated debt originally due December 15, 1999, and the $6.9 million 10.0% senior notes originally 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 that was retired 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, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Return on average assets: net income divided by average total assets (1) ........ .77% .85% .70% Return on average equity: net income divided by average equity (1) .............. 9.95 10.96 9.18 Equity-to-assets ratio: average stockholders' equity to average total assets .... 7.79 7.76 7.68 General and administrative expenses divided by average assets (2) ............... 2.10 2.10 2.20 - -----------------------------------------------------------------------------------------------------------
(1) Return on average assets and return on average stockholders' equity for fiscal year 1999 are 1.00% and 12.86%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $27.1 million. Return on average assets and return on average stockholders' equity for fiscal year 1998 are 1.06% and 13.65%, respectively, excluding the after-tax effect of merger-related and other nonrecurring charges totaling $21.5 million. Return on average assets and return on average stockholders' equity for fiscal year 1997 are .97% and 12.58%, respectively, excluding the after-tax effect of the nonrecurring expenses totaling $25.1 million associated with the SAIF special assessment, the repurchase of 2,812,725 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. (2) General and administrative expenses divided by average assets for fiscal year 1999 is 1.85% excluding the merger-related and other nonrecurring charges totaling $30.1 million on a pre-tax basis. General and administrative expenses divided by average assets for fiscal year 1998 is 1.86% excluding the merger- related and other nonrecurring charges totaling $25.2 million on a pre-tax basis. General and administrative expenses divided by average assets for fiscal year 1997 is 1.81% excluding the nonrecurring expenses totaling approximately $38.4 million on a pre-tax basis associated with the SAIF special assessment and the repurchase of 2,812,725 shares of the Corporation's common stock. - -------------------------------------------------------------------------------- The operating ratio for general and administrative expenses for fiscal year 1999 is unchanged compared to 1998 due to a net increase of $33.7 million in such expenses offset by an increase of approximately $1.6 billion in average assets over the same periods. The increase in general and administrative expenses is primarily due to the AmerUs and Midland acquisitions accounted for as purchases and the termination of the three employee stock ownership plans acquired - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -31- - -------------------------------------------------------------------------------- in mergers the past two fiscal years. The increase in the average assets is attributable to the AmerUs and Midland acquisitions. The decrease in the ratio of general and administrative expenses to average assets for fiscal year 1998 compared to 1997 is primarily attributable to an increase of $600.6 million in average assets partially offset by a net increase of $3.0 million in total general and administrative expenses. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- During fiscal year 1999 the Corporation adopted the provisions of four accounting pronouncements: Statement No. 129 entitled "Disclosure of Information About Capital Structure," Statement No. 130 "Reporting Comprehensive Income," Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," and Statement No. 132 "Employers' Disclosure About Pensions and Other Postretirement Benefits." All of these pronouncements were only of a disclosure nature, and therefore the adoption of these statements did not have a material effect on the Corporation's financial position, liquidity or results of operations. 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. Effective April 1, 1999, the Office of Thrift Supervision (OTS) issued a final rule revising its capital distribution regulation. This revised regulation reflects the OTS's implementation of the system of prompt corrective action established under the Federal Deposit Insurance Corporation Improvement Act of 1991 and conforms the OTS's capital distribution requirements more closely to those of the other banking agencies. Under the terms of this regulation, the Bank is permitted to pay capital distributions during a calendar year up to 100.0% of its retained net income (net income determined in accordance with generally accepted accounting principles less total capital distributions declared) for the current calendar year combined with the Bank's retained net income for the preceding two calendar years without prior approval of the OTS. At June 30, 1999, the Bank would be permitted to pay an aggregate amount approximating $113.8 million in dividends under this regulation. 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. At June 30, 1999, the cash of Commercial Federal Corporation (the parent company) totaled $10.4 million. Due to the parent company's limited independent operations, management believes that its cash balance at June 30, 1999, is currently sufficient to meet operational needs. However, the parent company's ability to make future interest and principal payments on its $50.0 million of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes), on its $46.4 million of 9.375% fixed-rate junior subordinated debentures due May 15, 2027 (the Debentures) and on its promissory notes, is dependent upon its receipt of dividends from the Bank. Accordingly, during fiscal years 1999 and 1998, the parent company received cash dividends totaling $73.3 million and $47.4 million, respectively, from the Bank. The dividends received during fiscal year 1999 were paid to cover (i) the cash payment of $25.0 million related to the acquisition of Midland on March 1, 1999, (ii) common stock cash dividends totaling $17.4 million paid by the parent company to its shareholders during fiscal year 1999, (iii) interest payments totaling $15.2 million on the parent company's debt, (iv) the cash payment of $10.0 million related to the acquisition of AmerUs on July 31, 1998, and (v) principal payments of $5.7 million on the parent company's five-year promissory term note. Cash dividends paid by the parent company to its common stock shareholders totaled $13.5 million and $16.1 million, respectively, during fiscal years 1999 and 1998. Such cash dividends for fiscal year 1998 include approximately $9.1 million from acquisitions accounted for as pooling of interests. 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 quarterly cash dividends on common stock when and as declared by the parent company. The parent company also receives cash from the exercise of stock options and the sale of stock under its employee benefit plans which totaled $9.7 million and $6.5 million, respectively, during fiscal years 1999 and 1998, as well as from the Bank for income tax benefits from operating losses of the parent company as provided in the corporate tax sharing agreement. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -32- - -------------------------------------------------------------------------------- Effective April 28, 1999, the Corporation's Board of Directors authorized the repurchase of up to five percent, or approximately 3,000,000 shares, of the Corporation's outstanding common stock during the next 18 months. During the fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled 1,500,000 shares of its common stock at a cost of approximately $36.2 million. 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 and (iv) cash generated from operations. As reflected in the Consolidated Statement of Cash Flows, net cash flows provided by operating activities for fiscal years 1999 and 1997 totaled $251.5 million and $32.4 million, respectively, and net cash flows used by operating activities for fiscal year 1998 totaled $96.8 million. Amounts fluctuate from period to period primarily as a result of mortgage banking activity relating to the purchase and origination of loans for resale and the subsequent sale of such loans. The purchase and origination of loans for resale totaling $1.9 billion for fiscal year 1999 is higher compared to $1.4 billion and $915.8 million for fiscal years 1998 and 1997, respectively, primarily due to increased prepayment and refinancing activity. Proceeds from the sales of loans totaled $2.0 billion for fiscal year 1999 compared to $1.2 billion and $873.1 million in fiscal years 1998 and 1997. Net cash flows used by investing activities totaled $840.0 million and $425.6 million for fiscal years 1999 and 1997, respectively, and net cash flows provided by investing activities totaled $112.4 million for fiscal year 1998. 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 acquisition of First Colorado consummated August 14, 1998, had no material effect on liquidity, except for the net cash outlays totaling $16.1 million relating to nonrecurring merger related costs, since such transaction was consummated in an exchange of common stock between the financial institutions. The acquisition of AmerUs on July 31, 1998, resulted in a cash outlay of approximately $53.2 million and the acquisition of Midland on March 1, 1999, resulted in a cash outlay of $83.0 million. The acquisition of AmerUs was financed by $40.0 million of one-year purchase notes due July 31, 1999, from the seller bearing interest at 150 basis points over the one-year Treasury bill rate, a $10.0 million capital distribution from the Bank and, in part, by a $45.0 million term note borrowed by the Corporation on July 30, 1998. This note was a five-year term note due July 31, 2003, unsecured, with quarterly principal payments of $1.25 million and interest payable quarterly at 100 basis points below the lender's national base rate. In November 1998 this term note was partially paid down by an additional $8.75 million, resulting in a remaining principal balance of $32.5 million at June 30, 1999. The one-year notes for $40.0 million from the AmerUs transaction were paid in full on July 30, 1999, and the term note due July 31, 2003, was refinanced on July 1, 1999, from the same lender with a note due June 30, 2004, in the same amount and at the same interest rate. The acquisition of Midland on March 1, 1999, was financed by parent company funds and a $25.0 million capital distribution from the Bank. The Corporation's four fiscal year 1998 acquisitions, structured to be consummated as an exchange of common stock between the Corporation and these respective financial institutions, resulted in the Corporation issuing 9,368,063 shares of its common stock in fiscal year 1998. Cash outlays for nonrecurring merger-related costs associated with these acquisitions approximated $19.8 million. The fiscal year 1997 acquisitions resulted in cash paid totaling approximately $8.7 million for the common stock of these institutions and the exchange of 1,016,173 shares of the Corporation's common stock. Net cash flows provided by financing activities totaled $724.7 million, $56.6 million and $381.8 million, respectively, for fiscal years 1999, 1998 and 1997. Advances from the FHLB, retail deposits and securities sold under agreements to repurchase have been the primary sources to balance the Corporation's funding needs during each of the fiscal years presented. Excluding deposits acquired in acquisitions, the Corporation experienced net decreases in deposits of $211.1 million and $212.9 million for fiscal years 1999 and 1998, respectively, and a net increase of $86.3 million for the fiscal year ended June 30, 1997. The decreases in deposits during fiscal years 1999 and 1998 were primarily due to depositors leaving for higher interest rates. During fiscal year 1999 the Corporation continued to borrow long-term FHLB advances that are callable at the option of the FHLB. Such advances provide the Corporation with lower interest-bearing liabilities than other funding alternatives. At June 30, 1999 and 1998, the Corporation had fixed-rate advances totaling $3.0 billion and $1.0 billion, respectively, that were convertible into adjustable-rate advances. At June 30, 1999, these convertible advances had call dates ranging from July 1999 to March 2003. On August 14, 1998, First Colorado issued 1,400,000 shares of common stock prior to its merger with the Corporation, resulting in the receipt of proceeds totaling $32.5 million. On April 28, 1999, the Corporation's Board - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -33- - -------------------------------------------------------------------------------- of Directors authorized the repurchase of up to five percent of the Corporation's outstanding common stock over the next 18 months. As of June 30, 1999, the Corporation had repurchased 1,500,000 shares at a cost totaling $36.2 million. In August 1996 the Corporation repurchased 2,812,725 shares of its common stock for $51.2 million including certain expenses and costs associated with the seller's ownership of such stock. The sources of cash to consummate this stock repurchase consisted of a promissory note totaling $28.0 million, a dividend from the Bank totaling $18.0 million and cash totaling $5.2 million paid directly by the parent company. In December 1996, 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 fees. With the proceeds from the issuance of these subordinated extendible notes, the Corporation redeemed $47.2 million of subordinated debt and senior notes. Effective May 1997 the Corporation, through a special-purpose wholly-owned trust subsidiary of the Corporation, issued $45.0 million of fixed- rate 9.375% cumulative trust preferred securities. The Deposit Insurance Funds Act of 1996 authorized the recapitalization of the SAIF fund by imposing a one-time special assessment of .657% of SAIF-insured deposits resulting in the Corporation recording an after-tax charge of approximately $23.1 million ($36.1 million pre-tax) in fiscal year 1997. The Corporation's annual deposit insurance rate in effect prior to this recapitalization was .23% of insured deposits, which was reduced to .064% of insured deposits effective January 1, 1997. Until December 31, 1999, SAIF-insured institutions will be required to pay assessments to the FDIC at the rate of .064% to help fund interest payments on bonds issued by an agency of the federal government established to finance takeovers of insolvent thrifts. During this period, Bank Insurance Fund (BIF) members will be assessed at the rate of .013% to fund interest payments on these bonds. After December 31, 1999, both BIF and SAIF members will be assessed at the same rate for such interest 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 Corporation will continue to grow its franchise through an ongoing program of internal growth and selective acquisitions of other financial institutions. The Corporation has considered and will continue to consider possible mergers with and acquisitions of other selected financial institutions. During fiscal year 1999, the Corporation consummated the acquisitions of AmerUs, First Colorado and Midland. During fiscal year 1998 the Corporation consummated four acquisitions and during fiscal year 1997 consummated two acquisitions. See Note 2 to the Consolidated Financial Statements for additional information on these completed acquisitions. Such acquisitions present the Corporation with the opportunity to further expand its community banking retail network in its existing markets; and to increase its earnings potential by increasing its mortgage, consumer and commercial loan volumes funded primarily by deposits which generally bear lower rates of interest than alternative sources of funds and by lower costing callable FHLB advances. Acquisition candidates are 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, 1999, the Corporation issued commitments totaling $771.8 million to fund and purchase loans, investment securities and mortgage-backed securities as follows: $345.6 million of single-family fixed-rate mortgage loans, $37.7 million of single-family adjustable-rate mortgage loans, $19.5 million of commercial real estate loans, $81.5 million of investment securities, $10.0 million of mortgage-backed securities and $277.5 million of unused lines of credit for commercial and consumer use. These outstanding loan commitments to extend credit in order to originate loans or fund commercial and consumer loans 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. 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 Bank is required by federal regulation to maintain a minimum average daily balance of liquid assets in each calendar quarter of not less than 4.0% of net withdrawable deposits plus short-term borrowings or 4.0% of the average daily balance of net withdrawable accounts plus short-term borrowings during the preceding quarter. The Bank's liquidity ratio was 11.69% at June 30, 1999. Liquidity levels will vary depending upon savings flows, future loan fundings, cash operating needs, collateral requirements and general prevailing economic conditions. The Bank does not foresee any difficulty in meeting its liquidity requirements. - -------------------------------------------------------------------------------- COMMERICAL FEDERAL CORPORATION - -34- - -------------------------------------------------------------------------------- IMPACT OF INFLATION AND CHANGING PRICES - -------------------------------------------------------------------------------- The consolidated financial statements and related consolidated financial information are 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, low and closing sales prices and dividends declared for the periods indicated for the common stock of the Corporation:
1999 1998 ----------------------------------- ------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ============================================================================================================== Common stock prices: High ..................... $25.00 $24.00 $24.44 $32.38 $38.19 $36.38 $36.50 $32.13 Low ...................... 22.00 21.06 19.63 22.00 31.13 30.00 31.38 25.08 Close .................... 23.19 23.19 23.19 23.56 31.63 36.38 35.56 31.42 - -------------------------------------------------------------------------------------------------------------- Dividends declared ......... $ .065 $ .065 $ .065 $.055 $ .055 $ .055 $ .055 $ .047 ==============================================================================================================
As of June 30, 1999, there were 59,593,849 shares of common stock issued and outstanding which were held by approximately 5,400 shareholders of record and 2,589,107 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 16, 1998, the Board of Directors increased the quarterly common stock cash dividend from $.055 per share to $.065 per share for stockholders of record on December 30, 1998. On November 17, 1997, 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 November 28, 1997. The stock dividend was distributed on December 15, 1997, and totaled 10,865,530 shares of common stock with fractional shares paid in cash. Also in November 1997 the Board of Directors increased the quarterly cash dividend from $.047 per common share to $.055 per common share. In November 1996 the Board of Directors 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. This stock dividend was distributed in January 1997 and totaled 10,745,214 shares of common stock with fractional shares paid in cash. Cash dividends declared during fiscal year 1999 totaled $15.1 million, or $.25 per common share, compared to fiscal year 1998 of $7.8 million, or $.212 per common share, and fiscal year 1997 of $5.9 million, or $.185 per common share. The total amount for cash dividends declared and the per share amounts are the amounts authorized by the Corporation's Board of Directors only and are not restated for any of the Corporation's acquisitions accounted for as a pooling of interests. See "Liquidity and Capital Resources" and Note 18 to the Consolidated Financial Statements regarding the payment of future dividends and any possible restrictions thereon. YEAR 2000 - -------------------------------------------------------------------------------- The year 2000 poses an important business issue regarding how existing application software programs and operating systems can accommodate this date value. Many computer programs that can only distinguish the final two digits of the year are expected to read entries for the year 2000 as the year 1900. Like most financial service providers, the Corporation may be significantly affected by the Year 2000 issue due to the nature of financial information. Software, hardware and equipment both within and outside the Corporation's direct control and with whom the Corporation electronically or operationally interfaces are likely to be affected. If computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations that rely on the data field information, such as interest, payment or due dates and other operating functions, may generate results that could be significantly misstated, and the - -------------------------------------------------------------------------------- COMMERICAL FEDERAL CORPORATON -35- - -------------------------------------------------------------------------------- Corporation could experience a temporary inability to process transactions and engage in normal business activities. All of the significant computer programs of the Corporation that could be affected by this problem are provided by major third party vendors. The Corporation has completed the process of replacing/upgrading its integral computer systems and programs, as well as most equipment, in order to provide cost-effective and efficient delivery of services to its customers, information to management, and to provide additional capacity for processing information and transactions due to acquisitions. The total cost of the Year 2000 project is estimated to approximate $14.0 million which will be funded through cash flows from operations. Most of the total project cost is expected to be capitalized since it involves the purchase of computer systems, programs and equipment. During fiscal year 1999 approximately $4.4 million was expensed that related to systems conversion costs, internal staff costs, as well as consulting and other Year 2000 expenses. In addition, during fiscal year 1998 the Corporation expensed $4.3 million due to accelerated amortization of certain computer systems and software necessitated by Year 2000 compliance and the related planned systems conversions. The adjusted carrying amount of these computer systems and software was depreciated until their disposal at the date of conversion. The third party vendors have advised the Corporation that all such mission critical computer systems and programs are Year 2000 compliant. The Corporation tested all such systems for Year 2000 compliance before integration into its computer environment. The Corporation scheduled certain operations that began conversions in October 1998. These conversions allowed the Corporation to resolve application and conversion problems that arose and to do further testing to enhance software programs and future conversions. Final conversions that are Year 2000 compliant were completed by the end of fiscal year 1999. Other mission critical systems were tested in conjunction with certain nationwide financial industry test programs. All Year 2000 testing was substantially completed June 30, 1999. In addition, as a financial services institution, the Corporation is under the supervision of federal regulatory agencies that have guidelines and perform ongoing monitoring and evaluation of the Corporation's Year 2000 readiness. The Corporation is also working with non-mainframe software and hardware vendors to determine the extent to which the Corporation's interface systems may be vulnerable to those third parties' failure to remediate their own Year 2000 issues. If the third party vendors are unable to resolve Year 2000 issues in time, the conversion is delayed significantly or problems arise as a result of the conversion, the Corporation would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have significant adverse impact on the financial condition and results of operations of the Corporation. In addition, there can be no assurance that the systems of other companies on which the Corporation's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Corporation's systems, would not have a material adverse effect on the Corporation. The Corporation has developed and tested a Year 2000 contingency plan that addresses, among other issues, critical operations and potential failures thereof, and strategies for business continuation such as contracting with alternative vendors and re-deployment of internal staff as needed in critical areas. The Corporation has also evaluated non-technical systems that rely on imbedded technology in their critical processes so that such systems will continue to operate without interruption. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -36- - -------------------------------------------------------------------------------- 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 effective internal control over financial reporting. The internal control structure contains monitoring mechanisms and actions are taken to correct 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 effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Management assessed the Corporation's internal control over financial reporting as of June 30, 1999. 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 effective internal control over financial reporting as of June 30, 1999. /s/ William A. Fitzgerald William A. Fitzgerald Chairman of the Board and Chief Executive Officer /s/ James A. Laphen James A. Laphen President, Chief Operating Officer and Chief Financial Officer INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- 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, 1999 and 1998, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1999. 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. The consolidated financial statements give retroactive effect to the merger of Commercial Federal Corporation and First Colorado Bancorp, Inc. which has been accounted for as a pooling-of-interests as described in Note 2 to the consolidated financial statements. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Omaha, Nebraska August 12, 1999 - -------------------------------------------------------------------------------- COMMERICAL FEDERAL CORPORATION
-37- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF FINANCIAL CONDITION June 30, (Dollars in Thousands) -------------------------- ASSETS 1999 1998 =============================================================================================================== Cash (including short-term investments of $39,585 and $62,886) .................... $ 353,275 $ 217,012 Investment securities available for sale, at fair value ........................... 83,811 141,116 Mortgage-backed securities available for sale, at fair value ...................... 419,707 171,393 Loans and leases held for sale, net ............................................... 104,347 290,380 Investment securities held to maturity (fair value of $846,805 and $533,078) ...... 862,760 532,188 Mortgage-backed securities held to maturity (fair value of $849,488 and $922,042) . 862,838 920,456 Loans and leases receivable, net of allowances of $80,344 and $64,660 ............. 9,222,046 7,566,896 Federal Home Loan Bank stock ...................................................... 194,129 131,132 Interest receivable, net of allowances of $319 and $201 ........................... 77,513 66,353 Real estate, net .................................................................. 31,513 22,195 Premises and equipment, net ....................................................... 185,302 134,951 Prepaid expenses and other assets ................................................. 125,544 127,971 Intangible assets, net of accumulated amortization of $49,260 and $33,558 ......... 252,677 77,186 - --------------------------------------------------------------------------------------------------------------- Total Assets ................................................................... $12,775,462 $10,399,229 - --------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY =============================================================================================================== Liabilities: Deposits ....................................................................... $ 7,655,415 $ 6,558,207 Advances from Federal Home Loan Bank ........................................... 3,632,241 2,379,182 Securities sold under agreements to repurchase ................................. 128,514 334,294 Other borrowings ............................................................... 225,383 110,674 Interest payable ............................................................... 48,759 36,261 Other liabilities .............................................................. 118,267 119,416 - --------------------------------------------------------------------------------------------------------------- Total Liabilities ............................................................ 11,808,579 9,538,034 - --------------------------------------------------------------------------------------------------------------- Commitments and Contingencies ..................................................... - - - --------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued - - Common stock, $.01 par value; 120,000,000 shares authorized; 59,593,849 and 58,714,826 shares issued and outstanding ...................... 596 587 Additional paid-in capital ..................................................... 364,320 337,697 Retained earnings .............................................................. 611,529 534,245 Accumulated other comprehensive income (loss), net ............................. (9,562) 70 Unearned Employee Stock Ownership Plan (ESOP) shares ........................... - (11,404) - --------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity ................................................... 966,883 861,195 - --------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity ................................... $12,775,462 $10,399,229 ===============================================================================================================
See accompanying Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -38- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands Except Per Share Data) Year Ended June 30, ------------------------------------ 1999 1998 1997 =============================================================================================================== Interest Income: Loans and leases receivable ......................................... $700,911 $619,851 $570,788 Mortgage-backed securities .......................................... 77,039 81,168 99,661 Investment securities ............................................... 61,404 56,669 47,143 - --------------------------------------------------------------------------------------------------------------- Total interest income ............................................. 839,354 757,688 717,592 Interest Expense: Deposits ............................................................ 322,858 313,752 315,603 Advances from Federal Home Loan Bank ................................ 157,787 121,414 90,088 Securities sold under agreements to repurchase ...................... 12,419 30,533 36,615 Other borrowings .................................................... 13,957 11,690 11,663 - --------------------------------------------------------------------------------------------------------------- Total interest expense ............................................ 507,021 477,389 453,969 Net Interest Income .................................................... 332,333 280,299 263,623 Provision for Loan and Lease Losses .................................... (12,400) (13,853) (13,427) - --------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan and Lease Losses .......... 319,933 266,446 250,196 Other Income (Loss): Loan servicing fees ................................................. 34,481 34,784 35,190 Retail fees and charges ............................................. 36,740 30,284 26,198 Real estate operations .............................................. (1,674) 1,894 1,314 Gain on sales of loans .............................................. 3,423 3,092 2,142 Gain on sales of securities ......................................... 4,376 3,765 510 Other operating income .............................................. 24,189 23,702 15,914 - --------------------------------------------------------------------------------------------------------------- Total other income ................................................ 101,535 97,521 81,268 Other Expense: General and administrative expenses - Compensation and benefits ......................................... 98,869 88,129 77,790 Occupancy and equipment ........................................... 36,528 28,316 25,045 Data processing ................................................... 12,360 18,276 12,367 Regulatory insurance and assessments .............................. 5,777 5,089 10,467 Advertising ....................................................... 13,893 12,633 10,675 Other operating expenses .......................................... 52,770 45,907 41,005 Merger expenses ................................................... 29,917 18,034 - - --------------------------------------------------------------------------------------------------------------- General and administrative expenses before Federal deposit insurance special assessment .................. 250,114 216,384 177,349 Federal deposit insurance special assessment ........................ - - 36,061 - --------------------------------------------------------------------------------------------------------------- Total general and administrative expenses ......................... 250,114 216,384 213,410 Amortization of intangible assets ................................... 15,702 7,814 11,235 - --------------------------------------------------------------------------------------------------------------- Total other expense ................................................ 265,816 224,198 224,645 - --------------------------------------------------------------------------------------------------------------- Income Before Income Taxes and Extraordinary Items ...................... 155,652 139,769 106,819 Provision for Income Taxes .............................................. 63,260 52,356 37,980 - --------------------------------------------------------------------------------------------------------------- Income Before Extraordinary Items ....................................... 92,392 87,413 68,839 Extraordinary Items, Net of Tax Benefit ................................. - - (583) - --------------------------------------------------------------------------------------------------------------- Net Income .............................................................. $ 92,392 $ 87,413 $ 68,256 ===============================================================================================================
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -39- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(Dollars in Thousands Except Per Share Data) Year Ended June 30, --------------------------------------- 1999 1998 1997 ================================================================================================================ Weighted Average Number of Common Shares Outstanding Used in Basic Earnings Per Share Calculation .......... 59,539,111 56,381,051 58,142,355 Add Assumed Exercise of Outstanding Stock Options as Adjustments for Dilutive Securities ............................ 587,735 1,304,230 951,260 - ---------------------------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Used in Diluted Earnings Per Share Calculation ........ 60,126,846 57,685,281 59,093,615 ================================================================================================================ Basic Earnings Per Share: Income before extraordinary items ................................. $1.55 $1.55 $1.18 Extraordinary items ............................................... - - (.01) - ---------------------------------------------------------------------------------------------------------------- Net income ........................................................ $1.55 $1.55 $1.17 ================================================================================================================ Diluted Earnings Per Share: Income before extraordinary items ................................. $1.54 $1.52 $1.17 Extraordinary Items ............................................... - - (.01) - ---------------------------------------------------------------------------------------------------------------- Net Income ........................................................ $1.54 $1.52 $1.16 ================================================================================================================ Dividends Declared Per Common Share .................................. $.250 $.212 $.185 ================================================================================================================
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands) Year Ended June 30, ------------------------------------- 1999 1998 1997 ================================================================================================================ Net Income ........................................................... $ 92,392 $87,413 $68,256 Other Comprehensive Income (Loss): Unrealized holding gains (losses) on securities available for sale. (10,443) 3,935 5,778 Less net gains on securities included in net income ............... (4,376) (3,765) (510) - ---------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) Before Income Taxes ................ (14,819) 170 5,268 Income Tax Provision (Benefit) ....................................... (5,187) 59 1,844 - ---------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) .................................... (9,632) 111 3,424 - ---------------------------------------------------------------------------------------------------------------- Comprehensive Income ................................................. $ 82,760 $87,524 $71,680 ================================================================================================================
See accompanying Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -40-
- -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Dollars in Thousands) Unearned Accumulated Employee Other Stock Additional Comprehensive Ownership Common Paid-in Retained Income Plan Stock Capital Earnings (Loss), Net Shares Total - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996....................... $431 $371,480 $404,896 $(3,289) $(15,234) $758,284 Issuance of 10,745,214 shares in three-for-two stock split effected in the form of a 50 percent stock dividend.. 72 (72) - - - - Repurchase and cancellation of 2,812,725 shares of common stock................... (12) (49,312) - - - (49,324) Issuance of 298,552 shares under certain compensation and employee plans.. 11 2,739 - - - 2,750 Issuance of 1,016,173 shares of common stock for acquisition of business........ 4 19,416 - - - 19,420 Restricted stock and deferred compensation plans, net.................. - 3,059 - - - 3,059 Commitment of release of ESOP shares....... - - - - 1,642 1,642 Goodwill related to the Liberty Financial Corporation reorganization..... - 7,055 - - - 7,055 Purchase and cancellation of 2,039,751 shares of common stock of combining companies... (29) (36,946) - - - (36,975) Cash dividends declared.................... - - (13,525) - - (13,525) Net income................................. - - 68,256 - - 68,256 Change in unrealized holding gain (loss) on securities available for sale, net.... - - - 3,424 - 3,424 First Colorado Bancorp, Inc. activity for six months ended June 30, 1997...... (16) (27,082) 5,363 (176) - (21,911) - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997....................... 461 290,337 464,990 (41) (13,592) 742,155 Mid Continent Bancshares, Inc. activity for three months ended September 30, 1997... - (797) (797) - (28) (1,622) Issuance of 10,865,530 shares in three-for-two stock split effected in the form of a 50 percent stock dividend. 109 (109) - - - - Issuance of 613,548 shares under certain compensation and employee plans......... 7 4,346 - - - 4,353 Issuance of 1,290,174 shares of common stock for acquisition of business....... 10 38,181 - - - 38,191 Restricted stock and deferred compensation plans, net................. - 7,625 - - - 7,625 Commitment of release of ESOP shares...... - - - - 2,216 2,216 Purchase and cancellation of 101,879 shares of common stock of combining companies.. - (1,886) - - - (1,886) Cash dividends declared................... - - (17,361) - - (17,361) Net income................................ - - 87,413 - - 87,413 Change in unrealized holding gain (loss) on securities available for sale, net............................... - - - 111 - 111 - -------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998....................... $ 587 $337,697 $534,245 $ 70 $(11,404) $861,195 ===========================================================================================================================
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -41- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
(Dollars in Thousands) Unearned Accumulated Employee Other Stock Additional Comprehensive Ownership Common Paid-in Retained Income Plan Stock Capital Earnings (Loss), Net Shares Total - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 ....................... $587 $337,697 $534,245 $ 70 $(11,404) $861,195 Issuance of 979,856 shares under certain compensation and employee plans ......... 10 14,279 - - - 14,289 Issuance of 1,378,580 shares of common stock ........................ 14 32,401 - - - 32,415 Restricted stock and deferred compensation plans, net ................. - 2,192 - - - 2,192 Commitment of release of ESOP shares ...... - - - - 11,404 11,404 Termination of ESOP plans ................. - 13,954 - - - 13,954 Purchase and cancellation of 1,500,000 shares of common stock .................. (15) (36,203) - - - (36,218) Cash dividends declared ................... - - (15,108) - - (15,108) Net income ................................ - - 92,392 - - 92,392 Change in unrealized holding gain (loss) on securities available for sale, net ... - - - (9,632) - (9,632) - --------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 ....................... $596 $364,320 $611,529 $(9,562) $ - $966,883 ===========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -42- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, (Dollars in Thousands) ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Net income ............................................................. $ 92,392 $87,413 $68,256 Adjustments to reconcile net income to net cash provided (used) by operating activities: Extraordinary items, net of tax benefit ........................... - - 583 Amortization of intangible assets ................................. 15,702 7,814 11,235 Provision for losses on loans and leases and real estate .......... 13,974 13,902 13,907 Depreciation and amortization ..................................... 18,172 13,135 11,880 Amortization (accretion) of deferred discounts and fees, net ...... 2,542 (2,163) (271) Amortization of mortgage servicing rights ......................... 12,021 10,177 9,534 Amortization of deferred compensation on restricted stock and deferred compensation plans and premiums on other borrowings. 1,754 1,798 1,611 Termination of employee stock ownership plans ..................... 13,954 - - Deferred tax provision ............................................ 17,093 2,504 438 Gain on sales of real estate, loans and loan servicing rights, net. (4,618) (6,144) (4,190) Gain on sales of securities ....................................... (4,376) (3,765) (510) Gain on sale of branch ............................................ (1,076) - - Stock dividends from Federal Home Loan Bank ....................... (10,827) (8,413) (5,606) Proceeds from sales of loans ...................................... 1,958,807 1,178,244 873,139 Origination of loans for resale ................................... (479,852) (648,969) (512,115) Purchases of loans for resale ..................................... (1,411,210) (721,703) (403,645) Decrease (increase) in interest receivable ........................ 1,261 5 (2,575) (Decrease) increase in interest payable and other liabilities ..... (22,804) (12,531) 5,960 Other items, net .................................................. 38,588 (8,107) (35,210) - --------------------------------------------------------------------------------------------------------------- Total adjustments ............................................... 159,105 (184,216) (35,835) - --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities .............. 251,497 (96,803) 32,421 =============================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES - --------------------------------------------------------------------------------------------------------------- Purchases of loans ..................................................... (1,531,385) (787,496) (730,460) Repayment of loans, net of originations ................................ 1,122,811 465,595 96,246 Principal repayments of mortgage-backed securities available for sale .. 69,559 70,770 56,798 Purchases of mortgage-backed securities available for sale ............. (446,186) (40,758) (25,745) Proceeds from sales of mortgage-backed securities available for sale ... 209,789 121,187 99,273 Principal repayments of mortgage-backed securities held to maturity .... 290,726 287,135 198,357 Purchases of mortgage-backed securities held to maturity ............... (218,479) - (35,066) Maturities and repayments of investment securities held to maturity .... 339,089 430,084 225,739 Purchases of investment securities held to maturity .................... (666,574) (368,084) (347,785) Purchases of investment securities available for sale .................. (33,901) (81,778) (59,043) Proceeds from sales of investment securities available for sale ........ 30,153 20,189 54,366 Maturities and repayments of investment securities available for sale .. 170,196 35,336 43,070 Purchases of mortgage loan servicing rights ............................ (21,959) (14,483) (10,194) Proceeds from sales of loan servicing rights ........................... - 412 - Proceeds from sales of Federal Home Loan Bank stock .................... 13,691 7,229 21,502 Purchases of Federal Home Loan Bank stock .............................. (51,213) (31,547) (11,269) Acquisitions, net of cash received (paid) .............................. (88,351) 7,283 2,595 Proceeds from sales of real estate ..................................... 17,183 21,780 18,104 Payments to acquire real estate ........................................ (613) (2,806) (847) Purchases of premises and equipment, net ............................... (40,675) (16,668) (22,562) Other items, net ....................................................... (3,820) (11,012) 1,293 - --------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities .............. (839,959) 112,368 (425,628) ===============================================================================================================
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -43- - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands) Year Ended June 30, -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- (Decrease) increase in deposits .................................... $ (211,102) $ (212,908) $ 86,293 Proceeds from Federal Home Loan Bank advances ...................... 2,400,000 1,665,165 1,362,765 Repayments of Federal Home Loan Bank advances ...................... (1,386,781) (1,022,207) (1,296,585) Proceeds from securities sold under agreements to repurchase ....... 25,000 100,000 444,856 Repayments of securities sold under agreements to repurchase ....... (235,955) (405,000) (186,317) Proceeds from issuances of other borrowings ........................ 152,200 12,254 154,735 Repayments of other borrowings ..................................... (23,423) (67,181) (88,797) Payments for debt issue costs ...................................... - - (2,218) Proceeds from loan repayments from employee stock ownership plans .. 11,058 - - Payments of cash dividends on common stock ......................... (13,539) (16,147) (12,354) Repurchases of common stock ........................................ (36,218) (1,886) (86,299) Issuance of common stock ........................................... 45,095 6,519 4,000 Other items, net ................................................... (1,610) (1,982) 1,720 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities ................. 724,725 56,627 381,799 - ----------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS - ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in net cash position ........................... 136,263 72,192 (11,408) Balance, beginning of year ......................................... 217,012 177,403 194,671 Adjustments to convert acquisitions to fiscal year end ............. - (32,583) (5,860) - ----------------------------------------------------------------------------------------------------------------- Balance, end of year ............................................... $ 353,275 $217,012 $177,403 - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - ----------------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest expense ................................................ $ 506,137 $426,832 $409,899 Income taxes, net ............................................... 54,110 53,075 34,161 Non-cash investing and financing activities: Loans exchanged for mortgage-backed securities .................. 20,773 161,189 46,165 Loans transferred to real estate ................................ 17,671 7,205 17,285 Loans to facilitate the sale of real estate ..................... 259 302 557 Common stock issued in connection with the aquisitions of businesses .................................... - 32,267 19,420 Common stock received in connection with employee benefit plans, net ........................................... (475) (4,180) (320) - -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -44- - -------------------------------------------------------------------------------- NOTE 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 1999 have been reclassified for comparative purposes. POOLING OF INTERESTS On August 14, 1998, the Corporation consummated the acquisition of First Colorado Bancorp, Inc. (First Colorado). 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 this acquisition to include the accounts and results of operations of First Colorado. First Colorado had a calendar year end, and in restating prior periods its accounts and results of operations were conformed to the Corporation's fiscal year ended June 30, 1998. In changing to the Corporation's fiscal year, First Colorado's accounts and results of operations for the six months ended June 30, 1997, were excluded from reported results of operations for the restated combined companies. The Corporation's Consolidated Statement of Stockholders' Equity as of June 30, 1997, has been adjusted to include the First Colorado activity for the six months ended June 30, 1997. 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, community banking operations, consumer lending, commercial real estate lending, retail deposit activities, mortgage banking, commercial and agribusiness lending, equipment leasing 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, amounts due from banks 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. Premiums and discounts are amortized over the contractual lives of the related securities on the level yield method. Any unrealized losses on securities reflecting a decline in the fair value of such securities considered 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 AND LEASES 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. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -45- - -------------------------------------------------------------------------------- A loan is considered to be impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All impaired loans are classified as substandard for risk classification purposes. Impaired loans are charged-off, to the estimated value of collateral associated with the loan, when management believes principal and interest are deemed uncollectible. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet the payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent that cash payments are received. 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. Leases are accounted for as direct financing leases for financial statement purposes. The total minimum rentals receivable and the residual value of leased assets under each lease contract are recorded as assets, net of unearned income. Unearned income is the excess of the total rentals receivable and residual value over the cost of the leased asset. Unearned income is recognized during the lease term utilizing the interest method. Direct origination costs are deferred and recognized over the estimated life of the lease. 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. 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 AND LEASE LOSSES The allowance for loan and lease 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 and lease loss experience, known and inherent risks in the respective portfolios, 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 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 these 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. Amortization of mortgage servicing rights is based on the ratio of net servicing income received in the current period to - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -46- - -------------------------------------------------------------------------------- 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. The Corporation reports mortgage servicing rights at the lower of amortized cost or fair value. The fair 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 loans. Impairment losses are recognized to the extent the unamortized mortgage servicing rights for each stratum exceed the current fair 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, 1999, 1998 or 1997. PREMISES AND EQUIPMENT Land is carried at cost. Buildings, building improvements, leasehold improvements and furniture, fixtures and equipment are stated at the lower of cost or fair value 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 Intangible assets consist primarily of goodwill and core value of deposits. 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 established by the Corporation is amortized on an accelerated basis over a period not to exceed 10 years and goodwill is amortized on a straight-line basis over periods up to 25 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 - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -47- - -------------------------------------------------------------------------------- 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 the deposit liabilities are not affected. Under these agreements, the Corporation pays fixed rates of interest and receives variable rates of interest that are based on the same rates the Corporation pays on the hedged deposit liabilities. As the swaps have the opposite interest rate characteristics of the hedged deposit liabilities, the interest rate swap agreements qualify for settlement accounting. Accordingly, 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 payments received from these agreements are recognized upon receipt as a reduction to amortization expense. INCOME TAXES The Corporation files a consolidated federal income tax return and separate state income tax returns. 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 SPLITS On November 17, 1997, 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. The stock dividend totaled 10,865,530 shares of common stock. Also, on November 18, 1996, the Board of Directors declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders. This stock dividend totaled 10,745,214 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 these stock splits. EARNINGS PER COMMON SHARE The Corporation follows the provisions of Statement of Financial Accounting Standards No. 128 entitled "Earnings Per Share." 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. COMPREHENSIVE INCOME Effective July 1, 1998, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 130 entitled "Reporting Comprehensive Income" (SFAS No. 130). This statement requires disclosures of the components of comprehensive income and the accumulated balance of other comprehensive income within consolidated total stockholders' equity. The adoption of the provisions of SFAS No. 130, disclosed in the Consolidated Statement of Comprehensive Income, did not effect the Corporation's consolidated financial position, results of operations or liquidity. SEGMENT REPORTING Effective July 1, 1998, the Corporation adopted Statement of Financial Accounting Standards No. 131 entitled - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -48- - -------------------------------------------------------------------------------- "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. 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. As a community banking institution, substantially all of the Corporation's operations involve commercial and consumer banking and mortgage banking. Management makes operating decisions and assesses performance based on a continuous review of these two primary operations, which constitute the Corportion's operating segments under the provisions of SFAS No. 131. NOTE 2. ACQUISITIONS - -------------------------------------------------------------------------------- FISCAL YEAR 1999 ACQUISITIONS On July 31, 1998, the Corporation consummated its acquisition of AmerUs, a wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a taxable acquisition all of the outstanding shares of the common stock of AmerUs for total consideration of $178,269,000. Such consideration consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One single-family residential mortgage loans and a receivable for income tax benefits) totaling approximately $85,027,000, (ii) cash (as adjusted per the agreement) totaling $53,242,000, and (iii) promissory notes due July 31, 1999, for $40,000,000 bearing interest, adjusted monthly, at 150 basis points over the one-year Treasury bill rate. These promissory notes were paid in full on July 30, 1999. AmerUs was a federally chartered savings bank headquartered in Des Moines, Iowa and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase accounting adjustments, AmerUs had total assets of approximately $1,266,800,000, deposits of approximately $949,700,000 and stockholder's equity of approximately $84,800,000. This acquisition was accounted for as a purchase with resulting core value of deposits totaling $16,264,000 amortized on an accelerated basis over 10 years, and estimated goodwill totaling $110,176,000 amortized on a straight-line basis over 25 years. Fair value adjustments and other purchase accounting adjustments will be finalized pursuant to generally accepted accounting principles. The accounts and consolidated results of operations for fiscal year 1999 include the results of AmerUs beginning July 31, 1998. The following table summarizes results on an unaudited consolidated pro forma basis for the last two fiscal years as though this purchase had occurred at the beginning of fiscal year 1998: Fiscal Year Ended June 30, ------------------------- 1999 1998 - -------------------------------------------------------------------------------- Total interest income and other income ............ $921,607 $871,127 Net income ........................................ 69,345 69,481 Diluted earnings per common share ................. 1.15 1.67 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -49- - -------------------------------------------------------------------------------- On August 14, 1998, the Corporation consummated its acquisition of First Colorado. The Corporation acquired in a tax-free reorganization all 18,564,766 outstanding shares of First Colorado's common stock in exchange for 18,278,789 shares of its common stock. Based on the Corporation's closing stock price of $26.375 at August 14, 1998, the total consideration for this acquisition, including cash paid for fractional shares, approximated $482,154,000. This acquisition was accounted for as a pooling of interests. First Colorado, headquartered in Lakewood, Colorado, was a unitary savings and loan holding company and the parent company of First Federal Bank of Colorado, a federally chartered stock savings bank that operated 27 branches located in Colorado, with 23 branches located in the Denver metropolitan area and four in Colorado's western slope region. At July 31, 1998, First Colorado had assets of approximately $1,572,200,000, deposits of approximately $1,192,700,000 and stockholders' equity of approximately $254,700,000. The following table reconciles total interest income and other income, total interest expense and net income previously reported by the Corporation and First Colorado to give effect to this merger for fiscal years 1998 and 1997 as if this acquisition had occurred at the beginning of the respective fiscal years:
First Corporation Colorado Combined - ------------------------------------------------------------------------------------------------ Fiscal year 1998: Total interest income and other income ........... $735,883 $119,326 $855,209 Total interest expense ........................... 417,188 60,201 477,389 Net income ....................................... 67,333 20,080 87,413 Earnings per diluted common share ................ 1.62 1.26 1.52 - ------------------------------------------------------------------------------------------------ Fiscal year 1997: Total interest income and other income ........... $688,737 $110,123 $798,860 Total interest expense ........................... 396,775 57,194 453,969 Extraordinary items, net of tax benefit .......... (583) - (583) Net income ....................................... 54,884 13,372 68,256 Earnings per diluted common share - Income before extraordinary items .............. 1.35 .74 1.17 Extraordinary items, net of tax benefit ........ (.01) - (.01) Net income ..................................... 1.34 .74 1.16 - ------------------------------------------------------------------------------------------------
Net income and diluted earnings per share presented above do not include any expected cost savings and benefits of related synergies, or any nonrecurring merger transaction costs, as a result of the merger of First Colorado. Prior to its merger into the Corporation, results of operations for First Colorado were reported on a calendar year basis. In restating prior periods, the accounts and results of operations of First Colorado were conformed to the Corporation's fiscal year ended June 30, 1998. Accordingly, in changing to the Corporation's fiscal year, First Colorado's accounts and results of operations for the six months ended June 30, 1997, including total interest income and other income of $55,737,000, total interest expense of $29,399,000 and net income of $8,840,000 were excluded from reported results of operations for the restated combined companies. Such amounts, net of a cash dividend of $3,477,000, are included in the Corporation's consolidated retained earnings in the Consolidated Statement of Stockholders' Equity. On March 1, 1999, the Corporation consummated its acquisition of Midland First Financial Corporation (Midland), parent company of Midland Bank. The Corporation acquired in a taxable acquisition all of the outstanding shares of Midland's common stock. The total purchase consideration of this acquisition was $83,000,000 in cash, including cash to pay off existing Midland debt totaling $5,550,000, the retirement of preferred stock of both Midland and Midland Bank totaling $11,562,000 and $810,000 for advisor fees. Midland Bank was a privately held commercial bank headquartered in Lee's Summit, Missouri that operated eight branches in the greater Kansas City area. At February 28, 1999, - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -50- - -------------------------------------------------------------------------------- Midland had total assets of approximately $399,231,000, deposits of approximately $353,090,000 and stockholders' equity of approximately $24,236,000. This acquisition was accounted for as a purchase with the fair value adjustments and other purchase accounting adjustments to be finalized pursuant to generally accepted accounting principles. The effect of the Midland acquisition on the Corporation's consolidated financial statements as if this acquisition had occurred at the beginning of fiscal year 1999 is not material. FISCAL YEAR 1998 ACQUISITIONS On January 30, 1998, the Corporation consummated its acquisition of First National Bank Shares, LTD (First National). The Corporation acquired all of the outstanding shares of First National's common stock for 992,842 shares of the Corporation's common stock resulting in a total aggregate value approximating $32,267,000. At January 30, 1998, before purchase accounting adjustments, First National had assets of approximately $147,800,000, deposits of approximately $131,300,000 and stockholders' equity of approximately $12,000,000. First National operated seven branches located in Kansas. This acquisition was accounted for as a purchase with resulting core value of deposits totaling $6,045,000 amortized on an accelerated basis over 10 years, and goodwill totaling $19,162,000 amortized on a straight-line basis over 25 years. The effect of the First National acquisition on the Corporation's consolidated financial statements as if this acquisition had occurred at the beginning of fiscal year 1998 is not material. On February 13, 1998, the Corporation consummated its acquisition of Liberty Financial Corporation (Liberty), a privately held commercial bank and thrift holding company. The Corporation acquired all of the outstanding shares of Liberty's common stock for 4,015,555 shares of the Corporation's common stock for an aggregate value of approximately $135,349,000. Liberty operated 38 branches in Iowa and seven in the metropolitan area of Tucson, Arizona and at January 31, 1998, had assets of approximately $658,100,000, deposits of approximately $569,800,000 and stockholders' equity of approximately $50,100,000. This acquisition was accounted for as a pooling of interests. On February 27, 1998, the Corporation consummated its acquisition of Mid Continent Bancshares, Inc. (Mid Continent). The Corporation acquired all of the outstanding shares of Mid Continent's common stock for 2,641,945 shares of the Corporation's common stock for an aggregate value of approximately $86,961,000. Mid Continent operated ten branches located in Kansas and at February 27, 1998, had total assets of approximately $405,700,000, deposits of approximately $258,600,000 and stockholders' equity of approximately $41,200,000. This acquisition was accounted for as a pooling of interests. On May 29, 1998, the Corporation consummated its acquisition of Perpetual Midwest Financial, Inc. (Perpetual). The Corporation acquired in a tax-free reorganization all of the outstanding shares of Perpetual's common stock in exchange for 1,717,721 shares of the Corporation's common stock for an aggregate value of approximately $57,222,000. At May 29, 1998, Perpetual had total assets of approximately $412,200,000, deposits of approximately $323,400,000, and stockholders' equity of approximately $36,000,000. Perpetual operated five branches located in Iowa. This acquisition was accounted for as a pooling of interests. The Corporation's historical consolidated financial statements were restated for all periods prior to the acquisitions of Liberty, Mid Continent and Perpetual to include the accounts and results of operations of these financial institutions. Prior to merger into the Corporation, results of operations for Liberty were reported on a calendar year basis and Mid Continent on a September 30 fiscal year basis. In restating prior periods, the accounts and results of operations of Liberty and Mid Continent were conformed to the Corporation's fiscal year ended June 30, 1997 and 1998, respectively. Accordingly, in changing fiscal years, Liberty's accounts and results of operations for the six months ended June 30, 1996, including total interest income and other income of $24,952,000, total interest expense of $9,916,000 and net income of $2,850,000 were excluded from reported results of operations for the restated combined companies. Such amounts, net of cash dividend of $479,000, are included in the Corporation's Consolidated Statement of Stockholders' Equity. Mid Continent's accounts and results of operations for the three months ended September 30, 1998, including total interest income and other income of $9,507,000, total interest expense of $4,558,000 and net income of $977,000 were included in results of operations for the restated combined companies for both fiscal years 1998 and 1997. Such amounts, net of a cash dividend of $180,000, are included in the Corporation's Consolidated Statement of Stockholders' Equity only for the fiscal year ended June 30, 1998. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -51- - -------------------------------------------------------------------------------- FISCAL YEAR 1997 ACQUISITIONS On October 1, 1996, the Corporation consummated its acquisition of Heritage Financial, Ltd. (Heritage). The Corporation acquired all of the outstanding shares of Heritage's common stock in exchange for cash and 1,016,173 shares of the Corporation's common stock for an aggregate value of approximately $22,806,000. At October 1, 1996, before purchase accounting adjustments, Heritage had assets of $182,934,000, deposits of $158,168,000 and stockholders' equity of $10,308,000. Heritage operated six branches located in west-central Iowa. This acquisition was accounted for as a purchase with resulting core value of deposits totaling $7,633,000 amortized on an accelerated basis over 10 years and goodwill totaling $8,617,000 amortized on a straight-line basis over 25 years. On May 1, 1997, the Corporation consummated its acquisition of Investors Federal Savings (Investors). The Corporation acquired all of the outstanding shares of Investors' common stock for $5,347,000 in cash. At April 30, 1997, before purchase accounting adjustments, Investors had assets of $30,723,000, deposits of $26,117,000 and stockholders' equity of $4,431,000. Investors operated three branches in southwest Kansas with one branch closed as part of the acquisition consolidation process. This acquisition was accounted for as a purchase with resulting goodwill totaling $925,000. The effect of the Heritage and Investors acquisitions on the Corporation's consolidated financial statements as if these acquisitions had occurred at the beginning of fiscal year 1997 is not material. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -52- - -------------------------------------------------------------------------------- NOTE 3. INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Investment securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair June 30, 1999 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ Available for sale: U.S. Treasury and other Government agency obligations .. $ 80,185 $ 6 $ (1,429) $ 78,762 States and political subdivisions ...................... 4,652 2 (61) 4,593 Other securities ....................................... 459 - (3) 456 - ------------------------------------------------------------------------------------------------------------------ $ 85,296 $ 8 $ (1,493) $ 83,811 - ------------------------------------------------------------------------------------------------------------------ Weighted average interest rate ......................... 6.45% - ------------------------------------------------------------------------------------------------------------------ Held to maturity: U.S. Treasury and other Government agency obligations .. $755,195 $ 79 $(15,720) $739,554 States and political subdivisions ...................... 49,857 145 (459) 49,543 Other securities ....................................... 57,708 - - 57,708 - ------------------------------------------------------------------------------------------------------------------ $862,760 $ 224 $(16,179) $846,805 - ------------------------------------------------------------------------------------------------------------------ Weighted average interest rate ......................... 6.53% - ------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair June 30, 1998 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------ Available for sale: U.S. Treasury and other Government agency obligations .. $124,314 $ 719 $ (30) $125,003 States and political subdivisions ...................... 7,168 79 (127) 7,120 Other securities ....................................... 8,978 20 (5) 8,993 - ------------------------------------------------------------------------------------------------------------------ $140,460 $ 818 $ (162) $141,116 - ------------------------------------------------------------------------------------------------------------------ Weighted average interest rate ......................... 6.86% - ------------------------------------------------------------------------------------------------------------------ Held to maturity: U.S. Treasury and other Government agency obligations .. $465,359 $ 876 $ (170) $466,065 States and political subdivisions ...................... 48,571 333 (276) 48,628 Other securities ....................................... 18,258 130 (3) 18,385 - ------------------------------------------------------------------------------------------------------------------ $532,188 $1,339 $ (449) $533,078 - ------------------------------------------------------------------------------------------------------------------ Weighted average interest rate ......................... 6.40% - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -53- - -------------------------------------------------------------------------------- As of June 30, 1999, the Corporation recorded an unrealized loss on securities available for sale as a decrease to stockholders' equity totaling $1,485,000 net of a deferred tax benefit of approximately $555,000; and as of June 30, 1998, recorded an unrealized gain on securities available for sale as an increase to stockholders' equity totaling $656,000, net of deferred income taxes of $239,000. The amortized cost and fair value of investment securities by contractual maturity at June 30, 1999, 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 ............................... $ 8,948 $ 8,948 $ 32,088 $ 32,079 Due after one year through five years ................. 20,256 20,035 24,798 24,859 Due after five years through ten years ................ 22,152 21,668 91,756 90,563 Due after ten years ................................... 33,940 33,160 714,118 699,304 - ------------------------------------------------------------------------------------------------------------------- $85,296 $ 83,811 $862,760 $846,805 - -------------------------------------------------------------------------------------------------------------------
Activity from the sales of investment securities available for sale for the years ended June 30 is summarized as follows:
Gross Gross Realized Realized Net Fiscal Year Ended Proceeds Gains Losses Gain - ------------------------------------------------------------------------------------------------------------------- 1999 .................................................. $30,153 $ 491 $ - $ 491 1998 .................................................. 20,189 1,287 (4) 1,283 1997 .................................................. 54,366 91 (57) 34 - -------------------------------------------------------------------------------------------------------------------
At June 30, 1999 and 1998, investment securities totaling $101,130,000 and $179,270,000, respectively, were pledged primarily to secure public funds and securities sold under agreements to repurchase. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -54- - -------------------------------------------------------------------------------- NOTE 4. MORTGAGE-BACKED SECURITIES - -------------------------------------------------------------------------------- Mortgage-backed securities are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Fair June 30, 1999 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation ................ $ 85,380 $ 24 $ (3,128) $ 82,276 Government National Mortgage Association .............. 44,319 88 (544) 43,863 Federal National Mortgage Association ................. 260,267 44 (10,731) 249,580 Collateralized Mortgage Obligations ................... 37,968 537 (121) 38,384 Other ................................................. 5,548 70 (14) 5,604 - ------------------------------------------------------------------------------------------------------------------- $433,482 $ 763 $(14,538) $419,707 - ------------------------------------------------------------------------------------------------------------------- Weighted average interest rate ........................ 6.67% - ------------------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation ................ $239,873 $ 837 $(13,065) $227,645 Government National Mortgage Association .............. 358,975 2,437 (2,734) 358,678 Federal National Mortgage Association ................. 83,888 845 (1,579) 83,154 Collateralized Mortgage Obligations ................... 169,539 55 (468) 169,126 Privately Issued Mortgage Pool Securities ............. 10,563 413 (91) 10,885 - ------------------------------------------------------------------------------------------------------------------- $862,838 $4,587 $(17,937) $849,488 - ------------------------------------------------------------------------------------------------------------------- Weighted average interest rate ........................ 6.10% - ------------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair June 30, 1998 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- Available for sale: Federal Home Loan Mortgage Corporation ................ $ 40,123 $ 557 $ (44) $ 40,636 Government National Mortgage Association .............. 75,218 116 (686) 74,648 Federal National Mortgage Association ................. 29,515 131 (914) 28,732 Collateralized Mortgage Obligations ................... 24,428 168 (26) 24,570 Other ................................................. 2,817 11 (21) 2,807 - ------------------------------------------------------------------------------------------------------------------- $172,101 $ 983 $ (1,691) $171,393 - ------------------------------------------------------------------------------------------------------------------- Weighted average interest rate ........................ 6.55% - ------------------------------------------------------------------------------------------------------------------- Held to maturity: Federal Home Loan Mortgage Corporation ................ $175,707 $1,952 $ (1,632) $176,027 Government National Mortgage Association .............. 480,607 4,000 (2,091) 482,516 Federal National Mortgage Association ................. 82,921 1,664 (449) 84,136 Collateralized Mortgage Obligations ................... 166,448 122 (2,379) 164,191 Privately Issued Mortgage Pool Securities ............. 14,773 559 (160) 15,172 - ------------------------------------------------------------------------------------------------------------------- $ 920,456 $8,297 $ (6,711) $922,042 - ------------------------------------------------------------------------------------------------------------------- Weighted average interest rate ........................ 6.76% - -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERICIAL FEDERAL CORPORATION -55- - -------------------------------------------------------------------------------- Mortgage-backed securities held to maturity at June 30 are classified by type of interest payment and contractual maturity term as follows:
1999 1998 ------------------------------------- ---------------------------------------- Amortized Fair Weighted Amortized Fair Weighted Cost Value Rate Cost Value Rate - ------------------------------------------------------------------------------------------------------------------------ Adjustable rate ................... $369,922 $362,589 5.77% $543,059 $544,083 6.80% Fixed rate, 5-year term ........... 17,820 17,816 6.31 34,584 34,716 6.44 Fixed rate, 7-year term ........... 17,860 17,812 5.64 29,683 29,625 5.99 Fixed rate, 15-year term .......... 195,746 189,411 6.00 44,668 44,978 6.50 Fixed rate, 30-year term .......... 91,951 92,734 7.32 102,014 104,449 7.61 - ------------------------------------------------------------------------------------------------------------------------ 693,299 680,362 6.05 754,008 757,851 6.84 Collateralized mortgage obligations 169,539 169,126 6.30 166,448 164,191 6.40 - ------------------------------------------------------------------------------------------------------------------------ $862,838 $849,488 6.10% $920,456 $922,042 6.76% - ------------------------------------------------------------------------------------------------------------------------
As of June 30, 1999 and 1998, the Corporation recorded unrealized losses on securities available for sale as decreases to stockholders' equity totaling $13,775,000 and $568,000, respectively, net of deferred income tax benefits of approximately $5,143,000 and $221,000, respectively. Activity from the sales of mortgage-backed securities available for sale for the years ended June 30 is summarized as follows: Gross Gross Realized Realized Net Fiscal Year Ended Proceeds Gains Losses Gain - -------------------------------------------------------------------------------- 1999 ....................... $209,789 $3,885 $ - $3,885 1998 ....................... 121,187 2,511 (29) 2,482 1997 ....................... 99,273 999 (523) 476 - -------------------------------------------------------------------------------- At June 30, 1999 and 1998, mortgage-backed securities totaling $370,735,000 and $394,802,000, respectively, were pledged as collateral primarily for collateralized mortgage obligations, public funds, securities sold under agreements to repurchase and interest rate swap agreements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -56- - -------------------------------------------------------------------------------- NOTE 5. LOANS AND LEASES HELD FOR SALE - -------------------------------------------------------------------------------- Loans and leases held for sale at June 30, 1999 and 1998, totaled $104,347,000 and $290,380,000, respectively, with weighted average rates of 6.76% and 7.21%, respectively. Loans held for sale are secured by single-family residential properties totaling $103,174,000 at June 30, 1999, consisting entirely of fixed rate mortgage loans with a weighted average rate of 6.72%. Leases held for sale totaled $1,173,000 at June 30, 1999, consisting of fixed rate leases with a weighted average rate of 9.73%. Loans held for sale at June 30, 1998, consisted of fixed and adjustable rate mortgage loans totaling $289,954,000 and $426,000, respectively. NOTE 6. LOANS AND LEASES RECEIVABLE - -------------------------------------------------------------------------------- Loans and leases receivable at June 30 are summarized as follows: 1999 1998 - -------------------------------------------------------------------------------- Conventional mortgage loans .................... $6,509,981 $5,490,799 FHA and VA loans ............................... 406,171 358,941 Commercial real estate loans ................... 756,412 494,325 Construction loans ............................. 346,349 325,698 Consumer, other loans and leases ............... 1,442,654 1,060,631 - -------------------------------------------------------------------------------- 9,461,567 7,730,394 Unamortized premiums, net ...................... 4,846 5,681 Unearned income ................................ (22,445) (13,253) Deferred loan costs, net ....................... 11,546 21,515 Loans-in-process ............................... (153,124) (112,781) Allowance for loan and lease losses ............ (80,344) (64,660) - -------------------------------------------------------------------------------- $9,222,046 $7,566,896 - -------------------------------------------------------------------------------- Weighted average interest rate ................. 7.70% 7.95% - -------------------------------------------------------------------------------- At June 30, 1999, conventional, FHA and VA loans, including loans held for sale, totaling $7,287,850,000 are secured by residential properties located as follows: 20% in Colorado, 13% in Nebraska, 10% in Kansas, and the remaining 57% in 47 other states. At June 30, 1998, conventional, FHA and VA loans, including loans held for sale, totaling $6,422,772,000 were secured by residential properties located as follows: 24% in Colorado, 15% in Nebraska, 10% in Kansas and the remaining 51% in 47 other states. The commercial real estate portfolio at June 30, 1999, was secured by properties located as follows: 29% in Colorado, 15% in Kansas, 14% in Iowa and the remaining 42% in 22 other states. The commercial real estate portfolio at June 30, 1998, was secured by properties located as follows: 34% in Colorado, 29% in Iowa, 9% in Nebraska and the remaining 28% in 13 other states. The lease portfolio totaling $103,985,000 and $64,855,000 at June 30, 1999 and 1998, respectively, includes contracts to lessees throughout the United States and involved in various industries. The commercial operating loan portfolio, including agricultural loans, is well diversified with no industry constituting a concentration. Nonperforming loans and leases at June 30, 1999 and 1998, aggregated $70,015,000 and $49,366,000, respectively. Of the nonperforming loans and leases at June 30, 1999, approximately 22% were secured by properties located in Kansas, 9% in Iowa, 6% each in California and Florida and the remaining 57% located in 46 other states. Of the nonperforming loans and leases at June 30, 1998, approximately 12% were secured by properties located in Kansas, 8% each in Colorado and Iowa, 7% in California, 6% in Oklahoma and the remaining 59% located in 45 other states. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -57- - -------------------------------------------------------------------------------- Also included in loans and leases receivable at June 30, 1999 and 1998, are loans with carrying values of $9,729,000 and $4,302,000, respectively, the terms of which have been modified in troubled debt restructurings. During the fiscal years ended June 30, 1999, 1998 and 1997, the Corporation recognized interest income on these loans aggregating $470,000, $380,000 and $852,000, respectively, whereas under their original terms the Corporation would have recognized interest income of $475,000, $499,000 and $1,087,000, respectively. At June 30, 1999, the Corporation had no material commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructurings. Impaired loans, a portion of which are included in the balances for troubled debt restructurings at June 30, 1999 and 1998, and the resulting interest income as originally contracted and as recognized, are not material for either fiscal year 1999 or 1998. At June 30, 1999 and 1998, the Corporation pledged real estate loans totaling $3,365,770,000 and $3,045,978,000, respectively, as collateral for Federal Home Loan Bank advances and other borrowings. The amount of collateral at June 30, 1998, excludes qualifying loans from First Colorado, which had a blanket pledge with the Federal Home Loan Bank. NOTE 7. REAL ESTATE - -------------------------------------------------------------------------------- Real estate at June 30 is summarized as follows:
1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Real estate owned and in judgment, net of allowance for losses of $4,894 and $1,055 ........... $22,026 $13,258 Real estate held for investment, which includes equity in unconsolidated joint ventures and investments in real estate partnerships, net of allowance for losses of $734 and $777 ...... 9,487 8,937 - --------------------------------------------------------------------------------------------------------------------------- $31,513 $22,195 - ---------------------------------------------------------------------------------------------------------------------------
At June 30, 1999 and 1998, real estate is comprised primarily of commercial real estate (54% and 58%, respectively) and residential real estate (46% and 40%, respectively). Real estate located by states at June 30, 1999, was as follows: 30% in Nebraska, 15% in Missouri and the remaining 55% in 37 other states. Real estate located by states at June 30, 1998, was as follows: 39% in Nebraska, 18% in Colorado and the remaining 43% in 23 other states. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -58- - -------------------------------------------------------------------------------- NOTE 8. ALLOWANCES FOR LOSSES ON LOANS AND LEASES AND REAL ESTATE - -------------------------------------------------------------------------------- An analysis of the allowances for losses on loans and leases and real estate is summarized as follows:
Loans and Real Leases Estate Total - ------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1996 (1) .............................................. $ 59,577 $ 5,389 $ 64,966 Provision charged to operations ......................................... 13,427 480 13,907 Charges ................................................................. (15,432) (2,097) (17,529) Recoveries .............................................................. 2,872 43 2,915 Allowances acquired in acquisitions ..................................... 1,966 31 1,997 Liberty activity for the six months ended June 30, 1996, net ............ 475 - 475 Change in estimate of allowance for bulk purchased loans ................ (1,878) - (1,878) Charge-offs to allowance for bulk purchased loans ....................... (78) - (78) - ------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 (1) .............................................. 60,929 3,846 64,775 Provision charged to operations ......................................... 13,853 49 13,902 Charges ................................................................. (14,157) (2,136) (16,293) Recoveries .............................................................. 4,816 61 4,877 Allowances acquired in acquisitions ..................................... 1,273 52 1,325 First Colorado activity for the six months ended June 30, 1997, net ..... 428 (52) 376 Mid Continent activity for the three months ended September 30, 1997, net (38) 12 (26) Change in estimate of allowance for bulk purchased loans ................ (2,324) - (2,324) Charge-offs to allowance for bulk purchased loans ....................... (23) - (23) - ------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1998 (1) .............................................. 64,757 1,832 66,589 Provision charged to operations ......................................... 12,400 1,574 13,974 Charges ................................................................. (15,760) (1,408) (17,168) Recoveries .............................................................. 3,674 18 3,692 Allowances acquired in acquisitions ..................................... 17,307 3,612 20,919 Change in estimate of allowance for bulk purchased loans ................ (1,959) - (1,959) Charge-offs to allowance for bulk purchased loans ....................... - - - - ------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1999 (1) .............................................. $ 80,419 $ 5,628 $ 86,047 - -------------------------------------------------------------------------------------------------------------------
(1) Includes $75,000, $97,000, $77,000 and $78,000 at June 30, 1999, 1998, 1997 and 1996 in general allowance for losses established primarily to cover risks associated with borrowers' delinquencies and defaults on loans and leases held for sale. ================================================================================ Bulk loan purchases acquired at a discount between January 1991 and June 30, 1992, are allocated an estimated allowance for bulk purchased loans that is available for potential losses in the future on a particular loan package. At June 30, 1999, 1998 and 1997, $6,503,000, $8,462,000 and $10,809,000, respectively, are included in the total amount of allowance for losses on loans and leases. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -59- - -------------------------------------------------------------------------------- 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, 1999, 1998 and 1997, was $7,448,814,000, $7,239,726,000 and $7,506,688,000, respectively. Custodial escrow balances maintained in connection with loan servicing totaled approximately $120,246,000, $119,014,000 and $130,727,000 at June 30, 1999, 1998 and 1997, 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. 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:
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Beginning balance .......................................................... $ 67,836 $61,976 $57,688 Purchases of mortgage servicing rights ..................................... 21,959 14,483 10,194 Mortgage servicing rights from purchase acquisitions ....................... - - 271 Mortgage servicing rights capitalized through loan originations ............ 6,702 3,183 3,149 Amortization expense ....................................................... (12,021) (10,177) (9,534) Conforming accounting practices of combining companies ..................... - (1,100) - First Colorado activity for the six months ended June 30, 1997, net ........ - 72 - Mid Continent activity for the three months ended September 30, 1997, net .. - (382) - Other items, net ........................................................... 276 (219) 208 - ------------------------------------------------------------------------------------------------------------------- Ending balance ............................................................. $84,752 $67,836 $61,976 - -------------------------------------------------------------------------------------------------------------------
At June 30, 1999, 1998 and 1997 the fair value of the Corporation's mortgage servicing rights totaled approximately $106,906,000, $87,409,000 and $90,143,000, respectively. No valuation allowances were necessary to be established during fiscal years 1999, 1998 or 1997. At June 30, 1999, 1998 and 1997, the Corporation utilized interest rate floor agreements with notional amounts totaling $375,000,000, $215,000,000 and $165,000,000, respectively, designed to hedge impairment losses due to potential decreasing interest rates. See Note 16 "Derivative Financial Instruments" for additional information. At June 30, 1999 and 1998, there were no commitments to purchase mortgage loan servicing rights or to sell any bulk packages of mortgage servicing rights. Outstanding commitments to purchase mortgage loan servicing rights totaled $1,284,000 at June 30, 1997. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -60- - -------------------------------------------------------------------------------- NOTE 10. PREMISES AND EQUIPMENT - -------------------------------------------------------------------------------- Premises and equipment at June 30 are summarized as follows: 1999 1998 - -------------------------------------------------------------------------------- Land ................................................. $ 27,878 $ 28,010 Buildings and improvements ........................... 117,127 102,748 Leasehold improvements ............................... 6,621 3,919 Furniture, fixtures and equipment .................... 138,962 96,570 - -------------------------------------------------------------------------------- 290,588 231,247 Less accumulated depreciation and amortization ....... 105,286 96,296 - -------------------------------------------------------------------------------- $185,302 $134,951 - -------------------------------------------------------------------------------- Depreciation and amortization of premises and equipment, included in occupancy and equipment expenses, totaled $18,172,000, $13,135,000 and $11,880,000 for fiscal years ended June 30, 1999, 1998 and 1997, respectively. The Bank has operating lease commitments on certain premises and equipment. Rent expense totaled $4,489,000, $3,571,000 and $2,628,000 for fiscal years ended June 30, 1999, 1998 and 1997, respectively. Annual minimum operating lease commitments as of June 30, 1999, are as follows: 2000 - $3,975,000; 2001 - $3,705,000; 2002 - $2,899,000; 2003 - $2,141,000; 2004 - $1,474,000; 2005 and thereafter - $7,859,000. NOTE 11. INTANGIBLE ASSETS - -------------------------------------------------------------------------------- An analysis of intangible assets is summarized as follows: Core Value Goodwill of Deposits Total - -------------------------------------------------------------------------------- Balance, June 30, 1996 ................ $ 8,473 $35,980 $ 44,453 Additions relating to acquisitions .... 17,314 7,634 24,948 Amortization expense .................. (1,855) (9,380) (11,235) - -------------------------------------------------------------------------------- Balance, June 30, 1997 ................ 23,932 34,234 58,166 Additions relating to acquisitions .... 20,290 6,544 26,834 Amortization expense .................. (1,860) (5,954) (7,814) - -------------------------------------------------------------------------------- Balance, June 30, 1998 ................ 42,362 34,824 77,186 Additions relating to acquisitions .... 155,928 35,265 191,193 Amortization expense .................. (6,718) (8,984) (15,702) - -------------------------------------------------------------------------------- Balance, June 30, 1999 ................ $191,572 $61,105 $252,677 - -------------------------------------------------------------------------------- No impairment adjustment was necessary to intangible assets during fiscal years 1999, 1998 or 1997. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -61- - -------------------------------------------------------------------------------- NOTE 12. DEPOSITS - -------------------------------------------------------------------------------- Deposits at June 30 are summarized as follows:
1999 1998 ----------------------- -------------------------- Description and interest rates Amount % Amount % - ----------------------------------------------------------------------------------------------------------------- Passbook accounts (average of 3.70% and 3.93%) ......... $1,137,282 14.9% $ 990,996 15.1% NOW accounts (average of 1.20% and 1.23%) .............. 1,036,921 13.5 880,001 13.4 Market rate savings (average of 3.62% and 3.51%) ....... 909,233 11.9 640,487 9.8 - ----------------------------------------------------------------------------------------------------------------- Total savings (no stated maturities) ................... 3,083,436 40.3 2,511,484 38.3 - ----------------------------------------------------------------------------------------------------------------- Certificates of deposits: Less than 3.00% ..................................... 6,555 .1 4,894 .1 3.00% - 3.99% ..................................... 73,342 1.0 7,858 .1 4.00% - 4.99% ..................................... 1,816,539 23.7 371,298 5.7 5.00% - 5.99% ..................................... 2,310,800 30.2 2,983,982 45.5 6.00% - 6.99% ..................................... 307,487 4.0 622,235 9.5 7.00% - 7.99% ..................................... 53,311 .7 51,282 .8 8.00% - 8.99% ..................................... 3,488 - 4,273 - 9.00% and over .................................... 457 - 901 - - ----------------------------------------------------------------------------------------------------------------- Total certificates of deposit (fixed maturities; average of 5.38% and 5.81%) ......................... 4,571,979 59.7 4,046,723 61.7 - ----------------------------------------------------------------------------------------------------------------- $7,655,415 100.0% $6,558,207 100.0% - -----------------------------------------------------------------------------------------------------------------
Interest expense on deposit accounts for the years ended June 30 is summarized as follows:
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Passbook accounts ...................................................... $ 41,616 $ 39,788 $ 33,965 NOW accounts ........................................................... 12,223 10,092 10,241 Market rate savings .................................................... 26,993 18,324 17,169 Certificates of deposit ................................................ 242,026 245,548 254,228 - ----------------------------------------------------------------------------------------------------------------- $322,858 $313,752 $315,603 - -----------------------------------------------------------------------------------------------------------------
At June 30, 1999, scheduled maturities of certificates of deposit are as follows:
Year Ending June 30, ------------------------------------------------------------------------------------ Rate 2000 2001 2002 2003 2004 Thereafter Total - --------------------------------------------------------------------------------------------------------------- Less than 3.00% ........ $ 6,449 $ 15 $ 14 $ 1 $ 76 $ - $ 6,555 3.00% - 3.99% ....... 73,165 - 14 17 146 - 73,342 4.00% - 4.99% ....... 1,543,511 214,024 35,279 4,893 13,790 5,042 1,816,539 5.00% - 5.99% ....... 1,806,668 319,135 94,526 49,516 27,288 13,667 2,310,800 6.00% - 6.99% ....... 164,921 55,659 67,670 17,340 621 1,276 307,487 7.00% - 7.99% ....... 46,388 1,553 4,739 - 100 531 53,311 8.00% - 8.99% ....... 2,177 337 747 19 13 195 3,488 9.00% and over ...... 53 79 8 9 4 304 457 - --------------------------------------------------------------------------------------------------------------- $3,643,332 $590,802 $202,997 $71,795 $42,038 $21,015 $4,571,979 - ---------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -62- - -------------------------------------------------------------------------------- Certificates of deposit in amounts of $100,000 or more totaled $792,343,000 and $437,711,000, respectively, at June 30, 1999 and 1998. There were no brokered certificates of deposit at June 30, 1999 or 1998. At both June 30, 1999 and 1998, the Corporation utilized interest rate swap agreements with notional amounts totaling $215,000,000 to artificially lengthen the maturity of certain deposits. Under these requirements, 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 deposits. See Note 16 "Derivative Financial Instruments" for additional information. At June 30, 1999 and 1998, deposits of certain state and municipal agencies and other various non-retail entities were collateralized by mortgage-backed securities with carrying values of $224,733,000 and $109,235,000, respectively, and investment securities with carrying values of $84,762,000 and $85,308,000, respectively. In accordance with regulatory requirements, at June 30, 1999 and 1998, the Corporation maintained $72,285,000 and $34,038,000, 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 at June 30 as follows:
1999 1998 -------------------------------------- -------------------------- Weighted Weighted Interest Rate Average Average Scheduled Maturities Due: Range Rate Amount Rate Amount - --------------------------------------------------------------------------------------------------------------- Within 1 year ........................... 6.05% - 8.21% 6.33% $ 295,606 5.87% $ 795,207 Over 1 year to 2 years .................. 5.06 - 8.31 6.21 194,595 6.38 252,000 Over 2 years to 3 years ................. 5.38 - 6.86 6.18 328,640 6.30 170,000 Over 3 years to 4 years ................. 5.70 - 7.20 6.47 29,825 6.17 320,000 Over 4 years to 5 years ................. -- - -- -- -- 5.97 16,350 Over 5 years ............................ 3.86 - 6.55 4.70 2,783,575 5.10 825,625 - --------------------------------------------------------------------------------------------------------------- 3.86% - 8.31% 5.05% $3,632,241 5.69% $2,379,182 - ---------------------------------------------------------------------------------------------------------------
Fixed-rate advances totaling $3,046,000,000 and $1,013,000,000 at June 30, 1999 and 1998, respectively, are convertible into adjustable-rate advances at the option of the Federal Home Loan Bank. At June 30, 1999, these convertible advances had call dates ranging from July 1999 to March 2003 consisting primarily of $316,000,000 within the category of scheduled maturities due over two years to three years and $2,708,000,000 within the category due over five years. At June 30, 1999 and 1998, outstanding advances were collateralized by real estate loans totaling $3,365,770,000 and $3,045,978,000, respectively, and, in addition, at June 30, 1998, were collateralized by investment and mortgage-backed securities totaling $9,940,000 and $3,805,000, respectively. The amount of collateral at June 30, 1998, excludes qualifying loans from First Colorado, which had a blanket pledge with the Federal Home Loan Bank. 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, 1999 and 1998, holding Federal Home Loan Bank stock totaling $194,129,000 and $131,132,000, respectively. At June 30, 1999 and 1998, there were no commitments for advances from the Federal Home Loan Bank. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -63- - -------------------------------------------------------------------------------- NOTE 14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - -------------------------------------------------------------------------------- At June 30, 1999 and 1998, securities sold under agreements to repurchase identical securities totaled $128,514,000 and $334,294,000, respectively. An analysis of securities sold under agreements to repurchase identical securities for the years ended June 30 is summarized as follows: 1999 1998 - -------------------------------------------------------------------------------- Maximum month-end balance ............................. $334,294 $639,294 - -------------------------------------------------------------------------------- Average balance ....................................... $209,111 $501,979 - -------------------------------------------------------------------------------- Weighted average interest rate during the period ...... 5.94% 6.08% Weighted average interest rate at end of period ....... 5.72% 5.96% - -------------------------------------------------------------------------------- At June 30, 1999, securities sold under agreements to repurchase totaling $3,514,000 matured overnight with the remaining balance of $125,000,000 having maturities ranging from November 1999 to September 2000 with a weighted average maturity of 213 days. At June 30, 1999, mortgage-backed securities and investment securities with carrying values totaling $123,628,000 and $16,369,000, respectively, and fair values totaling $122,374,000 and $16,095,000, respectively, were pledged as collateral. At June 30, 1998, mortgage-backed securities and investment securities with carrying values totaling $262,531,000 and $79,217,000, respectively, and fair values totaling $230,501,000 and $79,449,000, respectively, 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, 1999, 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:
1999 1998 - ---------------------------------------------------------------------------------------------------------- Subordinated extendible notes, interest 7.95%, due December 1, 2006 ........ $ 50,000 $ 50,000 Guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures, interest 9.375%, due May 15, 2027 .............. 45,000 45,000 Purchase notes, adjustable interest, due July 31, 1999 ..................... 40,000 - Term note, adjustable interest, due July 31, 2003 .......................... 32,500 - Term note, adjustable interest, due September 30, 1998 ..................... - 1,000 Collateralized mortgage obligations ........................................ 3,483 6,773 Other borrowings ........................................................... 54,400 7,901 - ---------------------------------------------------------------------------------------------------------- $225,383 $110,674 - ----------------------------------------------------------------------------------------------------------
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). 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. 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 consisting of fixed-rate 9.375% cumulative trust preferred - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -64- - -------------------------------------------------------------------------------- securities (Capital Securities) due May 15, 2027. Also, effective May 14, 1997, the Corporation purchased all of the common securities (Common Securities) of the Issuer for $1,391,775. 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. 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 are 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 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. 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 Debentures mature on May 15, 2027, which may be shortened to not earlier than May 15, 2002, if certain conditions are met. 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. On July 31, 1998, the Corporation partially financed the acquisition of AmerUs with $40,000,000 of one-year purchase notes from the seller due July 31, 1999. The terms of the purchase notes require the payment of principal and interest on the maturity date. The interest rate is adjusted monthly at 150 basis points over the one-year Treasury bill rate. These notes were paid in full on July 30, 1999. On July 30, 1998, the Corporation borrowed $45,000,000 in the form of a five-year term note due July 31, 2003. Proceeds were used, in part, to finance the acquisition of AmerUs on July 31, 1998. Terms of the note require quarterly principal payments of $1,250,000 and quarterly interest payable at a monthly adjustable interest rate priced at 100 basis points below the lender's national base rate, or 6.75% at June 30, 1999. This term note, which is unsecured but subject to certain covenants, was partially paid down on November 13, 1998, by an additional $8,750,000, resulting in a balance of $32,500,000 at June 30, 1999. This note was refinanced on July 1, 1999, from the same lender with a $32,500,000 term note due June 30, 2004, and bearing interest adjusted monthly at 100 basis points below the lender's national base rate. On December 31, 1996, the Corporation borrowed $28,000,000 in the form of a five-year term note originally due December 31, 2001. Proceeds were used to refinance a short-term promissory note obtained in the financing of the repurchase of 2,812,725 shares of the Corporation's common stock. This unsecured term note carried a monthly adjustable interest rate which was 7.50% at June 30, 1998. This term note was paid in full on July 29, 1998. At June 30, 1999, notes issued in conjunction with collateralized mortgage obligations bear interest from 7.89% to 8.75% and are due in varying amounts contractually through 2019. The notes are secured by FNMA and FHLMC mortgage-backed securities with book values of approximately $9,345,000 and $13,600,000, respectively, at June 30, 1999 and 1998. As the principal balance on the collateral on these notes repay, the notes are correspondingly repaid. Other borrowings at June 30, 1999, consisted of Federal funds purchased totaling $54,400,000 bearing an interest rate of 6.06% and due July 1, 1999. Other borrowings at June 30, 1998, were collateralized by certain mortgage-backed securities and by lease-backed notes that were secured by lease financing receivables with a book value totaling $3,121,000 and restricted cash totaling $500,000. Contractual principal maturities of other borrowings as of June 30, 1999, for the next five fiscal years are as follows: 2000 - $101,116,000; 2001 - $6,556,000; 2002 - $5,211,000; 2003 - $5,000,000; 2004 - $12,500,000; 2005 and thereafter - $95,000,000. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -65- - -------------------------------------------------------------------------------- NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The following summarizes the Corporation's interest rate swap agreements, by maturity date, at June 30:
1999 1998 ------------------------------------- --------------------------------------------- Notional Interest Rate Notional Interest Rate Scheduled Maturities Due: Amount Paying Receiving Amount Paying Receiving - --------------------------------------------------------------------------------------------------------------------------- 2000 ......................... $ 75,000 6.24% 4.43% $ 75,000 6.24% 5.80% 2001 ......................... 140,000 6.00 4.77 140,000 6.00 5.29 - --------------------------------------------------------------------------------------------------------------------------- $ 215,000 6.08% 4.65% $215,000 6.08% 5.47% - ---------------------------------------------------------------------------------------------------------------------------
The Corporation began utilizing interest rate swaps to artificially lengthen the maturity of certain deposit liabilities. during fiscal year 1997. As of June 30, 1999 and 1998, the Corporation had notional amounts outstanding totaling $215,000,000 for such purposes. 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. Net interest expense on the swap agreements totaled $2,849,000, $1,926,000 and $916,000, respectively, for fiscal years 1999, 1998 and 1997. The fair value of the interest rate swaps at June 30, 1999, resulted in a loss position of approximately $2,301,000 which represents the amount that would be paid to terminate the swap agreements. The interest rate swap agreements were collateralized at June 30, 1999, by mortgage-backed securities with carrying values of $7,941,000 and at June 30, 1998, by mortgage-backed securities and investment securities with carrying values of $4,665,000 and $998,000, 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 is in a net interest receivable position at the time of potential default by the counterparties. However, at June 30, 1999 and 1998, the Corporation was in a net interest payable position. The Corporation does not anticipate nonperformance by the counterparties. At June 30, 1999 and 1998, the Corporation had interest rate floor agreements with notional amounts totaling $375,000,000 and $215,000,000, respectively. These interest rate floor agreements with strike rates ranging from 3.84% to 5.75%, are designed to hedge 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 June 2002. Premiums paid to enter into such agreements are deferred and totaled $541,000, $138,000 and $399,000, respectively, for fiscal years 1999, 1998 and 1997. During fiscal years 1999, 1998 and 1997, amortization expense on these premiums totaled $188,000, $122,000 and $67,000, respectively. In addition, during fiscal years 1999, 1998 and 1997, agreements were sold resulting in deferred gains of $135,000, $41,000 and $39,000, respectively. These deferred gains are amortized as a credit to expense and during fiscal years 1999, 1998 and 1997 totaled $109,000, $27,000 and $10,000, respectively. The deferred premiums are amortized over the lives of the respective agreements and the deferred gains are amortized over the remaining lives of the agreements sold. The fair value of the interest rate floor agreements at June 30, 1999, resulted in a gain position of approximately $249,000 which represents the amount that would be received to terminate the floor agreements. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -66- - -------------------------------------------------------------------------------- NOTE 17. INCOME TAXES - -------------------------------------------------------------------------------- The following is a comparative analysis of the provision for federal and state taxes on income: Year Ended June 30, -------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Current: Federal ............................ $42,937 $46,154 $34,508 State .............................. 3,230 3,698 3,034 - -------------------------------------------------------------------------------- 46,167 49,852 37,542 - -------------------------------------------------------------------------------- Deferred: Federal ............................ 16,789 2,188 713 State .............................. 304 316 (275) - -------------------------------------------------------------------------------- 17,093 2,504 438 - -------------------------------------------------------------------------------- Total provision for income taxes ...... $63,260 $52,356 $37,980 - -------------------------------------------------------------------------------- The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate:
Year Ended June 30, --------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Statutory federal income tax rate .............................................. 35.0% 35.0% 35.0% Nondeductible merger-related expenses and other nonrecurring charges ........... 4.9 1.8 - Amortization of discounts, premiums and intangible assets from acquisitions .... 1.4 .4 - Tax exempt interest ............................................................ (.8) (1.0) (.9) Income tax credits ............................................................. (.4) (.5) (.6) State income taxes, net of federal income tax benefit .......................... 1.5 2.0 1.8 Other items, net ............................................................... (1.0) (.2) .3 - ---------------------------------------------------------------------------------------------------------------------- Effective tax rate ............................................................. 40.6% 37.5% 35.6% - ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -67- - -------------------------------------------------------------------------------- The components of deferred tax assets and liabilities at June 30 are as follows:
1999 1998 - ------------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Federal Home Loan Bank stock ..................................................... $19,060 $14,332 Core value of acquired deposits .................................................. 11,108 6,630 Real estate investment trust deferred income ..................................... 8,803 - Deferred loan fees ............................................................... 7,632 9,703 Mortgage servicing rights ........................................................ 6,699 4,054 Differences between book and tax basis of premises and equipment ................. 6,645 6,076 Basis differences between tax and financial reporting arising from acquisitions .. 1,847 2,486 Other items ...................................................................... 6,932 5,657 - ------------------------------------------------------------------------------------------------------------------ 68,726 48,938 - ------------------------------------------------------------------------------------------------------------------ Deferred tax assets: Allowance for losses on loans and real estate not currently deductible ........... 29,945 19,192 Basis differences between tax and financial reporting arising from acquisitions .. 10,718 4,760 State operating loss carryforwards ............................................... 5,085 3,494 Employee benefits ................................................................ 2,919 3,780 Collateralized mortgage obligations .............................................. 2,584 2,738 Accretion of discounts on purchased items ........................................ 1,786 1,713 Other items ...................................................................... 5,436 6,201 - ------------------------------------------------------------------------------------------------------------------ 58,473 41,878 Valuation allowance ................................................................. (5,089) (3,582) - ------------------------------------------------------------------------------------------------------------------ 53,384 38,296 - ------------------------------------------------------------------------------------------------------------------ Net deferred tax liability .......................................................... $15,342 $10,642 - ------------------------------------------------------------------------------------------------------------------
The valuation allowance, primarily attributable to state operating loss carryforwards, was $5,089,000 at June 30, 1999, increasing from $3,582,000 at June 30, 1998, primarily due to increases in such state net operating losses available for income tax purposes. In August 1996, changes in the federal tax law repealed the reserve method of accounting for tax bad debt deductions and, effective July 1, 1996, required the Corporation to calculate the tax bad debt deduction based on actual charge-offs. These tax law changes resulted in a charge of $191,000 to income tax expense in fiscal year 1997. In accordance with provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," 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, 1999, the amount of these reserves totaled approximately $105,266,000 with an unrecognized deferred tax liability approximating $38,527,000. 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. During fiscal year 1998, the Internal Revenue Service completed its examination of the Corporation's consolidated federal income tax returns through June 30, 1995. Such examination had no effect on the Corporation's results of operations for fiscal year 1998. NOTE 18. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS - -------------------------------------------------------------------------------- Effective July 3, 1998, stockholders approved an amendment to the Corporation's Articles of Incorporation to increase the number of authorized shares of common stock to 120,000,000 shares. 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 - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -68- - -------------------------------------------------------------------------------- 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. Effective December 18, 1998, the Corporation's Shareholder Rights Plan was amended primarily to extend the expiration date of such rights to December 19, 2008, unless earlier redeemed by the Corporation. At June 30, 1999, 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. Effective April 1, 1999, the Office of Thrift Supervision (OTS) issued a final rule revising its capital distribution regulation. This revised regulation reflects the OTS's implementation of the system of prompt corrective action established under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) and conforms the OTS's capital distribution requirements more closely to those of the other banking agencies. Under the terms of this regulation, the Bank is permitted to pay capital distributions during a calendar year up to 100.0% of its retained net income (net income determined in accordance with generally accepted accounting principles less total capital distributions declared) for the current calendar year combined with the Bank's retained net income for the preceding two calendar years without prior approval of the OTS. At June 30, 1999, the Bank is permitted to pay an aggregate amount approximating $113,783,000 in dividends under this regulation. 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 2,812,725 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 repurchased shares represented 8.3% of the outstanding shares of the Corporation's common stock prior to the repurchase. Pursuant to Nebraska corporate law, the 2,812,725 shares of repurchased common stock were canceled. The Corporation also reimbursed CAI Corporation a total of $2,262,500 for costs and expenses incurred in connection with the 1995 proxy contest and the pro rata portion of the 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 in fiscal year 1997. On November 17, 1997, the Board of Directors declared a three-for-two stock split effected in the form of a 50 percent stock dividend to stockholders of record on November 28, 1997. The stock dividend was distributed on December 15, 1997, and totaled 10,865,530 shares of common stock with $109,000 transferred from additional paid-in capital to common stock to record this distribution. Fractional shares resulting from the stock split were paid in cash. Also, on November 18, 1996, the Board of Directors 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. This stock dividend, which was distributed on January 14, 1997, totaled 10,745,214 shares of common stock with $72,000 transferred from additional paid-in capital to common stock. Fractional shares resulting from the stock split were paid in cash. Effective April 28, 1999, the Board of Directors authorized the repurchase of up to five percent, or approximately 3,000,000 shares, of the Corporation's outstanding common stock during the next 18 months. As of June 30, 1999, the Corporation repurchased and cancelled 1,500,000 shares of its common stock at a cost of $36,218,000. NOTE 19. REGULATORY CAPITAL - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -69- - -------------------------------------------------------------------------------- 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 pursuant to 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 table. At June 30, 1999 and 1998, 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, 1999 ---------------------------------------------------------- Actual Capital Required Capital ----------------------- -------------------------- Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------ OTS capital adequacy: Tangible capital ...................................... $880,400 6.97% $189,412 1.50% Core capital .......................................... 890,967 7.05 379,142 3.00 Risk-based capital .................................... 957,676 13.70 559,279 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital ............................... 890,967 7.05 631,903 5.00 Tier 1 risk-based capital ............................. 890,967 12.74 419,459 6.00 Total risk-based capital .............................. 957,676 13.70 699,099 10.00 - ------------------------------------------------------------------------------------------------------------------------ As of June 30, 1998 ----------------------------------------------------------- Actual Capital Required Capital ------------------------ --------------------------- Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------ OTS capital adequacy: Tangible capital ...................................... $813,961 7.88% $154,993 1.50% Core capital .......................................... 826,686 7.99 310,278 3.00 Risk-based capital .................................... 878,363 15.49 453,593 8.00 FDICIA regulations to be classified well-capitalized: Tier 1 leverage capital ............................... 826,686 7.99 517,130 5.00 Tier 1 risk-based capital ............................. 826,686 14.58 340,195 6.00 Total risk-based capital .............................. 878,363 15.49 566,992 10.00 - ------------------------------------------------------------------------------------------------------------------------
As of June 30, 1999, 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, 1999, the Corporation issued commitments, excluding undisbursed portions of loans in process, of - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -70- - -------------------------------------------------------------------------------- approximately $771,842,000 as follows: $296,879,000 to originate loans, $106,000,000 to purchase loans, $81,500,000 to purchase investment securities, $9,953,000 to purchase mortgage-backed securities and $277,510,000 to provide unused lines of credit for commercial and consumer use. At June 30, 1998, the Corporation had issued commitments, excluding undisbursed portions of loans in process, of approximately $618,694,000 as follows: $303,823,000 to originate loans, $144,150,000 to purchase loans and $170,721,000 to provide unused lines of credit for commercial and consumer use. There were no commitments to purchase mortgage loan servicing rights at June 30, 1999 or 1998. 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, 1999 and 1998, the Corporation had approximately $77,686,000 and $392,760,000, respectively, in mandatory forward delivery commitments to sell residential mortgage loans. At June 30, 1999 and 1998, loans sold subject to recourse provisions totaled approximately $16,601,000 and $29,471,000, 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 that 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 12, 1994, the Bank and the Corporation 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 that it had entered into with the Bank. The suit alleges that such governmental action constitutes a 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 Corporation and the Bank are pursuing alternative damage claims of up to approximately $230,000,000. The Bank also assumed a lawsuit in the merger with Mid Continent against the United States also relating to a supervisory goodwill claim filed by the former Mid Continent. The litigation status and process of these legal actions, as well as that of numerous actions brought by others alleging similar claims with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank (including the Mid Continent claim) uncertain as to their 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 that may be awarded to the Bank and the Corporation if they finally prevail in this litigation. NOTE 21. EMPLOYEE BENEFIT AND INCENTIVE PLANS - -------------------------------------------------------------------------------- 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 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 $3,737,000, $2,312,000 and $1,998,000 for fiscal years ended June 30, 1999, 1998 and 1997, respectively. STOCK OPTION AND INCENTIVE PLANS The Corporation maintains the 1996 Stock Option and Incentive Plan (the 1996 Plan), the 1984 Stock Option and Incentive Plan, as amended (the 1984 Plan), and various stock option and incentive plans assumed in certain mergers since 1995. 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, stock options granted to executives vest over various periods not exceeding 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. Effective July 3, 1998, shareholders approved an amendment to the 1996 Plan to increase the number of shares available for grant by 2,400,000 shares. Such shares were registered - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -71- - -------------------------------------------------------------------------------- on July 7, 1998. The following table presents the activity of all stock option plans for each of the three fiscal years ended June 30, 1999, and the stock options outstanding at the end of the respective fiscal years:
Weighted Stock Option Average Price Aggregate Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1996 ................................ 1,595,158 $ 7.69 $12,266 Granted .................................................. 1,652,891 15.49 25,599 Exercised ................................................ (244,655) 4.93 (1,205) Canceled ................................................. (32,559) 13.15 (428) - ------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1997 ................................ 2,970,835 12.20 36,232 Granted .................................................. 744,972 33.91 25,261 Exercised ................................................ (831,300) 7.77 (6,463) Canceled ................................................. (20,251) 15.16 (307) - ------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1998 ................................ 2,864,256 19.11 54,723 Granted .................................................. 766,825 24.19 18,549 Exercised ................................................ (1,000,491) 12.78 (12,785) Canceled ................................................. (41,483) 32.32 (1,357) - ------------------------------------------------------------------------------------------------------------- Outstanding at June 30, 1999 ................................ 2,589,107 $22.84 $59,130 - ------------------------------------------------------------------------------------------------------------- Exercisable at June 30, 1999 ................................ 2,299,394 $22.49 $51,722 - ------------------------------------------------------------------------------------------------------------- Shares available for future grants at June 30, 1999: 1984 Plan ................................................ 8,600 1996 Plan ................................................ 2,546,500 - -------------------------------------------------------------------------------------------------------------
The following table summarizes information about the Corporation's stock options outstanding at June 30, 1999:
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 - --------------------------------------------------------------------------------------------------------------------------- $ 1.11 - $ 2.67 73,767 1.83 $ 2.31 73,767 $ 2.31 5.36 - 6.26 11,894 4.69 6.21 11,894 6.21 9.01 - 13.77 586,883 6.57 12.63 586,883 12.63 17.22 - 22.17 441,829 7.51 20.21 441,829 20.21 24.19 - 25.26 787,874 9.84 24.22 538,231 24.23 34.16 686,860 8.88 34.16 646,790 34.16 - --------------------------------------------------------------------------------------------------------------------------- $ 1.11 - $34.16 2,589,107 8.19 $ 22.84 2,299,394 $ 22.49 - ---------------------------------------------------------------------------------------------------------------------------
During fiscal years 1999 and 1998, non-incentive stock options for 50,000 and 55,000 shares, respectively, of the Corporation's common stock were granted under the 1996 Plan to directors of the Corporation and the Bank. Stock options under the 1984 Plan and the 1996 Plan were also granted to executives and employees during fiscal years 1999 and 1998 for 766,825 (1996 Plan) and 668,920 shares (1984 Plan - 144,239 shares and 1996 Plan - 524,681 shares), respectively. 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. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -72- - -------------------------------------------------------------------------------- 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 been determined based on the fair value at the grant dates for stock options awarded pursuant to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table.
Year Ended June 30, ---------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Net income: As reported ..................... $92,392 $87,413 $68,256 Pro forma ....................... 84,101 79,615 66,333 - -------------------------------------------------------------------------------- Earnings per share: Basic - As reported ................... $ 1.55 $ 1.55 $ 1.17 Pro forma ..................... 1.41 1.41 1.14 Diluted - As reported ................... $ 1.54 $ 1.52 $ 1.16 Pro forma ..................... 1.42 1.40 1.12 - --------------------------------------------------------------------------------
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 in fiscal years 1999, 1998 and 1997, respectively: dividend yield of 1.07%, .64% and .84%; expected volatility of 26%, 24% and 25%; risk-free interest rates of 5.50%, 5.72% and 6.62%; and expected lives of six years for the plans for each year. Restricted stock is also granted for awards earned each fiscal year under management incentive plans. On the grant dates of June 30, 1999, 1998 and 1997, the Corporation issued restricted stock for 39,072 shares, 39,494 shares and 37,761 shares, respectively, with an aggregate market value of $906,000, $1,249,000, and $935,000, 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 $1,887,000, $1,944,000, and $1,435,000, at June 30, 1999, 1998 and 1997, 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 $960,000, $731,000 and $531,000 for fiscal years 1999, 1998 and 1997, respectively. First Colorado, Liberty, Mid Continent and Perpetual had certain deferred compensation, retirement and incentive plans that were effectively terminated after acquisition by the Corporation. During fiscal years 1999 and 1998 these plans were in the process of final distribution of plan assets to participants with all appropriate unearned compensation and employer contributions recognized as charges to operations in the respective fiscal years. POSTRETIREMENT BENEFITS The Corporation recognizes the cost of providing postretirement benefits other than pensions over the employee's period of service. The determination of the accrual liability requires a calculation of the accumulated postretirement benefit obligation (APBO) which represents the actuarial present value of postretirement benefits to be paid out in the future (primarily 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 table on the following page reconciles the status of the plan with the amounts recognized in the Consolidated Statement of Financial Condition at June 30, 1999 and 1998. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -73- - --------------------------------------------------------------------------------
1999 1998 - ----------------------------------------------------------------------------------------------- Change in benefit obligation: APBO at the beginning of the year ............................. $ 906 $1,110 Service cost - benefits earned during the fiscal year ......... 47 63 Interest cost on benefit obligation ........................... 57 81 Actuarial (gain) loss ......................................... 269 (317) Retiree contributions ......................................... 111 92 Benefits paid ................................................. (280) (123) - ----------------------------------------------------------------------------------------------- APBO at the end of the year ................................... $ 1,110 $ 906 - ----------------------------------------------------------------------------------------------- Change in the fair value of plan assets: Fair value of plan assets at the beginning of the year ........ $ - $ - Retiree contributions ......................................... 111 92 Employer contributions ........................................ 169 31 Benefits paid ................................................. (280) (123) - ----------------------------------------------------------------------------------------------- Fair value of plan assets at the end of the year .............. $ - $ - - ----------------------------------------------------------------------------------------------- Funded status of the plan: Funded status at the beginning of the year .................... $(1,110) $ (906) Unrecognized prior service cost ............................... (259) (288) Unrecognized net loss ......................................... 533 276 - ----------------------------------------------------------------------------------------------- Accrued postretirement benefit cost at the end of the year included in other liabilities ................... $ (836) $ (918) - -----------------------------------------------------------------------------------------------
The following sets forth the components of the net periodic postretirement benefit cost for the fiscal years ended June 30:
1999 1998 1997 - -------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the fiscal year ................. $ 47 $ 63 $105 Interest cost on accumulated postretirement benefit obligation ........ 57 81 99 Amortization (accretion) of net loss (gain) ........................... (17) 4 40 - -------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit expense ........................... $ 87 $148 $244 - --------------------------------------------------------------------------------------------------------------
The weighted average discount rate used to determine the APBO was 7.0%, 7.0% and 7.75%, respectively, for fiscal years ended June 30, 1999, 1998 and 1997. The assumed health care cost trend rate used in measuring the APBO as of July 1, 1998, was 8.0% decreasing gradually until it reaches 5.0% in 2008, when it remains constant. Assumed health care cost trend rates have a significant effect on the amounts reported for the Corporation's health benefit plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
One-Percentage Point Increase Decrease - ------------------------------------------------------------------------------------------------- Total service and interest cost components for fiscal year 1999 ......... $15 $(12) APBO as of June 30, 1999 ................................................ $71 $(66) - -------------------------------------------------------------------------------------------------
The Corporation 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). At June 30, 1999, 1998 and 1997, the accrued postretirement benefit cost included in other liabilities totaled $337,000, $220,000 and $125,000, respectively, and the net postretirement benefit cost charged to operations totaled $117,000, $95,000 and $92,000 for the respective fiscal years. The weighted average discount rate used to determine the accrued postretirement benefit cost was 7.0%, 7.0% and 7.75%, respectively, for fiscal years ended June 30, 1999, 1998 and 1997, and the assumed annual rate of increase for compensation was 3.0% for the last three fiscal years. - -------------------------------------------------------------------------------- COMMERCIAL CORPORATION CORPORATION - -74- - -------------------------------------------------------------------------------- NOTE 22. FINANCIAL INFORMATION (PARENT COMPANY ONLY) - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF FINANCIAL CONDITION - ------------------------------------------
June 30, ---------------------------- ASSETS 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Cash ............................................................................ $ 10,412 $ 40,005 Other assets .................................................................... 4,600 26,959 Intangible asset ................................................................ - 6,730 Equity in CFC Preferred Trust ................................................... 1,392 1,392 Equity in Commercial Federal Bank ............................................... 1,130,201 889,233 - ------------------------------------------------------------------------------------------------------------------ Total Assets ................................................................. $1,146,605 $964,319 - ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------ Liabilities: Other liabilities ............................................................ $ 10,830 $ 5,732 Unsecured promissory term note ............................................... 72,500 1,000 Subordinated extendible notes ................................................ 50,000 50,000 Junior subordinated deferrable interest debentures ........................... 46,392 46,392 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities .......................................................... 179,722 103,124 - ------------------------------------------------------------------------------------------------------------------ Stockholders' Equity ............................................................ 966,883 861,195 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity ................................... $1,146,605 $964,319 - ------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS - --------------------------------- Year Ended June 30, --------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Revenues: Dividend income from the Bank ....................................... $67,904 $47,627 $42,993 Interest income ..................................................... 2,373 3,157 4,992 Other income ........................................................ 362 1,711 1,475 Expenses: Interest expense .................................................... (13,175) (9,329) (8,586) Operating expenses .................................................. (8,557) (9,286) (7,566) - ------------------------------------------------------------------------------------------------------------------ Income before income taxes, extraordinary items and equity in undistributed earnings of subsidiaries ................ 48,907 33,880 33,308 Income tax benefit ..................................................... (4,042) (3,719) (2,965) - ------------------------------------------------------------------------------------------------------------------ Income before extraordinary items and equity in undistributed earnings of subsidiaries ................ 52,949 37,599 36,273 Extraordinary items, net of tax benefit ................................ - - (583) - ------------------------------------------------------------------------------------------------------------------ Income before equity in undistributed earnings of subsidiaries ......... 52,949 37,599 35,690 Equity in undistributed earnings of subsidiaries ....................... 39,443 49,814 32,566 - ------------------------------------------------------------------------------------------------------------------ Net income ............................................................. $92,392 $87,413 $68,256 - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -75- - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS - ---------------------------------
Year Ended June 30, ---------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ Net income ............................................................. $ 92,392 $ 87,413 $ 68,256 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 .................. (39,443) (49,814) (32,566) Other items, net .................................................. 16,639 (31) 2,342 - ------------------------------------------------------------------------------------------------------------------ Total adjustments ............................................... (22,804) (49,845) (29,641) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities ..................... 69,588 37,568 38,615 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES - ------------------------------------------------------------------------------------------------------------------ Purchase of stock of and cash distributions into the Bank .............. - (426) (17,157) Purchase of common securities of CFC Preferred Trust ................... - - (1,392) Payments for acquisitions .............................................. (179,556) - - Other items, net ....................................................... 2,479 11,373 30,094 - ------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities .............. (177,077) 10,947 11,545 - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES - ------------------------------------------------------------------------------------------------------------------ Proceeds from issuance of subordinated extendible notes, net ........... - - 48,500 Proceeds from issuance of notes payable ................................ 85,000 - 55,000 Payment of senior and subordinated notes ............................... - - (47,150) Payment of notes payable ............................................... (13,500) (40,395) (24,293) Proceeds from issuance of junior subordinated deferrable interest debentures ............................................................ - - 46,392 Payments for debt issue costs .......................................... - - (2,218) Repurchases of common stock ............................................ (36,218) (1,886) (86,299) Issuance of common stock ............................................... 45,095 6,519 4,000 Proceeds from loan repayments from employee stock ownership plans ...... 11,058 - - Payment of cash dividends on common stock .............................. (13,539) (16,147) (12,354) Other items, net ....................................................... - 204 (2,678) - ------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities .............. 77,896 (51,705) (21,100) - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS - ------------------------------------------------------------------------------------------------------------------ Increase (decrease) in net cash position ............................... (29,593) (3,190) 29,060 Balance, beginning of year ............................................. 40,005 43,379 13,753 Adjustments to convert acquisitions to fiscal year end ................. - (184) 566 - ------------------------------------------------------------------------------------------------------------------ Balance, end of year ................................................... $ 10,412 $ 40,005 $ 43,379 - ------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - ------------------------------------------------------------------------------------------------------------------ Cash paid during the period for: Interest expense .................................................... $ 10,722 $ 9,651 $ 7,129 Income taxes, net ................................................... 54,249 51,366 23,645 Non-cash investing and financing activities: Common stock issued in connection with the acquisitions of businesses ......................................................... - 32,267 19,420 Common stock received in connection with employee benefit plans, net ................................................................ (475) (4,180) (320) - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -76- - -------------------------------------------------------------------------------- NOTE 23. SEGMENT INFORMATION - -------------------------------------------------------------------------------- The Corporation has identified two distinct lines of business operations for the purposes of management reporting: Community Banking and Mortgage Banking. These segments were determined based on the Corporation's financial accounting and reporting processes with insurance and securities brokerage operations aggregated with Community Banking. Management makes operating decisions and assesses performance based on a continuous review of these two primary operations. The Community Banking segment involves a variety of traditional banking and financial services. These services include retail banking services, consumer checking and savings accounts, and loans for consumer, commercial real estate, residential mortgage and business purposes. Also included in this segment is insurance and securities brokerage services. The Community Banking services are offered through the Bank's branch network, including traditional offices, supermarkets and convenience stores, ATMs, 24-hour telephone centers and the Internet. Community Banking is also responsible for the Corporation's investment and mortgage-backed securities portfolios and the corresponding management of deposits, advances from the FHLB and certain other borrowings. The Mortgage Banking segment involves the origination and purchase of residential mortgage loans, the sale of such mortgage loans in the secondary mortgage market, the servicing of mortgage loans and the purchase and origination of rights to service mortgage loans. Mortgage Banking operations are conducted through the Bank's branches, offices of a mortgage banking subsidiary and a nationwide correspondent network of mortgage loan originators. The Bank allocates expenses to the Mortgage Banking operation on terms that are not necessarily indicative of those which would be negotiated between unrelated parties. The Mortgage Banking segment also 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. All of these losses are deferred by the Bank and amortized over the estimated life of the loans the Bank purchased. The Parent Company includes interest income earned on intercompany cash balances and intercompany transactions, interest expense on Parent Company debt and operating expenses for general corporate purposes. The contribution of the major business segments to the consolidated results for the last three fiscal years ended June 30 is summarized in the following table:
Community Mortgage Parent Eliminations/ Consolidated Banking Banking Company Adjustments Total - ------------------------------------------------------------------------------------------------------------------ FISCAL 1999: Net interest income (loss) ............... $ 312,502 $ 11,075 $ (10,802) $ 19,558 $ 332,333 Provision for loan and lease losses ...... 11,980 420 - - 12,400 Non-interest income ...................... 95,020 52,535 107,709 (153,729) 101,535 Total other expense ...................... 224,578 33,069 8,557 (388) 265,816 Net income before income taxes ........... 170,964 30,121 88,350 (133,783) 155,652 Income tax provision (benefit) ........... 57,474 9,828 (4,042) - 63,260 Net income ............................... 113,490 20,293 92,392 (133,783) 92,392 - ------------------------------------------------------------------------------------------------------------------ Total revenue ............................ 909,055 64,228 110,082 (142,476) 940,889 Intersegment revenue ..................... 33,764 6,952 109,034 Depreciation and amortization ............ 16,382 1,760 30 - 18,172 Total assets ............................. 12,909,398 282,374 1,146,605 (1,562,915) 12,775,462 - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -77- - --------------------------------------------------------------------------------
Community Mortgage Parent Eliminations/ Consolidated Banking Banking Company Adjustments Total - ------------------------------------------------------------------------------------------------------------------ FISCAL 1998: Net interest income (loss) ............... $ 255,535 $ 13,778 $ (6,172) $ 17,158 $ 280,299 Provision for loan and lease losses ...... 13,433 420 - - 13,853 Non-interest income ...................... 93,453 48,610 99,152 (143,694) 97,521 Total other expense ...................... 187,926 29,854 9,286 (2,868) 224,198 Net income before income taxes ........... 147,629 32,114 83,694 (123,668) 139,769 Income tax provision (benefit) ........... 45,214 10,862 (3,719) (1) 52,356 Net income ............................... 102,415 21,252 87,413 (123,667) 87,413 - ------------------------------------------------------------------------------------------------------------------ Total revenue ............................ 820,667 72,439 102,309 (140,206) 855,209 Intersegment revenue ..................... 19,769 18,271 100,505 Depreciation and amortization ............ 11,628 1,497 10 - 13,135 Total assets ............................. 10,550,020 440,052 964,319 (1,555,162) 10,399,229 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1997: Net interest income (loss) ............... $ 235,892 $ 11,060 $ (3,594) $ 20,265 $ 263,623 Provision for loan and lease losses ...... 13,007 420 - - 13,427 Non-interest income ...................... 79,834 44,831 77,034 (120,431) 81,268 Total other expense ...................... 193,176 25,080 7,566 (1,177) 224,645 Net income before income taxes and extraordinary items ............... 109,543 30,391 65,874 (98,989) 106,819 Income tax provision (benefit) ........... 30,257 10,688 (2,965) - 37,980 Income before extraordinary items ........ 79,286 19,703 68,839 (98,989) 68,839 Extraordinary items, net of tax benefit .. - - (583) - (583) Net income ............................... 79,286 19,703 68,256 (98,989) 68,256 - ------------------------------------------------------------------------------------------------------------------ Total revenue ............................ 764,819 61,180 82,026 (109,165) 798,860 Intersegment revenue ..................... 16,170 19,504 80,517 Depreciation and amortization ............ 10,365 1,515 - - 11,880 Total assets ............................. 9,941,503 171,312 907,923 (980,142) 10,040,596 - ------------------------------------------------------------------------------------------------------------------
NOTE 24. MERGER EXPENSES AND OTHER NONRECURRING CHARGES - -------------------------------------------------------------------------------- During fiscal years 1999 and 1998 the Corporation incurred merger expenses and other nonrecurring charges totaling $30,043,000 and $29,729,000, respectively. Such amounts for fiscal year 1999 are associated with the First Colorado acquisition and the termination of three employee stock ownership plans (ESOP) acquired in mergers during the past two fiscal years. The Corporation recorded merger-related charges totaling $13,954,000 from the termination of the three acquired ESOPs. These plans were terminated as soon as possible following consummation of the mergers and receipt of determination letters from the Internal Revenue Service to terminate such plans. During the third quarter of fiscal year 1999 the related outstanding loans totaling $11,058,000 associated with these plans were repaid from the respective ESOP trusts to the Corporation. The remaining amount of unallocated shares with a market value of $13,954,000 was distributed to plan participants during the fourth quarter of fiscal year 1999. The amounts for fiscal year 1998 are due to the Liberty, Mid Continent and Perpetual acquisitions and the accelerated amortization of certain computer systems and software necessitated by Year 2000 compliance and the related planned systems conversions. The Corporation finalized its plans for systems conversions and Year 2000 compliance in fiscal year 1998 resulting in a reduction in the estimated useful lives of such computer systems and software. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -78- - -------------------------------------------------------------------------------- These merger expenses incurred in fiscal years 1999 and 1998 are detailed in the following table. Other nonrecurring items not classified in the merger expenses category of general and administrative expenses are noted parenthetically where such items are included in the Corporation's Consolidated Statement of Operations.
Year Ended June 30, ---------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Merger expenses: Termination of employee stock ownership plans ...................................... $13,954 $ - $ - Transaction costs relating to the combinations ..................................... 8,015 8,992 - Employee severance and other termination costs ..................................... 1,449 6,555 - Costs to combine operations ........................................................ 6,499 2,487 - - --------------------------------------------------------------------------------------------------------------------------- 29,917 18,034 - - --------------------------------------------------------------------------------------------------------------------------- Other nonrecurring items: Additional loan loss reserves - (provision for loan and lease losses) .............. 1,000 3,931 - Gain on sale of First Colorado branch - (other operating income) ................... (1,076) - - Reserves on leasing operations - (other operating income) .......................... - 597 - Accelerated amortization of computer systems and software - (data processing) ...... - 4,314 - Conforming accounting practices of combining companies - (compensation and benefits) ......................................................................... 202 489 - Conforming accounting practices of combining companies - (other operating expenses) ......................................................................... - 2,364 - - --------------------------------------------------------------------------------------------------------------------------- 126 11,695 - - --------------------------------------------------------------------------------------------------------------------------- Total merger expenses and other nonrecurring items, before taxes ...................... 30,043 29,729 - Income tax benefit, net ............................................................... (2,954) (8,291) - - --------------------------------------------------------------------------------------------------------------------------- Total merger expenses and other nonrecurring items, after-tax ......................... $27,089 $21,438 $ - - ---------------------------------------------------------------------------------------------------------------------------
NOTE 25. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT - -------------------------------------------------------------------------------- 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. Such assessment, at the rate of .657%, was imposed to increase the reserve levels of the SAIF to 1.25% of insured deposits. On September 30, 1996, the Corporation recorded an after-tax charge of $23,079,000 ($36,061,000 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 .064% of insured deposits effective January 1, 1997. NOTE 26. LOSS ON EARLY RETIREMENT OF DEBT - -------------------------------------------------------------------------------- In fiscal year 1997, the Corporation recognized extraordinary losses of $583,000 (net of income tax benefits totaling $316,000), or $.01 loss per share, primarily as a result of the early retirement of the 10.25% subordinated debt totaling $40,250,000 originally due December 15, 1999, and the 10.0% senior notes totaling $6,900,000 originally 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 that was retired from the proceeds of the $50,000,000 subordinated extendible notes offering completed December 2, 1996. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -79- - -------------------------------------------------------------------------------- NOTE 27. 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 1999: Total interest income .................................. $220,706 $216,072 $203,715 $198,861 Net interest income .................................... 88,856 87,442 81,415 74,620 Provision for loan and lease losses .................... (2,800) (2,800) (3,000) (3,800) Gain on sales of securities and loans, net ............. 30 883 3,293 3,593 Net income ............................................. 29,874 16,169 31,226 15,123 Earnings per common share: Basic ............................................... .49 .27 .53 .26 Diluted ............................................. .49 .27 .52 .25 Dividends declared per share ........................... .065 .065 .065 .055 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1998: Total interest income .................................. $190,317 $189,573 $189,974 $187,824 Net interest income .................................... 72,575 71,463 68,618 67,643 Provision for loan and lease losses .................... (3,389) (2,817) (5,959) (1,688) Gain on sales of securities, loans and loan servicing rights, net ...................... 2,717 830 2,733 957 Net income ............................................. 22,375 13,628 25,455 25,955 Earnings per common share: Basic ............................................... .39 .24 .46 .47 Diluted ............................................. .38 .23 .45 .46 Dividends declared per share ........................... .055 .055 .055 .047 - ------------------------------------------------------------------------------------------------------------------ FISCAL 1997: Total interest income .................................. $184,449 $178,932 $180,380 $173,831 Net interest income .................................... 67,807 66,860 66,384 62,572 Provision for loan and lease losses .................... (3,836) (3,617) (3,540) (2,434) Gain on sales of securities and loans, net ............. 661 840 755 396 Net income ............................................. 24,690 19,868 21,184 2,514 Earnings (loss) per common share: Basic - Income before extraordinary items ................. .44 .34 .37 .04 Extraordinary items, net of tax benefit ........... - - (.01) - Net income ........................................ .44 .34 .36 .04 Diluted - Income before extraordinary items ................. .43 .34 .36 .04 Extraordinary items, net of tax benefit ........... - - (.01) - Net income ........................................ .43 .34 .35 .04 Dividends declared per share ........................... .047 .047 .047 .045 - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -80- - -------------------------------------------------------------------------------- NOTE 28. 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, 1999 and 1998, as more fully described in the following discussion. 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 following presentation of fair values. The following presents the carrying value and fair value of the specified assets and liabilities held by the Corporation at June 30, 1999 and 1998. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors.
1999 1998 ----------------------- -------------------------- Carrying Fair Carrying Fair SELECTED ASSETS Value Value Value Value - ------------------------------------------------------------------------------------------------------------------ Cash (including short-term investments) .............. $ 353,275 $ 353,275 $ 217,012 $ 217,012 Investment securities ................................ 946,571 930,616 673,304 674,194 Mortgage-backed securities ........................... 1,282,545 1,269,195 1,091,849 1,093,435 Loans and leases receivable, net ..................... 9,326,393 9,533,833 7,857,276 8,238,331 Federal Home Loan Bank stock ......................... 194,129 194,129 131,132 131,132 - ------------------------------------------------------------------------------------------------------------------ SELECTED LIABILITIES - ------------------------------------------------------------------------------------------------------------------ Deposits: Passbook accounts ................................. 1,137,282 1,137,282 990,996 990,996 NOW checking accounts ............................. 1,036,921 1,036,921 880,001 880,001 Market rate savings accounts ...................... 909,233 909,233 640,487 640,487 Certificates of deposit ........................... 4,571,979 4,556,506 4,046,723 4,039,474 - ------------------------------------------------------------------------------------------------------------------ Total deposits .................................. 7,655,415 7,639,942 6,558,207 6,550,958 Advances from Federal Home Loan Bank ................. 3,632,241 3,591,178 2,379,182 2,379,991 Securities sold under agreements to repurchase ....... 128,514 128,341 334,294 334,460 Other borrowings ..................................... 225,383 225,201 110,674 114,140 - ------------------------------------------------------------------------------------------------------------------ OFF-BALANCE SHEET INSTRUMENTS - ------------------------------------------------------------------------------------------------------------------ Derivative financial instruments ..................... 498 (2,052) 204 (3,133) 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, 1999 and 1998. CASH AND SHORT-TERM INVESTMENTS The book value of cash and short-term investments is assumed to approximate the fair value of such assets. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -81- - -------------------------------------------------------------------------------- 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 utilized quotes for similar or identical securities in an actively traded market, where such a market exists, or obtained quotes from independent security brokers to determine the fair value of such assets. LOANS AND LEASES RECEIVABLE, NET The fair value of loans and leases receivable was estimated by discounting the future cash flows using the current market rates at which similar loans and leases would be made to borrowers with similar credit ratings and for similar remaining maturities. When using the discounting method to determine fair value, loans and leases were gathered by homogeneous groups with similar terms and conditions and discounted at derived current market rates or rates at which similar loans and leases would be made to borrowers as of June 30, 1999 and 1998. The fair value of loans held for sale was determined from quoted market prices for such loans based on their intended final investment form, which are generally agency mortgage-backed securities. In addition, when computing the estimated fair value for all loans and leases, allowances for loan and lease losses were 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, NOW checking accounts and market rate savings accounts fair value is determined to approximate the carrying value (the amount payable on demand) since such deposits are primarily withdrawable immediately; (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, 1999 and 1998, offered on certificates of deposit with similar maturities. In accordance with the 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, 1999 and 1998, 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, 1999 and 1998, over the contractual maturity of such borrowings. OTHER BORROWINGS Included in other borrowings at June 30, 1999 and 1998, 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, with the fair value of such borrowings based on quoted market prices or dealer quotes. 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, 1999 and 1998, over the contractual maturity of such other borrowings. 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 and the estimated amount that would be received to terminate the floor agreements. COMMITMENTS The commitments to originate and purchase loans have terms that are consistent with current market terms. Since primarily all outstanding commitments are short-term or adjustable rate, the fair value of the commitments is not material for disclosure. 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 - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -82- - -------------------------------------------------------------------------------- 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, 1999 and 1998, are not intended to represent the underlying value of the Corporation, on either a going concern or a liquidation basis. NOTE 29. CURRENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement requires the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. The accounting for gains and losses associated with changes in the fair value of a derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value or cash flows of the asset or liability hedged. Under the provisions of SFAS No. 133, the method that will be used for assessing the effectiveness of a hedging derivative, as well as the measurement approach for determining the ineffective aspects of the hedge, must be established at the inception of the hedge. The methods must be consistent with the entity's approach to managing risk. SFAS No. 133 was effective for all fiscal quarters of fiscal years beginning after June 15, 1999. However, on July 7, 1999, the FASB issued Statement of Financial Accounting Standards No. 137 entitled "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS No. 137). This statement delays the effective date of SFAS No. 133 for one year, or for all fiscal quarters of fiscal years beginning after June 15, 2000, with initial application as of the beginning of any fiscal quarter that begins after issuance. On that initial application date, hedging relationships must be designated anew and documented pursuant to the provisions of SFAS No. 133. Management of the Corporation has not determined the effect, if any, that the adoption of this statement will have on the Corporation's financial position, liquidity or results of operations. Management of the Corporation has not determined when to adopt the provisions of SFAS No. 133. ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE In October 1998, the FASB issued Statement of Financial Accounting Standards No. 134 entitled "Accounting for Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65" (SFAS No. 134). FASB Statement No. 65, as amended by FASB Statements No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed security as a trading security. SFAS No. 134 further amends Statement No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This Statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. The provisions of SFAS No. 134 are effective as of July 1, 1999, for the Corporation. On the date that SFAS No. 134 is initially applied, an enterprise may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. Those securities and other interests shall be classified based on the entity's ability and intent, on the date this statement is initially applied, to hold those investments. Transfers from the trading category that result from implementing this statement will be accounted for in accordance with the provisions of SFAS Statement No. 115. Management of the Corporation does not believe that the adoption of SFAS No. 134 will have a material effect on the Corporation's financial position, liquidity or results of operations. - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION -83- - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION BOARD OF DIRECTORS AND COMMERCIAL FEDERAL BANK BOARD OF DIRECTORS WILLIAM A. FITZGERALD Chairman of the Board and Chief Executive Officer Commercial Federal Corporation TALTON K. ANDERSON President Baxter Chrysler Plymouth Inc. MICHAEL P. GLINSKY Retired Executive Vice President and CFO US WEST, Inc. ROBERT F. KROHN Vice Chairman and CEO PSI Group, Inc. CARL G. MAMMEL Chairman Mammel & Associates ROBERT S. MILLIGAN President MI Industries JAMES P. O'DONNELL Executive Vice President, CFO and Corporate Secretary ConAgra, Inc. ROBERT D. TAYLOR CEO Executive Aircraft Corporation ALDO J. TESI Former Group President First Data Resources Card Enterprise Group COMMERCIAL FEDERAL BANK BOARD OF DIRECTORS SHARON G. MARVIN Real Estate Consultant NP Dodge Company MICHAEL T. O'NEIL, M.D. Orthopedic Surgeon Private Practice EXECUTIVE OFFICERS OF THE BANK WILLIAM A. FITZGERALD Chairman of the Board and Chief Executive Officer JAMES A. LAPHEN President and Chief Operating Officer GARY L. MATTER Executive Vice President, Controller and Secretary JOY J. NARZISI Executive Vice President and Treasurer Lending/Asset Management ROGER L. LEWIS Executive Vice President Corporate Marketing RUSSELL G. OLSON Executive Vice President Community Banking GARY D. WHITE Executive Vice President Corporate Services - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION - -84- - -------------------------------------------------------------------------------- SENIOR VICE PRESIDENTS R. HAL BAILEY Construction Lending GARY L. BAUGH Special Projects RICK A. CAMPBELL Mortgage Operations THOMAS J. HROMATKA Bank Operations LAUREN W. KINGRY Commercial Banking KEVIN C. PARKS Audit/Compliance/Security THOMAS N. PERKINS Acquisitions and Expansion JON W. STEPHENSON Retail Banking TERRY A. TAGGART State President - Colorado FIRST VICE PRESIDENTS RONALD A. AALSETH Insurance and Brokerage Services PAMELA J. ACUFF Human Resources MARGARET E. ASH Customer Service MELISSA M. BEUMLER Marketing RONALD P. CHEFFER Commercial Underwriting MONTE M. DEERE State President - Oklahoma NEIL W. FELL State President - Iowa LARRY R. GODDARD Investor Relations JOHN J. GRIFFITH Community Investment ROBERT E. GRUWELL Treasury MICHAEL J. HOFFMAN In-Store Branch Banking JAMES C. PALMER Mortgage Loan Servicing DOUGLAS D. PULLIN Consumer Lending ROBERT W. RICHARDS Construction Lending/ Income Property JAMES M. ROONEY Systems & Technology HAROLD G. SIEMENS Correspondent Lending WILLIAM M. TANK, JR. State President - Nebraska MICHAEL J. WALTS State President - Kansas DENNIS R. ZIMMERMAN Information Services - -------------------------------------------------------------------------------- COMMERCIAL FEDERAL CORPORATION INVESTOR INFORMATION CORPORATE HEADQUARTERS Commercial Federal Corporation Commercial Federal Tower 2120 S. 72nd Street Omaha, NE 68124 GENERAL COUNSEL Fitzgerald, Schorr, Barmettler, Brennan 1100 Woodmen Tower Omaha, NE 68102 CORPORATE COUNSEL Housley Kantarian & Bronstein, P.C. 1220 19th Street, N.W. Suite 700 Washington, D.C. 20036 Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 INDEPENDENT AUDITORS Deloitte & Touche LLP 2000 First National Center Omaha, NE 68102 INVESTOR RELATIONS AND SHAREHOLDER SERVICES 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 Shareholders desiring to change the address or ownership of stock, report lost certificates or to consolidate accounts should contact Commercial Federal's Transfer Agent: Shareowner Services P.O.Box 64854 St. Paul, MN 55164-0865 Telephone 800-468-9716 DIVIDEND REINVESTMENT PLAN The Company maintains a Dividend Reinvestment Plan which offers shareholders a convenient and inexpensive way to increase their holdings of common stock in Commercial Federal Corporation. The Plan is available to all registered shareholders of the Company. To obtain information about the Plan, contact Shareowner Services at 800-468-9716. ANNUAL MEETING OF SHAREHOLDERS The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday, November 16, 1999. 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 abbreviation "Comrcl Fed" in the NYSE listings. VISIT COMMERCIAL FEDERAL ON THE INTERNET www.comfedbank.com For press releases, financial information, and services available. EX-21 4 SUBSIDIARIES OF THE CORPORATION Exhibit 21 Subsidiaries of the Corporation EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION - -------------------------------------------
Percent State of Parent Company Subsidiaries Owned Incorporation - ----------------------------------------------- ---------------------------- ------------------ ------------------------ Commercial Federal Corporation Commercial Federal Bank, 100% Nebraska a Federal Savings Bank CFC Preferred Trust 100% Delaware Liberty Mortgage Store, 100% Iowa Inc. (1) (4) Commercial Federal Bank, Commercial Federal 100% Nebraska a Federal Savings Bank Mortgage Corporation Commercial Federal 100% Nebraska Investment Services, Inc. Commercial Federal 100% Nebraska Insurance Corporation Commercial Federal 100% Nebraska Service Corporation Empire Capital 100% Colorado Corporation I Tower Title & Escrow 80% Nebraska Company Roxborough Acquisition 100% Nebraska Corporation CFT Company 100% Nebraska Liberty Leasing Company (1) 100% Iowa AmerUs Leasing 100% Iowa Corporation (2) First Savings Securities 100% California Corporation (3) First Savings Investment 100% Colorado Corporation (3)
EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION - -------------------------------------------
Percent State of Parent Company Subsidiaries Owned Incorporation - ----------------------------------------------- ---------------------------- ------------------ ------------------------ Commercial Federal Service Commercial Federal 100% Nebraska Corporation Realty Investors Corporation Commercial Federal 100% Nebraska Affordable Housing, Inc. Community Service, Inc 100% Kansas Commercial Federal Insurance ComFed Insurance Services 100% British Corporation Company, Limited Virgin Islands First Savings Insurance, 100% Colorado Inc. (3) (4) Commercial Federal Investment AmerUs 100% Iowa Services, Inc. Investments, Inc. (2) Liberty Leasing Company Liberty Leasing Funding 100% Iowa Corporation I (1) (4) Liberty Leasing Funding 100% Iowa Corporation II (1) Liberty Leasing Funding 100% Iowa Corporation III (1)
- -------------------------------------------------------------------------------- (1) Acquired in the acquisition of Liberty Financial Corporation. (2) Acquired in the acquisition of AmerUs Bank. (3) Acquired in the acquisition of First Colorado Bancorp, Inc. (4) In process of dissolution. 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 1999: - ----------------------------------------------- K101 First United Insurance Co. Greatland Financial Services, Inc. Laredo Investments, Inc. Liberty Insurance, Inc. Liberty Loan Store, Inc. Liberty Marketing, Inc. Liberty Services, Inc. - -------------------------------------------------------------------------------- EX-23 5 CONSENT OF INDEPENDENT AUDITORS 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. 333-58607,333-49967,333-45613,333-42817,333-20739,33-63629,33-63221, 33- 60448,33-39762,33-36708, 33-31685,33-21068,33-05616 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 12, 1999, incorporated by reference in the Annual Report on Form 10-K of Commercial Federal Corporation for the year ended June 30, 1999. /s/ Deloitte & Touche LLP Omaha, Nebraska September 24, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. US DOLLARS 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 1 313,690 0 39,585 0 503,518 1,725,598 1,696,293 9,326,393 80,419 12,775,462 7,655,415 500,236 167,026 3,485,902 596 0 0 966,287 12,775,462 700,911 138,443 0 839,354 322,858 507,021 332,333 12,400 4,376 265,816 155,652 155,652 0 0 92,392 1.55 1.54 2.99 70,015 0 9,729 0 64,757 15,760 3,674 80,419 6,503 0 73,916
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