SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
------------------------------------------------------
- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------- -----------------
Commission file number: 0-27126
-------
First Colorado Bancorp, Inc.
(Exact name of Registrant as specified in its charter)
Colorado 84-1320788
- -------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
of incorporation or organization) identification no.)
215 S. Wadsworth Boulevard, Lakewood Colorado 80226
--------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 232-2121
--------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of class)
Indicate by check mark whether 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 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. [ ]
Registrant's voting stock trades on the Nasdaq National Market System
under the symbol "FFBA." The aggregate market value of the voting stock held by
non-affiliates of registrant, based upon the closing price of such stock as of
March 24, 1998 ($28.4375 per share), was $478.5 million.
As of March 24, 1998, registrant had 16,826,798 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of registrant's Annual Report to Stockholders
for the fiscal year ended December 31, 1997.
2. Part III -- Portions of registrant's Proxy Statement for Annual Meeting of
Stockholders to be held on May 4, 1998.
<PAGE>
PART I
Item 1. Business
- -----------------
Business of the Company
First Colorado Bancorp, Inc. (the "Company") is a Colorado corporation
organized in September 1995, at the direction of the Board of Directors of the
First Federal Bank of Colorado (the "Bank") to facilitate the conversion of
First Savings Capital, M.H.C. (the "Mutual Holding Company") from the mutual to
stock form of ownership and to acquire and hold all of the capital stock of the
Bank (collectively, the "Conversion and Reorganization"). Prior to the
consummation of the Conversion and Reorganization, the Mutual Holding Company
was the majority stockholder of the Bank and upon consummation of the Conversion
and Reorganization, the Mutual Holding Company was merged with and into the
Bank. The Company acquired the Bank as a wholly owned subsidiary upon the
consummation of the Conversion and Reorganization on December 29, 1995. In
connection with the Conversion and Reorganization, the Company sold 13,403,798
shares of its common stock to the public in an initial public offering (the
"Offering") and issued 6,619,539 shares in exchange for the outstanding shares
of the Bank held by persons other than the Mutual Holding Company. As of
December 31, 1997, the Company had total assets of $1.6 billion, total deposits
of $1.2 billion, and stockholders' equity of $209.3 million, or 13.5% of total
assets.
The primary activity of the Company is holding the common stock of the
Bank. The Company is therefore a unitary savings and loan holding company. The
Company has no significant assets other than all of the outstanding shares of
Bank Common Stock, the note evidencing the Company's $10.5 million loan to the
Bank's Employee Stock Ownership Plan ("ESOP") and the portion of the net
proceeds from the Offering retained by the Company, which have been invested in
a $3.6 million loan to the Bank and in deposits in the Bank and in a stock
repurchase program resulting in the repurchase of 3.7 million shares of Company
common stock for $58.9 million (3.3 million shares with a cost of $53.6 million
at December 31, 1997). The Company neither owns nor leases any property, but
instead uses the premises, equipment and furniture of the Bank. At the present
time, the Company does not intend to employ any persons other than executive
officers who are also executive officers of the Bank, and the Company will
utilize the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands or changes its
business in the future.
Management believes that the holding company structure will provide the
Company with additional flexibility to diversify, should it decide to do so, its
business activities through existing or newly formed subsidiaries, or through
acquisitions of or mergers with other financial institutions and financial
services related companies.
Proposed Merger with Commercial Federal Corporation
On March 9, 1998, the Company approved an Agreement of Merger and
Reorganization ("Merger Agreement") with Commercial Federal Corporation whereby
the Company will merge with Commercial Federal Corporation and each share of the
Company's common stock will be exchanged for a certain amount of Commercial
Federal Corporation common stock in accordance with the Merger Agreement (the
"Merger"). The Merger will be submitted for approval by the stockholders of the
1
<PAGE>
Company at a special meeting of stockholders anticipated to be held later in
1998. There can be no assurance that all conditions contained in the Merger
Agreement (including approval by the stockholders of the Company and Commercial
Federal Corporation, and regulatory approval) will be met.
Business of the Bank
The Bank is a federally-chartered stock savings bank, originally
chartered by the State of Colorado as the Cooperative Building and Loan
Association on April 25, 1885. In connection with the Conversion and
Reorganization, the Bank changed its name from First Federal Savings Bank of
Colorado to its current name and became a wholly owned subsidiary of the
Company. The Bank is believed to be the oldest savings institution headquartered
in Colorado. A federal charter was granted to the Bank in 1934, the same year
that deposit accounts became federally insured and the Bank became a member of
the Federal Home Loan Bank ("FHLB") System. The Bank's deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association
Insurance Fund ("SAIF"), and the Bank is regulated by the Office of Thrift
Supervision ("OTS").
The principal business of the Bank is the acceptance of savings
deposits from the general public and the origination and purchase of mortgage
loans for the purpose of constructing, financing or refinancing one-to-four
family residences and other improved residential and commercial real estate. The
Bank is also active in the origination of home equity loans. The Bank's income
is derived largely from interest on interest-earning assets such as loans,
mortgage-backed securities and investments. Its principal expenses are interest
paid on deposits and borrowings, operating expenses and provisions for loan
losses.
Year 2000 Compliance
The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed and is repairing its computer applications and business processes to
provide for their continued functionality. An assessment of external entities
which it interfaces with, such as vendors, counterparties, customers, payment
systems, and others, is ongoing. Until such assessments are complete, it is not
possible to predict the affect on the Company of noncompliance by external
entities.
The Company expects that the principal costs will be those associated
with the remediation and testing of its computer applications. This effort is
under way and is following a process of inventory, scoping and analysis,
modification, testing and certification, and implementation. A major portion of
these costs will be met from existing resources through a reprioritization of
technology development initiatives, with the remainder representing incremental
costs.
The Company does not anticipate that the related overall costs will be
material to any single year.
Market Area and Competition
The Bank is authorized to make real estate loans throughout the United
States. The Bank's primary lending area is the Denver metropolitan area and the
Western Slope of Colorado communities served by the Bank's offices in Grand
Junction, Delta and Montrose. The Bank has no significant loan concentrations in
any one part of its primary lending area.
2
<PAGE>
The Colorado real estate market was generally depressed in the
mid-to-late 1980's. The market, however, has shown improvement in the 1990's,
but whether the recovery will continue is dependent upon general economic
conditions, not just in Colorado, but in the United States as a whole.
The Bank faces strong competition in its attraction of savings
deposits, which are its primary source of funds for lending, and in the
origination of real estate loans. The Bank's competition for savings deposits
and loans historically has come from other thrift institutions and commercial
banks located in the Bank's market area. The Bank also competes with mortgage
banking companies for real estate loans, and faces competition for investor
funds from short-term money market securities and corporate and government
securities. During recent periods the Bank has also experienced withdrawals of
deposit funds which it believes are being invested in the stock market.
The Bank considers its primary market area to consist of the following
Colorado counties: Denver, Adams, Arapahoe, Jefferson, Boulder, Douglas, Mesa,
Delta and Montrose.
The Bank competes for loans by charging competitive interest rates and
loan fees, remaining efficient and providing a wide range of services to its
customers. The Bank's goal is to be the best "consumer bank" in the area it
serves. The Bank offers all consumer banking services such as checking accounts,
certificates of deposit, retirement accounts, consumer and mortgage loans and
ancillary services such as safe deposit boxes, convenient offices and drive-up
facilities, automated teller machines, credit cards, check guarantee cards, and
overdraft protection. These services help the Bank compete for deposits. The
Bank offers competitive rates on deposits but does not attempt to pay the
highest rates in its market area.
Based upon total assets, the Bank was the largest thrift institution
based in the State of Colorado as of December 31, 1997. As of December 31, 1997,
one other thrift institution and 46 commercial banks were headquartered in the
Denver metropolitan area. The Bank also competes with several other larger
financial institutions, headquartered outside of Colorado, which maintain
offices in the Bank's market area. These competitors may be able to offer better
loan rates from time to time due to their size, financial resources, and
competitive strategy.
Legislative and regulatory measures in the past two decades have
significantly expanded the range of services which thrift institutions can offer
the public, such as demand deposits, trust services and consumer and commercial
lending. These changes, combined with increasingly sophisticated depositors,
have dramatically increased competition for savings dollars among thrift
institutions and other types of investment entities, as well as with commercial
banks in regard to loans, checking accounts and other types of financial
services. In addition, large conglomerates and investment banking firms have
entered the market for financial services. Such legislation has increased the
competition between commercial banks and thrift institutions by allowing banks
to acquire healthy thrift institutions, imposing similar capital requirements on
banks and thrift institutions, and placing certain investment and other
regulatory restrictions on thrift institutions which are similar to those
imposed on banks. Thus, in the future, the Bank, like other thrift institutions,
will face increased competition to provide savings and lending services and, in
order to remain competitive, will have to be innovative and knowledgeable about
its market, as well as to continue to exert effective controls over its costs.
3
<PAGE>
Investment Strategy
The Bank has adopted an investment strategy designed to help control
the Bank's interest rate risk, while maintaining profitability and reducing
credit risk. The Bank invests its funds primarily in mortgage loans receivable
and mortgage products, such as mortgage-backed securities and asset-backed
securities. The Bank's strategy is to first invest its funds in loans secured by
real estate located in its primary market area. The Bank's first priority is to
originate adjustable rate mortgage ("ARM") loans, predominately on residential
properties and to a lesser extent on commercial real estate, whenever possible
for its own portfolio. The Bank also originates for its own portfolio 15 year
fixed-rate residential mortgages on which interest is paid on a bi-weekly basis.
These mortgages have a relatively short average life of approximately 12 years,
and help reduce the Bank's long term interest rate risk. When interest rates are
rising, the demand for ARM loans increases. When the Bank is unable to originate
a sufficient amount of ARM loans or 15 year fixed-rate mortgage loans, the Bank
purchases ARM loans in the secondary market. When whole ARM loans are not
available in the secondary market, the Bank's third priority is to purchase
mortgage-backed securities backed by ARM loans or other acceptable mortgage
collateral. Pending such purchases, the Bank invests its funds in short-term
investments, such as U.S. government and agency securities, asset-backed
securities, non-government securities and corporate bonds rated AAA or higher,
and certificates of deposit.
The Bank's net interest income will vary, depending upon the difference
between the amount of income that it receives from its loan, mortgage-backed
securities and investment portfolios and its cost of funds. A significant
portion of the Bank's loan portfolio consists of long-term real estate loans and
mortgage-backed securities with interest rate features which, while variable to
some degree, do not vary as rapidly or to the same extent as the Bank's cost of
funds. Consequently, the Bank is vulnerable to future increases in interest
rates which, if significant, may have a material adverse affect on its financial
condition and results of operations.
In order to reduce the Bank's interest rate risk exposure, the Bank has
sold essentially all fixed-rate 30 year mortgage loans it originates into the
secondary market. The Bank has also developed its consumer lending,
concentrating in the area of home equity loans. This strategy is designed to
improve and stabilize its operational results to counter the volatile cost of
its funds and the mismatch between its relatively long-term, fixed-rate assets
and short-term, rate sensitive liabilities. The principal objective of this
strategy is to restructure assets to lessen the potential adverse effects of
interest rate volatility on earnings, while maintaining high quality (low credit
risk) assets and improving profits.
For further information, see "Management's Discussion of 1997 Results"
in the Annual Report to Stockholders for the year ended December 31, 1997.
Lending and Mortgage-Backed Securities Activities
Loan and Mortgage-Backed Securities Portfolio Composition. The Bank's
loan and mortgage-backed securities portfolio composition consists primarily of
conventional fixed-rate and adjustable-rate first mortgage loans secured by
one-to-four family residences and, to a lesser extent, multi-family residences
and commercial real estate. As of December 31, 1997, the Bank's total net
portfolio of loans and mortgage-backed and other asset-backed securities
outstanding (the "loan portfolio") was $1,381.0 million, of which $1,213.1
million, or 87.8% was secured by one-to-four family residential dwellings. At
that same date, $74.6 million, or 5.4% of the loan portfolio was secured by
multi-family dwellings, and $80.1 million, or 5.8% of the loan portfolio was
secured by non-residential commercial real estate.
4
<PAGE>
The Bank is active in making second mortgage loans on one-to-four
family residential properties, which constituted $147.4 million, or 10.7% of the
loan portfolio at December 31, 1997. To a lesser extent, the Bank originates
construction loans, primarily for one-to-four family residential properties, and
at December 31, 1997, such loans constituted $16.1 million or 1.2% of the loan
portfolio. The Bank does not actively offer commercial business loans, and at
December 31, 1997, such loans constituted $314,000 or 0.02% of the loan
portfolio.
Mortgage loans in the Bank's portfolio generally include due-on-sale
clauses that provide the Bank with the contractual right to deem the loan
immediately due and payable in the event that the borrower transfers ownership
of the property without the Bank's consent.
The Bank also invests in mortgage and other asset-backed securities. As
of December 31, 1997, total mortgage/asset-backed securities aggregated $216.4
million, or 15.7% of the Bank's loan portfolio. A portion of the mortgage-backed
securities portfolio as of December 31, 1997 was insured or guaranteed as to
principal by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") or the Government National Mortgage
Association ("GNMA").
5
<PAGE>
Analysis of Loan and Mortgage-Backed Securities Portfolios. Set forth
below is selected data relating to the composition of the Bank's loan and
mortgage-backed securities portfolios by type of loan and type of security on
the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------------- --------------------- ------------------- ------------------------------------------
Balance Percent Balance Percent Balance Percent Balance Percent Balance Percent
------- ------- ------------ -------- ---------- -------- ---------- -------- ----------- --------
Type of Loan: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conventional,
VA and FHA real estate
loans(1):
Construction............ $ 16,822 1.62% $ 28,525 2.45% $ 30,731 2.47% $ 27,931 2.08% $ 16,098 1.17%
One- to four-family..... 458,311 44.05 567,621 48.78 736,240 59.28 855,992 63.75 964,629 69.85
Multi-family............ 71,361 6.86 76,217 6.55 71,965 5.79 73,543 5.48 70,388 5.10
Nonresidential.......... 50,943 4.90 70,695 6.08 67,329 5.42 66,918 4.98 70,909 5.13
Commercial loans.......... 174 0.02 271 0.02 491 0.04 283 0.02 314 0.02
Consumer loans:
Savings account......... 4,392 0.42 3,731 0.32 4,657 0.37 5,252 0.39 5,028 0.36
Home improvement........ 12,737 1.22 19,053 1.64 23,356 1.88 30,403 2.27 30,516 2.21
Automobile.............. 5,270 .51 7,263 0.62 8,404 0.68 10.233 0.76 7,511 0.54
Unsecured open-end...... 1,537 .15 1,744 0.15 4,415 0.36 5,099 0.38 4,918 0.36
Other................... 585 .05 937 0.08 1,090 0.09 1,498 0.11 3,813 0.28
Less:
Loans in process........ (7,083) (0.75) (9,056) (0.78) (11,440) (0.92) (9,758) (0.73) (4,650) (0.34)
Deferred loan
origination
fees and costs........ (4,211) (0.41) (3,748) (0.32) (3,153) (0.25) (2,020) (0.15) (156) (0.01)
Allowance for
loan losses........... (3,575) (0.34) (3,310) (0.28) (2,926) (0.24) (3,850) (0.29) (4,716) (0.34)
--------- -------- --------- ------ --------- ----- --------- ----- ---------- ------
Total loans, net...... 606,543 58.30% 759,943 65.31% 931,159 74.97% 1,061,524 79.05% 1,164,602 84.33
--------- ------- --------- ------ --------- ----- --------- ------ --------- ------
Mortgage- and asset-
backed securities, net.. 433,870 41.70% 403,694 34.69% 310,886 25.03% 281,289 20.95% 216,382 15.67%
--------- ------ --------- ----- --------- ----- --------- ------ --------- ------
Loans and mortgage -
and asset-backed
securities, net......$1,040,413 100.00% $1,163,637 100.00% $1,242,045 100.00% $1,342,813 100.00% $1,380,984 100.00%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======
</TABLE>
- --------------------------
(1) Includes first mortgage and home equity loans.
6
<PAGE>
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans
secured by one-to-four family residences in the Bank's primary lending area.
Typically, such residences are single family homes that serve as the primary
residence of the owner. As of December 31, 1997, 87.8% of the Bank's loans and
mortgage-backed and other asset-backed securities receivable were secured by
one-to-four family residential real estate mortgages. The Bank currently offers
ARM loans with interest rates that adjust every six months with a maximum rate
increase cap of 1% per adjustment, and a lifetime rate increase cap of 4% to 6%.
Some of these ARM loans are fixed for three or five years with rates adjusting
semi-annually or annually after the initial term. The interest rates on the
Bank's ARM loans are based primarily on the one-year U.S. Treasury Constant
Maturity Treasury rate. As of December 31, 1997, six month, one year and three
year ARM loans originated by the Bank constituted 79.4%, 17.0%, and 3.6% of the
originated ARM loan portfolio, respectively. ARM loans are originated for a term
of up to 30 years. The Bank generally originates one-to-four family residential
mortgage loans in amounts up to 85% of the appraised value of the mortgaged
property, but will consider loan-to-value ratios of up to 97% if the loan amount
exceeding the 85% loan-to-value ratio is insured by a private mortgage insurance
("PMI") company. The Bank usually charges an origination fee of 0.5% (1/2 point)
of the loan amount on one to-four family ARM loans. Even in the current economic
environment which has caused a decrease in the overall level of interest rates,
the Bank continues to see significant interest in ARM loans. The Bank retains
the ARM loans it originates for its loan portfolio.
The Bank also offers 10, 12, 15 and 30 year fixed rate mortgage loans.
Interest rates charged on fixed rate loans are competitively priced based on the
FNMA/FHLMC daily pricing of one-to-four family mortgages. Loan origination fees
on these loans are generally 0.75% to 1.0% of the loan amount. One type of fixed
rate 15 year mortgage loan offered by the Bank is the bi-weekly loan, which
features bi-weekly mortgage payments. These bi-weekly payments cause the
principal of the mortgage loan to be repaid more rapidly than traditional 15
year mortgage loans and therefore cause the borrower to pay less interest during
the lifetime of the bi-weekly loan than would be paid for a traditional 15 year
mortgage loan made at the same interest rate. The Bank currently retains all
loans with terms of less than 15 years to maturity, regular amortized, and all
15 year bi-weekly loans, for its loan portfolio and attempts to sell its fixed
rate non-biweekly loans of 15 years and more and its bi-weekly loans with terms
of more than 15 years in the secondary market.
The Bank originates second mortgage loans and home equity loans secured
by one-to-four family residences. These loans generally are originated as fixed
rate loans with terms of from five to ten years. An origination fee is charged
on non-owner occupied properties, while most of these loans are originated for
costs only. The loans are generally subject to an 80% combined loan-to-value
limitation, including any other outstanding mortgages or liens. The Bank's most
popular second mortgage loan is a ten year fixed rate loan which is originated
for retention in the Bank's loan portfolio. Based upon experience, these loans
have an average life of 6.6 years. The Bank also originates a revolving line of
credit secured by one-to-four family residences. As of December 31, 1997 home
equity loans constituted 10.7% of the Bank's loan portfolio.
Multi-Family Mortgage Loans. The Bank originates, to a limited extent,
fixed rate and adjustable rate multi-family mortgage loans secured primarily by
apartment buildings located in its primary lending area. As of December 31,
1997, $74.6 million, or 5.4% of the Bank's loan portfolio consisted of
multi-family residential loans. These loans are generally made in amounts up to
75% of the appraised value of the mortgaged property. In making such loans, the
Bank evaluates the mortgage primarily on the net operating income generated by
the real estate to support the debt service. The Bank also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, the marketability of the property and
the Bank's lending experience, if any, with the
7
<PAGE>
borrower. An origination fee of 1% to 2% is usually charged on such loans. The
largest multi-family loan as of December 31, 1997, had an outstanding balance of
$3.1 million and was secured by a 182 unit retirement center located in the
Denver metropolitan area.
Commercial Real Estate. The Bank also originates commercial real estate
loans secured by properties located within its primary market area. The Bank's
commercial real estate loans are permanent loans secured by improved property
such as office buildings, retail stores, including shopping malls, industrial
facilities and other non-residential buildings. The Bank generally originates
commercial real estate loans with terms of 10 to 15 years and balances generally
under $2.0 million. As of December 31, 1997, the Bank had loans secured by
commercial real estate totalling $80.1 million, or 5.8% of the Bank's loan
portfolio. Eighteen of the commercial real estate loans had principal balances
outstanding of over $1.0 million as of December 31, 1997. The largest commercial
real estate loan was secured by a bank building in Wheatridge, Colorado, with a
loan balance of $3.7 million at December 31, 1997. Commercial real estate loans
are generally originated in amounts ranging from 65% to 75% of the appraised
value of the mortgaged property. The Bank makes both adjustable and fixed rate
commercial real estate loans. The adjustable rate loans have amortization terms
of up to 20 years, and most have balloon payments after 10 years. The rate of
interest on these loans is tied to either the prime rate or the Constant
Maturity Treasury Index. Fixed rate commercial real estate loans generally have
10 to 15 year terms, and some are balloon loans.
Construction Loans. The Bank's construction loan portfolio consists
primarily of residential construction loans with initial terms of six months to
one year. Land acquisition and development loans are also made on a limited
basis. The construction loans made by the Bank have an adjustable rate tied to
the prime rate, adjusted monthly. Generally, such loans are repaid or refinanced
by permanent loans when the property is completed or sold. A majority of
construction loans are made on properties that are presold. Construction loans
constituted $16.1 million, or 1.2% of the Bank's loan portfolio as of December
31, 1997.
Consumer Loans. Federal savings associations are permitted to make
secured and unsecured consumer loans up to 35% of their assets. In addition, a
savings association has lending authority above the 35% category for certain
consumer loans, such as home equity loans, property improvement loans, mobile
home loans and loans secured by savings accounts. Consumer loans, including home
improvement loans, amounted to 51.8 million, or 3.8% of the Bank's loan
portfolio as of December 31, 1997.
The Bank has engaged in consumer lending for the past 18 years and had
a specialized consumer loan department for 12 years. The Bank's consumer lending
consists primarily of home equity loans secured by one-to-four family
residential properties. These loans are described above under "- One-to- Four
Family Mortgage Loans" and are included in the table describing the Bank's loan
portfolio as loans secured by one-to-four family residential property. The Bank
also offers unsecured consumer loans, unsecured lines of credit, savings account
loans, and automobile loans.
Commercial Business Loans. Regulations authorize the Bank to make
secured or unsecured loans for commercial, corporate, business and agricultural
purposes. The aggregate amount of such loans outstanding may not exceed 10% of
the Bank's assets. In addition, another 10% of total assets may be invested in
commercial equipment leasing. The Bank does not actively offer commercial
business loans. As of December 31, 1997, $314,000, or 0.02% of the Bank's loan
portfolio was classified as commercial business loans.
8
<PAGE>
Loan Underwriting Risks. While commercial real estate, construction,
commercial business and consumer loans provide benefits to the Bank's
asset/liability management program and reduce exposure to interest rate changes,
such loans may entail significant additional credit and interest rate risks
compared to residential mortgage lending. Commercial real estate and
construction mortgage loans may involve large loan balances to single borrowers
or groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of the properties and thus may be subject to a greater extent to
adverse conditions in the real estate market or in the general economy.
Construction lending is generally considered to involve a higher level of credit
risk than one-to-four family residential lending due to the concentration of
principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developers and managers. Construction loans
may involve additional risks attributable to the fact that loan funds are
advanced upon the security of the project under construction. Moreover, because
of the uncertainties inherent in estimating construction costs, delays arising
from labor problems, material shortages, and other unpredictable contingencies,
it is relatively difficult to evaluate accurately the total loan funds required
to complete a project, and related loan-to-value ratios. Because of these
factors, the analysis of prospective construction loan projects requires an
expertise that is different in significant respects from the expertise required
for residential mortgage lending. The Bank seeks to minimize these risks by
lending primarily to established customers and generally restricting such loans
to its primary market area. Consumer loans have historically tended to have a
higher rate of default than residential mortgage loans, although the Bank's loan
loss experience to date on consumer loans has been favorable in comparison to
industry averages.
There are, due to the unseasoned nature of ARM loans in the industry,
risks resulting from increased costs to the borrower as a result of periodic
repricing. Despite the benefits of ARM loans to the Bank's asset/liability
management program, ARMs pose potential additional credit risks, primarily
because as interest rates rise, the underlying payment by the borrower rises,
increasing the potential for default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest rates.
Mortgage-Backed and Other Asset-Backed Securities. The Bank's
mortgage-backed securities, or pass-through certificates, represent a
participation interest in a pool of single-family mortgages, the principal and
interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interest in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies that guarantee the payment of principal
and interest to investors include the FHLMC, GNMA, or the FNMA. Pass- through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, (i.e., fixed rate or
adjustable rate) as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Mortgage- backed securities issued by FHLMC, FNMA
and GNMA make up a majority of the pass-through market. Generally, the Bank
purchases mortgage-backed securities guaranteed by GNMA and FNMA and
participation certificates issued by the FHLMC. GNMA mortgage-backed securities
are certificates issued and backed by the GNMA and are secured by interests in
pools of mortgages which are fully insured by the Federal Housing Administration
("FHA") or partially guaranteed by the Veterans' Administration ("VA"). FHLMC
mortgage-backed securities are participation certificates issued and guaranteed
by the
9
<PAGE>
FHLMC and secured by interests in pools of conventional mortgages originated by
savings associations. See "- Investment Activities" regarding the Bank's
investment in structured notes.
Mortgage-backed securities provide for monthly payments of principal
and interest and generally have contractual maturities ranging from five to
thirty years. However, due to expected repayment terms being significantly less
than the underlying mortgage loan pool contractual maturities, the estimated
lives of these securities could be significantly shorter.
The Bank also purchases mortgage-backed securities and collateralized
mortgage obligations ("CMOs") issued by government agencies, private issuers and
financial institutions, some of which are qualified under the Internal Revenue
Code of 1986, as amended (the "Code") as Real Estate Mortgage Investment
Conduits ("REMICs"). CMOs and REMICs (collectively CMOs) have been developed in
response to investor concerns regarding the uncertainty of cash flows associated
with the prepayment option of the underlying mortgagor and are typically issued
by governmental agencies, governmental sponsored enterprises and special purpose
entities, such as trusts, corporations or partnerships, established by financial
institutions or other similar institutions. Some CMO instruments are most like
traditional debt instruments because they have stated principal amounts and
traditionally defined interest-rate terms. Purchasers of certain other CMO
instruments are entitled to the excess, if any, of the issuer's cash inflows,
including reinvestment earnings, over the cash outflows for debt service and
administrative expenses. These mortgage related instruments may include
instruments designated as residual interests, which represent an equity
ownership interest in the underlying collateral, subject to the first lien of
the investors in the other classes of the CMO. Certain residual CMO interests
may be riskier than many regular CMO interests to the extent that they could
result in the loss of a portion of the original investment. Moreover, cash flows
from residual interests are very sensitive to prepayments and, thus, contain a
high degree of interest-rate risk.
At December 31, 1997, all of the Bank's investment in CMOs consisted of
regular interests. As of December 31, 1997, the Bank's CMOs did not include any
residual interests or interest-only or principal-only securities. As a matter of
policy, the Bank does not invest in residual interests of CMOs or interest-only
and principal-only securities. The CMOs held by the Bank at December 31, 1997
consisted of floating rate and fixed rate tranches. The interest rate of a
majority of the Bank's floating-rate securities adjusts monthly and provides the
institution with net interest margin protection in an increasing market interest
rate environment. The securities are backed by mortgages on one-to-four family
residential real estate and have contractual maturities up to 30 years. The
securities are primarily PACs and TACs (Planned and Targeted Amortization
Classes) which are designed to provide a specific principal and interest
cash-flow.
Privately issued CMOs tend to have greater prepayment and credit risk
than those issued by government agencies or government sponsored enterprises
(e.g., FHLMC, FNMA, and GNMA) generally because they often are secured by jumbo
loans (i.e., loans with aggregate outstanding balances above the limit for
purchases by FHLMC or FNMA). At December 31, 1997, the Bank had CMOs with an
aggregate carrying amount (including discounts and premiums) of $163.6 million,
of which $135.0 million, or 82.5% were privately issued. To minimize the credit
risk of private issued CMOs, the Bank only purchases those CMOs rated AA or
better by one of the rating agencies.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed and
related securities are more liquid than individual mortgage loans and may be
used to collateralize borrowings of the Bank in the event that the Bank
determined to utilize borrowings as a
10
<PAGE>
source of funds. Mortgage-backed securities insured or guaranteed by the GNMA,
FNMA or the FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20.0% for risk-based capital purposes,
compared to a weight of 50.0% to 100.0% for residential loans.
See "Regulation of the Bank - Regulatory Capital Requirements."
During the most recent declining interest rate environment, the Bank
experienced significant prepayments of both fixed- and adjustable-rate
mortgage-backed securities. Such circumstances generally make it difficult for
the Bank to reinvest the cash flow from these securities into comparable
yielding investments, thereby decreasing its yield.
As of December 31, 1997, government insured or guaranteed
mortgage-backed securities and CMOs amounted to $54.5 million or 3.9% of the
loan portfolio, and $161.9 million or 11.7% of the loan portfolio, respectively.
The CMOs purchased by the Bank are generally in the first or second tranche
priorities with a two to five year average life based upon prepayment schedules
and carried a weighted average coupon of 6.53% and a weighted average expected
maturity of 51 months as of December 31, 1997.
In addition, the Bank periodically purchases AAA-rated asset-backed
securities, generally secured by credit card receivables and automobile loans.
The Bank's investment policy limits the maturity of these securities to an
average life of three years. No asset-backed securities were included in the
Bank's loan portfolio as of December 31, 1997.
The following table presents the Bank's mortgage-backed and
asset-backed securities at the dates indicated. Securities classified
held-to-maturity and available-for-sale are carried at amortized cost and market
value, respectively.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1995 1996 1997
-------- ---------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Federal Home Loan Mortgage
Corporation................................................. $ 39,168 $ 47,366 $ 29,631
Federal National Mortgage Association.......................... 23,263 30,862 23,787
Government National Mortgage Association ...................... 520 419 285
Collateralized mortgage obligations and
other mortgage-backed securities............................ 243,024 200,004 161,505
Asset-backed securities........................................ 2,292 -- --
-------- ---------- --------
308,267 278,651 215,208
Allowance for losses........................................... (171) (181) (153)
Unamortized premiums, net...................................... 2,790 2,819 1,327
-------- -------- --------
Total..................................................... $310,886 $281,289 $216,382
======= ======= =======
</TABLE>
During periods of rising mortgage interest rates, if the coupon rates
of the underlying mortgages are less than the prevailing market interest rates
offered for mortgage loans, refinancings generally decrease and slow the
prepayment of the underlying mortgages and the related securities. Conversely,
during periods of falling mortgage interest rates, if the coupon rates of the
underlying mortgages exceed the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and
11
<PAGE>
accelerates the prepayment of the underlying mortgages and the related
securities. Under such circumstances, the Bank may be subject to reinvestment
risk because to the extent that the Bank's mortgage-related securities amortize
or prepay faster than anticipated, the Bank may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate. The declining
yields earned during recent periods is a direct response to falling interest
rates in fiscal 1993 and the first part of fiscal 1994 as well as to accelerated
prepayments. At December 31, 1997, of the $216.4 million of mortgage-backed
securities (including CMOs), $131.7 million were secured by fixed-rate
securities and $84.7 million were secured by adjustable-rate securities.
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current law have
lending limits in an amount equal to 15% of unimpaired capital and unimpaired
surplus on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral. However, the Bank's policy has been to limit loans to a
single borrower to 10% of capital and to require approval of the Board of
Directors for aggregation of loans to one borrower greater than $1 million. As
of December 31, 1997, the Bank's loan to one borrower limit was $20.9 million.
The lending limits to one borrower has not adversely affected the Bank's ability
to conduct its operations, particularly because it does not typically make real
estate development and construction loans which carry large balances. The
largest aggregation of loans to one borrower at December 31, 1997 was $8.0
million consisting of one construction loan, five land acquisition and
development loans, one office building loan and five single family loans. The
second largest aggregation of loans to one borrower was $6.1 million secured by
four office and retail properties in the Denver metropolitan area. The third
largest aggregation of loans to one borrower was $5.9 million secured by 10
office and retail properties in the Denver metropolitan area. The fourth largest
aggregation of loans to one borrower was $5.8 million secured by ten apartment
properties in Boulder, Colorado. The fifth largest aggregation of loans to one
borrower was $5.6 million secured by four apartment properties in the Denver
metropolitan area.
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1997, regarding the dollar amount of loans,
mortgage-backed securities, and asset-backed securities in the Bank's portfolio
based on their maturities. The table includes scheduled principal payments and
estimated prepayments, which totalled $250.9 million, $307.6 million and $341.0
million for the years ended December 31, 1995, 1996, and 1997, respectively.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Adjustable and
floating rate loans are included in the period in which they mature, and fixed
rate loans are included in the period in which the final contractual payment is
due.
12
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------
Over One Over Over Five
Through Three Through
One Year Three Through Ten Over Ten
or Less Years Five Years Years Years Total
------- ----- ---------- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
1-4 family first mortgage loans:
Adjustable rate.......................... $195,330 $219,757 $112,715 $122,784 $ 77,127 $ 727,713
Fixed rate............................... 85,530 113,357 83,680 101,074 22,689 406,330
Other residential and all
nonresidential:
Adjustable rate......................... 3,918 8,847 10,390 85,205 3,773 112,133
Fixed rate............................... 5,290 3,024 3,562 18,899 -- 30,775
Second mortgage and home equity loans...... 20,397 32,206 26,290 9,301 -- 88,194
Consumer loans............................. 7,732 9,868 1,374 256 -- 19,230
Commercial business loans.................. 98 216 -- -- -- 314
Deferred loan origination
fees and costs........................... -- -- -- -- -- 1,172
Allowance for loan and MBS loss............ -- -- -- -- -- (4,877)
------- ------- -------- -------- -------- ----------
Loans and mortgage-backed
and other asset-backed
securities, net.......................... $318,295 $387,275 $238,011 $337,519 $103,589 $1,380,984
======= ======= ======= ======= ======= =========
</TABLE>
The following table sets forth the dollar amount of all loans and
mortgage-backed and asset- backed securities due after December 31, 1997, that
have pre-determined (or fixed) interest rates and which have floating or
adjustable interest rates.
Fixed Adjustable
Rate Rate
---- ----
(In Thousands)
Real estate mortgage............. $346,285 $640,598
Second mortgage.................. 67,797 --
Consumer......................... 11,498 --
Commercial....................... 216 --
------- -------
Total........................... $425,796 $640,598
======= =======
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing or past customers, customer referrals, real
estate brokers, contractors, and call-ins and walk-ins to its offices. The Bank
has loan officers who originate mortgage, consumer, commercial real estate and
construction loans. The Bank also advertises in local newspapers for first and
second mortgage loans, home equity and consumer loans. One-to-four family
residential mortgage loans are also originated in areas of Colorado where the
Bank does not have offices through loan originators who are independent
contractors and are compensated on a commission basis. Since 1994, the Bank has
used these independent contractors to originate a significant volume of
one-to-four family mortgage loans in the Denver metropolitan area. Loan
applications originated by independent loan originators are in compliance with
the Bank's underwriting policies and procedures. For the years ended December
31, 1995, 1996
13
<PAGE>
and 1997, loans originated through independent loan originators approximated
$152.7 million, $135.6 million, and $145.8, respectively.
Upon receipt of any loan application from a prospective borrower, a
credit report and other documentation are ordered to confirm specific
information relating to the loan applicant's employment, income, and credit
standing. An appraisal or other evaluation of the real estate intended to secure
the proposed loan is obtained. In connection with the loan approval process, the
Bank's loan officers analyze the loan applications and the property involved.
All residential, multi-family, construction, and commercial real estate loans
are processed at the Bank's main office, while home equity and other types of
consumer loans may be processed at any of the Bank's offices. Residential first
mortgage loans of up to $400,000 may be approved (with varying dollar
limitations) by one of seven underwriters designated by the Board of Directors.
Residential first mortgage loans over $400,000 also require the approval of the
Bank's President or the Chief Executive Officer. Construction and commercial
real estate loans up to $400,000 may be approved by a specific senior vice
president; loans for over $400,000 up to $750,000 also require the approval of
the President. Construction and commercial real estate loans for over $750,000
require the approval of the Chief Executive Officer, and those for $1.0 million
or more require the approval of the Board of Directors or the Executive
Committee of the Board of Directors. All loans purchased by the Bank are
reviewed by senior lending officers. In connection with loans purchased by the
Bank, the Bank requires an appraisal, in addition to the information required
for all loans originated by the Bank.
Loan applicants are promptly notified of the decision of the Bank
orally or by a letter setting forth the terms and conditions of the decision. If
approved, these terms and conditions include the amount of the loan, interest
rate basis, amortization term, a brief description of real estate to be
mortgaged to the Bank, and the notice of requirement of insurance coverage to be
maintained to protect the Bank's interest. The Bank requires title, fire,
casualty and flood (if applicable) insurance on all properties securing loans,
which insurance must be maintained during the entire term of the loan. In
certain instances where the Bank is making a small second mortgage, and the Bank
holds the performing first mortgage, it may not require a title policy, but the
Bank does require certain informal assurances that there are no other liens
superior to the second mortgage.
Loan Purchases and Sales. The Bank originates adjustable rate and less
than 15 year fixed rate residential mortgage loans, commercial real estate
loans, and construction loans for retention in its loan portfolio and sells
fixed rate residential mortgage loans with terms of 15 years or longer in the
secondary market. These loans are sold without recourse by the Bank. The Bank
also purchases mortgage-backed securities and adjustable rate residential
mortgage loans in the secondary market.
The Bank's purchases in the secondary market are dependent upon the
demand for mortgage credit in the local market area and the inflow of funds from
traditional sources. Purchases of loans enable the Bank to utilize available
funds more quickly and to obtain a yield higher than could generally be obtained
in the alternative investment vehicles. The purchase of such loans is part of
the Bank's strategy to make its overall loan portfolio more sensitive to current
market conditions and interest rates.
The Bank purchases owner-occupied residential first mortgage ARM loans
that meet the Bank's underwriting standards, which generally follow FHLMC and
FNMA guidelines, except that the Bank will generally purchase loans up to
$500,000, which exceeds the limit up to which FHLMC and FNMA may purchase loans.
The majority of these loans purchased are sold by the seller without recourse.
It is the Bank's policy not to purchase loan packages secured by a concentration
of properties in a single subdivision or condominium project.
14
<PAGE>
The Bank reviews each purchased loan as if it were originating the loan
according to its underwriting standards. All loans must be documented, including
an original appraisal that substantiates the value of the subject property at
the time of origination of the loan. The Bank obtains from the seller a
duplicate copy of each original loan file, which generally includes an executed
loan application and mortgage note, financial statements and credit reports of
the borrower, appraisal and title insurance. The Bank may purchase a qualifying
loan up to $500,000 with an exposure of up to 80% based on the original
appraisal of the property.
The Bank purchases only ARM loans with interest rates that adjust on a
monthly, semi-annual and annual basis. Most of the ARMs are indexed to interest
rates at a margin of 250 to 275 basis points above a recognized index, usually
the FHLB 11th District Cost of Funds or the One Year Constant Maturity Treasury.
This cost of funds index generally lags the current market interest rates. The
Bank does not purchase loans that provide for negative amortization.
Most of the loans purchased are secured by real estate located outside
of Colorado, including California, Wisconsin, Illinois and the East Coast. At
December 31, 1997, the Bank's purchased loan portfolio totaled $69.2 million, or
5.9% of the loan portfolio. Of the purchased loan portfolio at December 31,
1997, 12.4% are Colorado loans, while the majority, 78.7%, are California loans
(of which approximately 0.7% were nonperforming at December 31, 1997) and 8.3%
are loans in the Midwestern United States.
15
<PAGE>
The following table sets forth loans and mortgage-backed and
asset-backed securities originated, purchased, sold, and repaid during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1995 1996 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans receivable and mortgage-backed securities,
net at beginning of period................................. $1,163,637 $1,242,045 $1,342,813
--------- --------- ---------
Loans originated:
One-to-four family residential........................... 232,136 235,352 237,374
Multi-family residential and commercial real
estate.............................................. 10,660 35,504 28,715
Construction loans....................................... 32,782 28,955 16,954
Consumer loans........................................... 62,003 87,523 70,804
Commercial loans......................................... 1,604 1,549 721
---------- ---------- -----------
Total loans originated................................. 339,185 388,883 354,568
--------- --------- ----------
Loans and MBS purchased:
One-to-four family residential........................... 17,932 -- 29,808
Consumer loans........................................... -- -- 5,221
Mortgage-backed securities............................... -- 34,149 2,220
----------- ---------- ----------
Total loans and MBS purchased.......................... 17,932 34,149 37,249
--------- ---------- ----------
Additions to revolving loans receivable 2,663 11,358 7,538
and MBS, net.............................................
Loans sold:
Whole loans sold......................................... (6,468) (25,258) (15,283)
Mortgage-backed securities............................... (24,469) -- --
--------- ------------ ---------
Total loans and MBS sold............................... (30,937) (25,258) (15,283)
---------- ----------- ----------
Loan and MBS principal repayments(1)....................... (250,899) (307,554) (340,980)
Other addition (reduction) to loans receivable and 464 (810) (4,921)
---------- --------- -----------
MBS, net(2)...............................................
Net loan and MBS activity.................................. 78,408 100,768 38,171
--------- --------- ----------
Loans receivable and mortgage-backed
securities, net at end of period......................... $1,242,045 $1,342,813 $1,380,984
========= ========= =========
</TABLE>
- ----------------
(1) Includes principal repayments on mortgage-backed and asset-backed
securities.
16
<PAGE>
(2) Loans transferred to real estate owned or real estate in judgement, net
of amortization of any deferred fees, and net change in loan loss
reserves.
Loan Commitments. The Bank generally grants commitments to fund
fixed-rate, single-family mortgage loans for periods of up to 30 days at a
specified term and interest rate. The Bank also makes standby loan commitments
for up to six months for which it receives a non-refundable commitment, usually
equal to approximately 1% of the committed funds. These six month commitments do
not normally specify a loan rate. The Bank also provides standby letters of
credit, for which it charges fees based on 1% of the loan amount. The total
amount of the Bank's commitments to originate real estate loans, consumer loans,
and lines and letters of credit as of December 31, 1997 was $55.7 million.
Loan Servicing and Servicing Fees. The Bank retains servicing on most
of the loans it sells to FHLMC and FNMA. The Bank also services all of its own
loans through a loan servicing department located at its main office. The loan
servicing department also oversees the adjustment process on adjustable rate
loans and performs clerical functions in regard to loan foreclosures. The loan
servicing department is also responsible for making disbursements on
construction loans made by the Bank. Site inspections are performed prior to
payment of such disbursements in order to ascertain that the construction
process has progressed in accordance with the loan agreement.
As of December 31, 1995, 1996, and 1997 the Bank serviced $144.1
million, $145.6 million, and $132.2 million respectively, of loans for others.
Loan servicing fees from the sold portfolio provided 0.34%, 0.16%, and 0.04% of
the Bank's net income for the fiscal years ended December 31, 1995, 1996, and
1997, respectively.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank received loan origination and commitment fees for originating or
purchasing loans. Prior to January 1, 1988, fees for originating loans were
deferred for amounts in excess of the Bank's estimated cost of origination. Fees
deferred prior to 1988 are being amortized to income over the average lives of
the related loans using the level-interest-yield method. Any unamortized fees on
loans sold are credited to income in the year the transaction occurs. Loan fees
received and certain direct loan origination costs incurred on or after January
1, 1988 are deferred and recognized as an adjustment of yield using the
level-interest-yield method over the contractual life of the loans.
The Bank's loan origination fees generally are 1/2 point on
adjustable-rate residential mortgages, 3/4 to 1 point for fixed-rate residential
mortgage loans and 1 1/2 points for construction and commercial real estate
loans. The total amount of deferred loan fees and net unearned discounts and
premiums on loans originated and purchased as of December 31, 1997 was $0.2
million.
The Bank also receives other fees and charges relating to existing
loans, which include prepayment penalties, late charges, and fees collected in
connection with a change in borrower or other loan modifications. These fees and
charges have not constituted a material source of income.
17
<PAGE>
The following table shows loan fees and service charges received by the
Bank expressed as a percentage of gross and pre-tax income, as well as the total
amount of loan fees and service charges received by the Bank.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loan fees and service charges as a percentage
of total interest income plus non-interest income.......... 0.1% 0.2% 0.2%
Loan fees and service charges as a percentage of
earnings before income taxes............................... 0.4% 0.8% 0.6%
Total loan fees and service charges.......................... $ 75 $167 $189
</TABLE>
Non-Performing Loans and Asset Classification. The Bank's collection
procedures provide that when a loan is 30 days or more delinquent, the borrower
is contacted by mail and telephone and payment is requested. If the delinquency
continues, subsequent efforts will be made to contact the delinquent borrower.
In certain instances, the Bank may modify the loan or grant a limited moratorium
on loan payments to enable the borrower to reorganize his or her financial
affairs. If the loan continues in a delinquent status for 60 days, the Bank will
initiate foreclosure proceedings. Any property acquired as the result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank. At December
31, 1997, the Bank's real estate owned approximated $225,000. When real estate
owned is acquired, it is recorded at the lower of the unpaid principal balance
of the related loan or its fair market value. Any write-down in the property is
charged to the allowance for REO losses.
Loans are reviewed on a regular basis and are placed on a non accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Residential mortgage loans are placed on a non-accrual status when
either principal or interest is 90 days or more past due. Consumer loans
generally are charged off when the loan becomes over 90 days delinquent.
Commercial business and real estate loans are placed on nonaccrual status when
the loan is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on nonaccrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
18
<PAGE>
The following table sets forth information with respect to the Bank's
non performing assets for the periods indicated. At such dates, the Bank had no
nonperforming loans (i.e., loans delinquent 90 days or more) accounted for on an
accrual basis. During the periods indicated the Bank had certain restructured
loans within the meaning of Statement of Financial Accounting Standards ("SFAS")
No. 15. Under certain economic or legal circumstances, the Bank may grant
concessions to a borrower. These concessions may include restructuring loans in
order to change payment terms, reduce the stated interest rate, reduce the
amount of interest due, or extend the maturity date. The new or modified loan
constitutes a troubled debt restructuring under SFAS No. 15. The Bank has
adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS
No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures. Troubled debt restructurings involving a modification of terms
are accounted for in accordance with SFAS No. 114 and SFAS No. 118.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1993 1994 1995 1996 1997
------------ -------- ------------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
Permanent loans secured by one-to-four family dwelling units....... $1,419 $ 992 $1,706 $1,372 $1,966
Commercial real estate and multi-family............................ -- 199 205 5 --
Non-mortgage loans:
Commercial....................................................... -- -- -- -- --
Consumer......................................................... 60 49 49 80 147
-----
Total nonaccrual loans.............................................. 1,479 1,240 1,960 1,457 2,113
Real estate owned and in judgment................................... 2,491 4,230 1,647 1,457 225
Nonaccruing federal funds sold...................................... -- -- 382 -- --
------ ------ ------ ------ ------
Total nonperforming assets.......................................... $3,970 $5,470 $3,989 $2,914 $2,338
===== ===== ===== ===== =====
Troubled debt restructuring loans:
Mortgage loans:
Permanent loans secured by one-to-four family dwelling units...... $ -- $ -- $ -- $ -- $ --
Commercial real estate and multi-family........................... 7,465 5,250 -- -- --
----- ----- ----- ----- -----
Total restructured loans, net....................................... $7,465 $5,250 $ -- $ -- $ --
===== ===== ===== ===== =====
Total nonaccrual loans to net loans receivable...................... 0.24% 0.16% 0.21% 0.14% 0.18%
Total nonaccrual loans to total assets.............................. 0.12% 0.10% 0.13% 0.10% 0.14%
Total nonperforming assets to total assets.......................... 0.32% 0.42% 0.27% 0.19% 0.15%
Total restructured loans to total assets............................ 0.61% 0.40% --% --% --%
</TABLE>
Management of the Bank regularly reviews the loan portfolio in order to
identify potential problem loans, and classifies any potential problem loan as a
special mention, substandard, doubtful, or
19
<PAGE>
loss asset according to the OTS classification of asset regulations. Potential
problem loans that had not been classified or had not been recorded as
nonaccrual or troubled debt restructuring were insignificant as of December 31,
1997.
OTS regulations provide for savings associations to classify their
loans and other assets as substandard, doubtful or loss assets. Assets
classified as substandard are inadequately protected by the current net worth
and paying capacity of the obligor or the pledged collateral. They are
characterized by the distinct possibility that the association will sustain some
loss if the deficiencies are not corrected. Assets classified as doubtful have
all the weaknesses of those classified as substandard with the additional
characteristic that the weaknesses make collection or liquidation in full highly
questionable and improbable. Assets classified as loss are considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific reserve is not warranted. Assets that do not
currently expose a savings association to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving management's close attention are designated "special mention." Special
mention assets have a potential weakness or pose an unwarranted financial risk
that, if not corrected, could weaken the asset and increase risk in the future.
All classified assets are recorded at fair market value.
Classified Assets and Loss Allowances. The following table provides
further information on the Bank's classified and nonperforming assets and
allowances for losses on loans and REO.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Substandard.............................................. $4,087 $8,603 $5,261
Loss..................................................... 778 -- --
------ ------- -------
Total................................................ $4,865 $8,603 $5,261
===== ===== =====
Special Mention Assets................................... $11,697 $6,138 $1,990
====== ===== =====
Allowance for losses on loans............................ $2,926 $3,850 $4,716
Allowance for losses on real estate owned................ 912 691 523
----- ----- -----
Total loss allowance................................. $3,838 $4,541 $5,239
===== ===== =====
</TABLE>
As of December 31, 1997, the Bank's total classified and special
mention assets with balances in excess of $500,000 totalled $5.2 million. The
following is a summary of the Bank's classified assets with balances in excess
of $500,000 as of December 31, 1997, or later, if such information was
available. All of the classified assets are either special mention, substandard
or real estate owned. The net realizable values or the fair values on these
classified assets are determined at least annually based on cash flow from the
properties and the condition of the local real estate market.
20
<PAGE>
Special Mention
---------------
Denver Apartment Complex. The property is a 78 unit apartment complex
located in Denver, Colorado. The original balance on this loan was $1.3 million,
and the origination date was May 4, 1982. The loan is special mention with an
interest rate of 7.6% and an outstanding balance of $1.15 million as of December
31, 1997. The fair value of the property as of June 12, 1997 was $1.4 million.
The loan is classified because the loan rate was previously modified to a below
market rate. At December 31, 1997, the loan was at a market rate and has been
performing since March 1992.
Substandard
-----------
Dime Bank, FSB Pass Through Mortgage-Backed Securities 1988 - 1A. This
mortgage-backed security was issued by Dime Bank, FSB, in 1988 and was
classified as special mention during the first quarter of 1995. The Bank bought
a portion of the security with an original face amount of $10.0 million in
November 1988 and a portion with an original face amount of $5.5 million in
January 1990. The remaining balances on these two portions of the security were
$2.6 million and $1.5 million, respectively, as of December 31, 1997. The
securities were reclassified substandard during the second quarter of 1996
because loans in foreclosure and real estate owned backing the securities
reached an unacceptable level. In addition, Moody's has lowered the rating on
the security from an original rating of Aa2 to Baa1. Although credit support for
the security has diminished, at January 23, 1998 there apparently was still
enough support to protect the senior piece of the security, which the Bank owns.
At December 31, 1997, the Bank had received all payments due on a timely basis.
Allowance for Losses on Loans. In making loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan. The Bank's management evaluates the need
to establish reserves against losses on loans and other assets each month based
on estimated losses on specific loans and on any real estate held for sale or
investment when a finding is made that a loss is estimable and probable. Such
evaluation includes a review of all loans for which full collectibility may not
be reasonably assured and considers, among other matters, the estimated market
value of the underlying collateral of problem loans, prior loss experience,
economic conditions, and overall portfolio quality. In addition, management
provides a general allowance for estimated loan losses that is not specifically
allocated to identified problem loans, based on several factors, including loss
experience and business and economic conditions. These provisions for losses are
charged against earnings in the year they are established. Based on past
experience and future expectations, management feels that loan loss reserves are
adequate. However, there can be no assurance that further additions will not be
made to the allowance for losses on loans or that such losses will not exceed
the estimated amounts.
As a result of the declines in real estate market values and the
significant losses experienced by many financial institutions nationwide, there
has been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions nationwide, undertaken as part of the
examination of the institution by the FDIC, OTS or other federal or state
regulators. Results of recent examinations indicate that these regulators may be
applying more conservative criteria in evaluating real estate values, requiring
significantly increased provisions for loan losses. While the Bank believes it
has established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not request the Bank to significantly increase its allowance for
loan losses, therefore negatively affecting the Bank's financial condition and
earnings.
21
<PAGE>
The following table sets forth certain information regarding the Bank's
allowances for loan losses for the periods indicated.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding(1) ...................... $ 606,543 $ 759,943 $ 931,159 $ 1,061,524 $ 1,164,602
=========== =========== =========== =========== ===========
Average loans outstanding ....................... $ 578,284 $ 679,236 $ 868,948 $ 998,024 $ 1,110,336
=========== =========== =========== =========== ===========
Allowance for loan losses - beginning ........... $ 3,333 $ 3,575 $ 3,310 $ 2,926 $ 3,850
Acquired in Business Combination ................ -- -- -- -- 269
Provision (credit) for loan losses(2) ........... 193 (411) (495) 1,143 (739)
Recoveries ...................................... 133 203 232 86 1,760
Charge-offs ..................................... (84) (57) (121) (305) (424)
----------- ----------- ----------- ----------- -----------
Allowance for loan losses - ending .............. $ 3,575 $ 3,310 $ 2,926 $ 3,850 $ 4,716
=========== =========== =========== =========== ===========
Allowance for loan losses as a
percentage of total loans outstanding ......... 0.59% 0.44% 0.31% 0.36 % 0.40%
Allowance for loan losses as a
percentage of non-performing loans ............ 242% 267% 149% 264 % 223%
Net loans recovered (charged-off) as a percentage
of average loans outstanding .................. 0.01% 0.02% 0.01% (0.02)% 0.12%
</TABLE>
- ----------------
(1) Excludes mortgage and other asset-backed securities.
(2) The established allowance for loan losses is predominately related to
real estate mortgage loans. As a result, the activities of provision
(credit) for losses, charge-offs, and recoveries are also predominately
related to those same loans.
The following table sets forth certain information regarding the Bank's
allowance for losses on real estate owned for the periods indicated.
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total real estate owned and in judgment, net . $ 2,491 $ 4,230 $ 1,647 $ 1,457 $ 225
======= ======= ======= ======= =======
Allowance balances - beginning ............... $ 1,907 $ 1,159 $ 1,105 $ 912 $ 691
Provision (credit) for losses ................ 172 448 (95) 3 (114)
Charge-offs .................................. (920) (502) (98) (224) (54)
------- ------- ------- ------- -------
Allowance balances - ending .................. $ 1,159 $ 1,105 $ 912 $ 691 $ 523
======= ======= ======= ======= =======
Allowance for losses on real estate owned
and in judgment to net real estate owned
and in judgment ............................ 47% 26% 55% 47% 232%
</TABLE>
22
<PAGE>
Investment Activities
Income from investment securities provides a significant source of
income for the Bank. The Bank maintains a portfolio of investment securities
such as U.S. government and agency securities, non-government securities,
including corporate bonds and certificates of deposit securities (in addition to
the Bank's mortgage-backed and asset-backed securities portfolio, which is
discussed above under " - Lending Activities - Mortgage-Backed and Other
Asset-Backed Securities".) The Bank is required by federal regulation to
maintain a minimum percentage of its liquidity base in the form of qualifying
long and short-term liquid assets. Currently, the liquidity requirement is 4%.
Qualifying liquid assets include certificates of deposit, federal funds,
banker's acceptances, discount notes, commercial paper, time deposits and short
term treasury and agency debt securities, all of which are subject to certain
creditworthiness and ratings criteria. In addition, longer term corporate,
agency and government debt securities may be held subject to similar
creditworthiness, ratings and maturity criteria. As of December 31, 1997, the
Bank exceeded the 4% liquidity requirement with a liquidity ratio of 9.6%. The
balance of security investments in excess of regulatory requirements reflects
management's response to the significantly increasing percentage of savings
deposits with short maturities. It is the intention of management to maintain
shorter maturities in the Bank's investment portfolio in order to better match
the interest rate sensitivities of its assets and liabilities. However, during
periods of rapidly declining interest rates, the yield on such investments also
decline at a faster rate than does the yield on long-term investments.
Investment decisions are made within policy guidelines established by
the Board of Directors and the Asset/Liability Committee. As of December 31,
1997, the Bank's investment portfolio, including unamortized premiums, totalled
$79.9 million.
At December 31, 1997, the Bank's investments included $9.1 million of
callable Federal Agency instruments. While the Bank projects that these
instruments will be called before their stated maturity date, the Bank does have
the ability to hold these instruments to maturity.
At December 31, 1997, the Bank held no step-up bonds which are
considered structured notes by the OTS.
The Bank classifies its investment, mortgage-backed, and other
asset-backed securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are those
securities in which the Bank has the ability and intent to hold the security
until maturity. All other securities not included in trading or held-to-maturity
are classified as available-for-sale.
Held to maturity securities are recorded at cost, adjusted for the
amortization or accretion of premiums or discounts. Trading and
available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses on trading securities are included in earnings. Unrealized
holding gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer. Transfers from
the held-to-maturity category are only appropriate in limited circumstances.
Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are recognized in earnings upon sale or
redemption at maturity. The specific identification method is used
23
<PAGE>
to determine the cost of securities sold. Discounts or premiums are accredited
or amortized using the level-interest-yield method to the earlier of call date
or maturity of the related held-to-maturity security.
The following table sets forth certain information regarding the Bank's
investments at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ----------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government obligations...................... $ 20,999 $10,725 $ 8,015 $ -- $ --
Federal agency obligations....................... 30,135 45,194 70,078 71,629 79,895
Obligations of state and political subdivisions.. 1,004 -- -- -- --
Corporate notes.................................. 25,188 5,016 -- -- --
Export/import notes.............................. 4,062 -- -- -- --
Foreign bank obligations......................... 999 1,000 -- -- --
FHLMC stock...................................... 372 249 418 552 --
FNMA stock....................................... 153 157 268 326 --
Other equity investments......................... -- -- -- 234 --
--------- --------- --------- --------- -----------
Total investment securities...................... 82,912 62,341 78,779 72,741 79,895
-------- ------ ------- ------- -------
Other Investments:
FHLB of Topeka stock............................. 6,693 7,745 8,829 9,554 11,277
Federal funds sold............................... 25,800 1,000 80,483 15,000 8,100
Other interest-earning assets.................... 4,159 7,828 6,097 12,777 8,587
Investment in property tax certificates.......... 53 36 21 6 --
-------- -------- -------- -------- -----------
Total other investments.......................... 36,705 16,609 95,430 37,337 27,964
------- ------ ------- ------- -------
Total investments................................ $119,617 $78,950 $174,209 $110,078 $107,859
======= ====== ======= ======= =======
</TABLE>
24
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and expected maturities of the Bank's
investment securities portfolio as of December 31, 1997. Expected maturities may
differ from contractual maturities, because issuers may have the right to call
some obligations without penalty. Market Value adjustments recorded in
compliance with SFAS No. 115 are now considered when computing the yields and
cost of securities.
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------------------------------------
Total Investment
One Year or Less One to Five Years Five to Ten Years More Than Ten Years Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------ ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities
held to maturity:
U.S. Government
Obligations ....... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ --
Federal Agency
Obligations ....... 73,944 5.79 -- -- -- -- -- -- 73,942 5.79 73,952
Other
Equity
Investments ....... -- -- -- -- -- -- -- -- -- -- --
------- ---- ------- ---- ------- --- ------- --- ------- ---- ------
Total Held-To-
Maturity
Securities ... $73,944 5.79%$ -- --% $ -- --% $ -- --% $73,942 5.79% $73,952
======= ==== ======= ==== ======= === ======= === ======= ==== =======
Investment
Securities
Available-for-Sale:
U.S. Government
Obligations ....... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ --
Federal Agency
Obligations ....... 5,193 4.64 758 6.91 -- -- -- -- 5,951 4.93 5,951
Other Equity
Investments ....... -- -- -- -- -- -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- --- -------- ---- -------
Total Available-
for-Sale
Securities ... $ 5,193 4.64% $ 758 6.91% $ -- --% $ -- --% $ 5,951 4.93% $ 5,951
======= ==== ======= ==== ======= ==== -====== === ======= ==== =======
Total
Investment
Securities ... $79,137 5.71% $ 758 6.91% $ -- --% $ -- --% $79,895 5.73% $ 79,903
======= ==== ======= ==== ======= ==== ======= === ======= ==== ========
</TABLE>
25
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan and mortgage-backed securities principal repayments, and proceeds from
the sale of loans, mortgage-backed securities and investment securities. The
Bank has also relied on borrowings from the FHLB of Topeka and as of December
31, 1997 had $122.4 million of such borrowings outstanding. The Bank also has
derived funds from the issue of mortgage-backed bonds in 1988 and as of December
31, 1997 had $4.5 million of such bonds outstanding. See " - Borrowings" and " -
Subsidiaries and Joint Venture Activity." Loan and mortgage-backed securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They also may be used on a longer term
basis for general business purposes.
Deposits. The Bank offers a wide variety of deposit accounts, although
a majority of such deposits are in fixed-term, market-rate certificate accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds must remain on deposit, and the applicable
interest rate.
Fixed-term certificates have been the primary sources of deposits for
the Bank and as of December 31, 1997, such certificates represented 58.2% of the
Bank's deposit accounts. Fixed-term, market-rate certificates with terms of 13
to 24 months are the largest individual source of deposit funds for the Bank and
as of December 31, 1997, represented 237.4 million, or 20.1% of the deposit
portfolio. As of December 31, 1997, $227.0 million, or 19.2% of the Bank's
deposit portfolio consisted of money market rate deposit accounts. The third
largest category of deposits are 7 to 12 month fixed-term market-rate
certificates which constituted $205.4 million or 17.4% of the portfolio.
The Bank also offers standardized individual retirement accounts
("IRAs"), as well as qualified defined master plans for self employed
individuals. IRAs are marketed in the form of an 18-month variable interest rate
account with a minimum balance of $1,000 with the rate based on 90 day U.S.
Treasury Bills and three-year fixed-rate accounts with a minimum balance of
$2,000, with the rate based on three-year U.S. Treasury Note. The rates adjust
quarterly.
The Bank intends to continue to emphasize retail deposits, including
checking, certificates of deposit, savings accounts and IRAs. The Bank had no
brokered certificates of deposit as of December 31, 1997. Institutional jumbo
certificates of deposit may be solicited on a limited basis. As of December 31,
1997, the Bank had $33.4 million of Colorado State Deferred Compensation Funds
in deposit accounts. State employees can open accounts at the Bank and deposit
deferred compensation funds.
The Bank pays interest rates on its certificate accounts that are
competitive in its market, but does not attempt to pay the highest rates in its
market area. Interest rates on deposits are set bi-weekly by the Bank's division
managers committee, which consists of the Bank's seven senior officers, based on
a combination of factors including: (i) the previous week's deposit flows by
product; (ii) a current survey of a selected group of competitors' products of
similar term and type; (iii) current yields on U.S. Treasury offerings with
terms similar to the Bank's products; (iv) new account activity during the
previous week; (v) overall cost of deposits; (vi) external data that may
influence interest rates, including securities markets trends, the policy of the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board"),
and federal government releases of statistics on national economic performance,
inflation, and money supply; (vii) investment opportunities and loan demand; and
(viii) schedule of maturities by term.
26
<PAGE>
Deposit Portfolio. Deposits in the Bank as of December 31, 1997, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
% of
Original Interest Minimum Balance Total
Category Term Rate Amount (In Thousands) Deposits
- -------- ---- ---- ------ -------------- --------
<S> <C> <C> <C> <C> <C>
NOW accounts None 1.77% $ 100 $ 116,764 9.87%
Regular savings None 2.75 100 94,490 7.99
Money market accounts None 4.22 100 227,032 19.20
Noninterest deposits None -- 100 56,575 4.78
Certificates of deposit:
Fixed term, fixed rate 1 - 3 months 4.91 500 12,631 1.07
Fixed term, fixed rate 4 - 6 months 5.29 500 58,204 4.92
Fixed term, fixed rate 7 - 12 months 5.60 500 205,360 17.36
Fixed term, fixed rate 13 - 24 months 5.81 500 237,445 20.08
Fixed term, fixed rate 25 - 36 months 5.57 500 28,253 2.39
Fixed term, fixed rate 37 - 48 months 6.08 500 7,259 0.61
Fixed term, fixed rate 49 - 120 months 6.21 500 123,814 10.47
Fixed term, variable rate 25 - 36 months 6.23 500 6,016 0.51
Jumbo certificates 5.94 100,000 8,884 0.75
--------- ------
Total $1,182,727 100.00%
========= ======
</TABLE>
Time Deposits by Rate and Time Maturity. The following table sets forth
the time deposits in the Bank classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1995 1996 1997
------------------- ------------------- --------------------
(In Thousands)
Weighted Average Rate
<S> <C> <C> <C> <C>
2.01 - 3.00%.......................... $ 4 $ 4 $ 4
3.01 - 4.00%.......................... 12,942 -- --
4.01 - 5.00%.......................... 144,416 138,716 49,662
5.01 - 6.00%.......................... 327,268 401,190 557,749
6.01 - 7.00%.......................... 130,147 123,116 79,299
7.01 - 8.00%.......................... 11,911 248 161
8.01 - 9.00%.......................... 875 622 651
9.01 - 10.00%.......................... 665 314 334
10.01% or more.......................... 5 6 6
--------- --------- -------
Total................................. $628,233 $664,216 $687,866
======= ======= =======
</TABLE>
27
<PAGE>
Time Deposit Maturity Schedule. The following table sets forth by
various rate categories the amount and the periods to maturity of the Bank's
certificate accounts outstanding as of December 31, 1997.
<TABLE>
<CAPTION>
As of December 31, 1997
Amount Due Within
----------------------------------------------------------------------------------------
Less than Greater than
1 Year 1-2 Years 2-3 Years 3 Years Total
---------- --------- --------- ----------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Weighted Average Rate
4.00% or less................ $ -- $ 4 $ -- $ -- $ 4
4.01 - 5.00%................. 49,554 108 -- -- 49,662
5.01 - 6.00%................. 440,405 75,050 16,264 26,030 557,749
6.01 - 7.00%................. 8,234 5,415 24,005 41,645 79,299
7.01 - 8.00%................. 63 17 81 -- 161
8.01 - 9.00%................. 110 541 -- -- 651
9.01 - 10.00%................ -- 334 -- -- 334
10.01% or more............... -- 6 -- -- 6
------- ------ ------ ------ -------
Total...................... $498,366 $ 81,475 $ 40,350 $67,675 $687,866
======= ======= ======= ====== =======
</TABLE>
Jumbo Certificate Maturities. The following table indicates as of
December 31, 1997, the amount of the Bank's certificates of deposit of $100,000
or more by time remaining until maturity.
Maturity Period Balance
--------------- -------
(In Thousands)
Three Months or Less...................... $3,451
Three Through Six Months.................. 1,016
Six Through Twelve Months................. 2,699
Over Twelve Months........................ 1,718
-----
Total..................................... $8,884
=====
28
<PAGE>
Deposit Flow. The following table sets forth the change in dollar
amount of savings deposits in the various types of savings accounts offered by
the Bank between the dates indicated.
<TABLE>
<CAPTION>
Balance at Percent Balance at Percent Increase Balance at Percent Increase
December 31, of December 31, of (Decrease) December 31, of (Decrease)
1995 Deposits 1996 Deposits 1995-1996 1997 Deposits 1996-1997
------------------------ ------------- ---------- ---------- ------------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest bearing deposits.... $ 45,393 4.20% $ 46,544 4.10% $ 1,151 $ 56,575 4.78% $10,031
NOW, Super NOW, and other
transaction accounts.......... 100,077 9.26 110,294 9.71 10,217 116,764 9.87 6,470
Money Market deposit accounts... 214,486 19.85 221,824 19.53 7,338 227,032 19.20 5,208
Regular savings accounts........ 92,100 8.53 92,945 8.18 845 94,490 7.99 1,545
Less than 7 month fixed rate,
fixed maturity deposits....... 70,868 6.56 67,004 5.90 (3,864) 70,835 5.99 3,831
7 - 12 month fixed rate,
fixed maturity deposits....... 98,139 9.08 178,500 15.72 80,361 205,360 17.36 26,860
13 - 36 month fixed rate,
fixed maturity deposits....... 271,949 25.18 245,158 21.58 (26,791) 265,698 22.46 20,540
13 - 36 month variable rate,
fixed maturity deposits....... 62,431 5.78 44,022 3.88 (18,409) 6,016 0.51 (38,006)
Greater than 36 month fixed
rate, fixed maturity
deposits...................... 119,491 11.06 121,437 10.69 1,946 131,073 11.08 9,636
Jumbo accounts and brokered
deposits...................... 5,355 0.50 8,095 0.71 2,740 8,884 0.75 789
---------- ------ ---------- ------ ------ ---------- ------ -------
Total...................... $1,080,289 100.00% $1,135,823 100.00% $55,534 $1,182,727 100.00% $46,904
========= ====== ========= ====== ====== ========= ====== ======
</TABLE>
2
<PAGE>
Deposit Activity. The following table sets forth the deposit activities
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits and accrued interest acquired..... $162,236 $ -- $ -- $ -- $ 30,000
Deposits and accrued interest sold.......... -- (45,608) -- -- --
Net deposits received,
less deposits withdrawn.................. 1,104 (25) 18,236 11,533 (29,208)
Interest credited........................... 30,975 32,537 43,366 $ 44,001 $ 46,112
------- ------ ------ ------- -------
Net increase (decrease) in deposits......... $194,315 $(13,096) $61,602 $55,534 $ 46,904
======= ======= ====== ====== =======
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings as an alternative or less
costly source of funds. The Bank obtains advances from the FHLB of Topeka. See
"Regulation of the Bank - Federal Home Loan Bank System." These advances are
collateralized by the capital of the FHLB of Topeka stock held by the Bank and
certain of the Bank's mortgage loans and mortgage-backed securities. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB of Topeka will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB of Topeka. The maximum
amount of FHLB of Topeka advances to a member institution generally is reduced
by borrowings from any other source. As of December 31, 1997, the Bank's FHLB of
Topeka advances totalled $122.4 million, representing 9.1% of total liabilities.
Of these advances, at December 31, 1997, $38.4 million are at a rate of 5.95%
and mature in 1998, $4.0 million are at a rate of 7.96% and mature in 1999,
$32.0 million are at a rate of 6.93% and mature in 2000, $1.0 million are at a
rate of 5.82% and mature in 2001, and $47.0 million are at a rate of 6.21% and
mature in 2002. The Bank has a blanket pledge with the FHLB of Topeka and has
pledged all of its stock in the FHLB and all otherwise unpledged or unencumbered
federal funds sold, U.S. agency securities, certain qualifying loans, and
mortgage-backed securities to secure these advances as of December 31, 1997.
In 1988, the Bank formed a finance subsidiary, First Savings Securities
Company ("FSSC"), for the sole purpose of borrowing funds through the
participation in a REMIC issued by Ryland Acceptance Corporation. REMICs are
bonds collateralized by mortgage-backed securities. See "- Lending Activities -
Mortgage-Backed and Other Asset-Backed Securities" for a more detailed
discussion of REMICs and the risks related thereto. The original amount borrowed
through the REMIC bond on March 1, 1988 and the amounts outstanding as of
December 31, 1997 were $22.0 million and $4.5 million, respectively. The REMIC
bonds, which have a fixed rate of interest of 8.75%, were secured by
mortgage-backed securities with carrying and market values of $4.9 million and
$5.2 million, respectively, as of December 31, 1997. The original bonds were
scheduled to retire as follows: $11.9 million in 2005, $2.4 million in 2007,
$6.3 million in 2011 and $1.4 million in 2019; however, the actual timing of the
retirement of the REMIC bonds is dependent upon mortgage prepayments and
reinvestment rates and, as of December 31, 1997, all remaining bonds are
scheduled to mature in 2019. The increased retirement of the REMIC bonds is due
to accelerated prepayments of the underlying mortgage-backed securities
collateral due to the decrease in market interest rates. Unamortized bond issue
costs amounted to $69,000 as of December 31, 1997.
30
<PAGE>
As of December 31, 1997, the Bank had unsecured lines of credit in
place with two commercial banks located in Colorado through which the Bank may
borrow a total of $8.0 million. The Bank utilizes these lines of credit to buy
federal funds in order to meet its short term liquidity needs. Longer term
arrangements for funds can be made with these banks, if needed, on a secured
basis.
The Bank has also borrowed funds in the past through the use of reverse
repurchase agreements, although it did not have any such borrowings outstanding
during the fiscal years ended December 31, 1995, 1996, and 1997.
The following tables set forth certain information regarding borrowings
by the Bank.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1995 1996 1997
-------------- -------------------- -------------------
<S> <C> <C> <C>
Weighted average rate paid on:
FHLB advances................................. 6.549% 6.285% 6.369%
REMIC issued.................................. 8.750 8.750 8.750
ESOP loan (1)................................. 8.500 8.750 8.500
Loan from Company (1)......................... 5.540 6.120 6.000
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended December 31,
-------------------------------------------------------
1995 1996 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end during the period:
FHLB advances................................. $171,726 $138,415 $141,210
REMIC issued.................................. 6,743 5,543 5,009
ESOP loan..................................... 13,404 13,404 12,063
Loan from Company (1)......................... 52,100 52,100 9,480
Maximum amount of short-term borrowings
outstanding at any month end with
respect to:
FHLB advances................................. 77,555 66,005 59,405
</TABLE>
- ----------------
(1) Payable to the Company.
Subsidiaries and Joint Venture Activity
The Company has one wholly owned subsidiary, the Bank. The Bank has
three wholly owned subsidiary corporations, First Savings Investment Corporation
("FSIC"), First Savings Insurance Services ("FSIS") and First Savings Securities
Company ("FSSC"). The Bank is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of December 31, 1997, the Bank was authorized to invest up to approximately
$31.1 million in the stock of, or loans to, service corporations (based upon the
2% limitation). As of December 31, 1997, the net book value of the Bank's
investment in stock, unsecured loans, and conforming loans in its service
corporations was $3.2 million.
31
<PAGE>
First Savings Investment Corporation. The Bank's largest service
corporation is FSIC, with total assets of $2.6 million as of December 31, 1997.
The principal activities of this service corporation are investing in delinquent
real estate tax certificates, land development, and equity ownership of real
property. The Bank is in the process of liquidating this service corporation in
an orderly manner, which will take place over several years. Assets that remain
are as follows:
(1) In March 1995, 80,000 square feet of land with a book value of
$1.2 million, located adjacent to the main office of the Bank,
was transferred from the Bank to FSIC. This land is leased to
General Mills Restaurant Group for the operation of an Olive
Garden Restaurant, which opened in April 1995.
(2) Cash in the amount of $1.4 million.
The Bank's net equity investment in FSIC as of December 31, 1997 was
$2.6 million.
First Savings Insurance Services. FSIS is a Colorado corporation which
in the past has been a full-service insurance agency. FSIS sold its casualty
insurance business in 1989, and now specializes in health, life and credit life
insurance. Beginning in 1994, FSIS began offering mutual funds and annuity
products. The Bank's net equity investment in FSIS at December 31, 1997 was
$135,000.
First Savings Securities Company. FSSC is a California corporation
formed expressly to participate in a REMIC issue by Ryland Acceptance
Corporation (see "- Borrowings"). As of December 31, 1997, the Bank had $4.5
million of borrowings outstanding through the REMIC issue, which was secured by
$4.9 million of mortgage-backed securities. As of December 31, 1997, FSSC had
$5.0 million in assets and a deficit of $1.0 million. FSSC plans no other
activities in the immediate future.
Under the OTS risk-based capital regulations, a savings association's
investments in and extensions of credit to any subsidiary engaged in activities
not permissible for a national bank must be deducted from the institution's
capital. Because a national bank is not permitted to engage in real estate
acquisition and development, and the OTS has informed the Bank that investments
in tax certificates are not permissible for national banks, the Bank's
investment in and loans to FSIC must be deducted from the Bank's capital in
calculating the minimum required capital ratios. As of December 31, 1997, the
Bank's investments in and loans to subsidiaries required to be deducted from its
regulatory capital pursuant to this rule were $2.6 million, all of which
consisted of investments and loans to FSIC.
Personnel
As of December 31, 1997, the Bank had 305 full-time employees and 163
part-time employees, including 28 part-time security employees. The employees
are not represented by a collective bargaining unit. The Bank believes its
relationship with its employees to be satisfactory.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
32
<PAGE>
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association, and if it controls a savings
association, merge or consolidate the assets and liabilities of the savings
association with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the Federal Reserve Board. Generally,
federal savings associations can acquire or be acquired by any insured
depository institution.
Federal Securities Law. The Company is subject to filing and reporting
requirement by virtue of having its common stock registered under the Securities
Exchange Act of 1934. Furthermore, Common Stock held by persons who are
affiliates (generally officers, directors, and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various state and federal
statutory and regulatory requirements. The Bank is also subject to certain
reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's
33
<PAGE>
operations. The Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal and state law, especially in such matters
as the ownership of savings accounts and the form and content of the Bank's
mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves. Any change in such
regulations, whether by the OTS, the FDIC, or the Congress could have a material
adverse impact on the Company, the Bank, and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). The FDIC has the authority, should it initiate proceedings to
terminate an institution's deposit insurance, to suspend the insurance of any
such institution without tangible capital. However, if a savings association has
positive capital when it includes qualifying intangible assets, the FDIC cannot
suspend deposit insurance unless capital declines materially, the institution
fails to enter into and remain in compliance with an approved capital plan or
the institution is operating in an unsafe or unsound manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a bank or thrift pays within a range of 23 cents to 31 cents
per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates, on a semi-annual basis, if it
determines that such action is necessary to cause the balance in the SAIF to
reach the designated reserve ratio of 1.25% of SAIF-insured deposits within a
reasonable period of time. The FDIC also may impose special assessments on SAIF
members to repay amounts borrowed from the U.S. Treasury or for any other reason
deemed necessary by the FDIC. The Bank's federal deposit insurance premium
expense for the year ended December 31, 1997, approximated $729,000.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted tangible assets, and (3) a risk-based capital
requirement equal to 8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest
rate exposure will, in the future, be subject to a deduction for an interest
rate risk ("IRR") component may be from capital for purposes of calculating
their risk-based capital requirement. See "- Net Portfolio Value."
34
<PAGE>
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1997:
Percent of
Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement.......... $ 23,239 1.50%
Actual capital.................. 189,859 12.25
------- -----
Excess.................... $166,620 10.75%
======= =====
Core Capital:
Regulatory requirement.......... $ 46,479 3.00%
Actual capital.................. 194,110 12.49
------- -----
Excess.................... $147,631 9.49%
======= =====
Risk-Based Capital:
Regulatory requirement.......... $ 66,355 8.00%
Actual capital.................. 197,080 23.76
------- -----
Excess.................... $130,725 15.76%
======= =====
Net Portfolio Value. The OTS requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities, and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. The OTS also requires the computation of estimated changes in
net interest income over a four-quarter period. These computations estimate the
effect of an institution's NPV and net interest income of instantaneous and
permanent 1% to 4% increases and decreases in market interest rates. In the
Bank's interest rate sensitive policy, the Board of Directors has established a
maximum decrease in net interest income and maximum decreases in NPV given these
instantaneous changes in interest rates.
An institution's interest rate risk is measured as the change to its
NPV as a result of a hypothetical 200 basis point change in market interest
rates. A resulting change in NPV of more than 2% of the estimated market value
of its assets will require the institution to deduct from its capital 50% of
that excess change. The rules provide that the OTS will calculate the IRR
component quarterly for each institution.
35
<PAGE>
The following table presents the Bank's NPV at December 31, 1997, as
calculated by the OTS and based on OTS assumptions utilizing raw data
voluntarily provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Change in Interest
Rates in Basis Points
(Rate Shock)(1) Net Portfolio Value NPV as % of Assets
--------------- -------------------------------------------------- -----------------------------
$ Amount $ Change % Change NPV Ratio Change
------ ------ ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $ 148,204 $ - 83,365 - 36% 10.01 % - 456 bp
+300 bp 172,897 - 58,673 - 25 11.44 - 313 bp
+200 bp 195,966 - 35,604 - 15 12.72 - 185 bp
+100 bp 215,990 - 15,579 - 7 13.79 - 79 bp
0 bp 231,569 -- -- 14.57 --
- -100 bp 242,499 10,929 +5 15.09 + 52 bp
- -200 bp 250,383 18,814 +8 15.43 + 86 bp
- -300 bp 258,427 26,857 +12 15.77 + 120 bp
- -400 bp 271,196 39,626 +17 16.35 + 178 bp
</TABLE>
- ---------------
(1) Denotes rate shock used to compute interest rate risk capital component.
As of
December 31,
1997
------------
RISK MEASURES:
200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets.......... 14.57 %
Exposure Measure: Post-Shock NPV Ratio............................ 12.72 %
Sensitivity Measure: Change in NPV Ratio.......................... - 185 bp
CALCULATION OF CAPITAL COMPONENT:
Change in NPV as % of Present Value of Assets...................... - 2.24 %
Interest Rate Risk Capital Component............................... $ 0
36
<PAGE>
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-offs, and should not be relied
upon as indicative of actual results. Further, the computations do not
contemplate any actions the Bank may undertake in response to changes in
interest rates.
While the OTS has deferred for the present time the date on which the
Bank is subject to the interest rate risk component reduction discussed above,
the Bank remains subject to interest rate risk and, as can be seen above, rising
interest rates will reduce the Bank's NPV.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
December 31, 1997, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount required for the liquidation account to be established
pursuant to the Bank's Plan of Conversion. Finally, a savings association is
prohibited from making a capital distribution if, after making the distribution,
the savings association would be undercapitalized (not meet any one of its
minimum regulatory capital requirements).
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Topeka. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of December 31, 1997, the Bank
was in compliance with its QTL requirement with 95.0% of its assets invested in
QTIs.
A savings association that does not meet a QTL test must either convert
to a bank charter or comply with the following restrictions on its operations:
(i) the savings association may not engage in any
37
<PAGE>
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 savings association shall be restricted to those of a national
bank; (iii) the savings association shall not be eligible to obtain any advances
from its FHLB; and (iv) payment of dividends by the savings association shall be
subject to the rules regarding payment of dividends by a national bank. Upon the
expiration of three years from the date the savings association 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).
Loans to One Borrower. See "Lending Activities-Loans to One Borrower."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"),
as implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. Federal law requires public disclosure of an institution's
CRA rating and requires the OTS to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered system. The Bank received
an "outstanding" rating as a result of its last evaluation in June 1996.
Transactions With Affiliates. Generally, restrictions on transactions
with affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors, and
10% shareholders, as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. OTS regulations, with minor
variation, apply Regulation O to savings associations.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At December 31, 1997, the Bank's required
liquid asset ratio is 4%.
38
<PAGE>
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Topeka, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Topeka in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At December 31, 1997, the Bank had $11.3 million in
FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
December 31, 1997, the Bank was in compliance with the applicable reserve
requirements.
Federal and State Taxation
The Company and the Bank report their income on a calendar year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including, particularly, the Bank's reserve for bad debts discussed below. The
Company and its subsidiaries, including the Bank, file a consolidated federal
income tax return. Consolidated returns have the effect of eliminating
intercompany distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which such distributions
occur.
Thrift institutions are subject to the same provisions as banks with
respect to deductions for bad debt. Only thrift institutions that are treated as
small banks may account for bad debts under the reserve method; however such
institutions may only use the experience method for determining additions to
their bad debt reserve. Thrift institutions that are not treated as small banks
must use the specific charge-off method. Under the Internal Revenue Code of
1986, as amended ("Code"), the Bank is not considered to be a small bank and
therefore the Bank uses the specific charge off method.
In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Code. A thrift institution, such as the Bank, would generally
be required to recapture into its taxable income its pre-1988 reserves in the
case of certain excess distributions to, and redemptions of, shareholders (e.g.,
stock repurchases). The balance of the Bank's pre-1988 reserves approximates
$12.0 million.
In addition to their regular federal income tax liability, corporations
are also subject to an alternative minimum tax. The corporate alternative
minimum tax rate is 20%. The tax is applied on "alternative minimum taxable
income" ("AMTI") which includes: (1) 100% of the excess of a savings
association's bad debt deduction over the amount allowable under the experience
method; (2) 75% of the excess of the "adjusted current earnings" of the Company
over the AMTI; and (3) interest on certain tax-exempt bonds.
39
<PAGE>
The Revenue Reconciliation Act of 1993 added a new Section 475 to the
Code. Section 475 is a mark-to-market tax law, that is different from the
accounting mark-to-market SFAS No. 115. The term "securities" in the Code
includes not just traditional debt and equity securities, but mortgages as well.
For tax purposes, institutions were required to identify which securities
qualified for an exemption by October 31, 1993. A financial institution is
subject to a mark-to-market rule if its activities bring it within the
definition of a dealer in securities under Section 475(c)(1) of the Code.
Non-thrift members are not subject to the special federal tax
provisions for savings associations described above. The Department of Treasury
issued a regulation effective for taxable years ended after November 30, 1982
requiring savings associations which file consolidated income tax returns to
reduce proportionately their bad debt deductions for tax losses incurred by
(functionally related) non-thrift members of the consolidated group.
The State of Colorado has a corporate income tax which subjected the
Bank's Colorado taxable income to tax at a 5.0% rate for the calendar year ended
December 31, 1996 and a 5.0% rate for the calendar year ended December 31, 1997.
Colorado taxable income is computed by applying certain modifications (e.g.,
state income tax deduction, interest on U.S. government securities, etc.) to
federal taxable income.
The IRS has completed an examination of the Bank's federal income tax
returns for tax years ending 1985 through 1990. The Bank had made an advance
payment of $1.755 million to the IRS against possible deficiencies arising from
this examination. In 1995, all examination issues were settled, resulting in a
tax assessment of $488,000. After application of the advance payment and related
interest thereon, the Bank received refunds amounting to approximately $1.4
million. The Bank has made all appropriate amendments to its prior Colorado
income tax returns related to this settlement.
40
<PAGE>
Item 2. Properties
- -------------------
The Bank's and the Company's executive offices are located at 215 S.
Wadsworth Boulevard in Lakewood, Colorado, a suburb of Denver. The Company does
not own any real property but uses the offices and facilities of the Bank from
time to time. The Bank conducts its business through 27 offices, 23 of which are
located in the Denver, Colorado area, and four of which are located on the
Western Slope of Colorado.
The following table sets forth the location of each of the Bank's
offices, the year the office was first acquired or rented, and the net book
value and square footage (excluding basement) of each office. All of the Bank's
offices are owned, with the exception of the Downtown branch, the Bonnie Brae
branch and the Montbello branch, all located in Denver, and the Grand Junction
Mesa Mall branch, located in Grand Junction, Colorado, as noted below.
<TABLE>
<CAPTION>
Net Book
Year Facility Value as of
Opened or December 31, Square
Office Location Acquired 1997 Footage
- -------------------------------- ---------- ------ -------
<S> <C> <C> <C>
Main Office and Lakewood Branch: 1973 1,059,550 38,420
215 S. Wadsworth Boulevard
Lakewood, Colorado
Arvada Branch: 1974 580,370 6,820
5805 Carr Street
Arvada, Colorado
Arvada West Branch: 1994 1,068,580 3,811
12880 W. 64th Avenue
Arvada, Colorado
Aurora Branch: 1972 390,020 6,820
1389 S. Havana
Aurora, Colorado
Bonnie Brae Branch(1): 1990 164,970 1,152
750 S. University Boulevard
Denver, Colorado
Brighton Branch: 1990 588,430 12,105
1795 Bridge Street
Brighton, Colorado
Cherry Creek Branch: 1979 434,070 3,494
3610 E. First Avenue
Denver, Colorado
Columbine Branch: 1976 451,940 3,494
6775 W. Ken Caryl
Littleton, Colorado
Commerce City Branch: 1990 350,760 5,200
7326 Magnolia Street
Commerce City, Colorado
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
Net Book
Year Facility Value as of
Opened or December 31, Square
Office Location Acquired 1997 Footage
- -------------------------------- ---------- ------ -------
<S> <C> <C> <C>
Delta Branch: 1993 272,910 4,427
564 Main Street
Delta, Colorado
Downtown Branch(2): 1983 -- 3,040
216 Sixteenth Street
Denver, Colorado
Englewood Branch: 1962 506,880 8,106
4301 S. Broadway
Englewood, Colorado
Golden Branch: 1983 483,380 5,854
701 13th Street
Golden, Colorado
Greenwood Village Branch: 1994 1,047,070 4,748
6050 S. Holly
Englewood, Colorado
Grand Junction Branch: 1993 562,120 6,999
130 N. Fourth Street
Grand Junction, Colorado
Grand Junction - Mesa Mall Branch(3): 1996 -- 2,473
2452 Patterson Road
Grand Junction, Colorado
Heather Gardens Branch: 1981 695,580 4,075
13781 E. Yale Avenue
Aurora, Colorado
Highlands Ranch Branch: 1987 1,691,810 11,108
7120 E. County Line Road
Highlands Ranch, Colorado
Highlands Ranch West Branch: 1997 1,729,590 3,811
9285 S. Broadway
Highlands Ranch, Colorado
Louisville Branch: 1978 450,550 3,500
865 S. Boulder Road
Louisville, Colorado
Montbello Branch(4): 1995 127,190(5) 1,300
4850 Chambers Road
Denver, Colorado
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Net Book
Year Facility Value as of
Opened or December 31, Square
Office Location Acquired 1997 Footage
- -------------------------------- ---------- ------ -------
<S> <C> <C> <C>
Montrose Branch: 1995 1,186,570 3,811
1105 S. Townsend
Montrose, Colorado
North Denver Branch: 1954 281,080 6,800
3460 W. 38th Avenue
Denver, Colorado
Smoky Hill Branch: 1994 1,128,910 3,811
16778 Smoky Hill Road
Aurora, Colorado
South Denver Branch: 1989 1,719,180 5,638
2050 S. Downing
Denver, Colorado
Thornton Branch: 1995 1,065,370 3,811
12080 Colorado Boulevard
Thornton, Colorado
Westminister Branch: 1991 888,310 3,656
9150 N. Sheridan
Westminister, Colorado
</TABLE>
- ----------------
(1) The Bank owns the building and improvements at this location but leases
the land. The land lease runs until April 1, 2000 for rent of $800 per
month. There are two five-year options to extend the term at a market
rate to be negotiated.
(2) Leased branch with original lease term to expire in March 2003, and
three five-year options to extend term at market rate. Current base
rent on the branch office is $6,333 per month.
(3) Leased branch with original term to expire in November 2000, and five
five-year options to extend the term at market rate. Current rent is
$2,567 per month.
(4) Leased Branch with original lease term to expire in November 1998, and
two two-year options at the current rate and a series of two-year
options to extend term at market rate. Current rent on the branch
office is $2,582 per month.
(5) Unamortized leasehold improvements.
The Bank owns several properties adjoining its existing facilities
which it is holding for possible future expansion. These are included in
buildings on the Company's consolidated financial statements and, as of December
31, 1997, amounted to $704,000. The Bank and its service corporation, FSIC, own
several properties on the corner of Alameda and Wadsworth, and Alameda and
Yarrow, adjoining the main office in Lakewood, Colorado. These consist
principally of a 1.5 acre vacant site, known as 280 S. Yarrow, and a property to
the east of this and directly south of the main office, consisting of
approximately 100,000 square feet of land. Eighty thousand square feet of this
land was leased in 1994 to General Mills Restaurant Group for the operation of
an Olive Garden Restaurant, which opened in April 1995. To the east of the land
are two smaller properties on sites of about 10,000 square feet each. These lots
and improvements are leased. The Bank also leases space to tenants at many of
its office locations. Net rental income from unaffiliated tenants, including
tenants renting property held for development of future branch offices, is
immaterial.
43
<PAGE>
The Bank performs its own data processing through its data processing
department located in its main office and utilizes several hardware platforms
and a combination of internally developed and purchased software systems. The
net book value of this data processing equipment as of December 31, 1997 was
$943,000. As of December 31, 1997, the net book value of land, buildings,
furniture, and equipment owned by the Bank and the Company, less accumulated
depreciation and amortization totalled $23.6 million.
Item 3. Legal Proceedings
- --------------------------
In the normal course of business, the Company is involved in various
legal actions arising from its lending and collection activities. In the opinion
of management, the outcome of these legal actions will not significantly affect
the consolidated financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1997.
PART II
Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Corporate
Information" and "Additional Stockholder Information" in the Company's Annual
Report to Stockholders for the Year ended December 31, 1997 ("Annual Report"),
is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion of 1997 Results" in the Annual Report is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Refer to the information contained in the section captioned "Net
Portfolio Value" on Page 35 of this report.
The information contained in the section captioned "Net Portfolio Value
- - Market Risk" in the Annual Report is incorporated herein by reference.
The information contained in the section captioned" Disclosures of Fair
Value of Financial Instruments" of Note 1 of Notes to Consolidated Financial
Statements as contained in the Company's Annual Report (which are listed under
Item 14 herein) is incorporated herein by reference.
44
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The consolidated financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I -
Election of Directors" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held May 4, 1998 ("Proxy Statement") is
incorporated herein by reference. For information regarding the executive
officers of the Company, see "Proposal I - Election of Directors" in the Proxy
Statement.
Because the Common Stock of the Company is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 ("Exchange Act"), the
executive officers and directors of the Company and beneficial owners of greater
than 10% of the Bank's Common Stock ("10% beneficial owners") are required to
file reports on Forms 3, 4, and 5 with the Securities and Exchange Commission
("SEC") disclosing changes in beneficial ownership of the Common Stock. SEC
rules require disclosure in the Company's Proxy Statement and Annual Report on
Form 10-K of the failure of an executive officer, director, or 10% beneficial
owner of the Common Stock to file a Form 3, 4, or 5 on a timely basis.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this Item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this Item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Registrant.
45
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this Item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
1. Independent Auditors' Report
2. Consolidated Financial Statements of First Colorado Bancorp, Inc.
(a) Consolidated Statements of Financial Condition -- December 31, 1996
and 1997 (b) Consolidated Statements of Operations -- Years ended
December 31, 1995, 1996, and
1997
(c) Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1995, 1996, and 1997
(d) Consolidated Statements of Cash Flows -- Years ended December
31, 1995, 1996, and 1997
(e) Notes to Consolidated Financial Statements
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
3. (a) Exhibits
<S> <C> <C>
3(i) Articles of Incorporation of First Colorado Bancorp, Inc.*
3(ii) Bylaws of First Colorado Bancorp, Inc.*
4.1 Stock Certificate of First Colorado Bancorp, Inc.*
4.2 Preferred Share Purchase Rights Agreement**
10.1 Severance Agreement with Malcolm E. Collier, Jr.***
10.2 Form of Severance Agreement with Key Officers****
10.3 1992 Stock Option Plan****
10.4 1992 Management Recognition Plan****
10.5 1996 Stock Option Plan****
10.6 1996 Management Stock Bonus Plan****
13 Annual Report to Stockholders for the fiscal year ended December 31, 1997
21 Subsidiaries of the Registrant (Incorporated by reference to "Item I - Subsidiary
Activities.")
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule *****
</TABLE>
46
<PAGE>
(b) Reports on Form 8-K
None.
- ---------------
<TABLE>
<CAPTION>
<S> <C>
* Incorporated by reference to the Registration Statement on Form S-1 (file no. 33-97228) declared
effective by the SEC on November 13, 1995.
** Incorporated by reference to the Registrant's Current Report on Form
8-K filed with the SEC on July 25, 1996.
*** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996.
***** Filed electronically only.
</TABLE>
47
<PAGE>
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.
FIRST COLORADO BANCORP, INC.
Date: March 30, 1998 By: /s/Malcolm E. Collier, Jr.
--------------------------
Malcolm E. Collier, Jr.
President, Chairman of the Board,
and Chief Executive Officer
(Duly Authorized Representative)
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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/Brian L. Johnson By: /s/Malcolm E. Collier, Jr.
----------------------------------- ------------------------------
Brian L. Johnson Malcolm E. Collier, Jr.
Vice President and Treasurer President, Chairman of the Board,
(Principal Financial and Accounting and Chief Executive Officer
Officer) (Principal Executive Officer)
Date: March 30, 1998 Date: March 30, 1998
By: /s/Robert W. Richards By: /s/Leeon E. Hayden
----------------------------------- ------------------------------
Robert W. Richards Leeon E. Hayden
Director Director
Date: March 30, 1998 Date: March 30, 1998
By: /s/John J. Nicholl By: /s/E. William Foerster, Jr.
----------------------------------- ------------------------------
John J. Nicholl E. William Foerster, Jr.
Director Director
Date: March 30, 1998 Date: March 30, 1998
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/Stephen Burkholder By: /s/Robert T. Person, Jr.
----------------------------------- ------------------------------
Stephen Burkholder Robert T. Person, Jr.
Director Director
Date: March 30, 1998 Date: March 30, 1998
By: /s/James R. Wexels By: /s/Polly Baca
----------------------------------- ------------------------------
James R. Wexels Polly Baca
Director Director
Date: March 30, 1998 Date: March 30, 1998
</TABLE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
First Colorado Bancorp, Inc.
1997 Annual Report
<PAGE>
First Colorado Bancorp Stock Price
By Quarter
<TABLE>
<CAPTION>
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Stock Price by Quarter $11.00 $11.750 $12.50 $14.9375 $16.375 $15.75 $17.25 $19.25
High Stock Price by Quarter $12.50 $13.75 $15.625 $17.875 $19.00 $19.875 $21.50 $26.125
</TABLE>
FCB First Colorado
Bancorp, Inc.
Consolidated Financial Highlights
<TABLE>
<CAPTION>
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends $0.075 $0.08 $0.08 $0.09 $0.10 $0.11 $0.12 $0.13
</TABLE>
<PAGE>
Table of Contents
A Letter from the Chairman 2
Business of the Company 3
Selected Consolidated Financial and Other Data 4
Key Operating Ratios 5
Management's Discussion of 1997 Results 6
Common Stock and Related Matters 17
Independent Auditor's Report 19
Consolidated Statements of Financial Condition 20
Consolidated Statements of Operations 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 26
Consolidating Schedule - Financial Condition 54
Consolidating Schedule - Operations and Retained Earnings 55
Boards of Director 56
Corporate Information 57
Officers 57
Branch Locations 58
1
<PAGE>
To our stockholders and friends:
First Colorado Bancorp, Inc. completed a very successful year in 1997.
Our deposits totaled $1.2 billion at year end, a 4.1% increase from 1996.
Lending activity was also very strong as our loans receivable increased 9.7% in
1997. Loans closed were $355 million for the year, of which 66% were single
family mortgage loans, 20% were consumer loans, and the balance commercial real
estate and construction loans.
The company's net income was a record $1.25 per share, and stockholders' equity
increased to $12.45 per share. Return on assets was 1.31% and return on equity
was 9.92%. We were able to increase our declared dividend each quarter during
1997, from $0.09 per share in fourth quarter 1996 to $0.13 per share in fourth
quarter 1997.
Expansion also continued for the bank as we added a new branch in Highlands
Ranch in the southern metro Denver area. Our Montbello office was relocated and
expanded as well. In addition, First Federal acquired the assets of Delta
Federal Savings in Delta, Colorado, and we're serving those new customers at our
Delta branch at 564 Main Street.
Colorado's economy remains one of the strongest in the nation as we move into
1998. The real estate market for both new and previously occupied homes is very
strong and suggests a strong source of business and increased revenue for First
Federal and First Colorado Bancorp in 1998.
This strong economy also suggested that 1998 would be a time to look for other
opportunities in banking. That is why, on March 8th of this year, First Colorado
Bancorp entered into an agreement to merge with Commercial Federal Corporation.
Commercial Federal is an $8.5 billion bank with branches in Iowa, Nebraska,
Kansas, Oklahoma, and Colorado. When the merger with First Colorado is
completed, Commercial Federal will have $2.5 billion in Colorado deposits and 48
branches. This larger combined bank will be a major force in this market.
The merger allows us to combine with a larger organization, offer a wider
product line, and undergo minimal change in our branch network and employees. We
feel it is a good deal for our shareholders and will ask for their approval at a
special meeting later this year. All of us at First Colorado Bancorp thank you
for your continued support.
Sincerely,
/s/ Malcolm E. Collier,
Malcolm E. Collier,
Chairman and Chief Executive Officer
2
<PAGE>
Business of the Company
First Colorado Bancorp, Inc. (the "Company") is a Colorado corporation
organized in September 1995 to facilitate the conversion of First Savings
Capital, M.H.C. (the "Mutual Holding Company") from the mutual to stock form of
ownership and to acquire and hold all of the capital stock of First Federal Bank
of Colorado (the "Bank" or "First Federal Bank"), (collectively, the "Conversion
and Reorganization"). The Mutual Holding Company previously was the majority
stockholder of the Bank and upon consummation of the conversion and
Reorganization on December 29, 1995, the Mutual Holding Company was merged with
and into the Bank and the Company acquired the Bank as a wholly owned
subsidiary. In connection with the Conversion and Reorganization, the Company
sold 13,403,798 shares of its common stock to the public in an initial public
offering and issued 6,619,539 shares in exchange for the outstanding shares of
the Bank held by persons other than the Mutual Holding Company. As of December
31, 1997, the Company had total assets of $1.6 billion, total deposits of $1.2
billion, and stockholders' equity of $209.3 million, or 13.5% of total assets.
The Company is a unitary savings and loan holding company and has no
significant assets or activities other than holding all of the outstanding
shares of the Bank and a note evidencing the Company's $10.5 million loan to the
Bank's Employee Stock Ownership Plan ("ESOP"), and investing the portion of the
net proceeds from the offering retained by the Company, which as of December 31,
1997, was invested in a loan to the Bank and in deposits in the Bank. Since the
conversion, the Company has utilized $58.9 million of the net proceeds from the
offering to repurchase its common stock (3.7 million shares) in the open market.
The Company neither owns nor leases any property, but instead uses the premises,
equipment and furniture of the Bank. Currently, the Company does not intend to
employ any persons other than executive officers who are also executive officers
of the Bank, and the Company will utilize the support staff of the Bank from
time to time.
Business of the Bank
First Federal Bank is a federally-chartered stock savings bank,
originally chartered by the State of Colorado as the Cooperative Building and
Loan Association on April 26, 1885. A federal charter was granted to the Bank in
1934. In connection with the Conversion and Reorganization, the Bank changed its
name from First Federal Savings Bank of Colorado to its current name and became
a wholly owned subsidiary of the Company. It is believed to be the oldest
savings institution headquartered in Colorado. The Bank's deposits are now
insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings
Association Insurance Fund ("SAIF"), and the Bank is regulated by the Office of
Thrift Supervision ("OTS").
The principal business of the Bank is the acceptance of deposits from
the general public and the origination and purchase of mortgage loans for the
purpose of constructing, financing or refinancing one-to-four family residences
and other improved residential and commercial real estate. The Bank is also
active in the origination of home equity loans. Excess liquidity is invested in
investment securities and in mortgage-backed securities.
First Federal Bank primarily serves the Colorado counties of Denver,
Adams, Arapahoe, Jefferson, Douglas, Boulder, Mesa, Delta and Montrose through a
network of 27 offices, providing a full
range of retail banking services.
3
<PAGE>
<TABLE>
<CAPTION>
As of and for the years ended December 31,
Selected financial condition data 1993 1994 1995 1996 1997*
-------------------------- -------------------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets $1,224,119 $1,302,879 $1,482,497 $1,514,088 $1,556,026
Mortgage loans receivable, net 510,319 641,545 795,691 894,561 994,788(4)
Non-mortgage loans receivable, net 96,224 118,398 135,468 166,963 169,814(4)
Mortgage-backed and other asset-backed securities, net:
Available-for-sale, net at market value N/A 29,145 8,506 7,687 6,839(4)
Held-to-maturity, at amortized cost 433,870 374,549 302,380 273,602 209,543
Investment securities/FHLB stock:
Available-for-sale, net at market value N/A 39,068 33,246 20,653 17,228
Held-to-maturity, at amortized cost 89,605 31,018 54,362 61,642 73,944
Deposits 1,031,783(1) 1,018,687(2) 1,080,289 1,135,823 1,182,727(4)
FHLB advances 59,450 141,948 125,670 122,515 122,410(4)
Other borrowed money 10,688 6,929 5,543 5,009 4,479
Stockholders' equity 98,690 108,014 238,718(3) 216,624 209,309
</TABLE>
(1) Deposits in the amount of $162.2 million were purchased in 1993.
(2) Deposits in the amount of $45.6 million were sold in 1994.
(3) Includes $117,620,000 form the net proceeds from the sale of common
stock in December, 1995, in connection with the conversion and
reorganization.
(4) Mortgage loans in the amount of $28.9 million,non-mortgage loans in the
amount of $6.2 million, mortgage-backed securities in the amount of
$0.5 million, deposits in the amount of $30.0 million, and FHLB
advances in the amount of $6.9 million, were acquired in 1997.
Selected operating data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Interest income $ 73,841 $ 79,255 $ 94,263 $ 104,628 $ 107,948
Interest expense 37,392 42,785 58,863 57,194 60,014
--------- --------- --------- --------- ---------
Net interest income 36,449 36,470 35,400 47,434 47,934
Provision (credit) for losses on loans 193 (411) (495) 1,143 (739)
--------- --------- --------- --------- ---------
Net interest income after provision (credit)
for losses on loans 36,256 36,881 35,895 46,291 48,673
--------- --------- --------- --------- ---------
Noninterest income:
Fees and service charges 3,704 3,818 4,195 4,773 5,336
Gain (loss) on sale of loans, net 961 146 (1) 218 251
Gain (loss) on sale of securities, net -- 317 (381) -- 1,260
Net income from real estate operations 214 762 1,222 337 1,148
Rental income 159 169 171 170 187
--------- --------- --------- --------- ---------
Total noninterest income 5,038 5,212 5,206 5,498 8,182
--------- --------- --------- --------- ---------
Noninterest expense:
Compensation 8,651 10,025 10,666 12,215 14,708
Occupancy 2,977 3,411 3,703 3,805 4,118
Provision (credit) for losses
on real estate owned 172 448 (95) 3 (114)
Provision (credit) for losses on federal funds sold -- -- 618 (618) --
Professional fees 692 642 667 779 710
Advertising 733 837 899 1,002 995
Printing, supplies and postage 1,022 1,038 1,095 1,093 1,136
FDIC premiums 1,820 2,291 2,391 9,392 729
Other, net 1,522 1,964 1,373 2,835 2,834
--------- --------- --------- --------- ---------
Total noninterest expense 17,589 20,656 21,317 30,506 25,116
--------- --------- --------- --------- ---------
Earnings before income taxes 23,705 21,437 19,784 21,283 31,739
Income tax expense 8,850 7,891 7,146 7,911 11,825
--------- --------- --------- --------- ---------
NET EARNINGS $ 14,855 $ 13,546 $ 12,638 $ 13,372 $ 19,914
========= ========= ========= ========= =========
</TABLE>
- -------------------
* All information prior to 1995 relates to the Bank. Information for 1995
represents consolidated financial information for the Company and the
Bank as a result of the Conversion and Reorganization completed
December 29, 1995. Information for 1996 and 1997 represents
consolidated financial information for the Company.
4
<PAGE>
Selected Financial and Key Operating Ratios
- --------------------------------------------------------------------------------
Key Operating Ratios
<TABLE>
<CAPTION>
At or for the year ended December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Return on average assets (net earnings
divided by average total assets) 1.33% 1.08% 0.92% 0.89% 1.31%
-- -- -- 1.18(1) --
Return on average equity (net earnings
divided by average equity) 16.25 13.03 11.03 5.72 9.92
-- -- -- 7.57(1) --
Average equity to average assets ratio
(average equity divided by average
total assets) 8.20 8.26 8.36 15.62 13.19
Equity to assets at year end 8.06 8.29 16.10 14.31 13.46
Net interest rate spread 3.21 2.82 2.41 2.68 2.74
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.43 3.04 2.71 3.33 3.29
Net interest income to average assets 3.27 2.90 2.58 3.17 3.15
Non-performing loans to total loans(2) 0.24 0.16 0.21 0.14 0.18
Non-performing assets to total assets 0.32 0.42 0.27 0.19 0.15
Allowance for loan losses to total loans(2) 0.59 0.44 0.31 0.36 0.40
Average interest-earning assets to
average interest-bearing liabilities 106.21 106.28 106.55 116.16 113.29
Noninterest expense/average assets 1.58 1.64 1.56 2.04 1.65
-- -- -- 1.57(1) --
Net interest income after provision (credit)
for loan losses to noninterest expenses 206.13 178.55 168.39 151.74 193.79
-- -- -- 197.11(1) --
Number of:
Mortgage loans serviced 8,991 9,001 9,753 10,285 11,060
Non-mortgage loans serviced 8,637 9,998 11,986 14,561 14,471
Deposit accounts 124,607 122,481 129,482 135,763 139,661
Offices (all full service) 23 23 25 26 27
Per Share Data
Book value per share NM NM NM $ 11.91 $ 12.45
Earnings per common share NM NM NM 0.74 1.29
Earnings per common share, assuming dilution NM NM NM 0.73 1.25
Dividends declared per share NM NM NM 0.325 0.46
Dividend payout ratio NM NM NM 46.94% 38.37%
</TABLE>
- ------------------
(1) Excluding the one-time SAIF Special Assessment of $7.0 million before taxes.
(2) Total loans exclude mortgage-backed and other asset-backed securities.
NM -- Not meaningful as a result of the Conversion and Reorganization completed
December 29, 1995.
5
<PAGE>
FCBI----------------------------------------------------------------------------
General
Since the Conversion and Reorganization was completed until December
29,1 995, the consolidated results of operations of the Company for years ended
prior to December 31, 1996 essentially relate solely to the results of
operations for First Federal Bank. Since the Company is a unitary savings and
loan holding company and First Federal Bank is the primary asset of the Company,
in the discussion to follow the terms "Company" and "Bank" are used
interchangeably.
First Federal Bank's results of operations are primarily dependent on
its net interest income, which is the difference between interest income earned
on its loan, mortgage-backed and other asset-backed securities and investment
portfolios, and its cost of funds, consisting of interest paid on deposits and
borrowings. Operating results also are affected to a lesser extent by the type
of lending, each of which has a different rate and fee structure. The Bank's net
earnings are also affected by its provision for loan losses, as well as the
amount of non-interest income, including loan origination fees and service
charges, and non-interest expense. The Bank's operating expenses principally
consist of employee compensation, occupancy expenses, federal deposit insurance
premiums and other general and administrative expenses. Earnings of the Bank
also are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
The Company and the Bank accessed the capital markets in December 1995
and raised $117.6 million of equity through the initial public offering. These
additional funds were initially used to decrease borrowings and to increase
short-term investments, specifically Federal funds sold. Throughout 1996 and
1997, those short-term investments have bene reallocated to other
interest-earning assets, specifically loans receivable.
On March 8, 1998, the company entered into a Reorganization and Merger
Agreement ("the agreement") to be acquired by Commercial Federal Corporation
("Commercial Federal"). Under the terms of the agreement, Commercial Federal
will acquire through a tax-free reorganization all of the outstanding shares of
the Company's common stock in exchange for Commercial Federal's common stock.
The exchange ratio will be determined based upon the average closing price of
Commercial Federal's common stock during a twenty consecutive trading day period
ending five trading days prior to closing. Based on Commercial Federal's closing
price prior to March 8, 1998, First Colorado shareholders would receive .8807
shares of Commercial Federal common stock for each share of First Colorado
Bancorp, Inc. common stock. The acquisition is subject to regulatory approvals,
the Company's and Commercial Federal's shareholder approval and other conditions
and is expected to close in the third quarter of 1998. Regardless of whether the
proposed acquisition is consummated, the following discussion addresses the
financial condition, results of operation, liquidity and capital resources and
ongoing strategy of the Company.
Management Strategy
First Federal Bank's management strategy has been to maintain
profitability and a strong capital position through growth at a rate that does
not exceed its ability to generate earnings. The Bank's lending strategy has
historically focused on the origination of traditional one-to-four family
mortgages and, to a lesser extent, multi-family residential and commercial real
estate loans. This focus and relatively conservative underwriting standards are
designed to reduce the risk of losses on its loan portfolio. This lack of
diversification in its asset structure does, however, make the portfolio more
susceptible to declines in real estate values in its market area. The risk has
been mitigated in part through investments in mortgage-backed securities.
First Federal Bank, like most other financial institutions, is subject
to interest rate risk as a result of the difference in the maturity on
interest-bearing liabilities and interest-earning assets and the volatility of
interest rates. Due to their shorter terms to maturity, most deposit accounts
react more quickly to market interest rate movements than do traditional
mortgage loans. Therefore, sharp increases in interest rates, such as occurred
in 1994, will generally adversely affect the Bank's earnings. Conversely, the
Bank will generally benefit during periods of declining or stable interest rates
such as existed in 1995, 1996, and 1997.
Since the early 1980's, management has been working to increase the
interest rate sensitivity of the Bank's assets and decrease the sensitivity of
its liabilities, while maintaining asset quality. This strategy has been
accomplished primarily by (i) maintaining a high asset quality, (ii) maintaining
a higher level of interest-earning assets than interest-bearing liabilities,
(iii) originating and purchasing for its own portfolio adjustable rate
one-to-four family residential mortgage ("ARM") loans and mortgage-backed
securities, (iv) originating 30-year fixed-rate mortgages for sale in the
secondary market, (v) expanding the Bank's consumer loan and home equity loan
portfolio, (vi) investing in shorter term investment securities, (vii) managing
deposit rates and maintaining a strong deposit base by providing convenient and
quality services and locations, and (viii) controlling operating expenses.
6
<PAGE>
Management's Discussion of Financial Results
- --------------------------------------------------------------------------------
Other aspects of management's current strategy include the following:
Loan diversification. First Federal Bank will continue to actively seek
to originate consumer loans at its branch offices, most of which have
historically consisted of home equity loans. Consumer loans generally
have shorter terms and higher rates than first mortgage loans. Consumer
loans comprised 10.9% of total assets as of December 31, 1997, and the
Bank will attempt to increase such loans to approximately 15% of
assets. In this regard, First Federal Bank has targeted its marketing
efforts toward consumer loan originations and provided branch office
personnel with specific goals for consumer loan origination.
Furthermore, the Bank is actively pursuing the origination, on a
selective basis, of loans secured by multi-family dwellings and
commercial real estate located in its primary market area. The Bank
believes it has an opportunity to selectively originate quality, low
loan-to-value, commercial real estate loans in its market area, which
generally yield a higher rate of interest and are at adjustable rates.
The success of such strategy will depend on a number of factors,
including, but not limited to, consumer demand, pricing of the
competition, and general economic conditions.
Deposits. First Federal Bank will continue to monitor its deposit costs
by adjusting the interest rates offered on its deposit accounts in
accordance with market conditions. The Bank will continue to stress
checking and money market type accounts that are not as interest rate
sensitive as certificates of deposit.
Property. During the past several years, the Bank has invested
significant amounts in building new offices and in remodelling several
of its existing offices. After constructing two branch offices in 1995,
one in 1996, and one in 1997, First Federal Bank currently has plans to
open one new branch office in 1998.
Profitability. For the year ended December 31, 1997, First Federal Bank
had a net interest rate spread of 2.74%. This increased spread over
fiscal 1996 resulted in increased profits. Although the net interest
rate spread may decrease as the cost of funds rise for deposits and
borrowings, the Bank believes that its net interest rate spread will
remain favorable as it continues to implement its strategies. The Bank
intends to further enhance its profits by further reducing its
operating expenses and maintaining asset quality, thereby limiting the
need for additional increases in the allowance for loan losses.
The Bank's ratio of non-interest expenses to average assets was 1.65%
for the year ended December 31, 1997. An objective of the Bank for 1998
is to maintain and, if possible, reduce this operating ratio. During
the past several years, however, the Bank has added additional
employees as a result of growth, expansion of services and increased
regulatory reporting.
The Bank will seek to maintain asset quality through the continued
origination of single family mortgages, underwritten on the same
conservative basis as in the past. In connection with commercial real
estate loans, the Bank has implemented several changes in an effort to
improve asset quality, including: (i) reducing amortization terms while
increasing the frequency of requiring balloon payments on new loans,
(ii) reducing loan-to-value ratios to an average of approximately 70%
and (iii) increasing periodic inspections of collateral with the
objective of addressing and resolving any deterioration of the
collateral with the borrower as it arises. Profitability is also
dependent upon a number of factors beyond the control of the Bank,
including general and local economic conditions and governmental
regulations.
Net Portfolio Value - Market Risk
OTS regulations require the Bank to measure its interest rate risk
("IRR") by computing the net present value of its cash flows from assets,
liabilities and off-balance sheet items ("NPV") in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on the Bank's NPV of sudden and sustained 1% to 4% increases and decreases in
market interest rates. The regulations provide that the OTS will calculate the
IRR component quarterly for each institution from the institution's Thrift
Financial Reports. A resulting change in NPV of more than 2% of the estimated
market of its assets will require an institution to deduct from its capital 50%
of the excess change. The OTS has deferred for the present time the date on
which savings institutions must deduct the IRR component from capital.
The table on page 8 presents the Bank's NPV as of December 31, 1997, as
calculated by the OTS based on information provided to the OTS by the Bank.
As the table shows, increases in interest rates would result in net
decreases in the Bank's NPV, while decreases in interest rates will result in
relatively smaller net increases in the Bank's NPV. Based upon the above
calculations as of December 31, 1997, the Bank would not be required to make a
deduction from total capita for purposes of calculating the Bank's risk-based
capital requirement. (Bank's NPV decreases by 1.85% if interest rates increase
by 200 basis points.) Certain shortcoming are inherent in the methodology used
in the table. Modeling changes in NPV requires the making of certain assumptions
that may tend to oversimplify the manner in which actual yields and costs
respond to changes in market interest rates. First, the model
7
<PAGE>
FCBI----------------------------------------------------------------------------
assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured. Second, the model assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity of repricing of specific assets and liabilities.
Accordingly, although the NPV measurements do provide an indication of the
Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to provide a precise forecast of the effect of
changes in market interest rates on the Bank's net interest income.
The Bank also measures interest rate risk by computing estimated
changes in its net interest income ("NII") over a four quarter period. These
computations estimate the effect on the Bank's NII of sudden and sustained 1% to
4% increases and decreases in market interest rates. (The OTS does not provide
estimated changes in the Bank's NII.)
Computations of prospective effects of hypothetical interest rates
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit runoffs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react at different times and in
different degrees to changes in the market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result in the event of an interest
rate increase as the ability of many borrowers to service their debt may
deteriorate.
The Bank's Board of Directors is responsible for reviewing the Bank's
asset and liability policies. The Board meets quarterly to review interest rate
risk and trends, as well as liquidity and capital ratios and requirements. In
connection with NPV and NII calculations, the Bank's Board of Directors has
adopted an interest rate risk policy which establishes certain percentage
changes in the Bank's NPV and NII that the Board deems to be acceptable in the
event of increases or decreases in interest rates. The Bank's management is
responsible for administering the policies and determinations of the Board of
Directors with respect to the Bank's asset and liability goals and strategies.
Management expects that the Bank's asset and liability policies and strategies
will continue as described above so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
<TABLE>
<CAPTION>
Net Portfolio Value
--------------------------------------------------------------------
(Dollars in thousands)
Change in NPV
Change in Interest as a % of
Rates in Basis Points Estimated Market
(Rate Shock)(1) $ Amount $ Change % Change value of Assets
- --------------- ---------- ---------- -------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 bp $ 148,204 $ (83,365) (36)% (4.56)%
+300 bp 172,897 (58,673) (25) (3.13)
+200 bp 195,966 (35,604) (15) (1.85)
+100 bp 215,990 (15,579) (7) (0.79)
Static 231,569 -- -- --
-100 bp 242,499 10,929 +5 +0.52
-200 bp 250,383 18,814 +8 +0.86
-300 bp 258,427 26,857 +12 +1.20
-400 bp 271,196 39,626 +17 + 1.78
</TABLE>
8
<PAGE>
Analysis of Net Interest Income
- --------------------------------------------------------------------------------
General. First Federal Bank's earnings depend primarily on its net
interest income. Net interest income is affected by (i) the amount of
interest-earning assets and interest-bearing liabilities, and (ii) the
difference ("interest rate spread") between rates of interest earned on
interest-earning assets and rates paid on interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income.
Rate/Volume Analysis. Changes in net interest income are attributable
to three factors: a change in volume of an interest-earning asset or
interest-bearing liability, a change in rates or a change caused by a
combination of changes in volume and rate. The table below sets forth certain
information regarding changes in interest income and interest expense of the
Bank for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to
(1) changes in volume (changes in average volume multiple by old rate); (2)
changes in rates (changes in rate multiplied by old average volume); and (3)
changes in rate-volume (changes in rate multiplied by changes in average
volume).
Rate/Volume Analysis
<TABLE>
<CAPTION>
Year Ended December 31,
1995 vs 1996 1996 vs 1997
Increase (Decrease) due to: Increase (Decrease) due to:
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loan portfolio $ 7,795 $ 1,124 $ 155 $ 9,074 $ 7,404 ($ 404) ($ 46) $ 6,954
Non-mortgage loan portfolio 2,222 352 75 2,649 1,467 63 7 1,537
Mortgage/Asset-backed
securities (2,939) (452) 59 (3,332) (3,471) (750) 136 (4,085)
Investment securities/
FHLB Stock 958 (26) (5) 927 (410) 217 (16) (209)
Fed Funds old and other
interest-earning assets 442 172 433 1,047 (820) (174) 117 (877)
-------- -------- -------- -------- -------- -------- -------- --------
Total change in interest
income $ 8,478 $ 1,170 $ 717 $ 10,365 $ 4,170 ($ 1,048) $ 198 $ 3,320
======== ======== ======== ======== ======== ======== ======== ========
Interest expense:
Time Deposits $ 1,245 ($ 269) ($ 10) $ 966 $ 1,911 $ 48 $ 3 $ 1,962
Other Deposits 356 (628) (16) (288) 571 (267) (11) 293
Borrowings (2,223) (157) 33 (2,347) 400 157 8 565
-------- -------- -------- -------- -------- -------- -------- --------
Total change in interest $ (622) ($ 1,054) $ 7 ($ 1,669) $ 2,882 ($ 62) $ 0 $ 2,820
======== ======== ======== ======== ======== ======== ======== ========
expense
NET CHANGE IN NET
INTEREST INCOME $ 9,100 $ 2,224 $ 710 $ 12,034 $ 1,288 ($ 986) $ 198 $ 500
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
The following table sets forth for the periods indicated, information regarding
the total dollar amounts of interest income from interest-earning assets and
the resulting average yields, the total dollar amount of interest expense on
interest bearing liabilities and the resulting average costs, net interest
income, interest rate spread, the net yield earned on interest-earned on
interest-earning assets, and the ratio of total interest-earning assets to total
interest-bearing liabilities.
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31, At December 31,
1995 1996 1997 1997
-------------------------------- ----------------------------- -------------------------- -----
Average Average Average
Average Yield/ Average Yield/ Average Yield/ Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost Balance Cost
------- -------- ---- ------- -------- ---- ------- -------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-
earning
assets:
Mortgage
loan
portfolio,
net $ 741,381 $56,637 7.64% $ 843,414 $ 65,711 7.79% $ 938,456 $ 72,666 7.74% $ 994,788 7.70%
Non-mortgage
loan
portfolio,
net 127,567 10,482 8.22 154,610 13,131 8.49% 171,880 14,668 8.53% 169,814 8.68
Mortgage/
asset
backed
securities,
net 352,148 22,455 6.38 306,055 19,123 6.25% 250,498 15,038 6.00 216,382 6.64
Investment
securities/
FHLB stock 80,343 4,513 5.62 97,403 5,440 5.59 90,070 5,231 5.81 91,172 6.01
Federal funds
sold and
other
interest-
earning
assets 7,078 176 2.49 24,759 1,223 4.94 8,168 346 4.24 16,687 3.44
-------- ------ -------- ------ -------- ------- --------
Total
interest-
earning
assets $1,308,517 $94,263 7.20% $1,426,241 $104,628 7.34%$1,459,072$107,949 7.40% $1,488,843 7.50%
---------- ======= ======== ======== ===== ======== ====
Non interest-
earning assets 61,376 69,015 62,537 67,183
---------- ---------- -------- ---------
Total assets $1,369,893 $1,495,256 $1,521,609 $1,556,026
========== ========== ======== =========
Interest-
bearing liabilities:
Time deposits $ 618,034 $34,332 5.56% $ 640,439 $35,298 5.51%$ 657,121 $37,260 5.52% 687,866 5.75%
Other deposits 448,234 13,982 3.12 459,633 13,694 2.98 478,810 $13,987 2.92 494,861 2.89
Borrowings 161,808 10,549 6.52 127,710 8,202 6.42 133,937 8,767 6.55 126,889 6.47
---------- ------- --------- ------- ------- ------ ----------
Total interest-
bearing
liabilities $1,228,076 $58,863 4.79% $1,227,782 $57,194 4.66%$1,287,868 $60,014 4.66% $1,309,616 4.74%
======= ======= ========== ======= ==== ====
Non interest-
bearing liabilities 27,287 33,864 33,006 37,101
---------- ---------- ---------- ----------
Total liabilities $1,255,363 $1,261,646 $1,320,874 $1,346,717
Stockholders' equity 114,530 233,610 200,735 209,309
---------- ---------- ---------- ----------
Total liabilities
and Stockholders'
equity $1,369,893 $1,495,256 $1,521,609 $1,556,026
========== ========== ========== ==========
Net interest income $35,400 $47,434 $47,935
======= ======= =======
Interest rate
spread 2.41% 2.68% 2.74% 2.76%
==== ==== ==== ====
Net interst
margin(2) 2.71% 3.33% 3.29%
==== ==== ====
Ratio of average
interest-earning
assets to
average interest-
bearing
liabilities 106,55% 116.16% 113,29%
====== ====== ======
Ratio of interst-
earning assets
to interest-
bearing
liabilities 113.69%
======
</TABLE>
(1) Excludes income earned on loan origination and commitment fees. Average
balances include non accrual loans.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
10
<PAGE>
Comparison of Financial Condition:
- --------------------------------------------------------------------------------
Comparison of Financial Condition:
1997-1996
The total assets of the Company increased $41.9 million, or 2.8%, from
$1,514.1 million at December 31, 1996 to $1,556.0 million at December 31, 1997.
A major factor in this increase was the acquisition, effective October 1, 1997,
of Delta Federal Savings, F.S.B. ("Delta") which had total assets of $40.5
million as of September 30, 1997. The increase is also due to an increase in
loan receivable of $103.1 million, or 9.7%, with $35.1 million being acquired
from Delta and much of the remaining increase due to the production from the
Bank's correspondent lending program. Investment securities also increased, from
$72.8 at December 31, 1996, to $79.9 million at December 31, 1997, an increase
of $7.1 million, or 9.8%. Cash and cash equivalents decreased $4.6 million, or
9.3%, from $49.2 million at December 31, 1996 to $44.6 million at December 31,
1997, and mortgage-backed and other asset-backed securities into loans
receivable.
As of December 31, 1997, non-performing assets totaled $2.3 million, or
0.15% of total assets as compared to $2.9 million, or 0.19% of total assets, as
of December 31, 1996. The decrease was due primarily to the sale of real estate
property previously held as REO and to the recovery of a non-performing
investment.
Total liabilities increase $49.3 million, or 3.8%, from $1,297.4
million at December 31, 1996, to $1,346.7 million at December 31, 1997. The
increase in liabilities primarily occurred in the deposit portfolio, which
increased $46.9 million, or 4.1%, from $1,135.8 million at December 31, 1996, to
$1,182.7 million at December 31, 1997, due primarily to the acquisition of Delta
with a $30.0 million deposit portfolio and to the interest credited to the
existing portfolio. Total advances from the Federal Home Loan Bank ("FHLB")
decreased by $105,000, or 0.1%, from $122.5 million as of December 31, 1996, to
$122.4 million s of December 31, 1997.
Stockholders' equity decreased $7.3 million, or 3.4%, from $216.6
million at December 31, 1996 to $209.3 million at December 31, 1997, due to net
earnings of $19.9 million for the year ended December 31, 1997, being offset by
treasury stock purchases totaling $29.7 million and by dividends declared of
$7.6 million.
Comparison of Operating Results
1997-1996
General
Net earnings for the year ended December 31, 1997, increased $6.5
million, or 48.9%, to $19.19 million from $13.4 million or the year ended
December 31, 1996. The increase was primarily due to a decrease in non-interest
expense and to increases in noninterest income and in the provision (credit) for
losses on loans, as well s to one-time gains on sale of equity securities and
real estate. The decrease in net noninterest expense can be attributed primarily
to the FDIC premium, specifically a one-time SAIF special assessment that
occurred in 1996. President Clinton signed legislation on September 30,,1996
requiring all banks and savings association with accounts insured by SAID
(administered by the FDIC) to pay a special assessment to recapitalize the fund.
The Bank's assessment was $7.0 million before taxes ($4.3 million after taxes),
which was charged to earnings during the third quarter of 1996. As a result of
the recapitalization, the Bank believes the SAIF premium it will pay in future
years will be reduced significantly from its current assessment, which will have
a positive effect on future earnings.
Net Interest Income
Net interest income increased $500,000, or 1.1%, from $47.4 million
during the year ended December 31, 1996 to $47.9 million during the year ended
December 31, 1997. This increase was primarily due to an increase in total
interest income of $3.3 million, or 3.2%, from $104.6 million for the year ended
December 31, 1996 to $107.9 million for the year ended December 31, 1996. This
increase was primarily the result of an increase in interest income on loans
receivable from $78.8 million in the year ended December 31, 1996 to $87.3
million in the year ended December 31, 1997, due to a three basis point decrease
in the interest rate earned on loans receivable being offset by an increase in
the average balance of loans receivable of $112.3 million, or 11.3 %, to
$1,110.3 million for the year ended December 31, 1997, from $998.0 million for
the year ended December 31, 1996. The increase in the average balance of loans
receivable resulted primarily from a strong economy in the
11
<PAGE>
FCBI----------------------------------------------------------------------------
Company's market area coupled with an aggressive program to attract new loan
originations in both the mortgage and non-mortgage portfolios, as well as from
the acquisition of Delta. This increase in interest income on loans receivable
was partially offset by decreases in other interest income categories. Interest
income on investment securities (including those available for sale) decreased
from $5.4 million in the year ended December 31, 1996 to $5.2 million in the
year ended December 31, 1997, from $97.4 million for the year ended December 31,
1996. The decrease in the average investment portfolio balance was primarily due
to the reallocation of funds to loans receivable. Interest income on
mortgage-backed and other asset-backed securities (including those available for
sale) decreased $4.1 million, or $21.4%, to $15.0, million for the year ended
December 31, 1997, from $19.1 million for the year ended December 31, 1996, due
primarily to the decrease in the average balance of $55.6 million, o 18.2%, to
$250.5 million for the year ended December 31, 1997, from $306.1 million for the
year ended December 31, 1996. The decrease in the average balance of
mortgage-backed and other asset-backed securities is due to management's
decision to reinvest the cash flows from those securities in loans receivable.
The increase in interest income was combined with an increase in total
expense of $2.8 million, or 4.9%, from $57.2 million for the year ended December
31, 1996, to $60.0 million for the year ended December 31, 1997. Interest paid
on deposits increased $2.2 million, or 4.6%, to $51.2 million for the year ended
December 31, 1996, from $49.0 million for the year ended December 31, 1996. This
increase was primarily due to the increase in the average balance of the
deposits of $53.8 million, or 4.9%, to $1,253.9 million for the year ended
December 31, 1997, from $1,100.1 million for the year ended December 31, 1996,
offset slightly by a decrease of one basis point in the cost of deposits. This
increase in interest paid on deposits was accompanied by an increase in interest
paid on borrowed funds of $565,000, or 6.9%, to $8.8 million for the year ended
December 31, 1997, from $8.2 million for the year ended December 31, 1996, due
to an increase in the average balance of FHLB advances and other borrowed money
of $6.2 million, or 4.9%, to $133.9 million for the year ended December 31,
1997, from $127.7 million for the year ended December 31, 1996. This increase
reflects the use of borrowings to fund loans receivable.
Provision (Credit) for Losses on Loans
In determining the provision for losses on loans, management analyzes,
among other things, the Bank's loan portfolio, market conditions and the Bank's
market area. The provision (credit) for losses on loans decreased by $1.9
million in 1997 compared to 1996, from a provision of $1.1 million for the year
ended December 31, 1996 to a credit of $739,000 for the year ended December 31,
1997. That credit was due primarily to the recovery of $1.5 million on one loan
that had previously been written off. Taking that recovery into account, the
credit for the year ended December 31, 1997 reflects management's recognition of
and desire to appropriately reserve the Bank's loan growth. Management believes
that the allowance for loan losses is adequate at December 31, 1997. There can
be no assurances that the allowance will be adequate to cover losses which may
in fact be realized in the future and that additional provisions will not be
required.
Noninterest Income
Noninterest income increased by $2.7 million, 48.8%, from $5.5 million
for the year ended December 31, 1996 to $8.2 million for the year ended December
31, 1997. This increase was primarily the result of gains on the sale of
investment in 1997 and an increase in net income from real estate operations.
Gains on the sale of loans and of investment, combined, increased $1.3 million,
or 593.1%, for 1997, primarily due to gains on the sale of equities of $1.3
million in fourth quarter 1997. Net income from real estate operations increased
$811,000, or 240.7%, in 1997, primarily due to the sale of real estate in a
service corporation, First Savings Investment Corporation, resulting in a profit
of $832,000 in the fourth quarter of 1997. Fees and service charges increased
$63,00, or 11.8%, due to increased transaction account activity in 1997.
Noninterest Expense
Noninterest expense decreased by $5.4 million, or 17.7% for the year
ended December 31, 1997 as compared to the year ended December 31, 1996. The
majority of the decrease related to the 1996 one-time special SAIF assessment
expense of 47.0 million, as previously discussed. The major increases occurred
in compensation expense ($2.5 million), and in the credit for losses on federal
funds sold ($618,000). Additional increases in occupancy expense ($2.5 million),
and in the credit for losses on federal funds sold ($618,00). Additional
increases in occupancy expense of $313,000 due to depreciation and other office
expenses associated with the two new offices opened in 1996 and 1996, and in
printing, supplies and postage of $3,000 due primarily to stockholder related
matters, were offset by decreases of $117,000 in the provision (credit) for
losses on real estate owned and of $69,000 in professional fees to contribute to
the net increase in noninterest expense.
The Bank experienced increased compensation costs during the year ended
December 31, 1997, primarily due to an increase of $710,000 in employee
compensation, resulting from increased staffing due to the added offices, and
from an
12
<PAGE>
Comparison of Financial Condition, Continued
- --------------------------------------------------------------------------------
increase of $1.7 million related to compensation expense recognized on stock
benefit plans due to the price appreciation of the fair market value of common
stock of the Company held by such plans. In 1995 the ESOP purchased 1,340,379
shares with a 10 year loan from the Company. Shares are expensed at fair market
value as they are released. In the third quarter of 1996, the Company began
experiencing additional compensation expense due to the adoption by shareholders
of a Management Stock Bonus Plan ("MSBP") whereby various officers and directors
of the Bank were granted restricted stock over a five-year period. The MSBP
purchased shares of common stock of the Company for the plan in open market
purchases. The MSBP shares are being expensed over a five year period beginning
July 24, 1996 based on the fair market value as of that date.
The credit for losses on federal funds sold booked in 1996 resulted
from the actions of the Superintendent of Banks of the State of New York, who
took possession of the business and property of Nationar, a New York-chartered
trust company in 1995. The Bank wrote down its $1.0 million federal funds sold
to Nationar to $382,500 and filed a proof of claim for the monies due. A partial
payment on the claim totaling $400,000 was received in June, 1996 and resulted
in a recovery of $18,000 in the second quarter of 1996. Final payment on the
claim totaling $600,000 was received in December, 1996 and resulted in a
recovery of $600,000 in the fourth quarter of 1996 and of $618,000 for the year
ended December 31, 1996.
Income Tax Expense
Federal and state income taxes increased by $3.9 million, or 49.5%, for
the year ended December 31, 1997 compared to the year ended December 31, 1996,
due primarily to the increase in earnings before income taxes.
Comparison of Operating Results:
1996-1995
General
Net earnings for the year ended December 31, 1996, increased $734,000,
or 5.8%, to $13.4 million from $12.6 million for the year ended December 31,
1995. The increase was primarily due to an increase in net interest income being
significantly offset by an increase in net noninterest expense. The substantial
increase in net interest income can be attributed primarily to the increase in
capital, as the proceeds from the conversion and reorganization of the Company
increased the average balance of interest-earning assets. The increase in net
noninterest expense can be attributed primarily to the FDIC premium,
specifically a one-time SAIF special assessment. President Clinton signed
legislation on September 30, 1996 requiring all banks and savings associations
with accounts insured by SAIF (administered by the FDIC) to pay a special
assessment to recapitalize the fund. The Bank's assessment was $7.0 million
before taxes ($4.3 million after taxes), which was charged to earnings during
the third quarter of 1996. As a result of the recapitalization, the Bank
believes the SAIF premium it will pay in future years will be reduced
significantly from its current assessment, which will have a positive effect on
future earnings.
Net Interest Income
Net interest income increased $12.0 million, or 34.0%, from $35.4
million during the year ended December 31, 1995 to $47.4 million during the year
ended December 31, 1996. This increase was primarily due to an increase in total
interest income of $10.4 million, or 11.0%, from $94.3 million for the year
ended December 31, 1995 to $104.6 million for the year ended December 31, 1996.
This increase was primarily the result of an increase in interest income on
loans receivable from $67.1 million in the year ended December 31, 1995 to $78.8
million in the year ended December 31, 1996, due to an 18 basis point increase
in the interest rate earned on loans receivable and to an increase in the
average balance of loans receivable of $129.1 million, or 14.9%, to $998.0
million for the year ended December 31, 1996, from $868.9 million for the year
ended December 31, 1995. The increase in the average balance of loans receivable
resulted primarily from a strong economy in the Company's market area coupled
with an aggressive program to attract new loan originations in both the mortgage
and nonmortgage portfolios. Interest income on investment securities (including
those available for sale) also increased, from $4.5 million in the year ended
December 31, 1995 to $5.4 million in the year ended December 31, 1996, due to
the increase in the average portfolio balance of $17.1 million, or 21.2%, to
$97.4 million for the year ended December 31, 1996, from $80.3 million for the
year ended December 31, 1995. The increase in the average investment portfolio
balance was primarily due to the investment of proceeds from the offering. These
increases in interest income were partially offset by a decrease in interest
income on mortgage-backed and other asset-backed securities (including those
available for sale) of $3.3 million, or 14.8%, to $19.1 million for the year
ended December 31, 1996, from $22.4 million for the year ended December 31,
1995, due to the decrease in the average balance of $46.1 million, or $13.1%, to
$306.1 million for the year ended December 31, 1996, from $352.2 mil-
13
<PAGE>
FCBI----------------------------------------------------------------------------
lion for the year ended December 31, 1995. The decrease in the average balance
of mortgage-backed and other asset-backed securities is due to management's
decision to reinvest the cash flows from those securities in loans receivable.
The increase in interest income was combined with a decrease in total
interest expense of $1.7 million, or 2.8%, from $58.9 million for the year ended
December 31, 1995, to $57.2 million for the year ended December 31, 1996.
Interest paid on deposits increased $678,000, or 1.4%, to $49.0 million for the
year ended December 31, 1996, from $48.3 million for the year ended December 31,
1995. This increase was primarily due to the increase in the average balance of
the deposits of $33.8 million, or 3.2%, to $1,100.1 million for the year ended
December 31, 1996, from $1,066.3 million for the year ended December 31, 1995,
offset somewhat by a decrease of eight basis points in the cost of deposits.
This increase in interest paid on deposits was offset by a decrease in interest
paid on borrowed funds of $2.3 million, or 22.2%, to $8.2 million for the year
ended December 31, 1996, from $10.5 million for the year ended December 31,
1995, due to a decrease in the average balance of FHLB advances and other
borrowed money of $34.1 million, or 21.1%, to $127.7 million for the year ended
December 31, 1996, from $161.8 million for the year ended December 31, 1995.
This decrease reflects the use of a portion of the proceeds from the Conversion
and Reorganization to repay borrowings.
Provision (Credit) for Losses on Loans
In determining the provision for losses on loans, management analyzes,
among other things, the Bank's loan portfolio, market conditions and the Bank's
market area. The provision (credit) for losses on loans increased by $1.6
million in 1996 compared to 1995, from a credit of $495,000 for the year ended
December 31 1995 to a provision of $1.1 million for the year ended December 31,
1996. The credit for the year ended December 31, 1995 was due primarily to the
favorable market conditions in the Colorado real estate market, resulting in the
historical loss factors used for the general loss provision being adjusted
downward and the excess reserve being recognized as a credit for losses on
loans. The provision for the year ended December 31, 1996 reflects management's
recognition of and desire to appropriately reserve for the Bank's loan growth.
Management believes that the allowance for loan losses is adequate at December
31, 1996. There can be no assurances that the allowance will be adequate to
cover losses which may in fact be realized in the future and that additional
provisions will not be required.
Noninterest Income
Noninterest income increased by $292,000, or 5.6%, from $5.2 million
for the year ended December 31, 1995 to $5.5 million for the year ended December
31, 1996. This increase was primarily the result of an absence of any losses on
the ale of mortgage-backed and other asset-backed securities in 1996. During the
first quarter of 1995, the Bank sold available-for-sale mortgage-backed
securities for a loss of $381,000. Furthermore, the Bank experienced an increase
in the gain on the sale loans of $219,000 due to increased loan activity, and an
increase in fees and service charges of $578,000 due to increased transaction
account activity, offset by a decrease in net income from real estate operations
of $885,000, primarily due to a gain on the sale of real estate owned in the
first quarter of 1995. There were no comparable sales of mortgage-backed
securities or real estate owned during the year ended December 31, 1996.
Noninterest Expense
Noninterest expense increased by $9.2 million, or 43.1% for the year
ended December 31, 1996 as compared to the year ended December 31, 1995. The
majority of the increase related to the one-time special SAIF assessment expense
of $7.0 million, as previously discussed. The other major increases occurred in
the other, net, noninterest expense category ($1.5 million) and in compensation
expense ($1.5 million). Additional increases in occupancy expense of $102,000
due to depreciation and other office expenses associated with the three new
offices opened in 1995 and 1996, in advertising expense of $103,000 due to
additional advertising programs in 1996, and in professional fees of $112,000
due primarily to stockholder related matters, were offset by the decrease of
$1.2 million in the provision for losses on federal funds sold. The Bank expects
additional occupancy expense due to the construction of one new branch office in
fiscal 1997.
During the year ended December 31, 1995, the Bank recognized income of
$809,000 in settlement of an IRS audit as an offset to other, net noninterest
expense, which represents the majority of the $1.5 million total increase in
other, net noninterest expense for the year periods ending December 31, 1996 and
1995. Additional items impacting other, net, noninterest expense included an
increase in income from a subsidiary, First Savings Insurance Services, of
$230,000 in 1996 and a gain on the sale of fixed assets of $180,000 in 1995,
which offset 1995 other, net, noninterest expense.
In addition, the Bank experienced increased compensation costs during
the year ended December 31, 1996, primarily due to an increase of $585,000 in
employee compensation, resulting from increased staffing due to the added
offices, and from an increase of $963,000 related to compensation expense
recognized on stock benefit plans due to the price appreciation of the
14
<PAGE>
Comparison of Financial Condition, Continued
- --------------------------------------------------------------------------------
fair market value of common stock of the Company held by such plans. In 1995 the
ESOP purchased 1,340,379 shares with a 10 year loan from the Company. Shares are
expended as they are released. In the third quarter of 1996, the Company began
experiencing additional compensation expense due to the adoption by shareholders
of a Management Stock Bonus Plan ("MSBP") whereby various officers and directors
of the Bank were granted restricted stock over a five-year period. The MSBP
purchased shares of common stock of the Company for the plan in open market
purchases. The MSBP shares are being expended over a five year period beginning
July 24, 1996 based on the fair market value as of that date.
The provision for losses on federal funds sold booked in 1995 resulted
when the Superintendent of Banks of the State of New York took possession of the
business and property of Nationar, a New York- chartered trust company. The Bank
wrote down its $1.0 million federal funds sold to Nationar to $382,500 and filed
a proof of claim for the monies due. A partial payment on the claim totaling
$400,000 was received in June, 1996 and resulted in a recovery of $18,000 in the
second quarter of 1996. Final payment on the claim totaling $600,000 was
received in December, 1996 and resulted in a recovery of $600,000 in the fourth
quarter of 1996 and of $618,000 for the year ended December 31, 1996.
Income Tax Expense
Federal and state income taxes increased by $765,000, or 10.7%, for the
year ended December 31, 1996 compared to the year ended December 31, 1995, due
primarily to the increase in earnings before income taxes.
Liquidity and Capital Resources
First Federal Bank's primary sources of funds are deposits, proceeds
from principal and interest payments on loans and mortgaged-backed and other
asset-backed securities and, to a lesser extent, advances from the FHLB of
Topeka. While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit flows and mortgage
prepayments are greatly influenced by interest rates, economic conditions,
competition and, most recently, the restructuring of the thrift industry. In
1995 the Company and the Bank accessed the capital markets to raise $117.6
million in funds from an initial public offering.
The primary investment activity of the Bank is the origination of
mortgage loans. During the years ended December 31, 1995, 1996 and 1997, the
Bank originated mortgage loans in the amounts of $275.6 million, $299.8 million,
and $283.0 million, respectively. The Bank also purchases loans and
mortgage-backed and other asset-backed securities on occasion to reduce
liquidity not otherwise required for local loan demand. Purchases of mortgage
loans and mortgaged-backed and other asset-backed securities in those same
periods totalled $17.9 million, $34.1 million, and $1.7 million respectively.
Other investment activities include investment in short term certificates of
deposits of other financial institutions, FHLB of Topeka stock, consumer loans
and, to a lesser extent, U.S. government and federal agency obligations.
First Federal Bank has other sources of liquidity if a need for
additional funds arises. Additional sources of funds include FHLB of Topeka
advances which, as of December 3, 1997, totalled $122.4 million. If needed, the
Bank has additional borrowing ability with the FHLB of Topeka. The Bank also has
borrowing authority with two Colorado commercial banks in an amount up to $8.0
million. First Federal also established a finance subsidiary in 1988 for the
purpose of borrowing funds through participation in a Real Estate Mortgage
Investment Conduit ("REMIC"). As of December 31, 1997, $4.5 million of the REMIC
bond was outstanding. Other sources of liquidity can be found in the Bank's
statement of financial condition, such as investment securities maturing within
one year and unencumbered mortgage-backed securities that are readily
marketable.
First Federal Bank is required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which may be varied at
the direction of the OTS depending upon economic conditions and deposit flows,
is based upon a percentage of deposits and short-term borrowings. The required
minimum ratio is currently 4.0%. The Bank's liquidity ratios were 13.0%, 9.7%
and 9.6% as of December 31, 1995, 1996 and 1997, respectively.
The Bank had tangible, core and risk-based capital ratios of 12.25%,
12.49% and 23.76%, respectively, at December 31, 1997, which greatly exceeded
the OTS's respective minimum requirements of 1.50%, 3.00% and 8.00%,
respectively. The Bank was classified as "well capitalized" institution at
December 31, 1997.
First Federal Bank's most liquid assets are cash and cash equivalents,
which include investments in highly liquid short-term investments. The level of
these assets are dependent on the Bank's operating, financing and investing
activities during any given period. At December 31, 1995, 1996, and 1997, cash
and cash equivalents totalled $113.7 million, $49.2 million and $44.7 million,
respectively.
First Federal Bank anticipates that it will have sufficient funds
available to meet its current commitments. As of December 31, 1997, the Bank had
commitments to fund loans and standby letters of credit of $55.7 million.
Certificates of deposit which
15
<PAGE>
FCBI----------------------------------------------------------------------------
are scheduled to mature in one year or less as of December 31, 1997, totalled
$498.4 million. Management believes that a significant portion of such deposits
will remain with the Bank.
Impact of Inflation
The Consolidated Financial Statements of the Company, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which, with the exception of market value accounting for
available-for-sale securities under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, generally require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Impact of New Accounting Standards
The Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125) and
SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 (SFAS 127) in June and December 1996, respectively, SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. It requires entities to
recognize servicing assets and liabilities for all contracts to service
financial assets, unless the assets is securitized and all servicing is
retained. The servicing assets are measured initially at fair values and are
amortized over the estimated useful lives of the servicing assets. In addition,
the impairment of servicing assets is recognized through a valuation allowance.
SFAS 125 also addresses the accounting and reporting standards for securities
lending, dollar-rolls, repurchase agreements and similar transactions. The
Company prospectively adopted SFAS 125 on January 1, 1997. However, in
accordance with SFAS 127, the Company deferred adoption of the standard as it
relates to securities lending, dollar-rolls, repurchase agreements and similar
transactions until January 1, 1998. The adoption of SFAS 125 did not have a
material impact on its 1997 consolidated financial statements.
In March 1997, the FASB issued SFAS No. 128, Earnings Per Share (SFAS
128) which replaced APB Opinion No. 15 related to standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock or potential common stock. SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. Also, SFAS 128 requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, SFAS 128 also requires restatement of all prior period EPS data
presented. The Company adopted SFAS 128 in December 1997, and restated all per
share amounts for prior periods. The adoptions of SFAS 128 did not have a
material impact on the Company's reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). SFAS 130, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for reporting and display of
comprehensive income and its components in a full set of general- purchase
financial statements. Comprehensive income represents the change in equity of a
business enterprise during a period from transitions and other events from
nonowner sources. Comprehensive income is comprised of net income and other
comprehensive income. SFAS 130 does not change the classifications currently
comprising net income. Other comprehensive income is classified into foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. All components of
comprehensive income shall be reported in the period in which they are
recognized and be displayed in the financial statements. The total of other
comprehensive income for a period shall be transferred to a component of equity
on a separate line-item. As such, net unrealized gain (loss) on securities
available for-sale will become a component of other comprehensive income upon
implementation of SFAS 130. The Company will adopt SFAS 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS 131). This Statement establishes
standards relating to public business enterprises' reporting of information
about operating segments in financial reports issued to shareholders. It also
established standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restat-
16
<PAGE>
Common Stock and Related Matters
- --------------------------------------------------------------------------------
ed. This Statement need not be applied to interim financial statements in the
initial year of application. SFAS 131 is not expected to change the reporting
requirements of the Company.
In January 1997, the SEC issued Release No. 33-7386, which requires
enhanced descriptions of accounting policies for derivative financial
instruments and derivative commodity instruments in the footnotes to financial
statements. The release also requires certain quantitative and qualitative
disclosures outside financial statements about market risks inherent in market
risk sensitive instruments and other financial instruments. The requirements
regarding accounting policy descriptions were effective for any fiscal period
ending after June 15, 1997. However, because derivative financial and commodity
instruments have not materially affected the Company's consolidated financial
position, cash flows or results of operations, this part of the release does not
affect the Company's 1997 financial statements disclosures. The quantitative and
qualitative disclosures required by the release will be initially provided in
the Company's annual report on Form 10-K for the year ending December 31, 1998.
Impact of Year 2000 Issue
As issue exists for all companies that rely on computers as the year
2000 approaches. The "Year 2000" problems is the result of past practices in the
computer industry of using two digits rather than four to identify the
application year. This practice will result in incorrect results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999. The Company anticipates that it will be able to test its entire
system using its internal programming staff and outside computer consultants and
intends to make any necessary modifications to prevent disruption to its
operations. Costs in connection with any such modifications are not expected to
be material.
First Colorado Bancorp, Inc.
Common Stock and Related Matters
The Company's offering of common stock closed on December 29, 1995.
Shares of common stock were issued and sold in that offering at $10.00 per
share.
As of February 28, 1998, the Company had 4,090 stockholders of record
and 16,826,798 outstanding shares of common stock. The number of stockholders
does not reflect those whose stock is in nominee or "street" name accounts
through brokers.
Payment of dividends on the common stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the payment
of dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
The Company is not subject to OTS regulatory restrictions on the
payment of dividends to its stockholders, although the source of such dividends
will be, in part, dependent upon the factors enumerated above. The Company is
subject, however, to the requirements of Colorado law, which generally limit
dividends to an amount equal to the excess of the net assets of the Company (the
amount by which total assets exceed total liabilities) over its stated capital,
or if there is no such excess, to its net profits for the current and/or
immediately preceding fiscal year. First Colorado Bancorp, Inc., completed the
reorganization from a federally chartered mutual holding company to a Colorado
stock holding company on December 29, 1995, and only eight quarters of
historical data can be provided in regard to the common stock of the Company.
First Colorado Bancorp, 1996-1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
-------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
# shares 16,808,372 16,484,530 16,561,425 16,555,197 18,184,108 19,030,844 20,134,256 20,096,940
High $ 26.1250 21.500 19.875 18.875 17.8750 15.625 13.750 12.500
Low $ 19.8125 17.375 16.000 16.500 14.9375 12.500 11.750 11.000
Dividends
Declared $ 0.13 0.12 0.11 0.10 0.09 0.08 0.08 0.075
(per share)
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
This page is intentionally left blank
18
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
First Colorado Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of First Colorado Bancorp, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Colorado
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position and results of
operations of the individual companies. The consolidating information has been
subjected to the auditing procedures applied in the audits of the consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the consolidated financial statements taken as a whole.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Denver, Colorado
March 9, 1998
19
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 1996 and 1997
(Amounts in Thousands, Except Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1996 1997
- ------ ------------- ------------
<S> <C> <C>
Cash and due from banks $ 21,449 27,970
Federal funds sold, net (note 11) 15,000 8,100
Other interest-earning assets 12,783 8,587
------------- ------------
Cash and cash equivalents 49,232 44,657
Investment securities (notes 3 and 11):
Held-to-maturity, at amortized cost (market value of $61,701 and 73,952 in 1996
and 1997, respectively) 61,642 73,944
Available-for-sale, at market value (amortized cost of $10,487 and $5,959 in 1996
and 1997, respectively) 11,099 5,951
------------- ------------
72,741 79,895
------------- ------------
Mortgage-backed and other asset-backed securities (notes 4, 5, 11 and 12):
Held-to-maturity, at amortized cost (market value of $268,043 and $208,228
in 1996 and 1997, respectively) 273,602 209,543
Available-for-sale, at market value (amortized cost of $7,708 and $7,168 in 1996
and 1997, respectively) 7,687 6,839
----------- ------------
281,289 216,382
----------- ------------
Loans receivable, net (notes 5, 8 and 11) 1,061,524 1,164,602
Accrued interest receivable (note 6) 8,059 8,356
Federal Home Loan Bank stock, at cost (note 11) 9,554 11,277
Real estate owned, net (notes 7 and 8) 1,457 225
Office properties and equipment, net of accumulated depreciation and
amortization (note 9) 22,930 23,606
Real estate held for investment and development 2,025 1,197
Income taxes receivable (note 14) 589 -
Other assets 4,688 5,829
----------- ------------
Total assets $ 1,514,088 1,556,026
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Deposits (note 10) $ 1,135,823 1,182,727
Advances from Federal Home Loan Bank (note 11) 122,515 122,410
Bonds payable (note 12) 5,009 4,479
Advances by borrowers for taxes and insurance 8,312 8,369
Deferred income taxes (note 14) 5,118 4,720
Deferred income 722 604
Other liabilities 19,965 23,408
---------- ------------
Total liabilities 1,297,464 1,346,717
Stockholders' equity (note 13):
Preferred stock, $0.10 par value. 25,000,000 shares authorized; none issued - -
Common stock, $0.10 par value. 50,000,000 shares authorized; 20,134,256 shares
issued at December 31, 1996 and 1997; 18,184,108 and 16,808,372 shares
outstanding at December 31, 1996 and 1997, respectively 2,013 2,013
Additional paid-in capital 151,581 155,047
Treasury stock (1,950,148 and 3,325,884 shares at December 31, 1996 and
1997, respectively, at cost) (28,957) (53,562)
Unearned ESOP shares (12,063) (10,523)
Unearned MRP/MSBP shares (3,929) (3,338)
Net unrealized gain (loss) on securities available-for-sale (net of tax effect of $226 and
$(122) in 1996 and 1997, respectively) 365 (215)
Retained earnings, partially restricted (note 14) 107,614 119,887
----------- ------------
Total stockholders' equity 216,624 209,309
Commitments and contingencies (notes 5, 13, 14, 16 and 18)
----------- ------------
Total liabilities and stockholders' equity $ 1,514,088 1,556,026
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in Thousands, Except Share and Per Share Data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans receivable $ 67,119 78,842 87,333
Interest on mortgage-backed and other asset-backed securities 22,455 19,123 15,038
Interest and dividends on investment securities 4,513 5,440 5,231
Interest on federal funds sold and other interest-earning assets 176 1,223 346
-------- -------- --------
Total interest income 94,263 104,628 107,948
-------- -------- --------
Interest expense:
Interest on deposits (note 10) 48,314 48,992 51,247
Interest on advances from Federal Home Loan Bank 9,927 7,702 8,226
Other interest expense 622 500 541
-------- -------- --------
Total interest expense 58,863 57,194 60,014
-------- -------- --------
Net interest income 35,400 47,434 47,934
Provision (credit) for losses on loans (note 8) (495) 1,143 (739)
-------- -------- --------
Net interest income after provision (credit) for
losses on loans 35,895 46,291 48,673
-------- -------- --------
Noninterest income:
Fees and service charges 4,195 4,773 5,336
Gain (loss) on sale of loans, net (1) 218 251
Gain on sale of investment securities available-for-sale - - 1,260
Loss on sale of mortgage-backed and other asset-backed
securities, net (381) - -
Income from real estate operations, net 1,222 337 1,148
Rental income 171 170 187
-------- -------- --------
5,206 5,498 8,182
-------- -------- --------
Noninterest expense:
Compensation (note 13) 10,666 12,215 14,708
Occupancy 3,703 3,805 4,118
Provision (credit) for losses on real estate owned (note 8) (95) 3 (114)
Provision (credit) for losses on federal funds sold 618 (618) -
Professional fees 667 779 710
Advertising 899 1,002 995
Printing, supplies and postage 1,095 1,093 1,136
FDIC premiums (note 2) 2,391 9,392 729
Other, net 1,373 2,835 2,834
-------- -------- --------
21,317 30,506 25,116
-------- -------- --------
Earnings before income taxes 19,784 21,283 31,739
Income tax expense (benefit) (note 14):
Current 5,817 7,902 11,875
Deferred 1,329 9 (50)
-------- -------- --------
7,146 7,911 11,825
-------- -------- --------
Net earnings $ 12,638 13,372 19,914
======== ======== ========
Earnings per common share (note 13) $ 2.00 .74 1.29
======== === ====
Earnings per common share, assuming dilution (note 13) $ 1.96 .73 1.25
======== === ====
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three-Year Period Ended December 31, 1997
(Amounts in Thousands, Except Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock, Common stock,
$1.00 par value $0.10 par value
--------------- ---------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 6,331,622 $ 6,332 -- $ --
Exercise of employee stock options 39,515 40 -- --
Payment of ESOP liability -- -- -- --
Contribution by First Savings Capital, M.H.C -- -- -- --
Exchange of common stock (note 13) (6,371,137) (6,372) 6,619,539 662
Common stock issued for cash, net of
offering costs (note 13) -- -- 12,063,419 1,206
Common stock issued to ESOP for note
receivable (note 13) -- -- 1,340,379 134
Employees' vesting in MRP (note 13) -- -- -- --
Dividends declared ($0.88 per share) -- -- -- --
Reversal of dividends previously waived by
First Savings Capital, M.H.C -- -- -- --
Change in net unrealized gain/loss on
securities available-for-sale -- -- -- --
Net earnings -- -- -- --
------------ ------- ---------- ------
Balance, December 31, 1995 -- -- 20,023,337 2,002
Exercise of employee stock options (note 13) -- -- 123,875 11
Additional offering costs on common
stock issued for cash -- -- -- --
Payment of ESOP liability (note 13) -- -- -- --
Common stock purchased by MSBP (note 13) -- -- -- --
Employees' vesting in ESOP/MRP/MSBP
(note 13) -- -- -- --
Purchase of treasury stock -- -- (1,963,104) --
Dividends declared ($0.325 per share) -- -- -- --
Change in net unrealized gain/loss on
securities available-for-sale -- -- -- --
Net earnings -- -- -- --
------------ ------- ---------- ------
Balance, December 31, 1996 -- -- 18,184,108 2,013
Exercise of employee stock options (note 13) -- -- 61,162 --
Acquisition of financial institution (note 1) -- -- 301,952 --
Payment of ESOP liability (note 13) -- -- -- --
Employees' vesting in ESOP/MRP/MSBP (note 13) -- -- -- --
Purchase of treasury stock -- -- (1,738,850) --
Dividends declared ($0.46 per share) -- -- -- --
Change in net unrealized gain/loss on securities
available-for-sale -- -- -- --
Net earnings -- -- -- --
------------ ------- ---------- ------
Balance, December 31, 1997 -- $ -- 16,808,372 $2,013
============ ======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
Net
unrealized
Common Unearned gain (loss)
Additional stock Unearned MRP/ on securities
paid-in treasury ESOP MSBP available- Retained
capital shares shares shares for-sale earnings Total
------- ------ ------ ------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 18,151 -- (446) (258) (1,370) 85,605 108,014
Exercise of employee stock options 224 -- -- -- -- -- 264
Payment of ESOP liability -- -- 446 -- -- -- 446
Contribution by First Savings Capital, M.H.C 31 -- -- -- -- -- 31
Exchange of common stock (note 13) 5,710 -- -- -- -- -- --
Common stock issued for cash, net of
offering costs (note 13) 116,414 -- -- -- -- -- 117,620
Common stock issued to ESOP for note
receivable (note 13) 13,270 -- (13,404) -- -- -- --
Employees' vesting in MRP (note 13) 224 -- -- 76 -- -- 300
Dividends declared ($0.88 per share) -- -- -- -- -- (1,911) (1,911)
Reversal of dividends previously waived by
First Savings Capital, M.H.C (4,187) -- -- -- -- 4,187 --
Change in net unrealized gain/loss on
securities available-for-sale -- -- -- -- 1,316 -- 1,316
Net earnings -- -- -- -- -- 12,638 12,638
------- ------- ------- ------ ------- ------- -------
Balance, December 31, 1995 149,837 -- (13,404) (182) (54) 100,519 238,718
Exercise of employee stock options (note 13) 78 183 -- -- -- -- 272
Additional offering costs on common
stock issued for cash (175) -- -- -- -- -- (175)
Payment of ESOP liability (note 13) -- -- 1,341 -- -- -- 1,341
Common stock purchased by MSBP (note 13) -- -- -- (3,848) -- -- (3,848)
Employees' vesting in ESOP/MRP/MSBP
(note 13) 1,841 -- -- 101 -- -- 1,942
Purchase of treasury stock -- (29,140) -- -- -- -- (29,140)
Dividends declared ($0.325 per share) -- -- -- -- -- (6,277) (6,277)
Change in net unrealized gain/loss on
securities available-for-sale -- -- -- -- 419 -- 419
Net earnings -- -- -- -- -- 13,372 13,372
------- ------- ------- ------ ------- ------- -------
Balance, December 31, 1996 151,581 (28,957) (12,063) (3,929) 365 107,614 216,624
Exercise of employee stock options (note 13) (661) 866 -- -- -- -- 205
Acquisition of financial institution (note 1) 1,646 4,278 -- -- -- -- 5,924
Payment of ESOP liability (note 13) -- -- 1,540 -- -- -- 1,540
Employees' vesting in ESOP/MRP/MSBP (note 13) 2,481 -- -- 591 -- -- 3,072
Purchase of treasury stock -- (29,749) -- -- -- -- (29,749)
Dividends declared ($0.46 per share) -- -- -- -- -- (7,641) (7,641)
Change in net unrealized gain/loss on securities
available-for-sale -- -- -- -- (580) -- (580)
Net earnings -- -- -- -- -- 19,914 19,914
------- ------- ------- ------ ------- ------- -------
Balance, December 31, 1997 155,047 (53,562) (10,523) (3,338) (215) 119,887 209,309
======= ======= ======= ====== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest and dividends from loans receivable, mortgage-backed,
other-asset backed and investment securities $ 92,154 103,767 106,940
Fees and service charges received 5,519 6,457 6,717
Rental income received 171 171 187
Proceeds from sale of loans held for sale 6,468 25,258 15,283
Originations of loans held for sale (7,493) (25,276) (14,950)
Interest paid (15,475) (13,175) (13,233)
Cash paid to suppliers and employees (20,270) (28,078) (21,244)
Income taxes paid (4,745) (8,286) (11,265)
---------- --------- --------
Net cash provided by operating activities 56,329 60,838 68,435
---------- --------- --------
Cash flows from investing activities, net of effect of business combination:
Proceeds from sales of investment and mortgage-
backed securities available-for-sale 24,469 - 1,028
Proceeds from maturities of investment and mortgage-backed
securities available-for-sale 8,000 12,000 5,950
Proceeds from maturities of investment and mortgage-backed
securities held-to-maturity 38,500 84,450 68,613
Purchase of investment securities available-for-sale (2,027) - (2,025)
Purchase of investment securities held-to-maturity (59,578) (90,023) (79,857)
Principal repayments of mortgage-backed and
asset-backed securities 68,370 63,959 65,345
Purchase of mortgage-backed and other asset-backed
securities held-to-maturity - (35,066) (293)
Origination of loans receivable (331,692) (358,245) (338,854)
Net increases in customers' lines of credit (2,663) (11,357) (2,698)
Principal repayments of loans receivable 182,529 238,232 275,635
Purchase of loans receivable (17,932) - -
Cash acquired in business combination (note 1) - - 1,660
Purchase of Federal Home Loan Bank stock (941) (136) (19)
Proceeds from sales of real estate owned 3,875 906 2,056
Proceeds from sale of office properties
and equipment 274 4 161
Purchase of office properties and equipment (3,725) (2,940) (2,108)
Proceeds from sale of real estate held for investment
and development 622 344 1,781
Purchase of real estate held for investment and development (11) - -
Other, net 350 294 362
---------- --------- --------
Net cash used by investing activities (91,580) (97,578) (3,263)
---------- --------- --------
</TABLE>
(continued)
23
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities, net of effect of business combination:
Net increase (decrease) in deposits $ 18,236 11,533 (29,208)
Proceeds of advances from Federal Home Loan Bank 403,700 146,300 286,400
Repayment of advances from Federal Home Loan Bank (419,978) (149,455) (293,405)
Repayment of bonds payable (1,005) (553) (637)
Repayment of note payable (446) - -
Net increase (decrease) in advances by borrowers for
taxes and insurance 1,216 (1,036) 57
Proceeds from issuance of common stock 120,634 - -
Purchase of treasury shares - (29,140) (29,749)
Cash paid for stock offering and conversion costs (3,014) (2,310) -
Proceeds from exercised stock options 264 272 205
Cash paid for MRP/MSBP - (3,848) -
Proceeds from ESOP for repayment of debt 446 1,341 1,540
Dividends paid (1,859) (5,121) (7,093)
Other, net 488 4,319 2,143
--------- --------- ---------
Net cash provided (used) by financing activities 118,682 (27,698) (69,747)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 83,431 (64,438) (4,575)
Cash and cash equivalents at beginning of year 30,239 113,670 49,232
--------- --------- ---------
Cash and cash equivalents at end of year $ 113,670 49,232 44,657
========= ========= =========
</TABLE>
(continued)
24
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by operating
activities, net of effect of business combination:
Net earnings $ 12,638 13,372 19,914
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts
on investment and mortgage-backed securities, net 256 1,597 1,258
Loss (gain) on sale of loans, net 1 (218) (251)
Loss on sale of mortgage-backed and
other asset-backed securities 381 - -
Gain on sale of investment securities available-for-sale - - (1,260)
Amortization of deferred loan origination fee income (896) (777) (788)
Deferred loan origination fee income, net of
deferred costs 362 332 (185)
Provision (credit) for losses on loans receivable,
federal funds sold and real estate owned 28 528 (853)
Gain on sale of real estate owned, net (976) (172) (103)
Gain on sale of real estate held for
investment and development (357) (24) (879)
Stock dividends from Federal Home Loan Bank (143) (589) (1,174)
Depreciation and amortization 1,607 1,794 1,821
Loss (gain) on sale of office properties and
equipment 6 - (9)
Increase (decrease) in deferred income taxes 1,329 9 (50)
Interest expense credited to deposit accounts 43,366 44,001 46,112
Amortization of unearned discounts and
deferred income (127) (225) (131)
Employee vesting in MRP/MSBP - 1,942 3,072
Decrease (increase) in loans held for sale (907) (18) 333
Increase in accrued interest receivable (1,232) (252) (109)
Decrease (increase) in other assets (182) 369 374
Decrease (increase) in income taxes receivable (128) (385) 589
Increase (decrease) in other liabilities 315 (516) 730
Other, net 988 70 24
-------- -------- -------
Net cash provided by operating activities $ 56,329 60,838 68,435
======== ======== =======
Noncash investing and financing transactions:
Foreclosure of collateral securing loans, net of reserve $ 948 546 564
======== ======== =======
Dividends reversed by parent $ (4,187) - -
======== ======== =======
Change in net unrealized gain (loss) on securities
available-for-sale, net of tax effect $ 1,316 419 (580)
======== ======== =======
Deferred tax effect of change in unrealized gain (loss) on
securities available-for-sale $ 813 226 (122)
======== ======== =======
Net assets acquired in business combination, net of cash
acquired of $1,660 (note 1) $ - - 4,264
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1996 and 1997
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Business and Basis of Presentation
The accompanying consolidated financial statements include the accounts
of First Colorado Bancorp, Inc. (FCB) and its wholly owned subsidiary,
First Federal Bank of Colorado (FFB). The accounts of FFB include its
three wholly owned subsidiaries, First Investment Corporation (FSIC),
First Savings Insurance Services (FSIS), and First Savings Securities
Corporation (FSSC) (Collectively, the Bank). All entities are
collectively referred to as the Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company is a Colorado stock corporation organized in September 1995
to facilitate the conversion of the Bank's holding company (formerly
First Savings Capital, M.H.C.) from the mutual to stock form of
ownership and to acquire and hold all of the capital stock of the Bank.
In connection with the conversion, First Savings Capital, M.H.C., which
had owned 66% of the Bank's common stock, was merged with and into the
Bank, and its shares of the Bank were canceled. On December 29, 1995,
the Company issued 6,619,539 shares of its common stock for all of the
remaining outstanding shares of the Bank. In 1995, 1996 and 1997, the
Company engaged in no significant business activity other than its
ownership of the Bank's common stock.
FFB provides a full range of banking and thrift-related services to
customers through its home office and branch facilities in Colorado.
FFB is subject to both completion from other financial institutions and
to regulations of certain federal agencies, including periodic
examinations by those regulatory agencies. FFB is also subject to
minimum regulatory capital requirements as described more fully in note
2 to the consolidated financial statements.
FSIC develops, leases and sells real estate property. FSIS sells
health, life and credit life insurance products and also offers mutual
funds and annuity products to customers. FSSC was formed expressly to
participate in a real estate mortgage investment conduit.
In preparing the accompanying consolidated financial statements, the
Company is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses and
disclosure of contingent assets and liabilities. Actual results could
differ from those estimates. Those estimates and assumptions are
described in the following significant accounting policies.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents.
26
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Cash equivalents include uninsured deposits in other financial
institutions approximating $1,903,000 and $4,707,000 at December 31,
1996 and 1997, respectively, other than amounts on deposit at the
Federal Home Loan Bank of Topeka and the Federal Reserve Bank.
The Federal Reserve Board requires banks to maintain certain average
reserve balances composed of cash on hand and balances maintained at
the Federal Reserve Bank. These reserve balances are based primarily on
deposit level.
Investment, Mortgage-Backed, and Other Asset-Backed Securities
The Company classifies its investment, mortgage-backed, and other
asset-backed securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought
and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company
has the ability and intent to hold until maturity. All securities not
classified as either trading or held-to maturity are classified as
available-for-sale. The Company has no securities classified as
trading.
Held-to-maturity securities are recorded at cost, adjusted for
amortization or accretion of premiums or discounts. Trading and
available-for-sale securities are recorded at fair value. Unrealized
gains and losses on trading securities are included in earnings.
Unrealized gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity. Transfers of
securities between categories are recorded at fair value at the date of
transfer.
Realized gains and losses for securities classified as
available-for-sale and held-to-maturity are recognized in earnings upon
sale or redemption at maturity. The specific identification method is
used to determine the cost of securities sold. Discounts or premiums
are accredit or amortized using the level-yield method to the earlier
of call date or maturity of the related held-to-maturity security.
Loans Receivable, Real Estate Owned, and Provisions for Losses
Effective January 1, 1995, the Company prospectively adopted Statement
of Financial Accounting Standards (SFAS) No. 114, Accounting by
Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures
(collectively referred to as Statement 114). Statement 114 addresses
the accounting treatment of certain impaired loans, excluding large
groups of smaller-balance, homogenous loans.
27
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Loans are considered impaired when it is probable that the Company will
not fully collect amounts due in accordance with the contractual terms
of the loans. For these loans, the Company measures the amount of
impairment using discounted cash flows, except when it is determined
that the sole source of repayment for the loan is operation or
liquidation of the collateral. In such case, the current fair value of
the collateral, reduced by estimated selling costs, is used in place of
discounted cash flows. If the measurement of the impaired loan is less
than the recorded investment-in the loan, impairment is recognized by
creating or adjusting an existing allocation of the allowance for
losses on loans.
The allowance for losses on impaired loans is one component of the
methodology for determining the allowance for losses on loans. The
remaining components of the allowance for losses on loans provide for
estimated losses on problem mortgages and loans and a general allowance
for estimated losses on loans not specifically identified as problem
loans which is base don factors such as historical loss experience and
business and economic conditions.
Interest on loans is accrued only if deemed collectible and is credited
to income as earned. Interest payments received on impaired loans are
recorded as interest income unless collection of the remaining recorded
investment is doubtful, at which time payments received are recorded as
reductions of loan principal. The Company stops accruing interest on
loans for which payments are more than 90 days past due as well as any
other loans for which it is probable that the Company will not collect
all of its outstanding principal.
Various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowances for losses on
loans and real estate. These agencies may require the Company to record
additional provisions for losses based upon their evaluation of
information available at the time of their examination.
The Company calculates gains or losses on sales of participating
interests in loans receivable by determining the difference between the
weighted average yield of the loans sold and the yield rate guaranteed
to the purchaser, adjusted for the estimated cost of servicing the
loans receivable. The resulting premium or discount is amortized or
accredited to interest income using the level- yield method over the
contractual life of the loans. Loans held for sale are recorded at the
lower of cost or estimated market value.
Loan Origination Income and Costs
Loan fees and certain direct loan origination costs are deferred and
recognized as an adjustment of yield using the level-yield method over
the contractual life of the loans.
Effective January 1, 1996, the Company prospectively adopted SFAS No.
122, Accounting for Mortgage Servicing Rights, an amendment of FASB
Statement No. 65 (Statement 122). SFAS 65, Accounting for Certain
Mortgage Banking Activities, requires the capitalization and subsequent
amortization of mortgage servicing rights which are acquired through
28
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
purchase transactions. Effective January 1, 1997, the Company
prospectively adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,
(Statement 125) which supersedes Statement 122. Both Statement 125 and
Statement 122 eliminate the accounting distinction between rights to
service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase
transactions. Any costs of acquiring mortgage loans, either through
origination or purchase, are allocated between the loans and their
related mortgage servicing rights. Consistent with Statement 65,
mortgage servicing rights are amortized in proportion to and over the
period of estimated net servicing income. In addition, the rights are
evaluated based on their fair value. Statement 125 requires entities to
recognize servicing assets and liabilities for all contracts to service
financial assets, unless the assets are securitized and all servicing
is retained. The servicing assets are initially measured at fair value,
and are amortized consistent with the method prescribed by Statement
122. In addition, the impairment of the servicing assets and
liabilities are assessed by strata and recognized through a valuation
allowance. Adoption of Statement 125 did not have a significant impact
on the Company's consolidated financial statements.
Real Estate Owned
Real estate owned is accounted for at the lower of cost (principal
balance of former mortgage loan) or estimated fair value. Fair value is
determined primarily by discounted cash flow calculations. Expenses of
holding foreclosed properties, net of rental income, are generally
charged to operations as incurred. Costs incurred in connection with
improvements to the properties are capitalized unless such costs result
in an amount in excess of net realizable value. Gains and losses on
dispositions of these properties are recognized in the year in which
the sales occur.
Office Properties and Equipment
Land, buildings and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized over the remaining terms
of the leases.
Estimated useful lives are as follows: furniture and equipment - 4 to
12 years; automobiles - 4 years; buildings - 20 to 40 years.
29
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long- Lived Assets and for Long-Lived Assets to Be
Disposed Of (Statement 121), on January 1, 1996. Statement 121 requires
that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying
amount of the assets to future net cash flows expected to be generated
by the assets. If such assets are considered to be impaired, the
impairment is measured as the amount by which the assets' carrying
amount exceed their fair value. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Adoption of Statement 121 did not have a significant impact on the
Company's financial position, results of operations, or liquidity.
Real Estate Held for Investment and Development
Real estate held for investment and development is recorded at the
lower of cost or estimated net realizable value.
Concentrations of Credit Risk
Concentrations of credit risk arise when a number of counterparties
have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in
economic or other conditions. The Company's loan portfolio consists
primarily of residential mortgages located in Colorado, making the
value of the portfolio more susceptible to declines in real estate
values and other changes in economic conditions in Colorado and the
Rocky Mountain region. The Company does not have a significant exposure
to any individual customer.
Disclosures of Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments
(Statement 107), requires the Company to disclose estimated fair values
of its financial instruments. Fair value estimates are made at a
specific point in time, based on relevant market information. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a portion
of the Company's financial instruments, fair value estimates are 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 precision. Changes in
assumptions could significantly affect the estimates.
30
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
Fair value estimates are based on financial instruments owned at
December 31, 1996 and 1997 without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments, including deferred tax
assets and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in these estimates.
The Company uses derivative financial instruments to a limited extent
to meet the objectives of the investment policy and for management of
interest rate risk. The Company held one derivative security, a Federal
National Mortgage Association Swap Trust with an outstanding principal
balance of $7,708,000 and $6,724,000 as of December 31, 1996 and 1997,
respectively. The security, which is classified as available-for-sale,
has a market value of $7,687,000 and $6,384,000 as of December 31, 1996
and 1997, respectively. The structure of the instrument integrates a
fixed-rate bond equal those scheduled in the swap, then the Company
will earn interest based on the one-month LIBOR rate plus 30 basis
points. The Company is exposed to interest rate risk if repayment of
the bound precedes the amortizing swap.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings per Share
(Statement 128). Statement 128 supersedes APB Opinion No. 15, Earnings
per Share, and specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held
common stock. Statement 128 is effective for period ending after
December 15, 1997. The Company computes two measures, basic and diluted
earnings per share. Basic earnings per share is computed by dividing
net earnings by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would
have been outstanding if dilutive potential common shares had been
issued. In addition, the numerator is adjusted for any changes in net
earnings that would have resulted from the assumed conversion of the
potential common shares. Consistent with the requirements of Statement
128, the Company has restated all prior-period earnings per share data
presented, including interim financial statements and selected
quarterly financial data.
31
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies (continued)
The weighted average number of shares of common stock and common stock
equivalents outstanding at December 31, 1995 have not been adjusted to
reflect the December 29, 1995 stock offering and exchange of the
outstanding common shares of the Bank for common shares of the Company
because of the immaterial effect of consummating the transaction at
December 29, 1995 (see note 13).
Business Combination
On October 1, 1997, the Company acquired Delta Federal Savings, FSB
(Delta) for $5,924,000 in the Company's stock. The Company issued
301,952 shares from treasury for the acquisition. The acquisition has
been accounted for by the purchase method and, accordingly, the results
of operations of Delta have been included in the Company's consolidated
financial statements from October 1, 1997. The excess of $1,128,000 of
the purchase price over the fair value of the identifiable assets
acquired of $4,796,000 has been recorded as goodwill and is being
amortized using the straight-line method over 15 years.
Reclassification
Certain previously reported amounts have been reclassified to conform
to the Company's 1997 presentation.
(2) Regulatory Matters
The Company is subject to assessment by the Savings Association
Insurance Fund (SAIF). In 1996, the Federal Deposit Insurance
Corporation (FDIC) assessed a special premium on deposits insured by
the SAIF. The Company's assessment approximated $7,000,000 and is
included in FDIC premiums in the accompanying consolidated statements
of operations.
The Bank is subject to various regulatory capital requirements
administered by federal agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off- statement of financial condition
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classification are 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 of
total and Tier I capital to risk-weighted assets, core capital to
adjusted tangible assets and tangible capital to adjusted total assets.
Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
32
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
At December 31, 1997, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total capital (to risk
weighted assets), Tier I capital (to risk weighted assets), core
capital (to adjusted tangible assets) and tangible capital (to adjusted
total assets) ratios as set forth in the table below. There are not
conditions or events since that notification that management believes
have changed the Bank's regulatory capital category.
The Bank's actual capital amounts and ratios are presented in the
following table (dollars in thousands):
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt
adequacy corrective action
Actual purposes provisions
----------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1997:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $197,080 23.76% $66,355 8.0% $82,943 10.0%
Core capital (to adjusted tangible assets) 194,110 12.49 46,479 3.0 77,465 5.0
Tangible capital (to adjusted total assets) 189,589 12.25 23,239 1.5 N/A N/A
Tier I capital (to risk weighted assets) 194,110 23.40 N/A N/A 49,766 6.0
As of December 31, 1996:
Total capital (to risk weighted assets) 183,728 23.84 61,654 8.0 77,067 10.0
Core capital (to adjusted tangible assets) 181,733 12.03 45,320 3.0 75,533 5.0
Tangible capital (to adjusted total assets) 178,976 11.87 22,625 1.5 N/A N/A
Tier I capital (to risk weighted assets) 181,733 23.58 N/A N/A 46,240 6.0
</TABLE>
(3) Investment Securities
Investment securities at December 31 consist of (amounts in thousands):
1996 1997
---- ----
Held-to-maturity, at amortized cost $61,642 73,944
Available-for-sale, at market price 11,099 5,951
------ ------
$72,741 $79,895
====== ======
33
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
As of December 31, 1996 and 1997, gross unrealized gains and losses of
investment securities are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
Held-to-maturity
U.S. government and agency securities $61,642 88 (29) 61,701
====== == == ======
Available-for-sale
U.S. government and agency securities $ 9,999 1 (13) 9,987
Equity securities 488 624 -- 1,112
------ --- -- ------
$10,487 625 (13) 11,099
====== === == ======
1997
Held-to-maturity
U.S. government and agency securities $73,944 26 (18) 73,952
====== == == ======
Available-for-sale
U.S. government and agency securities $ 5,959 -- (8) 5,951
====== == = =====
</TABLE>
Maturities of investment securities at December 31, 1997 are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Amortized Market
cost value
---- -----
<S> <C> <C>
Held-to-maturity
Obligations of the U.S. government and its agencies:
Due within one year $73,944 73,952
====== ======
Available-for-sale
Obligations of the U.S. government and its agencies:
Due within one year $ 5,200 5,193
Due after one year to five years 759 758
------ ------
$ 5,959 5,951
====== ======
</TABLE>
(4) Mortgage-Backed and Other Asset-Backed Securities
Mortgage-backed and other asset-backed securities at December 31
consist of amounts in thousands):
1996 1997
---- ----
Held-to-maturity, at amortized cost $273,602 209,543
Available-for-sale, at market value 7,687 6,839
------- -------
$281,289 216,382
======= =======
34
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Mortgage-Backed and Other Asset-Backed Securities (continued)
As of December 31, 1996 and 1997, gross unrealized gains and losses of
mortgage-backed and other asset-backed securities are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
1996
Held-to-maturity
Federal Home Loan Mortgage Corporation $48,584 953 (1,597) 47,940
Federal National Mortgage Association 23,795 388 (249) 23,934
Government National Mortgage Association 419 12 -- 431
Collateralized mortgage obligations and other
mortgage-backed securities 200,804 153 (5,219) 195,738
------- ----- ----- -------
$273,602 1,506 (7,065) 268,043
======= ===== ===== =======
Available-for-Sale
Federal National Mortgage Association $ 7,708 -- (21) 7,687
======= ===== ===== =====
1997
Held-to-maturity
Federal Home Loan Mortgage Corporation $ 29,913 638 (165) 30,386
Federal National Mortgage Association 17,272 341 (35) 17,578
Government National Mortgage Association 285 8 -- 293
Collateralized mortgage obligations and other
mortgage-backed securities 162,073 534 (2,636) 159,971
------- ----- ----- -------
$209,543 1,521 (2,836) 208,228
======= ===== ===== =======
Available-for-Sale
Federal Home Loan Mortgage Corporation $ 249 5 -- 254
Federal National Mortgage Association 6,919 -- (334) 6,585
------- ----- ---- -------
$ 7,168 5 (334) 6,839
======= ===== ==== =======
</TABLE>
35
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(4) Mortgage-Backed and Other Asset-Backed Securities (continued)
Expected maturities of mortgage-backed and other asset-backed
securities at December 31, 1997 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Amortized Market
Cost value
---- -----
<S> <C> <C>
Held-to-maturity
Federal Home Loan Mortgage Corporation:
Due within one year $ 256 256
Due after five years to ten years 325 333
Due after ten years 29,332 29,797
Federal National Mortgage Association:
Due after one year to five years 278 281
Due after ten years 16,994 17,297
Government National Mortgage Association:
Due after ten years 285 293
Collateralized mortgage obligations and other
mortgage-backed securities:
Due within one year 70,803 70,130
Due after one year to five years 43,802 43,313
Due after five years to ten years 22,022 21,643
Due after ten years 25,446 24,885
------- -------
$209,543 208,228
======= =======
Available-for-sale
Federal Home Loan Mortgage Corporation:
Due within one year $ 249 254
Federal National Mortgage Association:
Due after one year to five years 6,919 6,585
------- -------
$ 7,168 6,839
======= =======
At December 31, 1997, the Company held collateralized mortgage
obligations (CMOs) with an aggregate carrying amount of $162,073 which
consisted of $21,797 federal agency CMOs and $140,276 private issue
CMOs.
</TABLE>
36
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(5) Loans Receivable
Loans receivable consist of (amounts in thousands):
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1997
---- ----
<S> <C> <C>
First mortgage loans:
Conventional $ 798,608 915,871
Partially guaranteed by the Veterans Administration or 2,757
insured by the Federal Housing Administration 3,706
Real estate construction loans 27,931 16,098
Purchased loans and equity in participation loans 79,087 68,939
--------- ---------
Total first mortgage loans, net 909,332 1,003,665
Home improvement, home equity, commercial, and consumer
loans 167,820 170,459
--------- ---------
1,077,152 1,174,124
Less:
Undisbursed proceeds of loans in process 9,758 4,650
Unearned premiums and discounts, net 10 (997)
Deferred loan origination fees, net 2,010 1,153
Allowance for losses on loans (see note 8) 3,850 4,716
--------- ---------
$1,061,524 1,164,602
========= =========
</TABLE>
First mortgage loans secured by one-to-four family residences
approximated $855,992,000 and $964,629,000 at December 31, 1996 and
1997, respectively.
Under certain economic or legal circumstances, the Company may grant
concessions to a borrower. These concessions may include restructuring
loans to change payment terms, reduce the stated interest rate, reduce
the amount of interest due, or extend the maturity date. The new or
modified loan constitutes a troubled debt restructuring loans to change
payment terms, reduce the stated interest rate, reduce the amount of
interest due, or extend the maturity date. The new or modified loan
constitutes a troubled debt restructuring under SFAS No. 15. The Bank
had no troubled debt restructurings at December 31, 1996 and 1997.
Loans, net of allowances for losses, on nonaccrual status approximated
$1,457,000 and $2,113,000 at December 31, 1996 and 1997, respectively.
Interest income that would have been recorded for nonaccrual loans and
troubled debt restructuring had they been performing in accordance with
their contractual requirements approximated $858,000, $883,000 and
$866,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. Actually interest income recorded for these loans totaled
$576,000, $617,000 and $567,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
37
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Loans receivable and mortgage-backed securities with combined carrying
values approximating $18,341,000 and $19,624,000 at December 31, 1996
and 1997, respectively, were pledged to secure uninsured public
deposits approximating $7,878,000 and $5,147,000 at December 31, 1996
and 1997, respectively.
Loans serviced by the Company for the benefit of others at December 31,
1996 and 1997 approximated $145,563,000 and $132,197,000, respectively.
At December 31, 1996 and 1997, the Company had outstanding commitments
to fund loans and standby letters of credit approximating $52,355,000
and $55,687,000, respectively. Of the total outstanding commitments,
fixed rate commitments at December 31, 1996 and 1997 approximated
$3,179,000 and $3,659,000, respectively, having weighted average
interest rates of 7.3% and 7.1%, respectively. These commitments are
generally at the market rate of interest at the time of closing. The
Company's policy is to required customers to provide collateral prior
to the disbursement of approved loans.
At December 31, 1996 and 1997, loans held for sale approximated
$925,000 and $950,000, respectively.
(6) Accrued Interest Receivable
Accrued interest receivable is summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1997
---- ----
<S> <C> <C>
Loans receivable $5,166 5,808
Investment securities 1,065 1,132
Mortgage-backed and other asset-backed securities 1,828 1,416
----- -----
$8,059 8,356
===== =====
</TABLE>
(7) Real Estate Owned
Real estate owned consists of (amounts in thousands):
<TABLE>
<CAPTION>
December 31
-------------------------
1996 1997
---- ----
<S> <C> <C>
Real estate acquired by foreclosure $2,148 748
Less allowance for estimated losses (see note 8) 691 523
----- ---
$1,457 225
===== ===
</TABLE>
38
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(8) Allowances for Losses on Loans Receivable and Real Estate Owned
The Company provides allowances for potential losses associated with
its lending and real estate activities. changes in these allowances are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
Loans Real estate
receivable owned
---------- -----
<S> <C> <C>
Balance, December 31, 1994 $ 3,310 1,105
Credit for losses (495) (95)
Charge-offs (121) (98)
Recoveries 232 --
---- ----
Balance, December 31, 1995 2,926 912
Provisions for losses 1,143 3
Charge-offs (305) (224)
Recoveries 86 --
----- ----
Balance, December 31, 1996 3,850 691
Acquired in business combination 269 --
Credit for Losses (739) (114)
Charge-Offs (424) (54)
Recoveries 1,760 --
------ ----
Balance, December 31, 1997 $ 4,716 523
=== ==== ====== ====
</TABLE>
The recorded investment in impaired loans and the related impairment allowance
determined under Statement 114 (included within the allowance for losses on
loans receivable at December 31 are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Statement 114
Recorded impairment
Investment allowance
---------- ---------
1996
- ----
<S> <C> <C>
Impaired loans:
Statement 114 allowance $1,906 529
Statement 114 allowance not required 1,815 --
------ ------
Total impaired loans $3,721 529
====== ======
1997
- ----
Impaired loans:
Statement 114 allowance required $ 583 547
Statement 114 allowance not required 887 --
------ ------
Total Impaired Loans $1,470 547
====== ======
</TABLE>
39
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The majority of impaired loans requiring a Statement 114 allowance are
measured using the fair value of the underlying collateral since these
loans are considered collateral dependent.
The average recorded investment in impaired loans for the years ended
December 31, 1997 and 1997 was $3,160,000 and $2,866,000, respectively.
Interest recorded on impaired loans for the years ended December 31,
1995, 1996 and 1997 was $98,000, $102,000 and $64,000, respectively.
(9) Office Properties and Equipment
Office properties and equipment and related accumulated depreciation
and amortization are summarized as follows (amounts in thousands):
December 31
-------------------
1996 1997
---- ----
Land $ 7,068 6,976
Buildings 18,483 20,317
Furniture, equipment leasehold improvements and 10,790 11,850
automobiles
Construction-in-progress 115 25
------- -------
36,456 39,168
Less accumulated depreciation and amortization 13,526 15,562
------- -------
$22,930 23,606
======= =======
Depreciation and amortization expense approximated $1,607,000,
$1,794,000 and $1,821,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
40
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(10) Deposits
Deposits are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1996 1997
-------------------------------- ---------------------------------
Weighted Weighted
average average
Amount rate Amount rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
NOW Accounts and Money
Market Demand Deposits
Money market $ 139,990 3.50% $ 142,643 3.50%
Checking with interest 100,306 1.99 105,794 1.75
Commercial demand deposits 23,124 0.74 28,365 0.64
Retirement accounts 81,834 5.31 84,388 5.19
Non-interest-bearing 33,408 -- 39,181 --
checking accounts
Savings Accounts
Regular savings accounts 92,945 2.71 94,940 2.71
Time Deposits
Fixed rate and fixed 572,626 5.43 605,757 5.54
term certificates
Retirement accounts 83,495 6.08 73,225 5.98
Jumbo certificates 8,095 5.24 8,884 5.77
---------- ----------
Total deposits $1,135,823 4.58% $1,182,727 4.57%
========== ==== ========== ====
</TABLE>
Time deposits of $100,000 and over approximated $47,245,000 and
$64,556,000 at December 31, 1996 and 1997, respectively. Deposit
balances in excess of $100,000 are not federally insured.
At December 31, 1997, scheduled maturities of time deposits are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Year ending December 31
---------------------------------------------------------------
2002
and
1998 1999 2000 2001 thereafter Total
---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Fixed rate and fixed
term certificates $470,010 76,791 20,634 14,042 24,280 605,757
-------- ------ ------ ------ ------ -------
Retirement accounts 21,190 3,388 19,516 9,875 19,256 73,225
Jumbo certificates 7,166 1,296 200 99 123 8,884
-------- -------- -------- -------- -------- --------
$498,366 81,475 40,350 24,016 43,659 687,866
======== ======== ======== ======== ======== ========
</TABLE>
41
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Interest expense on deposits consists of the following (amounts in
thousands):
Year ended December 31
---------------------------
1995 1996 1997
---- ---- ----
Time Deposits $39,029 39,573 41,803
NOW accounts and money market
demand deposits 6,709 6,878 6,966
Savings accounts 2,576 2,541 2,4785
------- ------- -------
48,314 48,992 51,247
======= ======= =======
(11) Advances from Federal Home Loan Bank
Advances from the FHLB are secured by the Company's FHLB stock and by
qualifying loans receivable, investment securities and mortgage-backed
securities.
Advances from the FHLB at December 31, 1997 are as follows (amounts in
thousands):
Weighted average
Maturity interest rate Amount
-------- ------------- ------
1998 5.95 $ 38,410
1999 7.96 4,000
2000 6.93 32,000
2001 5,82 1,000
2002 6.21 47,000
------
$122,410
========
As a member of the FHLB system, the Bank is required to maintain an
investment in stock of the FHLB equal to the greater of 1% of certain
residential mortgages or 5% of FHLB advances. The Bank has a blanket
pledge with the FHLB and has pledged all of its stock in the FHLB, and
all otherwise unpledged or unencumbered federal funds sold, U.S. agency
securities, certain qualifying loans, and mortgage-backed securities.
(12) Bonds Payable
Bonds payable of $5,009,000 and $4,479,000 at December 31, 1996 and
1997, respectively, consist of Ryland Acceptance Corporation Four's
Collateralized Mortgage Bonds, Series 63, issued in March 1988 with a
fixed interest rate of 8.75%. FSSC's original principal amount was
$22,009,000 with stated final maturities through 2019. Bond issue costs
with a remaining unamortized balance of $176,000 and $69,000 at
December 31, 1996 and 1997, respectively, are netted against the bond
principal balance in the accompanying consolidated financial
statements.
42
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The bonds are secured by mortgage-backed securities with carrying
values and market values approximating $4,887,000 and $5,169,000,
respectively, at December 31, 1997. All remaining bonds outstanding are
scheduled to mature in 2019.
(13) Stockholders' Equity
On December 29, 1995, the Company completed its conversion from a
mutual holding company to a savings institution holding company and
acquired all of the capital stock of the Bank by exchanging all
outstanding shares of the Bank from 6,619,539 shares of the Company. In
connection with the conversion, the Company issued and sold 13,403,798
shares of common stock at a price of $10 per share. Net proceeds
received from the conversion and costs associated with the conversion
approximated $117,620,000 and $3,014,000, respectively. Included in the
number of shares sold are 1,340,379 shares purchased by the employee
stock ownership plan in exchange for a note payable to the Company.
For the purpose of granting eligible members of the Bank a priority in
the event of future liquidation, the Bank established a liquidation
account equal to the aggregate amount of the dividends waived by First
Savings Capital, M.H.C. plus 67.08% of the Bank's total stockholders'
equity as of September 30, 1995. In the event (and only in such event)
of future liquidation of the converted Bank, an eligible savings
account holder who continues to maintain a savings account shall be
entitled to receive a distribution from the liquidation account, in the
proportionate amount of the then-current adjusted balance of the
savings deposits then held before any distributions may be made with
respect to capital stock.
Present regulations provide that the Bank may not declare or pay a cash
dividend on or repurchase any of its capital stock if the result
thereof would be to reduce the regulatory capital of the Bank below the
amount required for the liquidation account or the regulatory capital
requirement. Further, any dividend declared or paid on, or repurchase
of the Bank's capital stock shall be in compliance with the rules and
regulations of the Office of Thrift Supervision, or other applicable
regulations.
All references to options and option prices below have been adjusted to
reflect the December 29, 1995 exchange of the outstanding common shares
of the Bank for common shares of the Company.
43
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Equity (continued)
(a) Earnings per Share
The following tables reconcile the numerators and denominators
of the basic and diluted earnings per share (EPS) computations
(amounts in thousands, except share and per share data).
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------------------
Weighted
average
Earnings common shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS -
net earnings $ 12,638 6,325,611 $ 2.00
======
Effect of dilutive securities:
Stock options -- 81,883
Nonvested MRP Shares -- 26,344
-------- ---------
Diluted EPS -
net earnings plus assumed conversions $ 12,638 6,433,838 $ 1.96
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------------------------------
Weighted
average
Earnings common shares Per share
(numerator) (denominator) amount
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS -
net earnings $ 13,372 18,064,252 $ .74
=====
Effect of dilutive securities:
Stock options -- 255,113
Nonvested MRP/MSBP shares -- 34,902
------- ----------
Diluted EPS -
net earnings plus assumed conversions $ 13,372 18,354,268 $ .73
======== ========== =====
</TABLE>
44
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS -
net earnings $ 19,914 15,407,378 $ 1.29
======
Effect of Dilutive Securities:
Stock options -- 500,808
Nonvested MRP/MSBP shares -- 54,076
------- ----------
Diluted EPS -
net earnings plus assumed conversions $ 19,914 15,962,262 $ 1.25
======== ========== ======
</TABLE>
(b) Stock Option Plans
In 1992, the Company established a stock option plan for
certain employees and reserved 631,325 shares of common stock
for issuance under the plan. As of December 31, 1997, all
631,325 options had been granted at $2.20 per option which
represented fair market value at the date of grant. Of the
options granted, 622, 232 are considered incentive stock
options and 9,093 are nonincentive. All options became
exercisable on November 1, 1993 and expire ten years from the
date of grant. During 1995, 1996 and 1997, respectively,
119,770, 123,875 and 55,162 options were exercised. As of
December 31, 1997, 145,667 options remain exercisable.
In 1996, the Company established an additional stock option
plan for certain employees and directors and reserved
1,340,379 shares of common stock under the plan. At December
31, 1997, 1,289,000 options had been granted at $13.563 per
option, 30,000 options had been granted at $17.188, and
$21.379 options had been granted at $24.875, which represented
fair market value at the date of grant. Of the options granted
to date 1,119,434 are considered incentive stock options and
220,945 are nonincentive. Options vest at the rate of 20% per
year over five years, beginning one year from grant date, and
expire ten years from grant date. Awards vest immediately upon
death, disability, or change in control of the Company.During
1997, 6,000 options were exercised.
45
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(c) Employee Stock Ownership Plan
In 1992, the Company established an employee stock ownership
plan (ESOP) covering all employees with more than one year of
service with the Company. Participant benefits become 30%
vested after three years of service, increasing to 50% vested
after fours of service, and by 20% annually thereafter until
benefits are 100% vested after 7 years. Contributions to the
plan are determined by the Company's Board of Directors and
approximated $359,000, $1,026,000 and $975,000 in 1995, 1996
and 1997 respectively.
The ESOP borrowed $972,000 to fund the purchase of the ESOP
shares in 1992. This loan was repaid by the end of 1995. On
December 29, 1995, the ESOP purchased 10% of the common shares
sold by the Company in connection with its conversion with a
$13,404,000 loan extended by the Company. The principal
balance of the note, which matures on December 28, 2005, is
payable in 10 equal installments of $1,340,379. The note bears
interest at the prime rate, payable quarterly. The borrowing
is to be repaid by contributions by the Bank and dividends on
common shares held by the ESOP. The shares are released to the
ESOP as the debt is repaid. ESOP shares that have been
committed to be released are considered outstanding for
purposes of computing earnings per common and common
equivalent share.
During 1995, 1996 and 1997, the ESOP received dividends from
the Company approximating $122,000, $315,000 and $565,000,
respectively, which were used to fund debt repayments.
(d) Management Recognition Plan
Effective July 14, 1992, the Company established a Management
Recognition Plan (MRP) o reward certain key employees with an
equality interest in the Company as compensation for their
future professional service. The Company contributed 182,208
shares of common stock. Shares are granted at the discretion
of a committee appointed by the Board of Directors and, while
initially and currently vesting at the rate of 20% per year
over 5 years, ultimately vest at the discretion of the
committee appointed by the board. The Company records
compensation expense and an increase in equity as individual
employees vest in allocated shares. At December 31, 1997, the
MRP has granted 170,785 shares to employees, all of which have
vested. Compensation expense recorded for vesting of MRP
shares approximated $300,000, $418,000 and $449,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
46
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(13) Stockholders' Equity (continued)
(e) Management Stock Bonus Plan
In 1996, the Company established a Management Stock Bonus Plan
(MSBP) to reward directors, officer, and certain key employees
with an equity interest in the Company as compensation for
their future professional service. The Company contributed
268,075 shares of common stock through purchases in the open
market. Shares are granted at the discretion of a committee
appointed by the Board of Directors and vest at a rate of 20%
per year over 5 years. All awards become immediately 100%
vested upon death, disability, or termination of service
following a change in control of the Company. The Company
records compensation expense and an increase in equity as
individual employees vest in allocated shares. At December 31,
1997 the MSBP has granted 195,000 shares, of which 38,300
shares have vested. Compensation expense recorded for vesting
of MSBP shares approximated $14,000 and $505,000 for the years
ended December 31, 1996 and 1997, respectively.
(f) Purchase Rights
On July 24, 1996, the Board of Directors of the Company
declared a dividend distribution of one Preferred Share
Purchase Right on each outstanding share of common stock. The
rights will be exercisable only if a person or group acquires
15% or more of the Company's common stock or announces a
tender offer, the consummation of which would result in
ownership by a person or group of 15% or more of the common
stock.
During 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation (Statement 123), which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees
(Opinion No. 25), in accounting for stock-based compensation issued to
employees. Statement 123 allows for a fair value-based method of
accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based
compensation arrangements under Opinion No. 25, Statement 123 requires
disclosure of the pro forma effect on net income and earnings per share
as if the fair value-based method of accounting defined in Statement
123 had been applied. The Company will continue to use the accounting
prescribed by Opinion No. 25, and provide the required disclosures of
Statement 123.
The per share weighted-average fair value of stock options granted
during 1996 and 1997 was $5.11 and $8.53 on the dates of grant using
the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk free interest rate of 6.57% and
5.66%, an expected life of 7.1 and 6.0 years, and expected volatility
of 22%and 35% for the years ended December 31, 1996 and 1997,
respectively. No stock options were granted in 1995. It was
assumed that quarterly dividends of $0.10 per share and dividend
growth will be 10% per year.
47
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Company applies the intrinsic value method in accounting for its
equity incentive plans and, accordingly, no compensation cost has been
recognized for such plans in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the
grant date for its stock options, the Company's net earnings and
earnings per common share, assuming dilution would have been reduced to
the proforma amounts indicated below:
1996 1997
---- ----
(In thousands, except per
share amounts)
--------------
Net earnings As reported $ 13,372 19,914
Pro Forma 12,493 14,332
Earnings per common share As reported .74 1.29
Pro Forma .69 .93
Earnings per common
share, assuming dilution As reported .73 1.25
Pro forma .68 .90
The effects of applying SFAS 123 for providing pro forma disclosures
may not be representative of the effects on reported net earnings for
future years.
(14) Income Taxes
The Company files consolidated federal and state income tax returns.
Prior to 1996, the Company computed its bad debt deduction for income
tax purposes pursuant to the thrift bad debt reserve method of Internal
Revenue Code Section 593. Effective for taxable years beginning after
December 31, 1995, the Section 593 reserve method was repealed by
Congress. The Company is now required to compute its bad debt deduction
for income tax purposes suing the specific charge-off method. The
change in method will result in the Company recapturing approximately
$7,491,000 into income for taxable years 1998 through 2003. Retained
earnings at December 31, 1997 include approximately $11,974,000 of
accumulated tax bad debt deductions for which no provision for federal
income taxes has been made. If, in the future, this portion of retained
earnings is used for any purpose other than to absorb bad debt losses,
then federal income taxes may be imposed at the tax rates then
applicable.
Income tax expense (benefit) for the year ended December 32, 1995, 1996
and 1997 consists of (amounts in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal $ 5,188 1,156 6,344
State and local 629 173 802
------- ----- -----
$ 5,817 1,329 7,146
======= ===== =====
</TABLE>
(continued)
48
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(14) Income Taxes (continued)
Current Deferred Total
------- -------- -----
Year ended December 31, 1996:
Federal $ 7,064 8 7,072
State and local 838 1 839
------- --- -----
$ 7,902 9 7,911
======= === =====
Year ended December 31, 1997:
Federal $ 10,545 (43) 10,502
State and local 1,330 (7) 1,323
-------- --- ------
$ 11,875 (50) 11,825
======== ==== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31,
1996 and 1997 are presented below (amounts in thousands):
1996 1997
---- ----
Deferred tax assets:
Net unrealized loss on securities available-for-sale $ -- 122
Other -- 185
------ ------
Total gross deferred tax assets -- 307
------ ------
Deferred tax liabilities:
Loans receivable due primarily to deferred loan fees 1,938 1,957
Allowance for losses on loans receivable 1,332 1,068
FHLB stock, due to stock dividends 1,362 1,689
Net unrealized gain on securities available-for-sale 226 --
Prepaid FDIC premiums 15 71
Deferred premiums on loan sales 112 78
Other 133 164
------ ------
Total gross deferred tax liabilities 5,118 5,027
------ ------
Net deferred tax liability $ 5,118 4,720
======= =====
49
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate to earnings before income taxes as a
result of the following (dollar amounts in thousands):
Year ended December 31
----------------------------------------------------------
1995 1996 1997
----------------------------------------------------------
% of % of % of
pretax pretax pretax
Amount earnings Amount earnings Amount earnings
Computed statutory
federal tax
expense $ 6,924 35.0 $ 7,449 35.0 $ 11,108 35.0
Change in tax
expense resulting
from:
State income
taxes, net of
federal income
tax effect 521 2.6 553 2.6 914 2.9
Employee
benefit
deductions not
expensed for
book purposes (120) (.6) (193) (.9) (322) (1.0)
Tax-exempt
interest income (42) (.2) (45) (.2) (44) (.1)
Other, net (137) (.7) 147 .7 169 .5
-------- ---- -------- ---- -------- ----
Total income tax
expense $ 7,146 36.1 $ 7,911 37.2 $ 11,825 37.3
======== ==== ======== ==== ======== ====
(15) 401(k) Plan
Until 1996, the Company had a profit sharing plan covering all
employees after one year of service. In 1996, the structure of the plan
was changed to a 401(k)plan format. The Company made no contributions
to the 401(k) plan in 1996 and 1997. Contributions to the profit
sharing plan for the year ended December 31, 1995 approximated
$817,000.
(16) Contingencies
In the normal course of business, the Company is involved in various
legal actions arising from its lending and collection activities. In
the opinion of management, the outcome of these legal actions will not
significantly affect the consolidated financial position of the
Company.
50
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The Company's operations depend on the smooth functioning of the
Company's computer systems. Many computer software systems in use today
cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated. That failure could have a negative
impact on the Company's operations. During 1997, the Company's
management developed a plan to schedule the timing of future
remediation to its computer systems to deal with the year 2000. The
Company has expensed $5,000 to date on year 2000 efforts and estimates
total remediation cost to be $120,000. Management expects that its
systems will be adapted in time for that event, although there cannot
be assurance of success.
(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of financial instruments at December 31, 1996 and 1997.
Statement 107 defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale (amounts in thousands):
<TABLE>
<CAPTION>
1996 1997
--------------------------------------------------
Estimated Estimated
Carrying fair Carrying fair
Amount value Amount value
------ ---------- ------ -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 49,232 49,232 44,657 44,657
Investment securities 72,741 72,800 79,895 79,903
Mortgage-backed and other
asset-back securities 273,602 268,043 209,998 208,683
Mortgage-backed derivatives 7,687 7,687 6,384 6,384
Loans receivable, net 1,061,524 1,080,881 1,164,602 1,184,150
FHLB stock 9,554 9,554 11,277 11,277
Financial liabilities:
Deposits 1,135,823 1,165,576 1,182,727 1,211,210
Advances from Federal Home
Loan Bank 122,515 123,478 122,410 122,923
Bonds Payable 5,009 5,582 4,479 5,349
Advances by borrows for
taxes and insurance 8,312 8,312 8,369 8,369
</TABLE>
The following summarizes the major methods and assumptions used in
estimating the fair values of financial instruments.
Cash and cash equivalents are valued at their carrying amounts, which
are reasonable estimates of fair value due to the relatively short
period to maturity of the instruments.
51
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The carrying amounts for federal funds sold, Federal Home Loan Bank
(FHLB) overnight deposits, and other interest-earning assets
approximate fair value because they mature in 90 days or less and do
not present unanticipated credit concerns. The carrying amount of the
Company's investment in FHLB stock approximates fair value because
excess stock held can be sole for par value to the FHLB.
Investment, mortgage-backed and other asset-backed securities are
valued based on bid prices published in financial newspapers or bid
quotations received from securities dealers or brokers. Statement 107
specifies that fair values should be calculated based on the value of
one unit without regard to any premium or discount that may result from
concentrations of ownership of a financial instrument, possible tax
ramifications, or estimated transaction costs.
Fair values of loans are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
residential mortgages, nonresidential mortgages, and other loans. Each
loan category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories. Fair
values of loans, except performing residential mortgage loans, are
calculated by discounting scheduled cash flows through the estimated
maturity, based on the Company's historical experience with repayments
for each loan classification, modified as required, by an estimate of
the effect of current economic and lending conditions. For performing
residential mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates based on
industry averages. The estimated market discount rates used in the
calculations are the new loan rates offered by the Company on similar
types of loans.
Fair values of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings accounts and advances by
borrowers for taxes and insurance, are determined to be the amount
payable on demand. The fair values of certificates of deposit, advances
from the Federal Home Loan Bank, and bonds payable are based on the
discounted value of contractual cash flows. The discount rates are
estimated using the rates currently offered for similar instruments
with similar remaining maturities.
Unrecorded financial instruments consist of commitments to fund loans
and standby letters of credit. The fair value of these commitments,
based on fees currently charged for similar commitments, is not
significant.
(18) Subsequent Event
On March 8, 1998 the Company's Board of Directors approved an agreement
for Commercial Federal Corporation (Commercial Federal) to acquire the
Company in a stock swap valued at approximately $525 million. The
acquisition, which is contingent upon being accounted for as a
pooling-of-interests, is expected to close during the third quarter of
1998, subject to approval by the shareholders of the Company and
Commercial Federal and by regulatory agencies.
52
<PAGE>
FIRST COLORADO BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
(19) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company for the eight quarters
ended December 31, 1997 are as follows (amounts in thousands, except per
share data):
<TABLE>
<CAPTION>
1996 1997
----------------------------------------------- -------------------------------------------
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- -------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $25,525 26,111 26,320 26,672 26,715 26,233 27,227 27,773
Net interest income 11,517 12,188 11,803 11,926 12,248 11,301 12,047 12,338
Provision (credit) for losses
on loans 230 77 218 618 219 335 (1,320) 27
Net interest income after provision
(credit) for losses on loans 11,287 12,111 11,585 11,308 12,029 10,966 13,367 12,311
Earnings (loss) before income taxes 6,854 7,711 (333) 7,051 7,679 6,403 8,368 9,289
Net earnings (loss) 4,337 4,927 (172) 4,280 4,815 4,025 5,180 5,894
Earnings (loss) per common share .23 .26 (.01) .26 .31 .26 .34 .38
Earnings (loss) per common share,
assuming dilution .23 .26 (.01) .25 .30 .26 .33 .36
</TABLE>
53
<PAGE>
FIRST COLORADO BANCORP, INC. AND SUBSIDIARIES
Consolidating Schedule - Financial Condition
December 31, 1997
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Elimin- Consolidated Elimin- Consolidated
Assets FFB FSIC FSIS FSSC ations FFB FCB ations FCB
- ------ ----------- ----- ---- ----- ------ --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 27,208 1,393 153 44 (1,590) 27,208 841 (79) 27,970
Federal funds sold 8,100 -- -- -- -- 8,100 -- -- 8,100
Other interest-earning assets 8,573 -- -- 7 -- 8,580 7 -- 8,587
----------- ----- --- ----- ------ --------- ------- -------- ---------
Cash and cash equivalents 43,881 1,393 153 51 (1,590) 43,888 848 (79) 44,657
Investment securities 79,895 -- -- -- -- 79,895 -- -- 79,895
Mortgage-backed and other
asset-backed securities 211,495 -- -- 4,887 -- 216,382 -- -- 216,382
Loans receivable, net 1,164,602 -- -- -- -- 1,164,602 14,163 (14,163) 1,164,602
Accrued interest receivable 8,290 -- -- 66 -- 8,356 -- -- 8,356
Federal Home Loan Bank stock,
at cost 11,277 -- -- -- -- 11,277 -- -- 11,277
Real estate owned, net 225 -- -- -- -- 225 -- -- 225
Office properties and equipment,
net of accumulated
depreciation and amortization 23,586 -- 20 -- -- 23,606 -- -- 23,606
Real estate held for investment
and development -- 1,197 -- -- -- 1,197 -- -- 1,197
Investment in subsidiaries 3,231 -- -- -- (3,231) -- 196,557 (196,557) --
Income taxes receivable 120 (48) 6 -- -- 78 (89) 11 --
Other assets 5,766 47 1 -- -- 5,814 15 -- 5,829
----------- ----- --- ----- ------ --------- ------- -------- ---------
Total assets $ 1,552,368 2,589 180 5,004 (4,821) 1,555,320 211,494 (210,788) 1,556,026
=========== ===== === ===== ====== ========= ======= ======== =========
Liabilities and
Stockholders' Equity
- ----------------------
Deposits $ 1,184,396 -- -- -- (1,590) 1,182,806 -- (79) 1,182,727
Advances from Federal
Home Loan Bank 122,410 -- -- -- -- 122,410 -- -- 122,410
Bonds payable -- -- -- 4,479 -- 4,479 -- 4,479
Note payable to FCB 14,163 -- -- -- -- 14,163 -- (14,163) --
Advances by borrowers
for taxes and insurance 8,369 -- -- -- -- 8,369 -- -- 8,369
Advances from FCB -- -- -- 1,515 (1,515) -- -- -- --
Deferred income taxes 4,739 (18) (1) -- -- 4,720 -- -- 4,720
Deferred income 604 -- -- -- -- 604 -- -- 604
Other liabilities 21,130 3 46 33 -- 21,212 2,185 11 23,408
----------- ----- --- ----- ------ --------- ------- -------- ---------
1,355,811 (15) 45 6,027 (3,105) 1,358,763 2,185 (14,231) 1,346,717
Stockholders' equity (deficit):
Common stock 100 3,821 50 10 (3,881) 100 2,013 (100) 2,013
Additional paid-in-capital 79,360 -- -- -- -- 79,360 241,490 (165,803) 155,047
Treasury stock -- -- -- -- -- -- (53,562) -- (53,562)
Unearned ESOP shares (10,523) -- -- -- -- (10,523) -- -- (10,523)
Unearned MRP/MSBP shares (3,338) -- -- -- -- (3,338) -- -- (3,338)
Net unrealized loss on
securities
available-for-sale (215) -- -- -- -- (215) -- -- (215)
Retained earnings (deficit),
partially restricted 131,173 (1,217) 85 (1,033) 2,165 131,173 19,368 (30,654) 119,887
----------- ----- --- ----- ------ --------- ------- -------- ---------
Total stockholders'
equity (deficit) 196,557 2,604 135 (1,023) (1,716) 196,557 209,309 (196,557) 209,309
----------- ----- --- ----- ------ --------- ------- -------- ---------
Total liabilities and
stockholders' equity $ 1,552,368 2,589 180 5,004 (4,821) 1,555,320 211,494 (210,788) 1,556,026
=========== ===== === ===== ====== ========= ======= ======== =========
</TABLE>
See accompanying independent auditors' report.
54
<PAGE>
FIRST COLORADO BANCORP, INC. AND SUBSIDIARIES
Consolidating Schedule - Operations and Retained Earnings
Year Ended December 31, 1997
(Amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Consoli- Consoli-
Elimin- dated Elimin- idated
FFB FSIC FSIS FSSC ations FFB FCB ations FCB
--------- ------ ----- ------ ----- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest on loans receivable $ 87,480 -- -- -- -- 87,480 1,316 (1,463) 87,333
Interest on mortgage-backed
and other asset-backed securities 14,619 -- -- 419 -- 15,038 -- -- 15,038
Interest and dividends on investment
securities 5,216 -- -- 6 -- 5,222 9 -- 5,231
Interest on federal funds sold
and other interest-earning assets 337 9 -- -- -- 346 -- -- 346
--------- ------ ----- ------ ----- ------- ------ ------- -------
Total interest income 107,652 9 -- 425 -- 108,086 1,325 (1,463) 107,948
--------- ------ ----- ------ ----- ------- ------ ------- -------
Interest expense:
Interest on deposits 51,247 -- -- -- -- 51,247 -- -- 51,247
Interest on advances from
Federal Home Loan Bank 8,226 -- -- -- -- 8,226 -- -- 8,226
Other interest expense 349 -- -- 540 -- 889 146 (494) 541
--------- ------ ----- ------ ----- ------- ------ ------- -------
Total interest expense 59,822 -- -- 540 -- 60,362 146 (494) 60,014
--------- ------ ----- ------ ----- ------- ------ ------- -------
Net interest income (expense) 47,830 9 -- (115) -- 47,724 1,179 (969) 47,934
Credit for losses on loans (739) -- -- -- -- (739) -- -- (739)
--------- ------ ----- ------ ----- ------- ------ ------- -------
Net interest income (expense)
after credit for losses on loans 48,569 9 -- (115) -- 48,463 1,179 (969) 48,673
--------- ------ ----- ------ ----- ------- ------ ------- -------
Noninterest income:
Fees and service charges 5,336 -- -- -- -- 5,336 -- -- 5,336
Gain on sale of loans, net 251 -- -- -- -- 251 -- -- 251
Gain on sale of investment securities
available-for-sale 983 -- -- -- -- 983 277 -- 1,260
Equity in income of subsidiaries 598 -- -- -- (598) -- 19,254 (19,254) --
Income from real estate operations, net 83 1,065 -- -- -- 1,148 -- -- 1,148
Rental income 205 -- -- -- (18) 187 -- -- 187
--------- ------ ----- ------ ----- ------- ------ ------- -------
7,456 1,065 -- -- (616) 7,905 19,531 (19,254) 8,182
Noninterest expense:
Compensation 15,373 -- 304 -- -- 15,677 -- (969) 14,708
Occupancy 4,111 5 18 2 (18) 4,118 -- -- 4,118
Credit for losses on real estate owned (114) -- -- -- -- (114) -- -- (114)
Professional fees 609 2 -- 40 -- 651 59 -- 710
Advertising 994 -- 1 -- -- 995 -- -- 995
Printing, supplies and postage 1,102 -- 5 -- -- 1,107 29 -- 1,136
FDIC premiums 729 -- -- -- -- 729 -- -- 729
Other, net 3,016 19 (467) 2 -- 2,570 264 -- 2,834
--------- ------ ----- ------ ----- ------- ------ ------- -------
25,820 26 (139) 44 (18) 25,733 352 (969) 25,116
--------- ------ ----- ------ ----- ------- ------ ------- -------
Earnings (loss) before income taxes 30,205 1,048 139 (159) (598) 30,635 20,358 (19,254) 31,739
Income tax expense (benefit):
Current 10,841 562 54 (26) -- 11,431 444 -- 11,875
Deferred 110 (160) -- -- -- (50) -- -- (50)
--------- ------ ----- ------ ----- ------- ------ ------- -------
Total income tax expense (benefit) 10,951 402 54 (26) -- 11,381 444 -- 11,825
--------- ------ ----- ------ ----- ------- ------ ------- -------
Net earnings (loss) 19,254 646 85 (133) (598) 19,254 19,914 (19,254) 19,914
Retained earnings (deficit),
beginning of year 111,919 (1,613) 121 (900) 2,392 111,919 7,095 (11,400) 107,614
Dividends declared -- (250) (121) -- 371 -- (7,641) -- (7,641)
--------- ------ ----- ------ ----- ------- ------ ------- -------
Retained earnings (deficit), end of year $ 131,173 (1,217) 85 (1,033) 2,165 131,173 19,368 (30,654) 119,887
========= ====== ===== ====== ===== ====== ====== ======= =======
</TABLE>
See accompanying independent auditors' report.
55
<PAGE>
Board of Directors
FCBI----------------------------------------------------------------------------
The Board of Directors of First Colorado Bancorp: (standing left to right) E.
Wmanager, manager of Foerster, Jr., James R. Wexels, John J. Nicholl, Malcolm E.
Collier (Seated left to right) Robert T. Person, Jr., Stephen A. Burkholder,
Polly Baca, Robert W. Richards, Leeon E. Hayden.
Malcolm E. Collier, Jr., has been a director of the Bank since 1966 and has been
Chief Executive Officer and Chairman of First Federal Bank since 1972 and 1989
respectively, and President, Chairman, and C.E.O. of First Colorado Bancorp
since its formation in September, 1995. He has served in various officer
capacities with the Bank since 1962.
Robert W. Richards began his service on the Board of Directors shortly after his
appointment as President and Chief Operating Officer of First Federal Ban in
1996. A First Federal Bank employee since 1976, Mr. Richards has served as a
branch officer of the bank.
Leeon E. Hayden has been a director of the Bank since 1956 and of the Company
since its formation in September, 1995. Mr. Hayden is a retired attorney from
the first of Leeon E. Hayden, P.C.
John J. Nicholl has been a director of the Bank since 1969 and of the Company
since its formation in September, 1995. Mr. Nicholl served as a Commissioner of
Arapahoe County from 1989 until his retirement in January of 1997. He also
served in that position from 1965 to 1980. He was self-employed (semi-retired)
from 1981 to 1988. Prior to that time, he owned and operated Arapahoe Surveys, a
land survey company.
E. William Foerster, Jr., has been a director of the Bank since 1973 and of the
Company since its formation in September, 1995. Mr. Foerster is the President
and a majority stockholder of EZT Fastener Co., Inc., Englewood, Colorado, and
three other companies, all of which engage in manufacturing and distributing.
Robert T. Person, Jr., has been a director of the Bank since 1975 and of the
Company since its formation in September, 1995. Mr. Person has been the sole
owner of Robert Person Communications, a management consulting practice in
Denver, Colorado, commencing in 1991. He was Vice President of the Public
Service Company of Colorado, a gas and electric utility in Denver, Colorado,
from 1978 to 1991.
Stephen A. Burkholder has been a director of the Bank since 1987 and of the
Company since its formation in September, 1995. Mr. Burkholder has been the sole
owner of the A&S Group, a marketing and distribution firm in Lakewood, Colorado
since April of 1994. He was a long term care specialists with AMEX Life
Assurance Company since August, 1993. Prior to that time, he served as Western
Regional Manager of Hirsh USA, a watch company, commencing in 1991, Western
Regional Sales Manager for CSC Time Corporation commencing in 1990, and Sales
Representative of Seiko Time Corporation from 1973 to 1990.
Polly Baca has been a director of the Bank since 1990 and of the Company since
its formation in September, 1995. Ms Baca is presently the Regional
Administrator of the United States General Services Administration Rocky
Mountain Region. In 1994 she served as a Special Assistant to President Clinton
and Director of the United State Office of Consumer Affairs. She was Executive
Director of the Colorado Institute for Hispanic Education from 1989 to 1993,
President and Sole Proprietor of the consulting from Sierra Baca Systems from
1985 to 1989, and served as Colorado State Senator from 1979 to 1986.
James R. Wexels has been a director of the Bank since 1993 and of the Company
since its formation in September, 1995. Mr. Wexels has been employed by Public
Service Company of Colorado, a gas and electric utility, since 1966 and
currently serves as Manager, Governmental Affairs.
56
<PAGE>
FCBI----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Officers of the Company EXECUTIVE OFFICES
Malcolm E. Collier, Chairman, President/C.E.O.
Brian L. Johnson, Executive Vice President/Treasurer First Colorado Bancorp, Inc.
Robert W. Richards, Vice President 215 S. Wadsworth Blvd.
William Marcoux, Vice President Lakewood, Colorado 80226
Eliane M. Samuelson, Secretary (303)232-2121 FAX: (303)237-2494
Officers of the Bank STOCK TRANSFER AGENT
Malcolm E. Collier, Chairman/C.E.O. American Securities Transfer &
Robert W. Richards, President/C.O.O. Trust, Inc.
Brian L. John, Executive Vice President/C.F.O. 938 Quail Street, Suite 101
James M. Rooney, Executive Vice President Lakewood, Colorado 80215-5513
Robert P. Easterly, Senior Vice President
Robert A. Francis, Senior Vice President NATIONAL MARKET SYSTEM
Elaine M. Samuelson, Senior Vice President/Secretary
Kenneth I. Boggs, Vice President NASDAQ
Cecil L. Cooksey, Vice President
Linda A. Erickson, Vice President/Controller STOCK SYMBOL
DAvid Esmoer, Vice President
George E. Hamblin, Jr., Vice President FFBA
David A. Humphries, Vice President
John H. Johnson, Vice President FINANCIAL PAPER LISTING
William G. Marcoux, Vice President/Treasurer
Patricia McMillan, Vice President FtColoBcp
Annette Spreier, Vice President
James C. Burkey, Vice President/Regional Manager LEGAL COUNSEL
Lew deSpain, Vice President/Regional Manager
Jennifer L. Swanson, Vice President/Regional Manager Malizia, Spidi, Sloane & Fisch, P.C.
Barbara D. Timson, Vice President/Regional Manager 1301 K Street, N.W.
Linda L. Chavez, Vice President/Branch Manager Washington, D.C. 20005
J.W. Edwards, Vice President/Branch Manager
Leroy Binder, Assistant Vice President AUDITORS
Jacqueline L. Brown, Assistant Vice President
Tom W. Deitemeyer, Assistant Vice President KPMG Peat Marwick LLP
Scott E. greene, Assistant Vice President 707 17th Street
Julie A. Haynes, Assistant Vice President Denver, Colorado 80202
Jill Kennedy, Assistant Vice President
Cathy J. Law, Assistant Vice President ANNUAL MEETING
Tracy E. Law, Assistant Vice President
Jeanne C. Nelson, Assistant Vice President The annual meeting of stockholders of
Renee A. Nichol, Assistant Vice President First Colorado Bancorp will be held on Monday,
M. Jean Orr, Assistant Vice President May 4, 1998 at 3:00 pm,. at the Arvada Center for
Lori Siegling, Assistnat Vice President the Arts and Humanities, 6901 Wadsworth Blvd.,
Vronica Ware, Assistant Vice President Arvada, Colorado
Nina L. Willlis, Assistant Vice President
FORM 10-K
A copy of the 1997 Form 10-K, as filed with the
Securities and Exchange Commission, will be
furnished without charge to stockholders as of
the record date upon written request to the
Secretary, First Colorado Bancorp, Inc.,
215 S. Wadsworth Blvd., Lakewood, Colorado 80226
</TABLE>
57
<PAGE>
Officers, Corporate Information, and Branches
FCBI----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Arvada Grand Junction
5805 Car St., 80004 202-5478 130 N. 4th St., 81502 242-6642
Virginia Hoskins, Asst. Vice President/Manager Jim Burkey, Vice President/Regional Manager
12880 W. 64th Avenue, 80004 202-5529 2452 Patterson Rd., 81502 245-5234
Jennifer Swanson, Vice President/Regional Manager Bob Callaway, Asst. Vice President/Manager
Aurora Highlands Ranch
1389 S. Havana, 80012 202-5306 7120 E. County Line Road, 80126 202-5412
Vivienne Alvarez, Asst. Vice President/Manager Kathy Buck, Asst. Vice President/Manager
13781 E. Yale Avenue, 80014 202-5539
Kay Pugh, Asst. Vice President/Manager Highlands Ranch West
16778 Smoky Hill Road, 80015 202-5480 9285 S. Broadway, 80126 202-5420
Lew deSpain, Vice President/Regional Manager Terry Miller, Asst. Vice President/Manager
Brighton Lakewood
1795 E. Bridge St., 80601 202-5330 215 S. Wadsworth, 80226 202-5536
J.W. Edwards, Vice President/Manager Bill Christopher, Asst. Vice President/Manager
Commerce City Littleton
7326 Magnolia St., 80022 202-5333 6775 W. Ken Caryl, 80123 (Columbine) 202-5534
Kathleen Tipton, Asst. Vice President/Manager Wally Sackett, Asst. Vice President/Manager
Delta Louisville
564 Main St., 81416 874-8636 865 S. Boulder Rd., 80027 202-5455
Bill Clanton, Asst. Vice President/Manager Joe Dawson, Asst. Vice President
Denver Greenwood Village
216 16th St., Denver, 80202 202-5535 6050 S. Holly St., 80121 202-5472
Barbara Timson, Vice President/Regional Manager Barry Hill, Asst. Vice President/Manager
750 S. University, 80209 202-5452
3610 E. 1st Ave., Denver, 80206 202-5445
Steve Kessler, Asst. Vice President/Manager
3460 W. 38th Ave., 80211 202-5307
Lawrence L. Lucero, Asst. Vice President/Manager Montrose
2050 S. Downing, 80210 202-5521 1105 S. Townsend Ave., 81401 249-9667
Melinda Anderson, Asst. Vice President/Manager Tracy Wich, Asst. Vice President/Manager
4850 Chambers Rd., 80239 202-5537
Dennis Young, Asst. Vice President/Manager
Thornton
12080 Colorado Blvd., 802
Englewood
4301 S. Broadway, 80110 202-5479
Linda Chavez, Vice President/Manager Westminster
9150 N. Sheridan, 80030 202-5545
Golden Cindy Lauffenberger, Asst. Vice President/Manager
701 13th St., 80401 202-5533
Brenda Kottke, Asst. Vice President/Manager
</TABLE>
58
<PAGE>
==============================================================================
COMMERCE CITY LAKEWOOD
==============================================================================
DELTA LITTLETON
- ------------------------------------------------------------------------------
DENVER LOUISVILLE
- ------------------------------------------------------------------------------
GREENWOOD VILLAGE
- ------------------------------------------------------------------------------
MONTROSE
- ------------------------------------------------------------------------------
ENGLEWOOD THORNTON
- ------------------------------------------------------------------------------
GOLDEN WESTMINSTER
- ------------------------------------------------------------------------------
ARVADA GRAND JUNCTION
- ------------------------------------------------------------------------------
AURORA HIGHLANDS RANCH
- ------------------------------------------------------------------------------
BRIGHTONGOLDEN HIGHLANDS RANCH WEST
==============================================================================
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE>
Consent of Independent Auditors
-------------------------------
The Board of Directors and Stockholders of
First Colorado Bancorp, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 of First Colorado Bancorp, Inc. related to the First Colorado Bancorp, Inc.
1992 Stock Option Plan and First Colorado Bancorp, Inc. 1996 Stock Option Plan
of our report dated March 9, 1998, relating to the consolidated statements of
financial condition of First Colorado Bancorp, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997, which report appears in the December
31, 1997 annual report on Form 10-K of First Colorado Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Denver, Colorado
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,970
<INT-BEARING-DEPOSITS> 8,587
<FED-FUNDS-SOLD> 8,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,790
<INVESTMENTS-CARRYING> 283,487
<INVESTMENTS-MARKET> 282,180
<LOANS> 1,164,602
<ALLOWANCE> 4,716
<TOTAL-ASSETS> 1,556,026
<DEPOSITS> 1,182,727
<SHORT-TERM> 38,410
<LIABILITIES-OTHER> 37,101
<LONG-TERM> 88,479
0
0
<COMMON> 2,013
<OTHER-SE> 207,296
<TOTAL-LIABILITIES-AND-EQUITY> 1,556,026
<INTEREST-LOAN> 87,333
<INTEREST-INVEST> 20,269
<INTEREST-OTHER> 346
<INTEREST-TOTAL> 107,948
<INTEREST-DEPOSIT> 51,247
<INTEREST-EXPENSE> 60,014
<INTEREST-INCOME-NET> 47,934
<LOAN-LOSSES> (739)
<SECURITIES-GAINS> 1,260
<EXPENSE-OTHER> 25,116
<INCOME-PRETAX> 31,739
<INCOME-PRE-EXTRAORDINARY> 19,914
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,914
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.25
<YIELD-ACTUAL> 3.29
<LOANS-NON> 2,113
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,850
<CHARGE-OFFS> 424
<RECOVERIES> 1,760
<ALLOWANCE-CLOSE> 4,716
<ALLOWANCE-DOMESTIC> 4,716
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
