<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
[x] ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[_] EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 1-11515
COMMERCIAL FEDERAL CORPORATION
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 South 72nd Street, Omaha, Nebraska 68124
- --------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 21, 1998, was
$1,334,200,492. As of September 21, 1998, there were issued and outstanding
60,390,988 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1998 - Parts I, II and IV.
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders -Part III.
1
<PAGE>
PART I
Item 1. Business
- --------------------------------------------------------------------------------
GENERAL
- -------
Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. The Corporation incurs
interest expense on $50.0 million of subordinated extendible notes, $46.4
million of junior subordinated deferrable interest debentures and an unsecured
promissory term note which totaled $1.0 million at June 30, 1998, and was paid
in full on July 29, 1998. Such interest is payable monthly on the subordinated
extendible notes and quarterly on the junior subordinated deferrable interest
debentures. The Corporation also paid scheduled quarterly principal payments of
$1.0 million on the promissory term note. See Note 15 of the Notes to
Consolidated Financial Statements in the Annual Report for additional
information on the debt of the Corporation. The Corporation also pays operating
expenses primarily for shareholder and stock related expenditures such as the
annual report, proxy, corporate filing fees and assessments and certain costs
directly attributable to the holding company. In addition, common stock cash
dividends totaling $8.8 million, or $.212 per common share, were declared during
fiscal year 1998.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt and for the common stock cash dividends paid to the Corporation's
shareholders. During fiscal year 1998 the Corporation received, in cash,
dividends totaling $47.4 million from the Bank which were made primarily to
cover (i) interest payments totaling $9.2 million on the parent company's debt,
(ii) principal payments of $3.0 million on the parent company's five-year
promissory term note, (iii) common stock cash dividends totaling $7.0 million
paid by the parent company to its shareholders through June 30, 1998, (iv)
principal and interest payments totaling $26.3 million on a revolving credit
note acquired from the Liberty acquisition, and (v) certain fees totaling $1.9
million in connection with the acquisition of Liberty Financial Corporation
("Liberty").
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is evolving from a
thrift institution into a community banking institution offering commercial and
consumer banking, mortgage banking and trust and investment services. The
Corporation completed four acquisitions in fiscal year 1998 and subsequent to
June 30, 1998, completed two other acquisitions and announced another pending
acquisition. Two of these fiscal year 1998 acquisitions were commercial banks
that have allowed the Bank to expand its banking services with commercial and
agricultural loans, business checking, equipment leasing and trust services. The
Bank has now moved from being primarily a single-family residential lender to a
full service banking institution with branches not only in traditional locations
but also, nontraditional locations such as supermarkets and convenience stores,
more ATM outlets and expanded services in telephone bill paying and Internet
banking. All loan origination activities are conducted through the Bank's branch
office network, through the loan offices of Commercial Federal Mortgage
Corporation ("CFMC"), its wholly-owned mortgage banking subsidiary, and through
a nationwide correspondent network of mortgage loan originators. The Corporation
also provides insurance and securities brokerage and other retail financial
services.
2
<PAGE>
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage and commercial
financing, consumer loans and other types of loans, which, in turn, are affected
by the interest rates at which such financings may be offered, the availability
of funds, and other factors, such as the supply of housing for mortgage loans
and regional economic situations.
At June 30, 1998, the Corporation had assets of $8.9 billion and stockholders'
equity of $643.0 million, and through the Bank operated 50 branches in Iowa, 37
branches in Kansas, 34 branches in Nebraska, 21 branches in metropolitan Denver,
Colorado, 19 branches in Oklahoma, and seven branches in Arizona. The increase
in branches over fiscal year 1997 was the result of four acquisitions during
fiscal year 1998. On January 30, 1998, the Corporation consummated the
acquisition of First National Bank Shares, LTD (First National) of Great Bend,
Kansas (seven branches and total assets of $147.8 million). On February 13,
1998, the Corporation consummated the acquisition of Liberty of West Des Moines,
Iowa (45 branches and total assets of $658.1 million). On February 27, 1998, the
Corporation consummated the acquisition of Mid Continent Bancshares, Inc. (Mid
Continent) of El Dorado, Kansas (ten branches and total assets of approximately
$405.7 million). On May 29, 1998, the Corporation consummated the acquisition of
Perpetual Midwest Financial, Inc. (Perpetual ) of Cedar Rapids, Iowa (five
branches and total assets of approximately $412.2 million). The accounts and
results of operation of First National are reflected in the Corporation's
consolidated financial statements beginning January 30, 1998, since this
acquisition was accounted for as a purchase. The Liberty, Mid Continent and
Perpetual acquisitions were accounted for under the pooling of interests method
and, accordingly, the Corporation's historical consolidated financial statements
were restated for all periods prior to those acquisitions to include the
accounts and results of operations of these financial institutions. The Bank is
one of the largest retail financial institutions in the Midwest, and, based upon
total assets at June 30, 1998, the Corporation was the 14th largest publicly-
held thrift institution holding company in the United States. In addition, CFMC
serviced a loan portfolio totaling $11.7 billion at June 30, 1998, with $7.115
billion in loans serviced for third parties and $4.536 million in loans serviced
for the Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General" in the Corporation's 1998 Annual Report to
Stockholders (the "Annual Report") which is incorporated herein by reference.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family residential, consumer, commercial real
estate, business lending and agribusiness loans) and providing customers with a
full array of financial products and a high level of customer service. As part
of its long-term strategic plan, the Corporation intends to expand its
operations within its market areas through direct marketing efforts aimed at
increasing market share, branch expansions, and opening additional branches. The
Corporation's retail strategy will continue to be centered on attracting new
customers and selling both new and existing customers multiple products and
services. Additionally, the Corporation will continue to build and leverage an
infrastructure designed to increase non-interest income. Complementing its
strategy of internal growth, the Corporation continues to grow its current
franchise through an ongoing program of selective acquisitions of other
financial institutions. As mentioned, during fiscal year 1998, the Corporation
consummated the acquisitions of four financial institutions. See "Acquisitions
During Fiscal Year 1998" herein. Subsequent to June 30, 1998, the Corporation
completed two other acquisitions and entered into a definitive agreement to
acquire another financial institution. See "Subsequent Events - Acquisitions
Consummated" and "Subsequent Event - Pending Acquisition" herein. Acquisition
candidates will be selected based on the extent to which the candidates can
enhance the Corporation's retail presence in both new and underserved markets
and enhance the Corporation's existing retail network.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
3
<PAGE>
RECENT DEVELOPMENTS
- -------------------
Subsequent Events - Acquisitions Consummated.
- --------------------------------------------
AmerUs Bank. On July 31, 1998, the Corporation consummated its acquisition of
- -----------
AmerUs Bank (AmerUs), a wholly-owned subsidiary of AmerUs Group Co. Under the
terms of the stock purchase agreement, the Corporation acquired through a
taxable acquisition all of the outstanding shares of the common stock of AmerUs
for total consideration of approximately $178.3 million. Such consideration
consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash
(primarily FHA Title One single-family residential mortgage loans and a
receivable for income tax benefits) totaling approximately $85.0 million, (ii)
cash (as adjusted per the agreement) totaling approximately $53.3 million, and
(iii) a one-year promissory note for $40.0 million bearing interest, adjusted
monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a
federally chartered savings bank headquartered in Des Moines, Iowa and operated
47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2)
and South Dakota (1). At July 31, 1998, before purchase accounting adjustments,
AmerUs had total assets of approximately $1.3 billion, deposits of approximately
$950.0 million and stockholder's equity of approximately $84.8 million. This
acquisition will be accounted for as a purchase. See Note 30 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
First Colorado Bancorp, Inc. On August 14, 1998, the Corporation consummated its
- ---------------------------
acquisition of First Colorado Bancorp, Inc. (First Colorado). Under the terms of
the agreement, the Corporation acquired in a tax-free reorganization all
18,564,766 outstanding shares of First Colorado's common stock in exchange for
18,278,789 shares of its common stock. Based on the Corporation's closing stock
price of $26.375 at August 14, 1998, the total consideration for this
acquisition, including cash paid for fractional shares, approximated $482.2
million. An additional requirement of the transaction with First Colorado was
the issuance of 1,400,000 shares of First Colorado common stock immediately
prior to the consummation of the merger. Such requirement was necessary to cure
the taint on the treasury stock of First Colorado so this transaction could be
accounted for as a pooling of interests. These shares offered directly by First
Colorado resulted in gross cash proceeds (prior to any transaction costs) of
$33.4 million less the placement agent's commission of $919,000, or net proceeds
to First Colorado totaling $32.5 million. First Colorado, headquartered in
Lakewood, Colorado, was a unitary savings and loan holding company and the
parent company of First Federal Bank of Colorado, a federally chartered stock
savings bank that operated 27 branches located in Colorado, with 23 branches
located in the Denver metropolitan area and four in Colorado's western slope
region. At July 31, 1998, on a pro forma basis including the net proceeds of
$32.5 million from the private placement of 1,400,000 shares on August 14, 1998,
First Colorado had assets of approximately $1.6 billion, deposits of
approximately $1.2 billion and stockholders' equity of approximately $254.7
million. The acquisition will be accounted for as a pooling of interests. See
Note 30 of Notes to Consolidated Financial Statements in the Annual Report for
additional information.
Subsequent Event - Pending Acquisition.
- --------------------------------------
Midland First Financial Corporation. On August 14, 1998, the Corporation entered
- -----------------------------------
into a reorganization and merger agreement with Midland First Financial
Corporation (Midland), parent company of Midland Bank. Under the terms of the
agreement, the Corporation will acquire in a taxable acquisition all of the
outstanding shares of Midland's common stock. The total purchase consideration
of this pending acquisition is $83.0 million, including cash to pay off
existing Midland debt totaling $5.6 million, the retirement of preferred stock
of both Midland and Midland Bank totaling $11.6 million and $810,000 for advisor
fees. If under certain conditions this transaction is terminated by Midland a
breakup fee of $2.5 million would be payable to the Corporation by Midland.
Midland Bank is a privately-held commercial bank headquartered in Lee's Summit,
Missouri that operates eight branches in the greater Kansas City area. At June
30, 1998, Midland had total assets of approximately $397.0 million, deposits of
approximately $352.0 million and stockholders' equity of approximately $25.7
million. This pending acquisition, approved by Midland's shareholders, is
subject to receipt of regulatory approvals and other conditions, and is expected
to close during the quarter ending March 31, 1999. See Note 31 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
4
<PAGE>
Acquisitions During Fiscal Year 1998.
- ------------------------------------
For additional information on fiscal year 1998 acquisitions see Note 2 to the
Notes to the Consolidated Financial Statements in the Annual Report.
First National Bank Shares, LTD. On January 30, 1998, the Corporation
- -------------------------------
consummated its acquisition of First National Bank Shares, LTD, parent company
of First United National Bank and Trust Company, a commercial bank headquartered
in Great Bend, Kansas. Under the terms of the merger agreement, all of the
outstanding shares of First National's common stock were exchanged for 992,842
shares of the Corporation's common stock. Based on the Corporation's closing
price on January 30, 1998, of $32.50 per share, the exchange of the
Corporation's common stock resulted in a total aggregate value approximating
$32.3 million. At January 30, 1998, before purchase accounting adjustments,
First National had assets of approximately $147.8 million, deposits of
approximately $131.3 million and stockholders' equity of approximately $12.0
million. First National operated seven branches located in Kansas. This
acquisition was accounted for as a purchase.
Liberty Financial Corporation. On February 13, 1998, the Corporation consummated
- -----------------------------
its acquisition of Liberty Financial Corporation, a privately held commercial
bank and thrift holding company. Pursuant to the terms of the merger agreement,
all 8,748,500 outstanding shares of Liberty's common stock were exchanged for
4,015,555 shares of the Corporation's common stock (exchange ratio of .459 based
on an average closing price of $33.7062) for total consideration of
approximately $135.3 million. Liberty operated 38 branches in Iowa and seven in
the metropolitan area of Tucson, Arizona and at January 31, 1998, had assets of
approximately $658.1 million, deposits of approximately $569.8 million and
stockholders' equity of approximately $50.1 million. This acquisition was
accounted for as a pooling of interests.
Mid Continent Bancshares, Inc. On February 27, 1998, the Corporation consummated
- -----------------------------
its acquisition of Mid Continent Bancshares, Inc., parent company of
Mid-Continent Federal Savings Bank. Pursuant to the terms of the merger
agreement, all outstanding shares of Mid Continent's common stock were exchanged
for 2,641,945 shares of the Corporation's common stock (exchange ratio of 1.3039
based on an average closing price of $32.9156) for total consideration of
approximately $87.0 million. Mid Continent operated ten branches located in
Kansas and at February 27, 1998, had total assets of approximately $405.7
million, deposits of approximately $258.6 million and stockholders' equity of
approximately $41.2 million. This acquisition was accounted for as a pooling of
interests.
Perpetual Midwest Financial, Inc. On May 29, 1998, the Corporation consummated
- --------------------------------
its acquisition of Perpetual Midwest Financial, Inc., parent company of
Perpetual Savings Bank, FSB. Under the terms of the merger agreement, the
Corporation acquired in a tax-free reorganization all 1,989,261 outstanding
shares of Perpetual's common stock in exchange for .8636 shares, or 1,717,721
shares of the Corporation's common stock. Based on the Corporation's closing
price on May 29, 1998, of $33.3125 per share, the transaction had an aggregate
value of approximately $57.2 million. At May 29, 1998, Perpetual had total
assets of approximately $412.2 million, deposits of approximately $323.4
million, and stockholders' equity of approximately $36.0 million. Perpetual
operated five branches located in Iowa. This acquisition was accounted for as a
pooling of interests.
Authorized Shares Increased.
- ---------------------------
Subsequent to June 30, 1998, stockholders approved an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock to 120,000,000 shares pursuant to a special meeting of
stockholders called on July 3, 1998, for shareholders of record at May 14, 1998.
See "General - Recent Developments - Special Meeting of Stockholders" herein.
5
<PAGE>
Merger Expenses and Other Nonrecurring Charges.
- ----------------------------------------------
During fiscal year 1998, the Corporation incurred merger expenses and other
nonrecurring charges totaling $29.7 million due to the Liberty, Mid Continent
and Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The $29.7 million recorded in fiscal year 1998
consists of $25.4 million in merger-related expenses and $4.3 million related to
the accelerated amortization of certain computer systems and software of the
Corporation necessitated by Year 2000 compliance and the related planned systems
conversions. The Corporation finalized its plans for systems conversions and
Year 2000 compliance in fiscal year 1998 resulting in a reduction in the
estimated useful lives of such computer systems and software.
The merger-related expenses totaling $25.4 million consists of $9.0 million in
transition costs as a result of the three acquisitions, $7.0 million in
personnel expenses for severance, retention and other employee related costs,
$4.9 million in costs to combine operations and conform certain accounting
practices and $4.5 million in additional loss reserves primarily to conform the
original loan portfolios and leasing operations to the reserve policies of the
Corporation.
Three-for-Two Stock Split.
- -------------------------
On November 17, 1997, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders of record on November 28, 1997. Par value of the common stock
remained at $.01 per share. The stock dividend was distributed on December 15,
1997, and totaled 10,865,530 shares of common stock. Fractional shares resulting
from the stock split were paid in cash totaling $24,366 based on the closing
price on the record date. All references to the number of shares, per share
amounts and stock prices for all periods presented have been adjusted on a
retroactive basis to reflect the effect of this stock split. The Board of
Directors also increased the Corporation's quarterly cash dividend from $.0467
per common share after adjusting for the three-for-two stock split to $.055 per
common share representing an increase of over 17 percent. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Stock
Prices and Dividends" in the Annual Report.
Special Meeting of Stockholders.
- -------------------------------
At the Special Meeting of Stockholders on July 3, 1998, held primarily to act
upon the First Colorado merger, three proposals were approved. The proposals
approved were (i) the First Colorado transaction and an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock from 50,000,000 to 70,000,000 shares, (ii) an amendment
to further increase the number of authorized shares from 70,000,000 to
120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock Option
and Incentive Plan to increase the number of shares available for grant by
2,400,000 shares.
Year 2000.
- ---------
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Corporation may be
significantly affected by the Year 2000 issue due to the nature of financial
information. Software, hardware and equipment both within and outside the
Corporation's direct control and with whom the Corporation electronically or
operationally interfaces are likely to be affected. If computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations that rely on
the data field information, such as interest, payment or due dates and other
operating functions, may generate results that could be significantly misstated,
and the Corporation could experience a temporary inability to process
transactions and engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this issue are provided by major third party vendors. The
Corporation is in the process of replacing/upgrading most of its computer
systems and programs, as well as most equipment, in order to provide
cost-effective and efficient delivery of services to its customers, information
to management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment. In
addition, during fiscal year 1998 the Corporation expensed $4.3 million due to
accelerated amortization of certain computer systems and software necessitated
by Year 2000 compliance and the related planned systems conversions. The
adjusted carrying amount of these computer systems and software will continue to
be depreciated until their disposal at the date of conversion.
6
<PAGE>
The third party vendors have advised the Corporation that all such computer
systems and programs either are or shortly will be Year 2000 compliant. The
Corporation has scheduled certain operations to be converted as early as October
1998 so testing can commence and conversion problems resolved. Final conversions
are scheduled for completion early in calendar year 1999.
The Corporation has also initiated formal communications with non-mainframe
software and hardware vendors to determine the extent to which the Corporation's
interface systems may be vulnerable to those third parties' failure to remediate
their own Year 2000 issues. If the third party vendors are unable to resolve
Year 2000 issues in time, the conversion is delayed significantly or major
problems arise as a result of the conversion, the Corporation would likely
experience significant data processing delays, mistakes or failures. Theses
delays, mistakes or failures could have significant adverse impact on the
financial condition and results of operations of the Corporation. In addition,
there can be no assurance that the systems of other companies on which the
Corporation's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Corporation's systems, would not have a material adverse effect on the
Corporation. The Corporation has developed a Year 2000 contingency plan that
addresses, among other issues, critical operations and potential failures
thereof, and strategies for business continuation.
Supervisory Goodwill Lawsuit.
- ----------------------------
On September 12, 1994, the Bank and the Corporation commenced litigation against
the United States in the United States Court of Federal Claims seeking to
recover monetary relief for the government's refusal to honor certain contracts
that it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States. The Bank also assumed a lawsuit in the merger
with Mid Continent against the United States relating to a supervisory goodwill
claim filed by the former Mid Continent. The litigation status and process of
these legal actions, as well as that of numerous actions brought by others
alleging similar claims with respect to supervisory goodwill and regulatory
capital credits, make the value of the claims asserted by the Bank (including
the Mid Continent claim) uncertain as to their ultimate outcome, and contingent
on a number of factors and future events which are beyond the control of the
Bank, both as to substance, timing and the dollar amount of damages that may be
awarded to the Bank and the Corporation if they finally prevail in this
litigation.
Regulatory Capital Compliance.
- -----------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios as set forth in the following tables of
tangible, core and total risk-based capital. Prompt Corrective Action provisions
contained in the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") require specific supervisory actions as capital levels decrease. To
be considered well-capitalized under the regulatory framework for Prompt
Corrective Action under FDICIA, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based and total risk-based capital ratios as set forth in the
following tables. At June 30, 1998, the Bank exceeded the minimum requirements
for the well-capitalized category. As of June 30, 1998, the most recent
notification from the OTS categorized the Bank as "well-capitalized" under the
regulatory framework for Prompt Corrective Action provisions under FDICIA. There
are no conditions or events since such notification that management believes
have changed the Bank's classification.
7
<PAGE>
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements as of June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
-------------------------- --------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS Capital Adequacy:
Tangible capital $ 609,801 6.94% $ 131,849 1.5%
Core capital 619,557 7.04 263,990 3.0
Risk-based capital 667,590 13.77 387,760 8.0
FDICIA Regulations to be Classified Well-Capitalized:
Tier 1 leverage capital 619,557 7.04 439,983 5.0
Tier 1 risk-based capital 619,557 12.78 290,820 6.0
Total risk-based capital 667,590 13.77 484,700 10.0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
Effects of New Accounting Pronouncements.
- ----------------------------------------
During fiscal year 1998, the Corporation adopted the provisions of the following
accounting pronouncements: Statement No. 125 entitled "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" and
Statement No. 128 entitled "Earnings Per Share." See Note 1 to the Consolidated
Financial Statements in the Annual Report for a discussion of these new
accounting pronouncements and their effect on the Corporation.
Other Information.
- -----------------
Additional information concerning the general development of the business of the
Corporation during fiscal year 1998 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
Forward Looking Statements.
- --------------------------
This document contains or incorporates by reference forward-looking statements
that involve inherent risks and uncertainties. The Corporation cautions readers
that a number of important factors could cause actual results to differ
materially from those in the forward looking statements. Those factors include
fluctuations in interest rates, inflation, government regulations, the progress
of integrating acquisitions, economic conditions, adequacy of allowance for
credit losses, the costs or difficulties associated with the resolution of Year
2000 issues on computer systems greater than anticipated, technology changes and
competition in the geographic and business areas in which the Corporation
conducts its operations. Management does not disclaim its responsibility to
provide a discussion and analysis enabling the reader to assess the sources and
effects of material changes in information from the end of last fiscal year.
These statements are based on management's current expectations. Actual results
in future periods may differ materially from those currently expected because of
various risks and uncertainties.
8
<PAGE>
MARKET RISK
- -----------
The Corporation's Assets Liability Management Committee ("ALCO"), which includes
senior management representatives, monitors and considers methods of managing
the rate and sensitivity repricing characteristics of the balance sheet
components consistent with maintaining acceptable levels of changes in net
portfolio value ("NPV") and net interest income. A primary purpose of the
Corporation's asset and liability management is to mange interest rate risk to
effectively invest the Corporation's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base. Management has sought to decrease the average
maturity of its assets by emphasizing the origination of adjustable-rate
residential mortgage loans, consumer loans and adjustable-rate mortgage loans
for the acquisition, development, and construction of residential and commercial
real estate, all of which are retained by the Bank for its portfolio. In
addition, long-term, fixed-rate single-family residential mortgage loans are
underwritten according to guidelines of the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and the
Federal National Mortgage Association ("FNMA"), and are either swapped with the
FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by
such loans which are then sold or sold directly for cash in the secondary
market, or are retained for the Corporation's loan portfolio if such loans have
characteristics which are consistent with the Corporation's asset and liability
goals and long-term interest rate yield requirements.
9
<PAGE>
Interest rate sensitivity analysis is used to measure the Corporation's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet instruments (interest rate swap agreements and
interest rate floor agreements) in the event of a range of assumed changes in
market interest rates. NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities,
with adjustments made for changes in the fair value of interest rate swap and
floor agreements pursuant to the hypothetical changes in interest rates. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained one hundred to four hundred basis points
increase or decrease in market interest rates. The Corporation's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the NPV of 10%, 20%, 30% and 40% in the event of a sudden and
sustained one hundred to four hundred basis points increase or decrease in
market interest rates. The following table presents the Corporation's projected
change in NPV for the various rate shock levels at June 30, 1998. All market
risk sensitive instruments presented in this table are held to maturity or
available for sale.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Percent Change
----------------------------
Hypothetical Hypothetical Hypothetical
Change in Market Value of Change From Change From Board
Interest Rates Portfolio Equity Base Scenario Base Scenario Limit
- --------------------------------- ------------------ --------------- --------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 basis point rise $ 552,566 $ (445,073) (45)% (40)%
300 basis point rise 671,127 (326,512) (33) (30)
200 basis point rise 799,082 (198,557) (20) (20)
100 basis point rise 920,292 (77,347) (8) (10)
Base Scenario 997,639 -- -- --
100 basis point decline 1,047,532 49,893 5 10
200 basis point decline 1,066,870 69,231 7 20
300 basis point decline 1,104,926 107,287 11 30
400 basis point decline 1,156,201 158,562 16 40
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The preceding table indicates that at June 30, 1998, in the event of a sudden
and sustained increase in prevailing market interest rates, the Corporation's
NPV would be expected to decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Corporation's NPV
would be expected to increase. At June 30, 1998, the Corporation's estimated
changes in NPV were within the targets established by the Board of Directors in
all rate scenarios except the 300 and 400 basis point rise scenarios.
NPV is calculated by the Corporation pursuant to guidelines established by the
OTS. The modeling calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of June 30, 1998, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
10
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Corporation's primary loan products, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable-rate loans in the Corporation's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the NPV. Finally, the ability of
many borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. The Bank's one-year
cumulative gap is a negative $1.084 billion, or 12.26% of the Bank's total
assets of $8.838 billion at June 30, 1998. The interest rate risk policy of the
Bank authorizes a liability sensitive one-year cumulative gap not to exceed
10.0%. Such exception to the Bank's interest rate risk policy regarding the
negative gap exceeding 10.0% was approved after noting that, on a pro forma
basis, the projected one-year cumulative gap is within policy guidelines
considering the AmerUs and First Colorado acquisitions consummated in July and
August 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" and Note 16 of Notes to Consolidated
Financial Statements for additional information in the Annual Report.
11
<PAGE>
LENDING ACTIVITIES
- ------------------
General. The Corporation's lending activities focus primarily on the
- -------
origination of first mortgage loans for the purpose of financing or refinancing
single-family residential properties, single-family residential construction
loans, commercial real estate loans, consumer and home improvement loans.
Increased emphasis on consumer loans during fiscal year 1998 increased
substantially over fiscal years 1997 and 1996. Residential loan origination
activity, including activity through correspondents, was substantially higher
for fiscal year 1998 compared to fiscal years 1997 and 1996 due primarily to
loan refinancing activity. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 168 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's various loan offices
located in its existing market areas, loan offices of CFMC and through its
nationwide correspondent network.
At June 30, 1998, the Corporation's total loan and mortgage-backed securities
portfolio was $7.6 billion, representing over 86.0% of its $8.9 billion of total
assets at that date. The carrying value of mortgage-backed securities totaled
$914.3 million at June 30, 1998, representing 12.0% of the Corporation's total
loan and mortgage-backed securities portfolio at such date. The Corporation's
total loan and mortgage-backed securities portfolio was secured primarily by
real estate at June 30, 1998. Commercial real estate and land loans
(collectively referred to as "income property loans") are secured by various
types of commercial properties including office buildings, shopping centers,
warehouses and other income producing properties. Commercial real estate lending
is expected to be a growth area for the Corporation in fiscal year 1999. The
Corporation believes that it has a number of potentially productive markets
available to it pursuant to its fiscal year 1998 acquisitions. The Corporation's
single-family residential construction lending activity is primarily
attributable to operations in Las Vegas, Nevada, Florida and in its primary
market areas. Residential construction lending will also operate in Tucson,
Arizona; Des Moines and Cedar Rapids, Iowa; and upon the completion of the
Midland acquisition, Springfield Missouri; in addition to the Corporation's
current markets. Lending operations have also begun on a limited basis in the
Dallas/Fort Worth area. Multi-family residential loans consist of loans secured
by various types of properties, including townhomes, condominiums and apartment
projects with more than four dwelling units.
Agricultural lending is new to the Corporation, however, First National and
Liberty had successful operations, and many of the loan officers of those former
institutions were able to be retained. The Corporation expects to expand this
business line in the markets served by the former First National and Liberty
branches and to its contiguous branches. The argicultural lending is primarily
for equipment, land and production. Another line of business acquired from
Liberty is lease financing that consist of the origination, servicing and
securitization of commerical equipment leases. The types of equipment leased
consists primarily of office equipment and commercial equipment.
12
<PAGE>
The Corporation's primary emphasis continues to be on the origination of loans
secured by existing single-family residences. Adjustable-rate single-family
residential loans are originated primarily for retention in the Corporation's
loan portfolio to match more closely the repricing of the Corporation's
interest-bearing liabilities as a result of changes in interest rates.
Fixed-rate single-family residential loans are originated using underwriting
guidelines, appraisals and documentation which are acceptable to the FHLMC, GNMA
and the FNMA to facilitate the sale of such loans to such agencies in the
secondary market. The Corporation also originates fixed-rate single-family
residential loans using internal lending policies in accordance with what
management believes are prudent underwriting standards but which may not
strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family
residential loans are originated or purchased for the Corporation's loan
portfolio if such loans have characteristics which are consistent with the
Corporation's asset and liability goals and long-term interest rate yield
requirements. At June 30, 1998, fixed-rate single-family residential loans
increased $1.051 billion over last fiscal year to $3.565 billion compared to
$2.514 billion at June 30, 1997. The adjustable-rate portfolio decreased to
$1.542 billion at June 30, 1998 compared to $2.330 billion at June 30, 1997. The
net changes in both fixed-rate and adjustable-rate portfolios is due to the loan
refinancing activity in fiscal year 1998.
In past years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. However, the
Corporation has initiated commercial and multi-family real estate lending with
such loans secured by properties located within the Corporation's primary market
areas. Such loans, which are subject to prudent credit review and other
underwriting standards and collection procedures, are expected to constitute a
greater portion of the Corporation's lending business in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, savings account, agricultural loans and commercial business loans
through the Corporation's branch and loan office network and direct mail
solicitation. Management intends to continue to increase its consumer loan
origination activity with strict adherence to prudent underwriting and credit
review procedures.
Regulatory guidelines generally limit loans and extensions of credit to one
borrower. At June 30, 1998, all loans and leases were within the Corporation's
limitation of $167.9 million to one borrower. See "Regulation - Limitation on
Loans to One Borrower."
13
<PAGE>
Composition of Loan Portfolio. The following table sets forth the composition of
- -----------------------------
the Corporation's loan and mortgage-backed securities portfolios (including
loans held for sale and mortgage-backed securities available for sale) as of the
dates indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $4,640,808 59.8% $4,408,020 58.4% $4,053,222 57.2%
Multi-family residential 97,303 1.3 82,584 1.1 74,252 1.1
Land 18,333 0.2 60,748 0.8 51,625 0.7
Commercial real estate 429,564 5.5 432,657 5.7 402,572 5.7
---------- --------- ---------- --------- ---------- ---------
Total 5,186,008 66.8 4,984,009 66.0 4,581,671 64.7
Construction loans -
Single-family residential 268,981 3.5 265,785 3.5 250,287 3.5
Multi-family residential 2,979 -- 6,320 -- 4,448 0.1
Land -- -- -- -- -- --
Commercial real estate 40,479 0.5 20,093 0.3 21,678 0.3
---------- --------- ---------- --------- ---------- ---------
Total 312,439 4.0 292,198 3.8 276,413 3.9
FHA and VA loans 465,968 6.0 435,692 5.8 390,777 5.5
Mortgage-backed securities 907,182 11.7 1,099,511 14.6 1,269,539 17.9
---------- --------- ---------- --------- ---------- ---------
Total real estate loans 6,871,597 88.5 6,811,410 90.2 6,518,400 92.0
Consumer and other loans -
Home improvement and other
consumer loans 654,575 8.5 605,246 8.0 452,240 6.4
Savings account loans 16,280 0.2 14,264 0.2 11,814 0.2
Leases 62,182 0.8 46,174 0.6 33,236 0.5
Commercial loans 155,692 2.0 72,949 1.0 68,269 0.9
---------- --------- ---------- --------- ---------- ---------
Total consumer and other loans 888,729 11.5 738,633 9.8 565,559 8.0
---------- --------- ---------- --------- ---------- ---------
Total loans $7,760,326 100.0% $7,550,043 100.0% $7,083,959 100.0%
---------- ========= ---------- ========= ---------- =========
<CAPTION>
June 30,
--------------------------------------------------
1995 1994
------------------------ ------------------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $3,886,586 56.4% $3,319,157 54.6%
Multi-family residential 63,878 0.9 59,387 1.0
Land 41,071 0.6 40,970 0.7
Commercial real estate 327,697 4.8 303,134 5.0
---------- --------- ---------- ---------
Total 4,319,232 62.7 3,722,648 61.3
Construction loans -
Single-family residential 233,265 3.4 84,268 1.4
Multi-family residential 1,380 -- 1,612 --
Land 1,600 -- 1,640 --
Commercial real estate 13,949 0.2 1,821 0.1
---------- --------- ---------- ---------
Total 250,194 3.6 89,341 1.5
FHA and VA loans 435,693 6.3 434,569 7.1
Mortgage-backed securities 1,496,084 21.7 1,512,773 24.9
---------- --------- ---------- ---------
Total real estate loans 6,501,203 94.3 5,759,331 94.8
Consumer, leases and other loans -
Home improvement and other
consumer loans 294,799 4.3 242,625 4.0
Savings account loans 10,146 0.2 10,066 0.2
Leases 35,902 0.5 11,692 0.2
Commercial loans 49,239 0.7 49,999 0.8
---------- --------- ---------- ---------
Total consumer and other loans 390,086 5.7 314,382 5.2
---------- --------- ---------- ---------
Total loans $6,891,289 100.0% $6,073,713 100.0%
---------- ========= ---------- =========
</TABLE>
(Continued on next page)
14
<PAGE>
Composition of Loan Portfolio (continued):
- ------------------------------------------
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ----------- --------- ----------- ---------
(Dollar in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance forward of total loans $ 7,760,326 100.0% $ 7,550,043 100.0% $ 7,083,959 100.0%
====== ====== ======
Add (subtract):
Unamortized premiums, net
of discounts 13,068 14,996 14,551
Deferred loan fees, net 10,998 (1,872) (4,968)
Loans in process (107,651) (98,983) (113,656)
Allowance for loan and
lease losses (59,795) (57,079) (56,651)
Allowance for losses on
mortgage-backed securities (282) (497) (742)
----------- ----------- -----------
Loan portfolio $ 7,616,664 $ 7,406,608 $ 6,922,493
=========== =========== ===========
<CAPTION>
June 30,
----------------------------------------------
1995 1994
--------------------- ---------------------
Amount Percent Amount Percent
----------- --------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance forward of total loans $ 6,891,289 100.0% $ 6,073,713 100.0%
====== ======
Add (subtract):
Unamortized premiums, net
of discounts 10,464 16,743
Deferred loan fees, net (2,358) (2,004)
Loans in process (102,369) (45,221)
Allowance for loan and
lease losses (55,853) (51,052)
Allowance for losses on
mortgage-backed securities (2,293) (2,233)
----------- -----------
Loan portfolio $ 6,738,880 $ 5,989,946
=========== ===========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated Financial
Statements in the Annual Report.
15
<PAGE>
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities and
before any reduction for unamortized premiums (net of discounts), undisbursed
loan proceeds, deferred loan fees and allowance for loan losses) as of the dates
indicated:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ---------------------- --------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------- ----------- ------- ----------- ------- ----------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 985,906 16.5% $ 937,025 16.4% $ 929,982 17.7% $ 836,054 16.7% $ 767,988 18.1%
Colorado 764,660 12.8 826,177 14.5 845,417 16.1 910,743 18.2 798,147 18.8
Kansas 678,734 11.4 557,657 9.8 510,159 9.7 443,428 8.9 374,311 8.8
Iowa 676,099 11.3 618,177 10.8 500,986 9.5 455,741 9.1 318,622 7.5
Oklahoma 318,198 5.3 264,710 4.6 229,563 4.4 211,984 4.2 145,736 3.4
Georgia 227,971 3.8 235,665 4.1 217,957 4.2 202,331 4.0 210,299 4.9
Missouri 181,764 3.0 170,316 3.0 174,542 3.3 183,706 3.7 160,888 3.8
Arizona 180,740 3.0 155,315 2.7 108,972 2.1 98,122 2.0 92,911 2.2
Virginia 161,793 2.7 140,498 2.5 123,806 2.4 111,081 2.2 81,290 1.9
Texas 158,614 2.7 187,189 3.3 204,339 3.9 226,132 4.5 181,741 4.3
Maryland 157,180 2.6 138,886 2.4 112,160 2.1 100,768 2.0 76,370 1.8
Nevada 130,159 2.2 109,475 1.9 80,696 1.5 51,874 1.0 41 -.-
Florida 123,528 2.1 116,881 2.0 111,770 2.1 100,533 2.0 92,576 2.2
Illinois 111,142 1.9 92,381 1.6 79,626 1.5 78,088 1.6 57,410 1.4
California 106,046 1.8 128,740 2.3 151,869 2.9 155,164 3.1 173,030 4.1
New Jersey 98,061 1.6 107,022 1.9 113,824 2.2 119,223 2.4 110,267 2.6
Ohio 93,325 1.6 76,049 1.3 47,396 0.9 47,851 1.0 37,603 0.9
Washington 91,670 1.5 91,054 1.6 64,967 1.2 55,947 1.1 40,656 1.0
Connecticut 64,975 1.1 72,154 1.3 75,946 1.5 81,418 1.6 83,002 2.0
Minnesota 62,765 1.1 63,885 1.1 42,144 0.8 32,866 0.7 23,347 0.5
North Carolina 60,634 1.0 69,465 1.2 31,601 0.6 23,260 0.5 19,683 0.5
Pennsylvania 59,083 1.0 68,728 1.2 59,943 1.1 53,421 1.1 43,271 1.0
Massachusetts 55,902 0.9 68,061 1.2 44,300 0.8 45,233 0.9 17,658 0.4
Alabama 50,285 0.8 37,653 0.7 39,544 0.8 38,171 0.8 38,621 0.9
Indiana 40,357 0.7 34,689 0.6 27,191 0.5 25,048 0.5 13,652 0.3
Michigan 38,495 0.7 46,762 0.8 46,650 0.9 45,865 0.9 46,298 1.1
New York 38,382 0.6 48,395 0.8 38,794 0.7 40,532 0.8 27,700 0.7
Other States 247,947 4.3 248,890 4.4 234,717 4.6 230,535 4.5 213,440 4.9
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -----
$5,964,415 100.0% $5,711,899 100.0% $5,248,861 100.0% $5,005,119 100.0% $4,246,558 100.0%
========== ======= ========== ======= ========== ======= ========== ======= ========== =====
</TABLE>
16
<PAGE>
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities and before any reduction
for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowance for loan losses) by state and property type at June 30,
1998:
<TABLE>
<CAPTION>
Conventional FHA/VA
Residential Residential Multi Land Sub Commercial % of
State 1-4 Units Loans Family Loans Total Loans Total Total
- ----------------- ------------ ------------ ---------- ----------- ------------- ----------- ------------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nebraska $ 838,034 $ 77,362 $ 18,152 $ 1,962 $ 935,510 $ 50,396 $ 985,906 16.5%
Colorado 616,910 14,378 16,383 1,973 649,644 115,016 764,660 12.8
Kansas 510,585 123,475 5,831 1,095 640,986 37,748 678,734 11.4
Iowa 459,072 12,318 42,221 7,851 521,462 154,637 676,099 11.3
Oklahoma 257,919 27,842 8,948 -- 294,709 23,489 318,198 5.3
Georgia 215,520 12,451 -- -- 227,971 -- 227,971 3.8
Missouri 153,718 24,663 510 -- 178,891 2,873 181,764 3.0
Arizona 122,070 8,600 3,920 5,452 140,042 40,698 180,740 3.0
Virginia 137,260 24,533 -- -- 161,793 -- 161,793 2.7
Texas 136,375 15,835 2,904 -- 115,114 3,500 158,614 2.7
Maryland 121,502 35,678 -- -- 157,180 -- 157,180 2.6
Nevada 97,880 4,170 1,236 -- 103,286 26,873 130,159 2.2
Florida 105,847 9,611 177 -- 115,635 7,893 123,528 2.1
Illinois 101,954 9,188 -- -- 111,142 -- 111,142 1.9
California 95,872 7,062 -- -- 102,934 3,112 106,046 1.8
New Jersey 97,338 723 -- -- 98,061 -- 98,061 1.6
Ohio 87,757 5,568 -- -- 93,325 -- 93,325 1.6
Washington 82,095 9,575 -- -- 91,670 -- 91,670 1.5
Connecticut 64,866 109 -- -- 64,975 -- 64,975 1.1
Minnesota 58,726 4,039 -- -- 62,765 -- 62,765 1.1
North Carolina 57,980 2,654 -- -- 60,634 -- 60,634 1.0
Pennsylvania 57,744 1,339 -- -- 59,083 -- 59,083 1.0
Massachusetts 55,778 124 -- -- 55,902 -- 55,902 0.9
Alabama 42,914 7,371 -- -- 50,285 -- 50,285 0.8
Indiana 33,696 6,661 -- -- 40,357 -- 40,357 0.7
Michigan 34,514 3,981 -- -- 38,495 -- 38,495 0.7
New York 37,781 329 -- -- 38,110 272 38,382 0.6
Other States 228,082 16,329 -- -- 244,411 3,536 247,947 4.3
---------- ---------- ---------- ---------- ------------ ---------- ------------ ------
Total $4,909,789 $ 465,968 $ 100,282 $ 18,333 $ 5,494,372 $ 470,043 $ 5,964,415 100.0%
========== ========== ========== ========== ============ ========== ============ ======
% of Total 82.3% 7.8% 1.7% 0.3% 92.1% 7.9% 100.0%
==== === === === ==== === =====
</TABLE>
17
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
- ---------------------------------
information at June 30, 1998, regarding the dollar amount of all loans and
mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of possible prepayments. Demand loans (loans having no stated schedule
of repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of
mortgage loans and mortgage-backed securities, management believes that the
following table will bear little resemblance to what will be the actual
repayments of the loan and mortgage-backed securities portfolios. Loan balances
have not been reduced for (i) unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Due During the Year Ended June 30,
---------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
After
1999 2000-2003 2003 Total
---------------- ---------------- ---------------- ----------------
Principal Repayments (In Thousands)
- --------------------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) -
Fixed-rate $ 97,588 $ 861,776 $ 2,605,534 $ 3,564,898
Adjustable-rate 23,663 115,969 1,402,246 1,541,878
Multi-family residential, land
and commercial real estate -
Fixed-rate 33,224 64,252 69,292 166,768
Adjustable-rate 21,028 69,262 288,142 378,432
--------- ----------- ----------- -----------
175,503 1,111,259 4,365,214 5,651,976
--------- ----------- ----------- -----------
Construction loans:
Fixed-rate 32,712 53,848 -- 86,560
Adjustable-rate 189,232 36,647 -- 225,879
--------- ----------- ----------- -----------
221,944 90,495 -- 312,439
--------- ----------- ----------- -----------
Mortgage-backed securities:
Fixed-rate 39,090 72,934 193,493 305,517
Adjustable-rate 9,864 46,681 545,120 601,665
--------- ----------- ----------- -----------
48,954 119,615 738,613 907,182
--------- ----------- ----------- -----------
Consumer, other loans and leases:
Fixed-rate 200,693 528,480 43,808 772,981
Adjustable-rate 26,921 65,019 23,808 115,748
--------- ----------- ----------- -----------
227,614 593,499 67,616 888,729
--------- ----------- ----------- -----------
Principal repayments $ 674,015 $ 1,914,868 $ 5,171,443 $ 7,760,326
========= =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional mortgage loans, FHA and VA loans.
18
<PAGE>
Scheduled contractual principal repayments do not reflect the actual maturities
of such assets. The average maturity of loans is substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Corporation the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" in the Annual Report.
The following table sets forth the amount of all loans, leases and mortgage-
backed securities due after June 30, 1999 (July 1, 1999 and thereafter), which
have fixed interest rates and those which have adjustable interest rates. Such
loans, leases and mortgage-backed securities have not been reduced for (i)
unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowance for loan and lease losses or (ii) nonperforming loans
and leases.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Adjustable
Fixed-Rate Rate Total
----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $ 3,467,310 $ 1,518,215 $ 4,985,525
Multi-family residential,
land and commercial 133,544 357,404 490,948
Construction loans 53,848 36,647 90,495
Mortgage-backed securities 266,427 591,801 858,228
Consumer, other loans and leases 572,288 88,827 661,115
----------- ----------- -----------
Principal repayments due
after June 30, 1999 $ 4,493,417 $ 2,592,894 $ 7,086,311
=========== =========== ===========
</TABLE>
- ----------------------------------------------------------------------------
LOAN ORIGINATIONS
- -----------------
RESIDENTIAL LOANS. The Corporation, through its 168 branch network, and CFMCs
loan offices and nationwide correspondent network, originates and purchase both
fixed-rate and adjustable-rate mortgage loans secured by single-family units.
Such residential mortgage loans are either (i) conventional mortgage loans which
comply with the requirements for sale to, or conversion into securities issued
by, FNMA or FHLMC ("conventional conforming loans"), (ii) mortgage loans which
exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise
generally comply with FNMA and FHLMC loan requirements ("conventional
nonconforming loans") or (iii) FHA/VA loans which qualify for sale in the form
of securities guaranteed by GNMA. The Corporation originates substantially all
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans")with loan-to-value ratios at or below 80.0% unless the
borrower obtains private mortgage insurance (through the Corporation's mortgage
banking subsidiary, which premium the borrower pays with their mortgage payment)
for the Corporation's benefit covering that portion of the loan in excess of
80.0% of the appraised value. Occasional exceptions to the 80.0% loan-to-value
ratio for conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
19
<PAGE>
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans generally are also
originated with terms of 15 and 30 years. However, certain adjustable-rate loans
contain provisions which permit the borrower, at the borrower's option, to
convert at certain periodic intervals over the life of the loan to a long-term
fixed-rate loan. The adjustable-rate loans currently have interest rates which
are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Cost of Funds Index. The amount of any such interest rate
increase is limited to one or two percentage points annually and four to six
percentage points over the life of the loan. Certain adjustable-rate loans are
also offered which have interest rates fixed over annual periods ranging from
two through seven years; and also ten year loans, with such loans repricing
annually after the fixed interest-rate term. Adjustable-rate loans are primarily
offered at the fully indexed contractual rate. The Corporation applies its
underwriting criteria to such loans based on the amount of the loan for which
the borrower could qualify at the indexed rate. At June 30, 1998, approximately,
.81%, or $38.2 million, of the Corporation's residential real estate loan
portfolio was 90 days or more delinquent See "Asset Quality" herein.
RESIDENTIAL CONSTRUCTION LOANS. Prior to 1995, the Corporation was not actively
- ------------------------------
pursuing construction loans, but provided interim construction financing that
was tied to permanent real estate mortgage loans. Beginning in fiscal year 1995,
the Corporation's single-family residential construction lending activity has
increased primarily as a result of the construction lending operations conducted
by an institution the Corporation acquired in October 1995. During fiscal years
1998, 1997 and 1996, the Corporation originated $335.9 million, $256.1 million
and $263.6 million, respectively, of residential construction loans. The
Corporation conducts its single-family residential construction lending
operations predominantly in its primary six-state market area, Florida and Las
Vegas, Nevada. The residential construction lending operations, which loans are
subject to prudent credit review and other underwriting standards and
procedures, are expected to increase from fiscal year 1998. At June 30, 1998,
approximately .84%, or $2.3 million, of the Corporation's residential loan
portfolio was 90 days or more delinquent.
Construction financing is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate. Risk of loss on
a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) thereof. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Corporation may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, the Corporation may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
20
<PAGE>
COMMERCIAL REAL ESTATE AND LAND LOANS. The Corporation originated commercial
- -------------------------------------
real estate loans totaling $172.7 million, $73.5 million and $69.8 million,
respectively, during fiscal years 1998, 1997 and 1996. Commercial real estate
lending may entail significant additional risks compared with residential real
estate lending. These additional risks are due to larger loan balances which are
more sensitive to economic conditions, business cycle downturns and construction
related risks. The payment of principal and interest due on the Corporation's
commercial real estate loans is substantially dependent upon the performance of
the projects securing such loans. As an example, to the extent that the
occupancy and rental rates are not high enough to generate the income necessary
to make such payments, the Corporation could experience an increased rate of
delinquency and could be required either to declare such loans in default and
foreclose upon such properties or to make concessions on the terms of the
repayment of such loans. At June 30, 1998, approximately .28%, or $1.4 million
of the Corporation's commercial real estate and land loans were 90 days or more
delinquent. See "Asset Quality" herein.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $2.670
billion at June 30, 1998, compared to $488.4 million of such loans outstanding
at June 30, 1998. This restriction has not and is not expected to materially
affect the Corporation's business.
CONSUMER LOANS. Federal regulations permit federal savings institutions to make
- --------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. Consumer loans originated by the Corporation are primarily second
mortgage loans, loans to depositors on the security of their savings accounts
and loans secured by automobiles. The Corporation has increased its secured
consumer lending activities in order to meet its customers' financial needs and
will continue to increase such lending activities in the future in its primary
market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Corporation, and a borrower may be able to
assert against such assignee claims and defenses which it has against the seller
of the underlying collateral. At June 30, 1998, approximately .50%, or $2.5
million, of the Corporation's consumer loans are 90 days or more delinquent. See
"Asset Quality" herein.
BULK LOAN PURCHASES. Between January 1991 and June 30, 1992, as part of its
- -------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the Resolution Trust Corporation ("RTC"),
comprised of 46,500 loans primarily collateralized by single-family residential
properties with principal balances aggregating $2.5 billion. These purchased
loans had a weighted average yield of 8.71%. At June 30, 1998, 1997 and 1996,
the aggregate principal balance of these bulk purchased loans associated with
such restructuring was $388.5 million, $494.6 million and $574.4 million
respectively.
Based upon both a review and analysis of the information provided by the seller
with respect to each loan package and management's own due diligence review of a
certain percentage (usually 5.0% to 10.0%) of the loans within a loan package,
management established specific estimated allowance amounts which were allocated
from the discount amounts on the loan packages. At June 30, 1998, 1997 and 1996,
$8.5 million, $10.8 million and $12.8 million, respectively, of the discount
amount relating to these purchased loans was allocated to an estimated allowance
amount for potential credit risk associated with such bulk purchased loans.
These allowances are available to absorb losses associated with the respective
purchased loan packages and are not available to absorb losses from other loans.
At June 30, 1998, 1997 and 1996, $15.4 million, $18.3 million and $17.8,
respectively, of these purchased loans were past due 90 days or more.
21
<PAGE>
To the extent opportunities to make similar bulk purchases of loans become
available, the Corporation will consider making such purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1998, 1997 and 1996, the
Corporation purchased $232.4 million, $300.2 million and $310.5 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
Loan Sales. In addition to originating loans for its portfolio, the
- -----------
Corporation, through its mortgage banking subsidiary, participates in secondary
mortgage market activities by selling whole and securitized loans to
institutional investors or other financial institutions with the Corporation
generally retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole
loans to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or
FHLMC which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1998, 1997 and 1996, the Corporation sold an aggregate of
$1.146 billion, and $846.0 million and $900.6 million, respectively in mortgage
loans resulting in net gains of $2.7 million, $1.9 million and $1.9 million,
respectively, in fiscal years 1998, 1997 and 1996. Of the amount of mortgage,
loans sold during fiscal year 1998, $1.444 billion were sold in the secondary
market, of which 42.9% were converted into GNMA securities, 46.3% were sold
directly to FNMA or FHLMC for cash or were exchanged for securities issued by
FNMA or FHLMC, and the remaining were sold to other institutional investors. At
June 30, 1998, the carrying value of loans held for sale totaled $289.7 million.
The net gains recorded in fiscal years 1998 and 1997 are attributable to the
relatively stable interest rate environments over the respective periods.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on a annual basis. However, in connection with a 1987 acquisition of
a financial institution, the Bank assumed agreements providing for recourse in
the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1998, the remaining balance
of such loans sold with recourse totaled $20.6 million.
22
<PAGE>
Set forth below is a table showing the Corporation's loan, lease and mortgage-
backed securities activity for the three fiscal years ended June 30 as
indicated.
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans-
Residential loans $ 1,174,963 $ 822,871 $ 959,707
Construction loans 335,898 256,105 263,570
Commercial real estate and land loans 172,709 73,544 69,759
Consumer loans and leases 715,144 537,462 474,575
------------ ------------ -----------
Loans and leases originated $ 2,398,714 $ 1,689,982 $ 1,767,611
============ ============ ===========
Loans purchased:
Conventional mortgage loans-
Residential loans $ 1,276,846 $ 833,893 $ 607,878
Bulk loan purchases 232,353 300,212 310,466
Mortgage-backed securities 40,758 25,745 85,649
------------ ------------ -----------
Loans purchased $ 1,549,957 $ 1,159,850 $ 1,003,993
============ ============ ===========
Loans securitized:
Conventional mortgage loans securitized
into mortgage-backed securities $ 161,189 $ 46,165 $ 63,445
============ ============ ===========
Acquisitions:
Residential real estate loans $ 9,661 $ 83,413 $ 138,679
Consumer and other loans 68,482 51,639 27,599
Mortgage-backed securities 16,567 36,194 82,580
------------ ------------ -----------
Loans from acquisitions $ 94,710 $ 171,246 $ 248,858
============ ============ ===========
Loans sold:
Conventional mortgage loans $ 1,146,406 $ 845,957 $ 900,623
Mortgage-backed securities 118,705 98,798 243,065
------------ ---------- -----------
Loans sold $ 1,265,111 $ 944,755 $ 1,143,688
============ ========== ===========
</TABLE>
________________________________________________________________________________
23
<PAGE>
LOAN SERVICING. The Corporation, through its mortgage banking subsidiary,
- --------------
servicing substantially all of the mortgage loans that it originates and
purchase (whether retained for the Bank's portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1998, the Bank's
mortgage banking subsidiary was servicing approximately 125,900 loans and
participations for others with principal balances aggregating $7.115 billion,
compared to 133,200 loans with principal balances totaling $7.396 billion at
June 30, 1997. At June 30, 1998, adjustable-rate mortgage loans represented
17.6% of the aggregate dollar amount of loans in the servicing portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General," -- "Loan Servicing Fees" and -- "Note 23 -Segment
Information" in the Annual Report for information pertaining to revenue from
servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .50% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .41% and .41%,
respectively, for fiscal years 1998 and 1997. The Corporation's servicing
portfolio is subject to reduction primarily by reason of normal amortization and
prepayment of outstanding mortgage loans. In general, the value of the
Corporation's loan servicing portfolio may also be adversely affected as
mortgage interest rates decline and loan prepayments increase. It is expected
that income generated from the Corporation's loan servicing portfolio also will
decline in such an environment. This negative effect on the Corporation's income
may be offset somewhat by a rise in origination and servicing fee income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates. The weighted average mortgage loan note
rate of the Corporation's servicing portfolio at June 30, 1998, was 7.80%
compared to 7.91% at June 30, 1997.
At June 30, 1998, approximately 95.0% of the Corporation's mortgage servicing
portfolio for other institutions was covered by servicing agreements pursuant to
the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these
agreements, the Corporation may be required to advance funds temporarily to make
scheduled payments of principal, interest, taxes or insurance if the borrower
fails to make such payments. Although the Corporation cannot charge any interest
on such advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1998, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $2.4 million.
INTEREST RATES AND LOAN FEES. Interest rates charged by the Corporation on its
- ----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. In addition to interest
earned on loans, the Corporation receives loan origination fees for originating
certain loans. These fees are a percentage of the principal amount of the
mortgage loan and are charged to the borrower.
LOAN COMMITMENTS. At June 30, 1998, the Corporation had issued commitments of
- ----------------
$566.5 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are generally expected to settle within three
months following June 30, 1998. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in the Annual Report.
COLLECTION PROCEDURES. If a borrower fails to make required payments on a loan,
- ---------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
24
<PAGE>
ASSET QUALITY
- -------------
Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a
- --------------------
nonaccruing status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on a nonaccruing status when
either principal or interest is 90 days or more past due. Interest accrued and
unpaid at the time a loan is placed on nonaccruing status is charged against
interest income. Subsequent payments are applied to the outstanding principal
balance until such time as the loan is removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. Such property is stated at the lower of cost or fair value, minus
estimated costs to sell. Valuation allowances for estimated losses on real
estate are subsequently provided when the carrying value exceeds the fair value
minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when a
delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of ownership
would still be retained by the borrower. The evaluation of borrowers and
collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring. In
these circumstances, the Corporation would strive to ensure that the borrower's
continued participation in and management of the collateral does not put the
Corporation at further risk of loss. In situations in which the borrower is not
performing under the restructured terms, foreclosure proceedings are commenced
when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Corporation would not otherwise consider. A loan classified as a troubled debt
restructuring may be reclassified as current if such loan has returned to a
performing status at a market rate of interest for at least 8 to 12 months, the
loan-to-value ratio is 80.0% or less, the cash flows generated from the
collateralized property support the loan amount subject to minimum debt service
coverage as defined and overall applicable economic conditions are favorable.
Such loans have decreased steadily over the past five fiscal years to a balance
of $4.3 million at June 30, 1998, compared to $10.6 million and $15.6 million,
respectively, at June 30, 1997 and 1996. No materially significant loans
classified as troubled debt restructuring have been added to the Corporation's
nonperforming assets since fiscal year 1994.
The Corporation's nonperforming assets totaling $68.4 million decreased by $2.5
million, or 3.5%, at June 30, 1998, compared to June 30, 1997, primarily as a
result of net decreases of $6.3 million in troubled debt restructurings and
$480,000 in real estate offset by a net increase of $4.3 million in
nonperforming loans.
25
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets as June 30 as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousand)
<S> <C> <C> <C> <C> <C>
Loans and leases accounted for on a nonaccrual basis: (1)
Real estate-
Residential $ 40,468 $ 36,134 $ 36,458 $ 31,601 $ 28,010
Commercial 1,369 900 2,444 854 5,866
Consumer, other loans and leases 4,630 4,242 1,229 808 866
-------- -------- -------- -------- --------
Total 46,467 41,276 40,131 33,263 34,742
-------- -------- -------- -------- --------
Accruing loans which are contractually
past due 90 days or more - 894 144 88 409
-------- -------- -------- -------- --------
Total nonperforming loans and leases 46,467 42,170 40,275 33,351 35,151
-------- -------- -------- -------- --------
Real estate: (2)
Commercial 8,432 8,417 9,323 9,161 17,489
Residential 8,709 9,568 5,014 3,971 4,618
Other 459 95 253 114 -
-------- -------- -------- -------- --------
Total 17,600 18,080 14,590 13,246 22,107
-------- -------- -------- -------- --------
Troubled debt restructurings: (3)
Commercial 3,524 9,489 14,533 17,211 19,455
Residential 778 1,126 1,052 1,944 2,397
-------- -------- -------- -------- --------
Total 4,302 10,615 15,585 19,155 21,852
-------- -------- -------- -------- --------
Nonperforming assets $ 68,369 $ 70,865 $ 70,450 $ 65,752 $ 79,110
======== ======== ======== ======== ========
Nonperforming loans and leases to total loans and leases (4) 0.68% 0.65% 0.69% 0.62% 0.77%
Nonperforming assets to total assets 0.77% 0.83% 0.90% 0.86% 1.16%
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases $ 51,333 $ 46,270 $ 43,886 $ 40,573 $ 33,731
Bulk purchased loans (5) 8,462 10,809 12,765 15,280 17,321
-------- -------- -------- -------- --------
Total $ 59,795 $ 57,079 $ 56,651 $ 55,853 $ 51,052
======== ======== ======== ======== ========
Allowance for bulk purchased loan
losses to bulk purchased loans (5) 2.18% 2.19% 2.22% 2.18% 2.00%
Allowance for loan and lease losses
to total loans and leases (less bulk purchased loans) 0.79% 0.78% 0.84% 0.86% 0.91%
Allowance for loans and lease losss
to total loans and leases (4) 0.87% 0.88% 0.97% 1.04% 1.12%
Allowance for loan and lease losses
to total nonperforming assets 87.46% 80.55% 80.41% 84.94% 64.53%
Allowance for loan and lease losses
to total nonperforming loans and leases
(less nonperforming bulk purchased loans) (6) 165.12% 193.84% 195.27% 260.90% 191.10%
</TABLE>
- --------------------------------------------------------------------------------
(Continued on next page)
26
<PAGE>
(1) During fiscal years 1997 and 1996, the Corporation recorded interest
totaling $49,000 and $51,000, respectively, on accruing loans contractually
past due 90 days or more. During fiscal year 1998, no interest income was
recorded. Had these nonaccruing loans been current in accordance with their
original terms and outstanding throughout this fiscal year or since
origination, the Corporation would have recorded gross interest income on
these loans of $3.5 million, $2.8 million and $2.4 million, respectively,
during fiscal years 1998, 1997 and 1996.
(2) Real estate as a component of nonperforming assets does not include
performing real estate held for investment, which totaled $3.2 million, $2.7
million and $2.8 million, respectively, at June 30, 1998, 1997 and 1996.
(3) During fiscal years 1998, 1997 and 1996, the Corporation recognized interest
income on these loans classified as troubled debt restructurings aggregating
$380,000, $852,000 and $1.3 million, respectively, whereas under their
original terms the Corporation would have recognized interest income of
$499,000, $1.1 million and $1.6 million, respectively. At June 30, 1998,
the Corporation had no material commitments to lend additional funds to
borrowers whose loans were subject to troubled debt restructuring.
(4) Based on the total balance of loans and lease receivable (before any
reduction for unamortized discounts net of premiums, undisbursed loan
proceeds, deferred loan fees and allowance for loan and lease losses) at the
respective dates.
(5) At June 30, 1998, 1997 and 1996, $8.5 million, $10.8 million and $12.8
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans is included in the total
allowance for loan losses to provide for the credit risk associated with
these bulk purchased loans, which had balances of $388.5 million, $494.6
million and $574.4 million, respectively, at June 30, 1998, 1997 and 1996.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(6) Nonperforming bulk purchased loans approximating $15.4 million, $18.3
million and $17.8 million, respectively, at June 30, 1998, 1997 and 1996,
and the allowance for loan losses associated with the total bulk purchased
loans, have been excluded from this calculation since these allowances are
not available to absorb the losses associated with other loans in the
portfolio.
- --------------------------------------------------------------------------------
For a discussion of the major components of the $2.5 million decrease in
nonperforming assets during the fiscal year ended June 30, 1998, compared to
June 30, 1997 see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Provision for Loan Losses and Real Estate
Operations" in the Annual Report.
27
<PAGE>
The geographic concentration of nonperforming loans and leases at June 30 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
State (In Thousands)
- -----
<S> <C> <C> <C> <C> <C>
Kansas $ 6,030 $ 2,973 $ 2,496 $ 861 $ 1,169
Iowa 4,013 4,632 2,052 989 2,317
California 3,377 2,977 4,624 3,758 3,966
Oklahoma 3,178 2,303 1,496 1,019 541
Nebraska 2,595 2,629 2,352 2,037 1,551
Maryland 2,258 1,623 1,548 743 613
Georgia 2,127 2,601 3,389 2,559 2,355
Texas 2,028 3,274 3,290 3,601 4,417
Missouri 1,944 2,402 2,018 1,864 1,720
Illinois 1,579 1,754 1,158 1,234 1,502
Florida 1,502 1,389 891 1,553 1,148
Virginia 1,479 656 880 446 790
Alabama 1,307 510 517 381 303
New Jersey 1,277 1,060 1,069 1,680 1,361
Arizona 1,195 973 469 596 681
Colorado 1,166 1,489 2,789 2,794 5,016
Pennsylvania 852 855 663 715 823
Connecticut 752 860 739 643 37
New York 671 606 447 855 407
Indiana 345 489 238 411 145
North Carolina 293 392 205 455 237
Washington 182 449 647 745 841
Other States 6,317 5,274 6,298 3,412 3,211
------- ------- ------- ------- -------
Nonperforming loans and leases $46,467 $42,170 $40,275 $33,351 $35,151
======= ======= ======= ======= =======
</TABLE>
Nonperforming loans and leases at June 30, 1998, consisted of 1,371 loans with
an average balance of $33,893. Nonperforming loans totaling $46.5 million at
June 30, 1998, consisted of $1.4 million (nine loans) collateralized by
commercial real estate, $38.2 million (781 loans) collateralized by residential
real estate, $2.3 million (16 loans) collateralized by residential construction
real estate, $2.5 million (509 loans) of consumer loans and $2.1 million (56
loans) of commercial and other operating loans and leases.
28
<PAGE>
The geographic concentration of nonperforming real estate at June 30 was as
follows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
State 1998 1997 1996 1995 1994
----- ------- ------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Nebraska $ 5,417 $ 5,565 $ 5,356 $ 5,770 $ 6,868
Colorado 2,640 5,161 6,011 6,823 4,027
Kansas 1,876 873 64 234 184
Iowa 1,345 1,129 834 609 874
Oklahoma 1,299 509 384 391 1,348
Missouri 465 522 125 262 219
Texas 445 220 1,608 999 8,323
New Jersey 317 240 270 280 90
Florida 297 277 312 197 115
Georgia 140 933 187 510 2,549
Nevada 138 603 -- -- --
Pennsylvania 111 102 116 326 351
California 52 1,191 187 109 64
Other states 3,511 1,940 2,063 743 1,484
Unallocated reserves (453) (1,185) (2,927) (4,007) (4,389)
--------- --------- --------- --------- --------
Nonperforming real estate $ 17,600 $ 18,080 $ 14,590 $ 13,246 $ 22,107
========= ========= ========= ========= ========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, total nonperforming commercial real estate amounted to $8.4
million (26 properties) or 47.9% of the $17.6 million in total nonperforming
real estate (consisting of 238 properties), $459,000 (4 loans) consisting of
nonperforming agricultural loans and the remaining $8.7 million (208 properties)
consisting of nonperforming residential real estate. The Corporation's
commercial real estate at June 30, 1998 is located primarily in Nebraska and
Colorado.
Under the Corporation's credit policies and practices, certain real estate loans
meet the definition of impaired loans under Statement of Financial Accounting
Standards No.114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." A loan is
considered impaired when it is probable that the Corporation, based upon current
information, will not collect amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Certain loans are
exempt from the provisions of the aforementioned accounting statements,
including large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment which, for the Corporation, include one-to-four family
first mortgage loans, consumer loans and leases. Loan impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a principal expedient, at the observable
market price of the loan or the fair value of the collateral if the loan is
collateral dependent.
Loans reviewed for impairment by the Corporation are primarily limited to loans
modified in a troubled debt restructuring (after July 1, 1994) and commercial
real estate loans. The Corporation's impaired loan identification and
measurement processes are conducted in conjunction with the Corporation's review
of classified assets and adequacy of its allowance for possible loan losses.
Specific factors utilized in the impaired loan identified process include, but
are not limited to, delinquency status, loan-to-value ratio, debt coverage and
certain other conditions pursuant to the Corporation's classification policy. At
June 30, 1998, the Corporation had impaired loans totaling $3.4 million, net of
specific reserves, of which $2.5 million are classified as troubled debt
restructurings. This balance of troubled debt restructurings is included in the
Corporation's $3.5 million balance as shown in the table for nonperforming
assets.
29
<PAGE>
CLASSIFICATION OF ASSETS . Savings institutions required to review their assets
- -------------------------
on a regular basis and, as warranted, classify them as "substandard ,"
"doubtful," or "loss" as defined by OTS regulations. Adequate general valuation
allowances are required to be established for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as loss
or charge off such amount. An asset which does not currently warrant
classification as substandard but which posses credit deficiencies or potential
weaknesses deserving close attention is required to be designated as "special
mention." In addition, a savings institution is required to set aside adequate
valuation allowances to the extent that any affiliate possesses assets which
pose a risk to the savings institution. The OTS has the authority to approve,
disapprove or modify any asset classification or any amount established as an
allowance pursuant to such classification. Based on a review of the
Corporation's portfolio at June 30, 1998, pursuant to reporting on the quarterly
thrift financial report, the Corporation had $46.6 million in assets classified
as special mention, $80.3 million in assets classified as substandard, $581,000
in assets classified as doubtful and no assets classified as loss. As required,
specific valuation allowances have been established in an amount equal to 100.0%
of all assets classified as loss. Substantially all nonperforming assets at June
30, 1998, are classified as either substandard or loss pursuant to applicable
asset classification standards. Of the Corporation's loans and leases which were
not classified at June 30, 1998, there were no loans or leases where known
information about possible credit problems of borrowers caused management to
have serious doubts as to the ability of the borrowers to comply with present
loan or lease repayment terms.
LOANS AND REAL ESTATE REVIEW POLICY. Management of the Corporation has the
- -----------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan, lease and real estate portfolios.
Management is also responsible for the determination of all specific and general
provisions for loan and real estate losses, taking into consideration a number
of factors, including changes in the composition of the Corporation's loan and
lease portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
effect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
lease and real estate portfolios, and regular review of specific problem loans
and real estate. see "Nonperforming Assets" herein.
Management also has the responsibility of ensuring timely charge-offs of loans,
lease and real estate balances, as appropriate, when general and economic
conditions warrant a change in the value of these loans, leases and real estate.
To ensure that credit risk is properly and timely monitored, this responsibility
has been delegated to a credit review group which consists of key personnel of
the Corporation knowledgeable in the specific areas of loan, lease and real
estate valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and leases and the likelihood of
liquidation of real estate and other assets and their book value, (ii) to
identify problem assets at the earliest possible time, (iii) to ensure an
adequate level of allowances for possible losses to cover identified and
anticipated credit risks, (iv) to monitor the Corporation's compliance with
established policies and procedures, and (v) to provide the Corporation's
management with information obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loans, lease or real estate weakness. Accordingly, these types of
loans, leases and real estate are assigned a credit risk rating ranging from one
(excellent) to six (loss). Loans, leases and real estate with minimal credit
risk (not adversely classified or with a credit risk rating of one to four)
generally have reserves established on the basis of the Corporation's historical
loss experience. Loans, leases and real estate adversely classified
(substandard, loss or with a credit risk rating of five or six) generally have
greater reserves similarly established on the basis of the Corporation's
historical loss experience, as well as specific reserves established as
applicable to recognize permanent declines in the value of loans, leases or real
estate.
30
<PAGE>
It is management's responsibility to maintain a reasonable allowance for loan
and lease losses applicable to all categories of loans and leases through
periodic charges to operations. The Corporation employs a systematic methodology
to determine the amount of general loan and lease losses, in addition to
specific valuation allowances, to be recorded as a percentage of the respective
loan and lease balances as follows:
________________________________________________________________________________
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
RESIDENTIAL REAL ESTATE LOANS:
Current .25%
90 days delinquent (or classified substandard) 7.50
RESIDENTIAL CONSTRUCTION LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 12.50
COMMERCIAL REAL ESTATE LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
COMMERCIAL OPERATING LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
AGRICULTURAL LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
CONSUMER LOANS:
Current .50
Classified substandard and 90 days delinquent 20.00
120 days delinquent 100.00
(The unsecured balance of consumer loans over
120 days delinquent is generally written off.)
LEASES:
Current 2.00
90 days delinquent (or classified substandard) 30.00
CREDIT CARD/TAXSAVER:
Current credit card 3.00
Current taxsaver .50
90 days delinquent (or classified substandard) 20.00
120 days delinquent 100.00
________________________________________________________________________________
As appropriate, management of the Corporation attempts to ensure that the
Corporation's reserves are in general compliance with previously established
regulatory examination guidelines.
31
<PAGE>
ALLOWANCE FOR LOSSES ON LOANS AND LEASES. The allowance for loan and lease
- ----------------------------------------
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans and leases, which takes into consideration such factors as
changes in the composition of the loan and lease portfolio and economic
conditions that may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem loans and leases
and of the overall portfolio quality and real estate market conditions in the
Corporation's lending areas. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Provision for Loan Losses and
Real Estate Operations" in the Annual Report.
The Corporation's policy is to charge-off loans or leases or portions thereof
against the allowance for loan and lease losses in the period in which loans or
leases or portions thereof are determined to be uncollectible. A majority of the
Corporation's loans are collateralized by residential or commercial real estate.
Therefore, the collectibility of such loans is susceptible to changes in
prevailing real estate market conditions and other factors which can cause the
fair value of the collateral to decline below the loan balance. When the
Corporation records charge-offs on these loans, it also begins the foreclosure
process of taking possession of the real estate which served as collateral for
such loans. Recoveries of loan and lease charge-offs generally occur only when
the loan deficiencies are completely cured. Upon foreclosure and conversion of
the loan into real estate owned, the Corporation may realize a credit to real
estate operations through the disposition of such real estate when the sale
proceeds exceed the carrying value of the real estate.
During fiscal years 1998 and 1997, consumer loan charge-offs, net of recoveries,
totaled $8.6 million and $8.7 million, respectively, compared to $3.8 million
during fiscal year 1996. Consumer loan balances increased to $670.9 million at
June 30, 1998, compared to $619.5 million and $464.1 million, respectively, at
June 30, 1997 and 1996. Net consumer loan charge-offs of the Corporation reflect
the overall increase in its consumer loan portfolio. With improved underwriting
and credit review procedures in place, along with improved collection efforts
implemented during fiscal year 1997, management does not anticipate increases in
the loan loss provisions or in net charge-offs for consumer loans in fiscal
1999 to be any greater than in fiscal years 1998 or 1997. In addition,
management expects the same approximate net amount of charge-offs by loan
category during fiscal year 1999 compared to the actual net charge-off results
for fiscal year 1998. The loan and lease loss provision increased during fiscal
year 1998 compared to 1997 due primarily to the net increase of $403.4 million
in the total loan and lease portfolio at June 30, 1998 compared to 1997, and to
additional nonrecurring loss reserves recorded in the current fiscal year to
conform reserve positions of fiscal 1998 acquisitions to the policies of the
Corporation.
Although management believes that the Corporation's allowance for loan and lease
losses is adequate to reflect the risk inherent in its portfolios, there can be
no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrower's
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans and leases on
a regular basis as an integral part of their examination process. Such agencies
may require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
32
<PAGE>
The following table sets forth the activity in the Bank's allowance for loan and
lease losses for the fiscal years ended June 30 as indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for losses on
loans and leases at beginning of year $ 57,079 $ 56,651 $ 55,853 $ 51,052 $ 50,895
--------- --------- --------- --------- ---------
Loans and leases charged-off:
Single-family residential (2,837) (2,230) (1,226) (1,247) (1,119)
Multi-family residential
and commercial real estate -- (300) (214) (842) (2,789)
Consumer and other (11,013) (12,597) (5,387) (2,199) (1,477)
--------- --------- --------- --------- ---------
Loans and leases charged-off (13,850) (15,127) (6,827) (4,288) (5,385)
--------- --------- --------- --------- ---------
Recoveries:
Single-family residential 197 15 35 88 150
Multi-family residential
and commercial real estate 745 297 56 1,090 164
Consumer and other 1,680 2,474 894 720 549
--------- --------- --------- --------- ---------
Recoveries 2,622 2,786 985 1,898 863
--------- --------- --------- --------- ---------
Net loans and leases charged-off (11,228) (12,341) (5,842) (2,390) (4,522)
--------- --------- --------- --------- ---------
Provision charged to operations 15,325 12,284 7,211 7,530 8,977
--------- --------- --------- --------- ---------
Activity of combining companies to convert
to June 30 fiscal year (38) 475 -- (116) 652
Allowances acquired in acquisitions 1,004 1,966 1,944 1,818 --
Estimated allowance added
for bulk purchased loans (1) -- -- -- -- 39
Change in estimate of allowance
for bulk purchased loans (1)(2) (2,324) (1,878) (2,273) (1,705) (4,357)
Charge off to allowance
for bulk purchased loans (1) (23) (78) (242) (336) (632)
--------- --------- --------- --------- ---------
Allowances for losses on loans and leases at end of year $ 59,795 $ 57,079 $ 56,651 $ 55,853 $ 51,052
========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net loans charged-off to average
loans outstanding during the year 0.17% 0.21% 0.11% 0.05% 0.11%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At June 30, 1998, 1997 and 1996, $8.5 million, $10.8 million and $12.8
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans, was included in the total
allowance for loan losses. Such bulk purchased loans had balances of $388.5
million, $494.6 million and $574.4 million, respectively, at June 30, 1998,
1997 and 1996. These allowances are available only to absorb losses
associated with the respective bulk purchased loans and are not available to
absorb losses from other loans.
(2) Consists primarily of changes in estimates of allowance amounts for bulk
purchased loans resulting from the 100% payoff of such purchased loans or
from loan principal pay-downs such that these reclassed allowance amounts
will be amortized into income as a yield adjustment over the respective
remaining lives of the related purchased loans.
- --------------------------------------------------------------------------------
33
<PAGE>
INVESTMENT ACTIVITIES
- ---------------------
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) equal to the monthly average of not less than a
specified percentage (currently 5.0%) of its net withdrawable savings deposits
plus short-term borrowings. The Corporation is also required to maintain average
daily balances of short-term liquid assets at a specified percentage (currently
1.0%) of the total of net withdrawable savings accounts and borrowings payable
in one year or less.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1998,
the Corporation had total average liquid assets of $594.4 million, which
consisted of $110.9 million in cash, $7.9 million in federal funds and $475.6
million in agency-backed securities. The Corporation's liquidity and short-term
liquidity ratios were 9.35% and 2.80%, respectively, at June 30, 1998. See
"Regulation -- Liquidity Requirements." The Corporation's management objective
is to maintain liquidity at a level sufficient to assure adequate funds, taking
into account anticipated cash flows and available sources of credit, to allow
future flexibility to meet withdrawal requests, to fund loan commitments, to
maximize income while protecting against credit risks and to manage the
repricing characteristics of the Corporation's assets and liabilities. Such
liquid funds are managed in an effort to produce the highest yield consistent
with maintaining safety of principal and within regulations governing the thrift
industry. The relative size and mix of investment securities in the
Corporation's portfolio are based on management's judgment compared to the
yields and maturities available on other investment securities. The Corporation
emphasizes low credit risk in selecting investment options.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury and other Government agency obligations $ 388,199 $ 425,267 $ 300,035
Obligations of states and political subdivisions 48,571 14,068 18,642
Other securities 18,258 19,182 10,703
---------- ---------- ---------
Total investment securities held to maturity 455,028 458,517 329,380
Interest-earning cash on deposit (federal funds) 6,586 3,965 12,124
---------- ---------- ---------
Total Investments $ 461,614 $ 462,482 $ 341,504
========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
The following table sets forth the scheduled maturities, carrying values, market
values and weighted average yields for the Corporation's investment securities
held to maturity at June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
One Year Over One Within Over Five Within
or Less Five Years Ten Years
------------------- ------------------ ------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $56,944 5.51% $68,578 6.22% $222,723 6.86%
States and political subdivisions 5,111 4.70 12,158 4.75 19,897 5.11
Other debt securities 25 8.00 25 4.00 -- --
------- ---- ------- ---- -------- ----
Total $62,080 5.44% $80,761 5.99% $242,620 6.71%
======= ==== ======= ==== ======== ====
<CAPTION>
More Than
Ten Years Total
-------------------- ---------------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ------- --------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $39,954 7.67% $388,199 $388,893 6.63%
States and political subdivisions 11,405 7.16 48,571 48,628 5.46
Other debt securities 18,208 7.28 18,258 18,385 7.28
------- ---- -------- -------- ----
Total $69,567 7.48% $455,028 $455,906 6.53%
======= ==== ======== ======== ====
- --------------------------------------------------------------------------------------------------------
</TABLE>
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report.
35
<PAGE>
SOURCES OF FUNDS
- ----------------
General. Deposits have historically been the major source of the Corporation's
- -------
funds for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, securities sold under
agreements to repurchase, prepayment and maturity of investment securities, and
other borrowings. At June 30, 1998, deposits made up 66.4% of total
interest-bearing liabilities compared to 69.5% at June 30, 1997. Deposit levels
are significantly influenced by general interest rates, economic conditions and
competition. Other borrowings, primarily FHLB advances, are utilized to
compensate for any decreases in the normal or expected inflow of deposits.
The Corporation anticipates that it will in the future continue to grow its
franchise through an ongoing program of selective acquisitions of other
financial institutions. During fiscal year 1998 the Corporation consummated the
acquisitions of four financial institutions: First National, Liberty, Mid
Continent and Perpetual, and subsequent to June 30, 1998 completed the
acquisitions of AmerUs and First Colorado and entered into a definitive
agreement to acquire Midland. During fiscal year 1997 the Corporation
consummated the acquisitions of Heritage and Investors. See Notes 2, 30 and 31
to the Consolidated Financial Statements for additional information on these
completed and pending acquisitions. Such completed and pending acquisitions
present the Corporation with the opportunity to further expand its retail
network over last fiscal year in the Iowa, Nebraska, Kansas, and Colorado
markets and to enter the Missouri, Minnesota, South Dakota and Arizona markets,
as well as to increase its earnings potential by increasing its mortgage and
consumer loan volumes funded by deposits which generally bear lower rates of
interest than alternative sources of funds.
Deposits. The Corporation's deposit strategy is to emphasize retail branch
- --------
deposits through extensive marketing efforts and product promotion, such as by
offering a variety of checking accounts and deposit programs to satisfy customer
needs. As such, during fiscal year 1998, NOW accounts increased $232.6 million,
from $569.5 million at June 30, 1997, to $802.1 million at June 30, 1998.
At June 30, 1998 non-interest bearing deposits totaled $378.6 million, or
7.1% of total deposits, compared to $326.2 million, or 6.0% at June 30, 1997, an
increase of $52.4 million.
As a community bank, the Corporation plans to increase its non-interest
bearing NOW accounts. In addition, the Corporation intends to continue pricing
its certificates of deposit products at rates that minimize the Corporation's
total costs of funds. The competition for certificates of deposit is very strong
in a market of shrinking funds as individuals continually seek the most
attractive investment alternatives available. Rates on deposits are priced based
on investment opportunities as the Corporation attempts to control the flow of
funds in its deposit accounts according to its business objectives and the cost
of alternative sources of funds.
Fixed-term, fixed-rate retail certificates at June 30, 1998, represented 62.6%
(or $3.356 billion) of total deposits compared to 68.9% at June 30, 1997 (or
$3.758 billion). The Corporation offers certificate accounts with terms ranging
from one month to 120 months.
Total deposits decreased $90.4 million during fiscal year 1998 from $5.454
billion at June 30, 1997, to $5.363 billion at June 30, 1998. This net decrease
is primarily a result of depositors leaving for higher interest rates for
more attractive investment alternatives.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 12 in the Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
36
<PAGE>
The following table sets forth the balances and percentages of the various types
of deposits offered by the Corporation at the dates indicated and the change in
the dollar amount of deposits between such dates:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
---------------------------------- --------------------------------- -----------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
---------- -------- ---------- ----------- -------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 890,181 16.6% $ 6,582 $ 883,599 16.2% $ 151,471 $ 732,128 14.0%
NOW accounts 802,084 14.9 232,593 569,491 10.4 73,633 495,858 9.5
Market rate savings 314,449 5.9 71,963 242,486 4.5 2,509 239,977 4.6
Certificates of deposit 3,356,426 62.6 (401,570) 3,757,996 68.9 1,628 3,756,368 71.9
----------- ----- --------- ----------- ----- --------- ----------- -----
Total Deposits $ 5,363,140 100.0% $ (90,432) $ 5,453,572 100.0% $ 229,241 $ 5,224,331 100.0%
=========== ===== ========= =========== ===== ========= =========== =====
</TABLE>
37
<PAGE>
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ------------------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $ 778,992 4.53% $ 774,158 4.06% $ 635,416 4.16%
NOW accounts 756,236 1.52 506,506 1.63 580,862 1.13
Market rate savings 238,332 4.04 248,404 3.24 227,824 3.50
Certificates of deposit 3,625,881 5.67 3,833,370 5.71 3,529,716 6.02
----------- ----- ----------- ----- ----------- -----
Average deposit accounts $ 5,399,441 4.85% $ 5,362,438 4.97% $ 4,973,818 5.09%
----------- ----- ----------- ----- ----------- -----
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the Corporation's certificates of deposit (fixed
maturities) classified by rates for the three fiscal years ended June 30 as
indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Rate
----
<S> <C> <C> <C>
Less than 3.00% $ 4,890 $ 7,234 $ 9,383
3.00% - 3.99% 7,858 6,384 21,881
4.00% - 4.99% 360,732 229,375 324,341
5.00% - 5.99% 2,382,212 2,531,778 2,266,012
6.00% - 6.99% 552,493 838,896 782,120
7.00% - 7.99% 44,097 127,063 331,018
8.00% - 8.99% 3,598 12,272 16,631
9.00% and over 546 4,994 4,982
----------- ----------- -----------
Certificates of deposit $ 3,356,426 $ 3,757,996 $ 3,756,368
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity for the three
fiscal years ended June 30, as indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Maturity Period 1998 1997 1996
------------------------------ ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Three months or less $ 110,598 $ 115,705 $ 155,481
Over three through six months 50,758 46,382 57,916
Over six through twelve months 59,084 61,988 90,900
Over twelve months 47,338 73,045 81,189
---------- ---------- ----------
Total $ 267,778 $ 297,120 $ 385,486
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Borrowings. The Corporation has also relied upon other borrowings, primarily
- ----------
advances from the FHLB, as additional sources of funds. Advances from the FHLB
are typically secured by the Corporation's stock in the FHLB and a portion of
first mortgage real estate loans. The maximum amount of FHLB advances which the
FHLB will advance for purposes other than meeting deposit withdrawals fluctuates
from time to time in accordance with federal regulatory policies. The
Corporation is required to maintain an investment in FHLB stock in an amount
equal to the greater of 1.0% of the aggregate unpaid loan principal of the
Corporation's loans secured by home mortgage loans, home purchase contracts and
similar obligations, or 5.0% of advances from the FHLB to the Corporation. The
Corporation is also required to pledge such stock as collateral for FHLB
advances. In addition to this collateral requirement, the Corporation is
required to pledge additional collateral which may be unencumbered whole
residential first mortgages with an aggregate unpaid principal amount equal to
158.0% of the Corporation's total outstanding FHLB advances. Alternatively, the
Corporation can pledge 90.0% of the market value of U.S. government or U.S.
government agency guaranteed securities, including mortgage-backed securities,
as collateral for the outstanding FHLB advances. Pursuant to this requirement,
as of June 30, 1998, the Corporation had pledged $3.0 billion of its real estate
loans and held FHLB stock of $119.4 million.
At June 30, 1998, the Corporation had advances totaling approximately $2.272
billion from the FHLB at interest rates ranging from 4.87% to 7.19% and at a
weighted average rate of 5.66%. At June 30, 1997, such advances from the FHLB
totaled $1.597 billion at interest rates ranging from 5.06% to 8.85% and at a
weighted average rate of 5.96%. Fixed-rate advances totaling $966,000,000 at
June 30, 1998 with a weighted average rate of 4.93% are convertible into
adjustable-rate advances at the option of the FHLB with call dates ranging from
July 1998 to May 2000. Such convertible advances consist primarily of amounts
totaling $276,000,000 with scheduled maturities due over three years to four
years and $675,000,000 with maturities due over five years.
The Corporation also borrows funds under repurchase agreements. During fiscal
years 1998 and 1997 the Corporation utilized securities sold under agreements to
repurchase primarily for liquidity and asset liability management purposes.
Under a repurchase agreement, the Corporation sells securities (generally,
government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued
mortgage-backed securities) and agrees to buy such securities back at a
specified price at a subsequent date. Repurchase agreements are generally made
for terms ranging from one day to four years, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold. At June 30, 1998,
the Corporation's repurchase agreements aggregated $334.3 million at an average
rate of 5.96%. The Corporation's repurchase agreements were collateralized by
$262.5 million and $79.2 million, respectively, of mortgage-backed securities
and investment securities at June 30, 1998. At June 30, 1998, these repurchase
agreements had maturities ranging from September 1998 to December 1999 with a
weighted average maturity of 225 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended June 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Balance at end of year $ 334,294 $ 639,294 $ 380,755
Maximum month-end balance $ 639,294 $ 696,318 $ 380,755
Average balance $ 501,979 $ 591,288 $ 189,568
Weighted average interest rate during the year 6.08% 6.19% 7.14%
Weighted average interest rate at end of year 5.96% 6.04% 6.51%
- --------------------------------------------------------------------------------------------------------
</TABLE>
For further information regarding the Corporation's FHLB advances, securities
sold under agreements to repurchase and other borrowings. See Notes 13, 14 and
15 to the Notes to the Consolidated Financial Statements in the Annual Report.
39
<PAGE>
Customer Services. The Corporation aggressively markets its various checking and
- -----------------
loan products as they are mass market entry points to target all consumers. This
enables the Corporation to attract and service customers to which it can cross-
sell its numerous services on a cost-effective, profitable basis with the goal
of providing them with 100% of their financial needs. Accordingly, management
continues to update data processing equipment in the Corporation's branch
operations in order to provide a cost-effective and efficient delivery of
services to its customers. The Corporation also has been proactive in the
implementation of new consumer-oriented technologies, offering home banking
services by providing Microsoft's Money, Intuit's Quicken, and Quicken Lite
financial software to its customer base. The Corporation continues to strive to
meet the customer's financial needs. This is exemplified by the availability of
home banking via personal computers, extended evening and weekend branch hours,
extended hour customer service lines, and 24-hour telephone bill paying
services. Additional information about the Corporation and its competitive
products also can be accessed through the Corporation's "web site" at
http://www.comfedbank.com. At June 30, 1998, there were 143 strategically
located proprietary automatic teller machines ("ATMs") in use. These ATMs are
also linked with a series of regional, national and international ATM services,
including CASHBOX, SHAZAM, CIRRUS, NETS, and MINIBANK. As a result of the
Corporation's participation in these ATM services, electronic banking machines
are currently available worldwide for the convenience of the Corporation's
customers.
SUBSIDIARIES
- ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1998, the Bank was authorized to invest up to
$264.2 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1998, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $9.6
million plus unsecured loans totaling $241,000 for a net investment of $9.8
million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has one subsidiary, Commercial Federal Service Corporation,
engaged in activities not permissible for national banks. Investments in such
subsidiary must be 100% deducted from capital. See "Regulation -- Regulatory
Capital Requirements." At June 30, 1998, the total investment in such subsidiary
was $3.9 million which was deducted from capital. Capital deductions are not
required for investment in subsidiaries engaged in non-national bank activities
as agent for customers rather than as principal, subsidiaries engaged solely in
mortgage banking activities, and certain other exempted subsidiaries.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
At June 30, 1998, the Bank had twelve wholly-owned subsidiaries, two of which
own and operate certain real estate properties of the Bank. As such, these
subsidiaries are considered engaged in permissible activities and do not require
deductions from capital as discussed above. In 1994, CFMC was approved by the
OTS to be classified as an "operating subsidiary" and as such, CFMC ceased to be
subject to the regulatory investment in service corporation limitations. The
remaining wholly-owned subsidiaries, exclusive of CFMC, are classified as
service corporations. Descriptions of the principal active subsidiaries of the
Bank follow.
See Exhibit 21. "Subsidiaries of the Corporation" herein for a complete listing
of all subsidiaries of the Corporation.
Commercial Federal Mortgage Corporation. CFMC is a full-service mortgage
- ---------------------------------------
banking company. The Corporation's real estate lending, secondary marketing,
mortgage servicing and foreclosure activities are conducted primarily through
CFMC. At June 30, 1998, CFMC serviced 65,700 loans for the Bank and 125,900
loans for others. See "Loan Originations -- Loan Servicing."
40
<PAGE>
Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers customers
- -----------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 35 of the Corporation's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities.
Commercial Federal Insurance Corporation ("CFIC"). CFIC was formed in November
- -------------------------------------------------
1983 and serves as a full-service independent insurance agency, offering a full
line of homeowners, commercial (including property and casualty), health, auto
and life insurance products. Additionally, a wholly-owned subsidiary of CFIC
provides reinsurance on credit life and disability policies written by an
unaffiliated carrier for consumer loan borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to
- ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC are fully excluded from regulatory capital. See
"Regulation -- Regulatory Capital Requirements."
Tower Title & Escrow Company ("TTE"). TTE was formed in 1996 with operations
- ------------------------------------
consisting of escrow closings, title insurance and title searches. TTE services
the Corporation's loan production process and offers its services to other
lending institutions.
Liberty Leasing Company ("LLC"). LLC, a former subsidiary of Liberty,
- -------------------------------
originates, services and securitizes primarily commercial equipment leases.
EMPLOYEES
- ---------
At June 30, 1998, the Corporation and its wholly-owned subsidiaries had 2,524
employees (2,371 full-time equivalent employees). The Corporation provides its
employees with a comprehensive benefit program, including basic and major
medical insurance, dental plan, a deferred compensation 401(k) plan, life
insurance, accident insurance, short and long-term disability coverage and sick
leave. The Corporation also offers loans with below market rates to its
employees who qualify based on term of employment (except that no preferential
rates or terms are offered to executive officers and senior management). The
Corporation considers its employee relations to be good.
EXECUTIVE OFFICERS
- ------------------
For certain information concerning the Registrant's directors and executive
officers as of June 30, 1998, refer to Part III -- Item 10. "Directors and
Executive Officers of the Registrant" of this report.
COMPETITION
- -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate loans. Its most direct competition for savings
deposits has come historically from commercial banks and from thrift
institutions located in its primary market areas. The Corporation's primary
market area for savings deposits includes Iowa, Nebraska, Colorado, Kansas,
Oklahoma and Arizona and, for loan originations, includes Iowa, Nebraska,
Colorado, Kansas, Oklahoma, Arizona, Florida and Las Vegas, Nevada (primarily
residential construction lending). Management believes that the Corporation's
extensive branch network has enabled the Corporation to compete effectively for
deposits and loans against other financial institutions. The Corporation has
been able to attract savings deposits primarily by offering depositors a wide
variety of deposit accounts, convenient branch locations, a full range of
financial services and competitive rates of interest.
The Corporation's competition for real estate, consumer and commercial loans
comes principally from other thrift institutions, mortgage banking companies,
commercial banks, insurance companies and other institutional lenders. The
Corporation competes for loans principally through the efficiency and quality of
the service provided to borrowers and the interest rates and loan fees charged.
41
<PAGE>
REGULATION
----------
GENERAL
- -------
As a federal savings bank, the Bank is subject to extensive regulation by the
OTS. The lending and deposit taking activities and other investments of the Bank
must comply with various regulatory requirements. The OTS periodically examines
the Bank for compliance with various regulatory requirements and the FDIC also
has the authority to conduct special examinations of the Bank because its
deposits are insured by the SAIF. The Bank must file reports with the OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Corporation is subject
to the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein.
The laws and regulations governing savings institutions have been through at
least two major revisions in recent years. First, the Riegel-Neal Interstate
Banking and Efficiency Act of 1994, effective on June 1, 1997, permits
commercial banks interstate branching which could result in more intense
competition from out of state banks. Second, on September 30, 1996, the
Regulatory Paperwork Reduction Act was signed into law. Among other things,
this legislation substantially eliminated the premium differential between SAIF-
insured institutions and BIF-insured institutions. The new legislation also
provides for the merger of SAIF and BIF if certain conditions are met by
January 1, 1999.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES
- -------------------------------------------
The U. S. Congress is in the process of drafting legislation which may have a
profound effect on the financial services industry. On May 13, 1998, the U. S.
House of Representatives passed H.R. 10, the "Financial Services Competition Act
of 1998," which calls for a sweeping modernization of the banking system that
would permit affiliations between commercial banks, securities firms, insurance
companies and, subject to certain limitations, other commercial enterprises.
The stated purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of financial
services and increase competition. H.R. 10 removes many of the statutory
restrictions contained in current laws regulating the financial services
industry and calls for a new regulatory framework of financial institutions and
their holding companies. H.R. 10, however, preserves the thrift charter and all
existing thrift powers, but would restrict the activities of new unitary thrift
holding companies. On September 11, 1998, the Senate Banking Committee approved
a substantially similar version of this legislation, although the Senate version
included a prohibition against the sale of existing unitary savings and loan
holding companies to commercial companies. At this time, it is unknown whether
H.R. 10 will be enacted into law, or if enacted, what form the final version of
such legislation might take and how such legislation may affect the
Corporation's business and operations.
42
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
At June 30, 1998, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Dollars in Thousands Actual Requirement Excess
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank's stockholder's equity $680,668
Less unrealized holding gain on securities
available for sale, net (539)
Less intangible assets (66,415)
Less investments in non-includable subsidiaries (3,913)
- --------------------------------------------------------------------------------------------------------
Tangible capital $609,801 $ 131,849 $ 477,952
- ---------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1) 6.94% 1.50% 5.44%
- ---------------------------------------------------------------------------------------------------------
Tangible capital $609,801
Plus certain restricted amounts of other intangible assets 9,756
- ---------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital) $619,557 $ 263,990 $ 355,567
- ---------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2) 7.04% 3.00% 4.04%
- ---------------------------------------------------------------------------------------------------------
Core Capital $619,557
Plus general loan loss allowances 48,202
Less amount of land loans and non-residential
construction loans in excess of an 80.0% loan-to-value ratio (169)
- ---------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital) $667,590 $ 387,760 $ 279,830
- ---------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3) 13.77% 8.00% 5.77%
- ---------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $8,789,908
(2) Based on adjusted total assets totaling $8,799,663
(3) Based on risk-weighted assets totaling $4,847,004
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized,
adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized; and authorized banking regulatory agencies to take
prompt corrective action with respect to institutions in the three
undercapitalized categories. These corrective actions become increasingly more
stringent as an institution's regulatory capital declines. In addition, the OTS
has adopted a prompt corrective action rule under which a savings institution
that has a core capital ratio of less than 4.0% would be deemed to be
"undercapitalized" and may be subject to certain sanctions. At June 30, 1998,
the Bank exceeded the minimum requirements for the well-capitalized category as
shown in the following table:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Percentage of adjusted assets 7.04% 12.78% 13.77%
Minimum requirements to be
classified well-capitalized 5.00% 6.00% 10.00%
- -------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "-- Prompt Corrective Regulatory
Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights. Purchased mortgage servicing rights may be
included in tangible capital to the extent they are permitted to be included
within the calculation of core capital.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. Effective December 31, 1994, no newly added
intangible assets other than purchased mortgage servicing rights and purchased
credit relationships to the extent described below are permitted to be included
in core capital. Purchased mortgage servicing rights and certain qualifying
intangible assets may be included in the calculation of core capital, subject to
a maximum aggregate limitation of the lesser of (i) 50% of the amount of core
capital computed before the deduction for any disallowed qualifying intangible
assets or mortgage servicing rights; and (ii) the lesser of 90% of their fair
market value or 100% of the remaining unamortized book value. In addition, a
sublimit applies for purchased credit card relationships equal to the lesser of
(i) 25% of the amount of core capital computed before the deduction of any
disallowed qualifying intangible assets and (ii) the lesser of 90% of the fair
market value of such credit card relationships and 100% of the unamortized book
value of such relationships. The Bank's core capital of $619.6 million at June
30, 1998, includes no qualifying supervisory goodwill and $9.8 million of
restricted amounts of certain intangible assets (core value of deposits).
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempted from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not
applied to federal savings associations existing as of August 9, 1989, that were
either chartered as a state savings bank or state cooperative bank prior to
October 1, 1982, or that acquired their principal assets from such an
association.
Accordingly, at June 30, 1998, the Bank had approximately $3.9 million of debt
and equity invested in CFSC which is engaged in activities not permissible for
national banks which was deducted from capital. See "Business -- Subsidiaries."
44
<PAGE>
Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loss allowances. Allowances for
loan and lease losses includable in capital are includable only up to 1.25% of
risk-weighted assets. In addition, equity investments and those portions of
nonresidential construction and land loans, and loans with loan-to-value ratios
in excess of 80.0% must be deducted from total capital under the same phase-out
period as is applied to investments in subsidiaries engaged in activities not
permissible for national banks. The Bank's investments subject to this
deduction totaled $169,000 at June 30, 1998, which was deducted from capital in
accordance with applicable regulations.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each on-balance-sheet asset and the credit-equivalent
amount of each off-balance-sheet item after being multiplied by an assigned risk
weight. Under the OTS risk-weighting system, cash and securities backed by the
full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80.0% and average annual occupancy rates over 80.0%, and certain
qualifying loans for the construction of one- to four-family residences pre-sold
to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non-
qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100.0%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100.0% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
The OTS' risk-based capital requirements require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The Bank has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the rule and believes
that it will not be required to increase its total capital as a result of the
rule.
The OTS has adopted a prompt corrective action rule under which a savings
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. See "Prompt
Corrective Regulatory Action."
45
<PAGE>
In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of
the OTS may treat the failure of any savings institution to maintain capital at
or above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
- -----------------------------
The Bank is a member of the FHLB System. The FHLB System consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. The FHLB of Topeka serves as
a reserve or central bank for its member institutions within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Topeka. Under applicable law, long-term advances may
only be made for the purpose of providing funds for residential housing lending.
Pursuant to the acquisitions of Liberty and Perpetual in fiscal year 1998, the
Bank acquired advances from the FHLB of Des Moines. The Bank has not borrowed
additional advances as of June 30, 1998 from this district. At June 30, 1998 the
Bank had advances of $2.3 billion from the FHLB of Topeka and Des Moines.
As a member of the FHLB, the Bank is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to the greater of (i) 1.0%
of the Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
(ii) 5.0% of its then outstanding advances (borrowings) from the FHLB. The Bank
was in compliance with this requirement at June 30, 1998, with an investment in
FHLB stock totaling $119.4 million compared to a required amount of $113.6
million. During fiscal years 1998, 1997 and 1996 the Bank received income from
its investment in FHLB stock totaling $7.6 million, $5.0 million and $4.5
million, respectively.
LIQUIDITY REQUIREMENTS
- ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquidity assets (defined as cash, deposits maintained pursuant
Federal Reserve Board requirements, time and savings deposits in certain
institutions, U.S. Treasury and other government agency obligations, obligations
of states and political subdivisions thereof, shares in mutual funds with
certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. This liquidity requirement, which is currently
5.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0% depending upon economic conditions and the savings flows of
savings associations. Regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet liquidity requirements. The average liquidity and
short-term liquidity ratios of the Bank as of June 30, 1998, were 9.35% and
2.80%, respectively.
On May 14, 1997, the OTS proposed the following amendments in an effort to
update, simplify and streamline its liquidity regulation: (i) exclude accounts
with unexpired maturities exceeding one year from the definition of "net
withdrawable accounts," (ii) streamline the average balance calculations of
liquid assets and liquidity base; (iii) reduce the liquid asset requirement from
5.0% to 4.0% and remove the 1.0% short-term requirement, (iv) expand the
categories of liquid assets that count toward satisfaction of the liquidity
requirement, and (v) add a general safety and soundness requirement.
46
<PAGE>
QUALIFIED THRIFT LENDER TEST
- ----------------------------
The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a
qualified thrift lender ("QTL") test. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank. Upon the expiration of
three years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65.0% of "portfolio assets." Under the HOLA, portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20.0% of
assets. Qualified Thrift Investments consist of (i) loans, equity positions or
securities related to domestic, residential real estate or manufactured housing,
(ii) stock in an FHLB and (iii) loans for educational purposes, loans to small
businesses and loans made through credit cards or credit card accounts. In
addition, subject to a 20.0% of portfolio assets limit, savings institutions are
able to treat as Qualified Thrift Investments (i) 50% of the dollar amount of
residential mortgage loans originated for sale and sold within 90 days of
origination, (ii) 200.0% of their investments in loans to finance "starter
homes" and loans for construction, development or improvement of housing and
community service facilities or for financing small businesses in "credit-needy"
areas, (iii) loans for the purchase or construction of churches, schools,
nursing homes and hospitals, other than those covered in (ii) and loans for the
improvement and upkeep of such properties, (iv) loans for personal family or
household purposes, and (v) shares of stock issued by the FHLMC or the FNMA. In
order to maintain QTL status, the savings institution must maintain a weekly
average percentage of Qualified Thrift Investments to portfolio assets equal to
65.0% on a monthly average basis in nine out of 12 months. A savings
institution that fails to maintain QTL status will be permitted to requalify
once, and if it fails the QTL test a second time, it will become immediately
subject to all penalties as if all time limits on such penalties had expired.
At June 30, 1998, approximately 84.1% of the Bank's portfolio assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a
"Tier 1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of:
(a) 75.0% of its net income for the previous four quarters; or (b) up to 100.0%
of its net income to date during the calendar year plus an amount that would
reduce by one-half the amount by which its ratio of total capital to assets
exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements but not in excess of the
fully phased-in requirements (a "Tier 2 Association") is permitted, after
notice, to make capital distributions without OTS approval of up to 75.0% of its
net income for the previous four quarters, less dividends already paid for such
period. At June 30, 1998, the Bank qualified as a Tier 1 Association, and would
be permitted to pay an aggregate amount approximating $139.1 million in
dividends under these regulations. A savings institution that fails to meet
current minimum capital requirements (a "Tier 3 Association") is prohibited from
making any capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that its is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association. The
Bank is a Tier 1 Association. Despite the above authority, the OTS may prohibit
any savings institution from making a capital distribution that would otherwise
be permitted by the regulation, if the OTS were to determine that the
distribution constituted an unsafe or unsound practice. Furthermore, under the
OTS's prompt corrective action regulations, which took effect on December 19,
1992, the Bank would be prohibited from making any capital distributions if,
after making the distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less
than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "-- Prompt
Corrective Regulatory Action."
47
<PAGE>
ENFORCEMENT
- -----------
Under the Federal Deposit Insurance Act of 1996 (the "FDI Act"), the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-related parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on a savings institution. Civil penalties cover a wide range of
violations and actions and range up to $25,000 per day unless a finding of
reckless disregard is made, in which case penalties may be as high as $1.0
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1.0 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
DEPOSIT INSURANCE
- -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment is based on the capital adequacy
and supervisory rating of the institution and is assigned by the FDIC.
The FDIC has adopted a risk-based deposit insurance assessment system under
which the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period. Well capitalized institutions are
institutions satisfying the following capital ratio standards: (i) total risk-
based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of
6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately
capitalized institutions are institutions that do not meet the standards for
well capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant
to which the assessment rate for well-capitalized institutions with the highest
supervisory ratings would be reduced to zero and institutions in the lower risk
assessment classification will be assessed at the rate of .27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of .064% of insured deposits
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for FICO obligations at the rate of .013% of insured deposits. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments. The Corporation's annual deposit insurance rate in effect
prior to this recapitalization was .23% of insured deposits, declining to .18%
of insured deposits for the quarter ended December 31, 1996, and reduced to
.064% of insured deposits effective January 1, 1997.
48
<PAGE>
The FDI Act provides that the BIF and SAIF will be merged into a single deposit
insurance fund effective December 31, 1999, but only if there are no insured
savings associations on that date. The legislation directed the Department of
Treasury to make recommendations to Congress for the establishment of a single
charter for banks and thrifts. Management of the Corporation cannot predict
accurately at this time what effect this legislation will have on the
Corporation.
The FDIC is authorized to raise insurance premiums for SAIF-member institutions
in certain circumstances. If the FDIC determines to increase the assessment
rate for all SAIF-member institutions, institutions in all risk categories could
be affected. While an increase in premiums for the Bank could have an adverse
effect on the Bank's earnings, a decrease in premiums could have a positive
impact on the earnings of the Bank.
Since the SAIF now meets its designated reserve ratio as a result of the special
assessment, SAIF members are now permitted to convert to the status of members
of the BIF and may merge with or transfer assets to a BIF member. However,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of the SAIF deposit insurance premiums effectively eliminated this
disparity and as of January 1, 1997, had the effect of increasing the net income
of the Bank and restoring the competitive equality between BIF-insured and SAIF-
insured institutions.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2.0% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4.0% of total assets for all but the most highly rated state
non-member banks.
49
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
- ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Corporation) and any companies which are controlled by such parent holding
company are affiliates of the savings institution. Generally, Sections 23A and
23B (i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10.0% of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20.0% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10.0% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
50
<PAGE>
CLASSIFICATION OF ASSETS
- ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets,
Doubtful Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. That portion of an asset classified loss is
considered uncollectible and of such little value that its continuance as an
asset, without establishment of a specific valuation allowance or charge-off, is
not warranted. This classification does not necessarily mean that an asset has
absolutely no recovery or salvage value; but rather, it is not practical or
desirable to defer writing off a basically worthless asset (or portion thereof)
even though partial recovery may be effected in the future.
With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for off-
balance sheet items, such as letters of credit, when loss becomes probable and
estimable.
In August 1993, the OTS issued revised guidance for the classification of assets
and a new policy on the classification of collateral-dependent loans (where
proceeds from repayment can be expected to come only from the operation and sale
of the collateral). With limited exceptions, effective September 30, 1993, for
troubled collateral-dependent loans where it is probable that the lender will be
unable to collect all amounts due, an institution must classify as "loss" any
excess of the recorded investment in the loan over its "value", and classify the
remainder as "substandard". The "value" of a loan is either all present value
of the expected future cash flows, the loan's observable market price or the
fair value of the collateral. The Bank does not anticipate any adverse impact
from the implementation of the revised guidance for classification of assets or
collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all credit
losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit losses
forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
Additionally, an adequate level of ALLL should reflect an additional
margin for imprecision inherent in most estimates of expected credit
losses.
51
<PAGE>
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of the following amounts:
(a) 50 percent of the portfolio that is classified doubtful,
(b) 15 percent of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable, supported by the
weight of reliable evidence and that all relevant factors have been
appropriately considered. The Bank has reviewed the Policy Statement and does
not believe that it will adversely affect the level of the Bank's allowances for
loan losses.
PROMPT CORRECTIVE REGULATORY ACTION
- -----------------------------------
Under FDICIA, the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must
include a guarantee by the institution's holding company that the institution
will comply with the plan until it has been adequately capitalized on average
for four consecutive quarters, under which the holding company would be liable
up to the lesser of 5.0% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
52
<PAGE>
Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order
or written directive to meet or maintain a specific capital level is deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMELS rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of core capital to total
assets of less than 2.0%. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMELS rating
category. The Bank is classified as "well capitalized" under the OTS
regulations.
STANDARDS FOR SAFETY AND SOUNDNESS
- ----------------------------------
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
- --------------------------------
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. The final rule and the
guidelines took effect on August 9, 1995. The guidelines require savings
associations to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
association's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth. The guidelines further provide that savings associations should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the OTS determines that a savings association is
not in compliance with the safety and soundness guidelines, it may require the
association to submit an acceptable plan to achieve compliance with the
guidelines. A savings association must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the association to regulatory
sanctions. Management believes that the Bank already meets substantially all
the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will materially affect
the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
53
<PAGE>
FEDERAL RESERVE SYSTEM
- ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$47.3 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1998, the Bank met its reserve requirements.
LIMITATIONS ON LOANS TO ONE BORROWER
- ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000 (ii) the savings
association is in compliance with its fully phased-in capital standards, (iii)
the loans comply with applicable loan-to-value requirements, (iv) the aggregate
amount of loans made under this authority does not exceed 150.0% of unimpaired
capital and surplus and (v) the savings association is, and continues to be, in
compliance with its fully phased in capital requirements. At June 30, 1998, the
Bank's loan to one borrower limitation was $167.9 million and all loans to one
borrower were within such limitation.
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $2.7 billion. At June 30,
1998 the Bank's nonresidential real property loans totaled $488.4 million.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
- -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA.
As such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- -----------------------
The Board of Directors of the Corporation operates the Corporation as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose such
restrictions as deemed necessary to address such risk including limiting: (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company. See "Qualified
Thrift Lender Test."
54
<PAGE>
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for
bank holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
RESTRICTIONS ON ACQUISITIONS
- ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an under-
capitalized savings institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
55
<PAGE>
TAXATION
- --------
The Corporation is subject to the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Corporation and its subsidiaries, including
the Bank, file a consolidated federal income tax return based on a fiscal year
ending June 30. Consolidated taxable income is determined on an accrual basis.
Prior to July 1, 1996, savings institutions that met certain definitional tests
and other conditions prescribed by the Code were allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income if
more favorable than the bad debt deduction based on actual loss experience (i.e.
experience method). The bad debt deduction for fiscal year 1996 was computed
under the percentage of taxable income method since it yielded a greater
deduction than did the experience method.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) required recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These tax law
changes resulted in the recognition to income tax expense of additional deferred
tax liabilities of approximately $191,000 in fiscal year 1997. The recapture of
excess reserves has no effect on the Corporation's results of operations since
income taxes were provided for in prior years in accordance with SFAS No. 109,
"Accounting for Income Taxes." The recapture may be delayed for a one or two-
year period if the Corporation originates more residential loans than its
average originations in the past six years. The Corporation met the origination
requirement for fiscal year 1998, therefore delaying the recapture until the
four-year period beginning in fiscal year 1999.
In accordance with provisions of SFAS No. 109, a deferred tax liability has not
been recognized for the bad debt reserves of the Bank created in the tax years
which began prior to December 31, 1987 (the base year). At June 30, 1998, the
amount of these reserves totaled approximately $85,464,000 with an unrecognized
deferred tax liability approximating $30,853,000. Such unrecognized deferred tax
liability could be recognized in the future, in whole or in part, if (i) there
is a change in federal tax law, (ii) the Bank fails to meet certain definitional
tests and other conditions in the federal tax law, (iii) certain distributions
are made with respect to the stock of the Bank or (iv) the bad debt reserves are
used for any purpose other than absorbing bad debt losses.
During fiscal year 1998, the Internal Revenue Service completed its examination
of the Corporation's consolidated federal income tax returns through June 30,
1995. Such examination had no effect on the Corporation's results operations for
fiscal year 1998.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation (which is filed separately) and will be assessed at
a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to
3.81% of the Bank's income before tax (including subsidiaries) as reported on
the regular books and records. The Corporation also pays franchise or state
income taxes in a number of jurisdictions in which the Corporation or its
subsidiaries conduct business. For further information regarding federal income
taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated
Financial Statements.
56
<PAGE>
Item 2. Properties
- --------------------------------------------------------------------------------
At June 30, 1998, the Corporation conducted business through 34 offices in
Nebraska, 37 offices in Kansas, 21 offices in Colorado, 19 offices in Oklahoma,
50 offices in Iowa and seven offices in Arizona. See Item 1. Business - "Recent
Developments--Pending Acquisitions" for additional branches that will be added
pursuant to pending acquisitions.
At June 30, 1998, the Corporation owned the buildings for 118 of its branch
offices and leased the remaining 50 offices under leases expiring (not assuming
exercise of renewal options) between July 1998 and August 2031. The Corporation
has 143 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma,
Iowa, Arizona and Missouri. At June 30, 1998, the total net book value of land,
office properties and equipment owned by the Corporation was $111.8 million.
Management believes that the Corporation's premises are suitable for its present
and anticipated needs.
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill
Lawsuit" for other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
A Special Meeting of Stockholders was called on July 3, 1998, for holders of
record at May 14, 1998. The purpose of the meeting was as follows:
1. Approval of the First Colorado transaction. In addition, an amendment
to the Corporation's Articles of Incorporation to increase the number
of shares authorized to 70,000,000 (from 50,000,000) was required to
consummate the acquisition of First Colorado.
2. Approval of an amendment to the Corporation's Articles of
Incorporation to further increase the number of authorized shares from
70,000,000 to 120,000,000 shares. In the event the First Colorado
transaction was not approved, this amendment would increase the
authorized shares from 50,000,000 to 100,000,000 shares. This increase
in the total number of authorized shares would allow the Corporation
to meet its future needs and provide greater flexibility in responding
to advantageous business opportunities including possible future
acquisition opportunities.
3. Approval of an amendment to the Corporation's 1996 Stock Option and
Incentive Plan to increase the number of shares available for grant by
2,400,000. The purpose for this amendment was to encourage stock
ownership and to attract, retain and motivate the best available
personnel and provide incentives for such individuals to promote the
success of the Corporation.
At the Special Meeting of Stockholders on July 3, 1998, the three proposals were
approved. The proposals approved were (i) the First Colorado transaction and an
amendment to the Corporation's Articles of Incorporation to increase the number
of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii)
an amendment to further increase the number of authorized shares from 70,000,000
to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock
Option and Incentive Plan to increase the number of shares available for grant
by 2,400,000.
57
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained under "Regulation -- Restrictions on Capital
Distributions" in Part I of this Report and the section "Stock Prices and
Dividends" appearing on page 31 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
The presentation of selected financial data for the years ended June 30, 1994
through 1998 is included in the "Selected Consolidated Financial Data" section
appearing on pages 11 and 12 of the Annual Report and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1998 compared
to fiscal year 1997 and fiscal year 1997 compared to fiscal year 1996 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 13 through 32 of the Annual
Report and are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The information contained under "Business -- Market Risk" in Part I of this
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
The "Independent Auditors' Report," "Consolidated Financial Statements" and
"Notes to Consolidated Financial Statements" set forth on pages 33 through 79 of
the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
- --------------------------------------------------------------------------------
None.
58
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
________________________________________________________________________________
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
The executive officers of the Corporation and the Bank as of June 30, 1998, are
as follows:
<TABLE>
<CAPTION>
Age at
Name June 30, 1998 Current Position(s) as of June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
William A. Fitzgerald 60 Chairman of the Board and Chief Executive Officer of the
Corporation and the Bank
James A. Laphen 50 President, Chief Operating Officer and Chief Financial
Officer of the Corporation and the Bank
Gary L. Matter 53 Senior Vice President, Controller and Secretary of the
Corporation and Executive Vice President, Controller and
Secretary of the Bank
Joy J. Narzisi 43 Senior Vice President, Treasurer and Assistant Secretary
of the Corporation and Executive Vice President,
Treasurer and Assistant Secretary of the Bank
Roger L. Lewis 48 Executive Vice President and Assistant Secretary of
the Bank
Russell G. Olson 44 Executive Vice President of the Bank
Jon W. Stephenson 50 Executive Vice President of the Bank
Gary D. White 53 Executive Vice President of the Bank
</TABLE>
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the
- ---------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Heartland
Community Bankers, the board of America's Community Bankers and the Board of
Governors of the Federal Reserve System Thrift Institutions Advisory Council.
Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973.
James A. Laphen is President, Chief Operating Officer and Chief Financial
- ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania and, prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
Gary L. Matter was named Executive Vice President of the Bank and Director of
- --------------
Finance in April 1998. Mr. Matter, a Senior Vice President of the Corporation
and Controller and Secretary of the Corporation and the Bank since November
1993, joined the Bank in December 1990, as First Vice President and Controller.
Mr. Matter, a certified public accountant, was the Treasurer of Anchor Glass
Container Corporation from June 1983 to November 1990.
59
<PAGE>
Joy J. Narzisi, Treasurer and Senior Vice President of the Corporation, and
- --------------
Assistant Secretary of the Bank, joined the Bank in September 1980. Ms. Narzisi
was named Executive Vice President of the Bank and Director of Lending/Asset
Management in April 1998. Ms. Narzisi was named Senior Vice President and
Assistant Secretary of the Bank in July 1995 after first being appointed
Treasurer of the Corporation in November 1994, Treasurer of the Bank in 1991 and
First Vice President in June of 1989. Prior to 1989, Ms. Narzisi was Investment
Portfolio Manager since July 1987.
Roger L. Lewis was named Executive Vice President of the Bank in April 1998. Mr.
- --------------
Lewis, Assistant Secretary of the Bank, joined the Bank in 1986 as Vice
President and Director of Public Relations until he was named First Vice
President and Director of Marketing in March 1988. Mr. Lewis was named a Senior
Vice President in 1996. Prior to joining Commercial Federal, Mr. Lewis was Vice
President and Communications Director for Omaha National Bank.
Russell G. Olson was named Executive Vice President of the Bank and Director of
- ----------------
Commercial Banking in April 1998. Mr. Olson joined the Bank in February 1998 as
Senior Vice President pursuant to the acquisition of Liberty Financial
Corporation of West Des Moines, Iowa, where he was President and Chief Executive
Officer.
Jon W. Stephenson was appointed Executive Vice President of the Bank in April
- -----------------
1998 and serves as Director of Retail Banking. Mr. Stephenson was named Director
of Retail Banking in March 1997 and Senior Vice President in July 1995. Mr.
Stephenson joined the Bank as First Vice President in July 1994, with
responsibility for Oklahoma retail operations. Mr. Stephenson, a certified
public accountant, was President and Chief Executive Officer of Home Federal
Savings and Loan Association of Ada, Oklahoma prior to joining Commercial
Federal.
Gary D. White was named Executive Vice President and Director of Corporate
- -------------
Services in April 1998. Previous positions held include Senior Vice President
for Administration and Special Projects in February 1997, Director of
Nebraska/Iowa in July 1995, Director of Residential Mortgage Lending in May
1994, and First Vice President and Director of Human Resources in March 1984.
Mr. White joined the Bank in 1976 as an Investment Account Executive and also
has held the positions of Branch Manager and Employment Manager.
Item 11. Executive Compensation
- -------------------------------------------------------------------------------
The information under the section captioned "Proposal I -- Election of
Directors --Executive Compensation" in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders" and "Proposal I -- Election
of Directors" in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
60
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A.) The following documents are filed as part of this report:
(1.) Consolidated Financial Statements (incorporated herein by reference
from the indicated section of the Annual Report):
(a.) Independent Auditors' Report.
(b.) Consolidated Statement of Financial Condition at June 30, 1998
and 1997.
(c.) Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996
(d.) Consolidated Statement of Operations for the Years Ended June
30, 1998, 1997 and 1996
(e.) Consolidated Statement of Cash Flows for the Years Ended June
30, 1998, 1997 and 1996.
(f.) Notes to Consolidated Financial Statements.
(2.) Financial Statement Schedules:
All schedules have been omitted as the required information is not
applicable, not required or is included in the consolidated
financial statements or related notes thereto included in Item 8.
(3.) Exhibits:
3.1 Articles of Incorporation of Registrant, as amended and
restated (incorporated by reference to the Registrant's
Current Report on Form 8-K dated July 3, 1998)
3.2 Bylaws of Registrant, as amended and restated
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-00330)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K
Current Report Dated January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to
the Securities and Exchange Commission a copy of each
instrument defining the rights of holders of the
Cumulative Trust Preferred Securities and the
Subordinated Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated
June 8, 1995 (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60
589)
10.2 Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen dated June 8,
1995 (incorporated by reference to the Registrant's Form
S-4 Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement
entered into with Executive Vice Presidents, Senior Vice
Presidents and First Vice Presidents (incorporated by
reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective
July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation
Plan Effective July 1, 1994 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the
Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated Effective August
1, 1992 (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 33-60448)
61
<PAGE>
10.7 Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996 (incorporated by
reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended June 30, 1996 - File No. 1-
11515)
10.8 Employment Agreement with William A. Fitzgerald,
dated May 15, 1974, as Amended February 14, 1996
(incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended June 30,
1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association
Survivor Income Plan, as Amended February 14, 1996
(incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended June 30,
1996 - File No. 1-11515)
10.10 Employee Agreement with James A. Laphen dated June 1,
1997 (incorporated by reference to the Registrant's
Form 10-K for the fiscal year ended June 30, 1997 -
File No. 1-11515)
10.11 Commercial Federal Corporation 1996 Stock Option and
Incentive Plan as amended (incorporated by reference
to the Registrant's Form S-8 Registration Statement
No. 333-20739)
10.12 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as
Amended February 22, 1991 (incorporated by reference
to the Registrant's Form S-8 Registration Statement
No. 33-63221 and Post-Effective Amendment No. 1 to
Registration Statement No. 33 -01333 and No.
33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan (incorporated by reference to the
Registrant's Form S-8 Registration Statement No.
33- 63629)
10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan
(incorporated by reference to the Registrant's Post-
Effective Amendment to Form S-4 under cover of Form
S-8 - File No. 333-42817)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option
and Incentive Plan (incorporated by reference to the
Registrant's Post-Effective Amendment to Form S-4
File No. 333-45613)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to
Stockholders for the Fiscal Year Ended June 30, 1998
(filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
(B.) Reports on Form 8-K:
The Corporation filed no reports on Form 8-K during the three
months ended June 30, 1998.
(C.) Exhibits to this Form 10-K are attached or incorporated by
reference as stated above.
(D.) No financial statement schedules required by Regulation S-X are
filed, and as such are excluded from the Annual Report as
provided by Exchange Act Rule 14a-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1998 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
62
<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, there unto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 28, 1998 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and as of the date indicated.
Principal Executive Officer:
Date: September 28, 1998 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Principal Financial Officer:
Date: September 28, 1998 By: /s/ James A. Laphen
-------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
Principal Accounting Officer:
Date: September 28, 1998 By: /s/ Gary L. Matter
------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
Directors:
Date: September 28, 1998 By: /s/ Talton K. Anderson
----------------------
Talton K. Anderson
Director
Date: September 28, 1998 By: /s/ Michael P. Glinsky
----------------------
Michael P. Glinsky
Director
63
<PAGE>
Date: September 28, 1998 By: /s/ W. A. Krause
----------------
W. A. Krause
Director
Date: September 28, 1998 By: /s/ Robert F. Krohn
-------------------
Robert F. Krohn
Director
Date: September 28, 1998 By: /s/ Carl G. Mammel
------------------
Carl G. Mammel
Director
Date: September 28, 1998 By: /s/ Robert S. Milligan
----------------------
Robert S. Milligan
Director
Date: September 28, 1998 By: /s/ James P. O'Donnell
----------------------
James P. O'Donnell
Director
Date: September 28, 1998 By: /s/ Robert D. Taylor
--------------------
Robert D. Taylor
Director
Date: September 28, 1998 By: /s/ Aldo J. Tesi
----------------
Aldo J. Tesi
Director
64
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibits
- ------ --------------------
3.1 Articles of Incorporation of Registrant (incorporated by
reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated
by reference to the Registrant's Form S-1 Registration
Statement No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K Current
Report Dated January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to the
Securities and Exchange Commission a copy of each instrument
defining the rights of holders of the Cumulative Trust
Preferred Securities and the Subordinated Extendible Notes of
the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8,
1995 (incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William
A. Fitzgerald and James A. Laphen dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement entered
into with Executive Vice Presidents, Senior Vice Presidents and
First Vice Presidents (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1,
1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994 - File
No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996 (incorporated by reference to
the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.8 Employment Agreement with William A. Fitzgerald, dated May 15,
1974, as Amended February 14, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor Income
Plan, as Amended February 14, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.10 Employment Agreement with James A. Laphen dated June 1, 1997 (filed
herewith).
10.11 Commercial Federal Corporation 1996 Stock Option and Incentive
Plan as amended (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 333-20739)
<PAGE>
INDEX TO EXHIBITS
(Continued)
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- ------
10.12 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan, Railroad Financial Corporation 1991 Directors' Stock
Option Plan and Railroad Financial Corporation 1986 Stock
Option and Incentive Plan, as Amended February 22, 1991
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-63221 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-01333 and No.
33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan (incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-63629)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive
Plan (incorporated by reference to the Registrant's Post-Effective
Amendment to Form S-4 File No. 333-45613)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
<PAGE>
Exhibit 11
Computation of Earnings Per Share
<PAGE>
EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE
- ---------------------------------------------
Computation of Income per Common and Common Equivalent Shares:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before extraordinary items $ 67,333,318 $ 55,467,352 $ 66,195,421
Extraordinary items, net of tax benefit - (583,312) -
------------- ------------- ------------
Net Income $ 67,333,318 $ 54,884,040 $ 66,195,421
============= ============= ============
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
- ------------------------
Weighted average number of common shares
outstanding used in basic earnings per share calculation 41,101,318 40,354,486 41,061,801
============= ============= ============
Income before extraordinary items $ 1.64 $ 1.37 $ 1.61
Extraordinary items, net of tax benefit -- (.01) --
------------- ------------- ------------
Net income $ 1.64 $ 1.36 $ 1.61
============= ============= ============
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
- --------------------------
Weighted average number of common shares
outstanding used in basic earnings per share calculation 41,101,318 40,354,486 41,061,801
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities 591,908 665,681 630,576
------------- ------------- ------------
Weighted average number of common shares
outstanding used in diluted earnings per share calculation 41,693,226 41,020,167 41,692,377
============= ============= ============
Income before extraordinary items $ 1.62 $ 1.35 $ 1.59
Extraordinary items, net of tax benefit -- (.01) --
------------- ------------- ------------
Net income $ 1.62 $ 1.34 $ 1.59
============= ============= ============
- ------------------------------------------------------------------------------------------------------------------------------------
All per share data restated to reflect the three-for-two stock split effective December 15, 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 13
Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1998
<PAGE>
COMMERCIAL FEDERAL CORPORATION ANNUAL REPORT 1998
[PHOTO APPEARS HERE]
P R O V I D I N G
Q U A L I T Y
C O M M U N I T Y
B A N K I N G
S E R V I C E S
[LOGO]
<PAGE>
Corporate Profile
- -----------------
Commercial Federal focuses on achieving growth for our customers, shareholders,
employees and the communities we serve.
Commercial Federal Corporation (NYSE: CFB), parent company of Commercial
Federal Bank, a federal savings bank headquartered in Omaha, Nebraska, is one of
the largest retail financial institutions in the Midwest and the 14th largest
publicly-held thrift institution in the United States with approximately $8.9
billion in assets at June 30, 1998. Pro forma, including the acquisitions of
AmerUs Bank and First Federal of Colorado, Commercial Federal had assets as of
June 30, 1998 of $11.7 billion. Commercial Federal is a community banking
institution offering commercial and consumer banking, mortgage banking, and
trust and investment services. Commercial Federal has 2,524 employees. Since
fiscal year 1994, Commercial Federal has completed twelve strategic acquisitions
to add 126 branch offices and $3.0 billion of deposits.
Founded in 1887, Commercial Federal operates 243 retail offices* in Iowa
(76), Colorado (48), Kansas (41), Nebraska (40), Oklahoma (19), Missouri (8),
Arizona (7), Minnesota(3) and South Dakota (1). In addition, Commercial Federal
benefits from a network of CASHBOX ATMs and belongs to several regional,
national, and international electronic systems that provide customers access to
their accounts at more than 525,000 ATMs in this country and abroad.
As a complement to its savings bank, the Company has other major subsidiary
operations: Commercial Federal Mortgage Corporation, a mortgage banking
operation conducting loan origination and servicing activities (in addition to
its nine state market area, CFMC also operates mortgage lending offices in
Florida and Nevada); Commercial Federal Investment Services, Inc., which
provides a full range of brokerage and other investment services to consumers;
and Commercial Federal Insurance Corporation, offering a variety of insurance
products.
* AmerUs Bank acquisition with 47 branches was completed on July 31, 1998
First Federal of Colorado acquisition with 27 branches was completed on August
14, 1998
[MAP APPEARS HERE]
<PAGE>
Highlights Of The 1998 Fiscal Year
- ----------------------------------
During the 1998 fiscal year, your Company:
. Attained record operating income from core banking business, increasing
17.4 percent to $88.8 million;
. Completed four strategic acquisitions to add 60 branch offices, $1.6
billion in assets and $1.3 billion in deposits;
. Increased stockholders' equity by 17.5 percent and book value per common
share by 13.1 percent over last fiscal year;
. Established 100,000 new account relationships with new households - a 28.8
percent increase;
. Opened 50,100 new relationships with existing households;
. Completed a three-for-two stock split in the form of a 50 percent stock
dividend and increased the quarterly cash dividend payment;
. Achieved a 27.8 percent increase in the market price of the Company's
common stock, advancing to $31.625 on June 30, 1998, from $24.75 on June
30, 1997;
. Subsequent to June 30, 1998, completed the acquisitions of AmerUs Bank and
First Colorado Bancorp, Inc. which added 74 branch locations, approximately
$2.8 billion in assets, and approximately $2.1 billion in deposits; and
. Entered a unique banking area of supermarket branches and now operates more
than 40 supermarket locations with the completion of the AmerUs
acquisition.
Table of Contents
- -----------------
Financial Highlights.............................................. 1
Letter to Shareholders............................................ 2
Board of Directors................................................ 9
Financial Information............................................. 10
Board, Executive Officers and Senior Management................... 80
Investor Information
(inside back cover)
<PAGE>
Financial Highlights
- --------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Amounts in thousands except per share data 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOR THE YEAR:
Interest income................................................................. $ 647,618 $ 607,604
Net interest income after provision for loan and lease losses................... 215,105 198,545
Other income.................................................................... 88,265 81,133
General and administrative expenses............................................. 187,825 154,129
Federal deposit insurance special assessment.................................... -- 29,039
Amortization of intangible assets............................................... 7,470 10,974
Provision for income taxes...................................................... 40,742 30,069
Income before extraordinary items............................................... 67,333 55,467
Extraordinary items, net of tax benefit......................................... -- (583)
Net income...................................................................... 67,333 54,884
Per diluted common share (1):
Income before extraordinary items............................................ 1.62 1.35
Extraordinary items, net of tax benefit...................................... -- (.01)
Net income................................................................... 1.62 1.34
Dividends declared per common share (1)......................................... .212 .185
Return on average assets (2).................................................... .77% .67%
Return on average equity (2).................................................... 11.41% 10.77%
General and administrative expenses divided by average assets (2)............... 2.15% 2.24%
- -----------------------------------------------------------------------------------------------------------------
AT JUNE 30:
Total assets.................................................................... $8,852,640 $8,526,508
Investment and mortgage-backed securities....................................... 1,509,673 1,657,150
Loans and leases receivable, net................................................ 6,702,378 6,298,957
Deposits........................................................................ 5,363,140 5,453,572
Other borrowings................................................................ 2,712,643 2,392,925
Stockholders' equity............................................................ 643,039 547,442
Book value per common share (1)................................................. 15.28 13.51
Tangible book value per common share (1)........................................ 13.54 12.14
Stock price (1)................................................................. 31.625 24.75
Nonperforming assets to total assets............................................ .77% .83%
Net yield on interest-earning assets............................................ 2.86% 2.68%
- -----------------------------------------------------------------------------------------------------------------
Regulatory capital ratios of the Bank:
Tangible capital............................................................. 6.94% 6.60%
Core capital (Tier 1 capital)................................................ 7.04% 6.73%
Risk-based capital:
Tier 1 capital............................................................. 12.78% 12.79%
Total capital.............................................................. 13.77% 13.77%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All per share data and the stock price for fiscal year 1997 restated to
reflect the three-for-two stock split effective December 15, 1997.
(2) Return on average assets and return on average stockholders' equity for
fiscal year 1998 are 1.02% and 15.05%, respectively, excluding the
after-tax effect of merger-related and other nonrecurring charges totaling
$21.5 million. Return on average assets and return on average stockholders'
equity for fiscal year 1997 are .92% and 14.84%, respectively, excluding
the after-tax effect of the nonrecurring expenses totaling $20.7 million
associated with the Savings Association Insurance Fund (SAIF) special
assessment, the repurchase of 2,812,725 shares of the Corporation's common
stock, the extraordinary loss on early retirement of debt and the change in
income taxes for tax bad debt reserves. General and administrative expenses
divided by average assets for fiscal year 1998 is 1.86% excluding the
merger-related and other nonrecurring charges totaling $25.2 million on a
pre-tax basis. General and administrative expenses divided by average
assets for fiscal year 1997 is 1.85% excluding the nonrecurring expenses
totaling $31.3 million on a pre-tax basis associated with the SAIF special
assessment and the repurchase of 2,812,725 shares of the Corporation's
common stock.
- --------------------------------------------------------------------------------
1
<PAGE>
To Our Shareholders
- -------------------
Commercial Federal reported record operating earnings for the sixth
consecutive year, as your Company continued to emerge as one of the premier
financial institutions in the Midwest. As is shown by our financial results for
fiscal year 1998, we continued to successfully grow through profitable
acquisitions, while initiating our entry into community banking. A community
banking focus does not change the resolve of our commitment to customer service
and does not mean a reduction of current services offered, however it does mean
that we will continue to provide diversified financial products to meet the
changing needs of our customers.
Fiscal 1998 was a historical year for acquisitions, as six were announced and
four of these were completed during the year. Subsequent to June 30, we
completed the other two acquisitions. Included in the acquisitions were two
commercial banks that have helped accelerate our progress toward becoming a
community bank. By expanding our banking services with commercial and
agricultural loans, business checking, and trust services, we now have the
opportunity to deepen and strengthen our relationships with our existing
customers and to obtain new customers.
RECORD OPERATING
EARNINGS
Operating earnings are a key measure of profitability in that they reflect
the Company's ability to generate income from its core banking business, without
the effect of any one-time or nonrecurring items. Commercial Federal recorded
operating earnings of $88.8 million, or $2.13 per diluted share, for the fiscal
year ended June 30, 1998. This represents a 17 percent increase compared with
1997 fiscal year operating earnings of $75.6 million, or $1.84 per diluted
share. All per share amounts have been adjusted to reflect a three-for-two stock
split distributed on December 15, 1997, to shareholders of record as of November
28, 1997. The Company's return on average equity was 15.05 percent, while return
on average assets was 1.02 percent.
Reported net income for fiscal 1998 -- which includes the effect of
nonrecurring income and expenses -- was $67.3 million, or $1.62 per diluted
share. These results were affected primarily by merger-related and other
nonrecurring charges, which totaled $29.7 million pre-tax ($21.5 million
after-tax, or $.51 per diluted share) associated with the Company's acquisitions
of Liberty Financial Corporation, Mid Continent Bancshares, Inc. and Perpetual
Midwest Financial, Inc., and the impairment
[PHOTO APPEARS HERE]
William A. Fitzgerald, James A. Laphen
2
<PAGE>
[GRAPH APPEARS HERE]
Core Operations
($ in Millions)
Net Interest Income
($ in Millions)
in the value of certain computer systems and software pursuant to systems
conversions and Year 2000 compliance.
The reported net income for fiscal 1998 compares with reported net income
of $54.9 million, or $1.34 per diluted share, for fiscal 1997. The fiscal 1997
net income was affected by the Company's share of the one-time, industry-wide
special assessment to recapitalize the Savings Association Insurance Fund, which
amounted to an after-tax charge of $18.6 million, or $.45 per diluted share, and
an extraordinary loss on early retirement of debt and other nonrecurring
after-tax charges of $2.1 million, or $.05 per diluted share.
CORE PROFITABILITY CONTINUES TO GROW
Core profitability is closely tied to net interest income -- the difference
between what is earned on interest-earning assets and what is paid on
interest-bearing liabilities -- as well as income derived from non-interest
sources such as retail fees and charges and loan servicing fees. In fiscal 1998,
net interest income and net interest spreads continued to increase. Net interest
income, after provision for losses, for fiscal 1998 was $215.1 million, up from
$198.5 million the prior year. The net interest rate spread for fiscal 1998 was
2.59 percent, compared to 2.50 percent for fiscal 1997. These improvements were
a result of the Company's strategic management of its cost of funds and the
positive impact of acquisitions.
Growth was experienced in non-interest income during the fiscal year, as our
focus on augmenting interest income with non-interest income continued. Total
non-interest income increased to $88.3 million in fiscal 1998, compared with
$81.1 million the prior year. Our loan servicing portfolio increased to $11.7
billion, of which $7.1 billion were serviced for others.
GROWTH THROUGH EXPANSION AND ACQUISITIONS
Your Company has been following a policy of pursuing a controlled
acquisitions program that seeks opportunities not simply for the sake of growth,
but for those opportunities that immediately add value to the Company's
franchise and offer significant future earnings potential. We want to continue
to enhance the value of our franchise through disciplined acquisitions and
through the growth of our existing retail network.
3
<PAGE>
Since October 1993, when Commercial Federal implemented its current
acquisition program, the Company has more than quadrupled its number of retail
locations. As of June 30, 1998, the Company had 168 branches in six states: Iowa
(50), Kansas (37), Nebraska (34), Colorado (21), Oklahoma (19) and Arizona (7).
The Company's presence in the Midwest, with each market having low unemployment
rates and steady or increasing property values, helps make our franchise
stronger.
Commercial Federal completed four acquisitions in fiscal 1998. On January
30, 1998, the Company acquired First National Bank Shares, LTD, parent company
of First United National Bank and Trust Company headquartered in Great Bend,
Kansas. First National operated seven full-service branch offices in western
Kansas and had deposits of approximately $131 million, complementing our
existing Kansas franchise. On February 13, 1998, the Company completed the
acquisition of Liberty Financial Corporation headquartered in West Des Moines,
Iowa. Liberty operated 38 branches in Iowa and seven in Tucson, Arizona, had
deposits of approximately $570 million, and strengthened our Iowa franchise and
gave us an entry into the Arizona market. Both First National Bank and Liberty
were commercial banks with a diverse mix of assets on their balance sheets and
banking expertise to help the Company with our initial entrance into community
banking operations and services.
On February 27, 1998, the company completed the acquisition of Mid Continent
Bancshares, parent company of Mid-Continent Federal Savings Bank, headquartered
in El Dorado, Kansas, which had deposits of approximately $259 million, operated
10 full-service offices in the Wichita, Kansas area and enhanced our Kansas
retail franchise. The Company on May 29, 1998, completed the acquisition of
Perpetual Midwest Financial, Inc., parent company of Perpetual Savings Bank,
FSB, headquartered in Cedar Rapids, Iowa, adding five full-service offices in
eastern Iowa and approximately $323 million in deposits, complementing our
existing Iowa franchise.
Since the close of the 1998 fiscal year, Commercial Federal has completed two
major acquisitions that significantly strengthened our existing franchise and
provided us entry into three
[PICTURE APPEARS HERE]
Our supermarket locations offer convenient banking services.
4
<PAGE>
more states -- Minnesota, Missouri and South Dakota. On July 31, 1998, the
Company completed the acquisition of AmerUs Bank, headquartered in Des Moines,
Iowa, with 47 locations -- including 36 supermarket branches -- in Iowa (26),
Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota (1), and
deposits of approximately $959 million. On August 14, 1998, the Company
completed the acquisition of First Colorado Bancorp, Inc., parent company of
First Federal Bank of Colorado, headquartered in Lakewood, Colorado, with 27
branches in Colorado and deposits of approximately $1.2 billion.
SUBSEQUENT ACQUISITION ANNOUNCEMENT
We announced on August 14, 1998, that Commercial had entered into a
definitive agreement to acquire Midland First Financial Corporation, parent
company of Midland Bank, headquartered in Lee's Summit, Missouri. Midland Bank
operates eight branches in the Kansas City, Missouri, metropolitan area, with
approximately $352 million in deposits, and will expand and strengthen our
franchise in the Kansas City market. This pending acquisition is subject to
regulatory approvals and certain other conditions. It is expected that the
transaction will close in the first calendar quarter of 1999.
SALES CLIMB IN BRANCH NETWORK
Just as important as building our customer base through the acquisitions of
new community bank offices, is building the customer base in the offices that
already exist. Intensive marketing programs primarily aimed at two lead products
- -- checking and consumer loans -- attracted an extensive number of customers in
fiscal 1998. We realized a net gain of about 20,400 net new checking households,
which is a 20 percent net increase from the previous year. The number of new
customer households added overall in fiscal 1998 exceed fiscal 1997's
performance by 8.4 percent.
Attracting customers to our branches through effective marketing is only the
first step in providing the best service possible. Our objective, as our
customers sit down with our branch personnel, is to develop an understanding of
our customers' broader financial needs and determine how we can help serve those
needs with our array of products.
FAST FORWARD, our sales development process, has been in full force now for
two years, and has made a significant impact to our core profitability. The
emphasis of increasing the customer satisfaction
[PHOTO APPEARS HERE]
Developing an understanding of our customers financial needs.
5
<PAGE>
[GRAPH APPEARS HERE]
Gross Revenues
($ in Millions)
Efficiency Ratio
through building 100% of their financial relationships with us, and increasing
new customer relationships, has had a positive impact on our overall
performance. Commercial Federal Bank has increased its in-market net new
households (excluding acquisitions) by 10.7 percent over fiscal 1997.
During this fiscal year, cross-selling opportunities resulted in 100,000 new
relationships with new households, up 28.8 percent from the prior year. In
addition, we opened 50,100 new relationships among existing households, an
increase of 8.4 percent from the previous year. Reflecting this increased
activity was a 12.0 percent increase in average daily sales by personal bankers
throughout the retail system.
While a prime objective is excellence in sales and service, we also know
the convenience of doing business is very important to our customers. Since the
beginning of fiscal 1998 and including the AmerUs and First Colorado
acquisitions, we have more than doubled our branch network to 243 branches from
107 branches, including 36 branches in supermarkets. In addition, we have
several new branches scheduled to open in fiscal 1999. We have extended the
hours in many branches to meet customer schedules and needs, and we have
continued our remodeling project in our older branches. The overall delivery
system has other options available to our customers for accessibility to our
services outside the branch network. We have installed 45 new ATMs during this
fiscal year for a total of 256 and have more planned for fiscal 1999. Other
examples of the delivery options we have made available to serve customers
include extended-hour telephone customer assistance, our telephone bill paying
service, on-line banking and bill paying through our PC-based Home Banking
service and our interactive website at the internet address www.comfedbank.com.
We are now developing a program to have banking on the internet within the next
year.
COMMUNITY PARTNERSHIPS
As a major financial institution in many of the markets we operate in,
Commercial Federal's role in providing innovative lending and investment
products is critical to the growth and stability of the communities and families
we serve. This point is clearly evident in the area of affordable housing. With
the aging of the housing stock in many parts of the
6
<PAGE>
Midwest and the continual escalating prices for new construction, homeownership
opportunities are becoming out of reach for many families. Commercial Federal
has been involved in a unique solution to this dilemma.
The Kountze Park CROWN Affordable Housing Project involves the construction
of sixteen single-family residences on the north side of Omaha, Nebraska. Only
one of few such projects in the country, this project was set up as an incubator
for homeownership and encourages tenants to purchase their own homes within
two-to-five years. Through this process, Commercial Federal and the non-profit
developer are able to increase the number of families eligible for
homeownership. In addition to a portion of their monthly rent set aside in a
reserve account for a down payment on their future purchase, borrowers are
required to complete a homebuyer education program. Tenants are also counseled
on credit history problems, neighborhood participation, employment issues and
overall financial management.
Commercial Federal worked with Holy Name Housing Corporation, the City of
Omaha, and the Equity Fund of Nebraska on the financing of this project. In
addition to providing a permanent loan for this project, Commercial Federal also
participated through the Equity Fund as an investor in the project's Low Income
Housing Tax Credits. This is one of three rent-to-own projects Commercial
Federal has helped to finance.
[PHOTO APPEARS HERE]
Kountze Park CROWN Affordable
Housing Project in Omaha, Nebraska
GOODWILL LAWSUITS
Commercial Federal's goodwill lawsuits are still pending at this time. The
goodwill lawsuit from the Mid Continent Bancshares acquisition is now in the
discussion stage concerning a possible settlement. Commercial Federal's lawsuit
now has entered the discovery phase as both parties exchange information. We
believe it is possible that Commercial Federal's case could be heard by the
courts before the end of 1999. While the outcome of the lawsuits cannot be
predicted, there exists the potential for future benefit to our shareholders.
YEAR 2000
Year 2000 issues (Y2K) relating to technology systems and programs have
necessitated a strong commitment by your Company to ensure that our operating
systems are "Y2K compliant" well before the end of 1999. A task force, under the
direction of an executive officer and including many
7
<PAGE>
[GRAPH APPEARS HERE]
Stockholders' Equity
($ in Millions)
Total Assets
($ in Millions)
members of management and staff, is being monitored by your Board of Directors
and is proceeding on schedule. As part of the Y2K process, we are converting to
a totally new "Comprehensive Banking System" that will update our computer
system and will serve our needs for our community banking services. The
conversion to the new system will be complete by the end of March 1999.
FUTURE
As we start fiscal 1999, Commercial Federal continues to be well-capitalized
with a continued commitment to be one of the premier financial institutions in
the country. We will continue to diversify the range of services we offer and
the way that we deliver those services to our expanding customer base. We will
continue to seek opportunities for acquisitions that will increase future
earnings potential and enhance your Company's franchise value, as well as
growing our existing retail network.
The Board of Directors, management and employees of Commercial Federal are
strongly focused to enhancing our performance and thus building the value of
your investment in the Company. As you will discover throughout this report, the
Company's achievements show record results are being attained on your behalf. We
look forward to meeting the challenges ahead.
We would like to thank our fellow shareholders for your confidence,
encouragement and continued support.
/s/ William A. Fitzgerald
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen
James A. Laphen
President and
Chief Operating Officer
8
<PAGE>
Superior Performance
- --------------------
Commercial Federal's objectives for the 1998 fiscal year were to increase our
core profitability and continue to enhance the long-term value of our
shareholders' investment in the Company. We are pleased to report that we were
successful in meeting those objectives. Every Commercial Federal employee is
focused on making your Company one of the superior performing institutions in
our industry.
As you read this annual report, you will note the Company has undertaken
several new initiatives that will enhance future growth and our entrance into
community banking. Looking ahead, we will continue to seek new ways to improve
our customer service, balance growth with profitability and increase shareholder
value.
The Board of Directors,
Management & Employees of Commercial Federal
[PHOTO APPEARS HERE]
Board of Directors: starting from left (standing) Carl G. Mammel, Aldo J. Tesi,
Sharon G. Marvin, William A. Fitzgerald, James P. O'Donnell, Michael P. Glinksy,
Robert D. Taylor, Robert F. Krohn, (seated) W. A. Krause, Robert S. Milligan,
Talton K. Anderson, Michael T. O'Neil, M.D.
9
<PAGE>
Financial Information
- ---------------------
Selected Consolidated Financial Data............................... 11
Management's Discussion and Analysis............................... 13
Management's Report on Internal Controls........................... 33
Independent Auditors' Report....................................... 33
Consolidated Statement of Financial Condition...................... 34
Consolidated Statement of Operations............................... 35
Consolidated Statement of Stockholders' Equity..................... 37
Consolidated Statement of Cash Flows............................... 39
Notes to Consolidated Financial Statements......................... 41
10
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
- -------------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1998 1997(1) 1996(1) 1995(1) 1994(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income.................................... $ 647,618 $ 607,604 $ 575,733 $ 522,459 $ 446,547
Interest expense................................... 417,188 396,775 378,580 341,342 284,073
---------- ---------- ---------- ---------- ----------
Net interest income................................ 230,430 210,829 197,153 181,117 162,474
Provision for loan and lease losses................ (15,325) (12,284) (7,211) (7,530) (8,813)
Loan servicing fees................................ 38,666 41,366 36,895 32,838 26,968
Retail fees and charges............................ 24,266 22,218 17,643 13,592 12,278
Real estate operations............................. 605 980 59 1,500 (1,493)
Gain (loss) on sales of loans...................... 2,745 1,924 1,941 (906) 3,332
Gain (loss) on sales of securities, net............ 2,505 510 87 (186) 409
Gain on sales of loan servicing rights............. 380 -- 452 5,480 5,929
Other operating income............................. 19,098 14,135 11,691 9,772 8,886
General and administrative expenses................ 187,825 183,168 149,565 132,424 117,564
Amortization of intangible assets.................. 7,470 10,974 10,209 11,285 15,103
Valuation adjustment and accelerated
amortization of goodwill........................ -- -- -- 21,357 52,703
---------- ---------- ---------- ---------- ----------
Income before income taxes,
extraordinary items and cumulative
effects of changes in accounting principles..... 108,075 85,536 98,936 70,611 24,600
Provision for income taxes........................ 40,742 30,069 32,741 28,972 20,146
---------- ---------- ---------- ---------- ----------
Income before extraordinary
items and cumulative effects of
changes in accounting principles................ 67,333 55,467 66,195 41,639 4,454
Extraordinary items, net (2)....................... -- (583) -- -- --
Cumulative effects of changes in
accounting principles, net (3).................. -- -- -- -- 6,733
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 67,333 $ 54,884 $ 66,195 $ 41,639 $ 11,187
========== ========== ========== ========== ==========
Diluted earnings per share (4):
Income before extraordinary
items and cumulative effects of
changes in accounting principles.............. $ 1.62 $ 1.35 $ 1.59 $ 1.02 $ .11
Extraordinary items, net (2).................... -- (.01) -- -- --
Cumulative effects of changes in
accounting principles (3)..................... -- -- -- -- .16
---------- ---------- ---------- ---------- ----------
Net income......................................... $ 1.62 $ 1.34 $ 1.59 $ 1.02 $ .27
---------- ---------- ---------- ---------- ----------
Dividends declared per common share (4)............ $ .212 $ .185 $ .178 $ -- $ --
---------- ---------- ---------- ---------- ----------
Weighted average diluted common
shares outstanding (4).......................... 41,693,226 41,020,167 41,692,377 40,905,351 41,037,013
========== ========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
Other data:
Net interest rate spread........................ 2.59% 2.50% 2.41% 2.35% 2.49%
Net yield on interest-earning assets............ 2.79% 2.71% 2.67% 2.58% 2.67%
Return on average assets (5).................... .77% .67% .86% .57% .17%
Return on average equity (5).................... 11.41% 10.77% 13.89% 10.27% 2.99%
Dividend payout ratio (6)....................... 13.09% 13.81% 11.19% -- --
Total number of branches at end of period....... 168 164 150 131 112
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial Data (continued)
- --------------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1998 1997(1) 1996(1) 1995(1) 1994(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets....................................... $ 8,852,640 $ 8,526,508 $ 7,847,690 $ 7,642,519 $ 6,849,006
Investment securities (7).......................... 595,387 549,499 449,336 443,462 412,533
Mortgage-backed securities (8)..................... 914,286 1,107,651 1,280,021 1,509,973 1,529,205
Loans and leases receivable, net (9)............... 6,702,378 6,298,957 5,642,472 5,228,907 4,460,741
Intangible assets.................................. 73,145 55,408 41,435 38,644 71,641
Deposits........................................... 5,363,140 5,453,572 5,224,331 4,844,242 4,407,966
Advances from Federal Home Loan Bank............... 2,271,772 1,597,326 1,517,490 1,897,352 1,652,956
Securities sold under agreements to
repurchase...................................... 334,294 639,294 380,755 208,373 157,432
Other borrowings................................... 106,577 156,305 87,019 79,399 89,142
Stockholders' equity............................... 643,039 547,442 517,725 434,970 375,115
Book value per common share (4).................... 15.28 13.51 12.24 10.67 9.23
Tangible book value per common share (4) (10)...... 13.54 12.14 11.26 9.73 7.47
Regulatory capital ratios of the Bank:
Tangible capital................................ 6.94% 6.60% 6.49% 5.64% 5.08%
Core capital (Tier 1 capital)................... 7.04% 6.73% 6.68% 5.90% 5.82%
Risk-based capital:
Tier 1 capital................................ 12.78% 12.79% 12.65% 12.49% 12.38%
Total capital................................. 13.77% 13.77% 13.66% 13.59% 13.16%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During fiscal year 1998, the Corporation consummated the acquisitions of
Liberty Financial Corporation, Mid Continent Bancshares, Inc. and Perpetual
Midwest Financial, Inc. which were accounted for as pooling of interests
and, accordingly, the Corporation's historical consolidated financial
statements were restated for all periods prior to these acquisitions to
include the accounts and results of operations of these financial
institutions.
(2) Represents the loss on early retirement of debt, net of income tax
benefits.
(3) Represents the cumulative effect of the change in the method of accounting
for income taxes less the cumulative effect of the changes in accounting
for postretirement benefits, net of income tax benefit.
(4) On November 17, 1997, the Board of Directors of the Corporation authorized
a three-for-two stock split to be effected in the form of a 50 percent
stock dividend to stockholders of record on November 28, 1997. Par value
remained at $.01 per share. The stock dividend was distributed on December
15, 1997. Fractional shares resulting from the stock split were paid in
cash. All per share data and stock prices for all periods presented prior
to December 15, 1997, have been adjusted on a retroactive basis to reflect
the effect of this three-for-two stock split.
(5) Return on average assets (ROA) and return on average stockholders' equity
(ROE) for fiscal year 1998 are 1.02% and 15.05%, respectively, excluding
the after-tax effect of merger-related and other nonrecurring charges
totaling $21.5 million. ROA and ROE for fiscal year 1997 are .92% and
14.84%, respectively, excluding the after-tax effect of the nonrecurring
expenses totaling $20.7 million associated with the Savings Association
Insurance Fund (SAIF) special assessment, the repurchase of 2,812,725
shares of the Corporation's common stock, the extraordinary loss on early
retirement of debt and the change in income taxes for tax bad debt
reserves. ROA and ROE for fiscal year 1996 are .91% and 14.78%,
respectively, excluding the after-tax effect of the nonrecurring expenses
totaling $4.2 million associated with the Railroad Financial Corporation
merger, the SAIF special assessment (incurred in fiscal year 1996 as a
result of the pooling of interests accounting method applied to the Mid
Continent Bancshares, Inc. merger) and the Corporation's 1995 proxy
contest. ROA and ROE for fiscal year 1995 are .86% and 15.54%,
respectively, excluding the accelerated amortization of goodwill totaling
$21.4 million. ROA and ROE for fiscal year 1994 are .76% and 12.94%,
respectively, excluding the after-tax effect of the intangible assets
valuation adjustment and the cumulative effects of changes in accounting
principles totaling $43.9 million and $6.7 million, respectively.
(6) Represents dividends declared per share divided by net income per dilutive
share. The Corporation established a quarterly common stock cash dividend
policy on October 4, 1995, and paid its first dividend on October 31, 1995.
(7) Includes investment securities available for sale totaling $140.4 million,
$91.0 million, $120.0 million, $73.8 million and $101.9 million,
respectively, at June 30, 1998, 1997, 1996, 1995 and 1994.
(8) Includes mortgage-backed securities available for sale totaling $165.7
million, $277.7 million, $363.2 million, $157.2 million and $223.8 million,
respectively, at June 30, 1998, 1997, 1996, 1995 and 1994.
(9) Includes loans held for sale totaling $289.7 million, $83.4 million, $105.0
million, $136.6 million and $195.0 million, respectively, at June 30, 1998,
1997, 1996, 1995 and 1994.
(10) Calculated by dividing stockholders' equity, reduced by the amount of
intangible assets, by the number of shares of common stock outstanding at
the respective dates.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
GENERAL
Commercial Federal Corporation (the Corporation) is a unitary
non-diversified savings and loan holding company whose primary asset is
Commercial Federal Bank, a Federal Savings Bank (the Bank), which is one of the
largest financial institutions in the Midwest and the 14th largest publicly held
thrift holding company in the United States. The Bank is evolving from a thrift
institution into a community banking institution offering commercial and
consumer banking, mortgage banking, and trust and investment services. The
Corporation completed four acquisitions in fiscal year 1998 and subsequent to
June 30, 1998, completed two other acquisitions and announced another pending
acquisition. Two of these fiscal year 1998 acquisitions were commercial banks
that have allowed the Bank to expand its banking services with commercial and
agricultural loans, business checking, equipment leasing and trust services. The
Bank has now moved from being primarily a single-family residential lender to a
full service banking institution with branches not only in traditional locations
but also, nontraditional locations such as in supermarkets and convenience
stores, more ATM outlets and expanded services in telephone bill paying and
Internet banking.
At June 30, 1998, the Corporation operated 168 branches with 50 located in
Iowa, 37 in Kansas, 34 in Nebraska, 21 primarily in metropolitan Denver,
Colorado, 19 in Oklahoma and seven in Arizona. Throughout its 111 year history,
the Corporation has emphasized customer service. To serve its customers, the
Corporation conducts community banking operations through its branch network, as
well as loan origination activities through its branches, offices of its
wholly-owned mortgage banking subsidiary and a nationwide correspondent network
of mortgage loan originators. The Corporation also provides insurance and
securities brokerage and other retail financial services.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family residential, consumer, commercial real
estate, business lending and agribusiness loans) and providing customers with a
full array of financial products and a high level of customer service. As part
of its long-term strategic plan, the Corporation intends to continue to expand
its operations within its market areas through direct marketing efforts aimed at
increasing market share, branch expansions, and opening additional branches. The
Corporation's retail strategy will continue to be centered on attracting new
customers and selling both new and existing customers multiple products and
services. Additionally, the Corporation will continue to build and leverage an
infrastructure designed to increase noninterest income.
Complementing its strategy of internal growth, the Corporation continues to
grow its current franchise through an ongoing program of selective acquisitions
of other financial institutions. Acquisition candidates will be selected based
on the extent to which the candidates can expand the Corporation's retail
presence in both new and underserved markets and enhance the Corporation's
existing retail network. Accordingly, during fiscal year 1998, the Corporation
consummated the acquisitions of four financial institutions: First National Bank
Shares, LTD (First National), Liberty Financial Corporation (Liberty), Mid
Continent Bancshares, Inc. (Mid Continent) and Perpetual Midwest Financial, Inc.
(Perpetual). The accounts and results of operations of First National are
reflected in the Corporation's consolidated financial statements beginning
January 30, 1998 since this acquisition was accounted for as a purchase. The
Liberty, Mid Continent and Perpetual acquisitions were accounted for under the
pooling of interests method and, accordingly, the Corporation's historical
consolidated financial statements were restated for all periods prior to those
acquisitions to include the accounts and results of operations of these
financial institutions.
Net income for fiscal year 1998 was $67.3 million, or $1.62 per diluted
share, compared to net income of $54.9 million and $66.2 million, respectively,
for fiscal years 1997 and 1996, or $1.34 per diluted share and $1.59 per diluted
share, respectively. Fiscal year 1998 net income was reduced by an after-tax
charge of $21.5 million, or $.51 per diluted share, ($29.7 million pre-tax),
associated with merger-related expenses and other nonrecurring charges. The
Corporation incurred these expenses due to the Liberty, Mid Continent and
Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. Fiscal year 1997 net income was affected by an
after-tax charge of $18.6 million, or $.45 per diluted share, ($29.0 million
pre-tax), as a result of the Corporation's share of a one-time industry-wide
special assessment to recapitalize the Savings Association Insurance Fund
(SAIF), and after-tax charges totaling $2.1 million ($.05 per diluted share)
primarily associated with the expenses incurred in repurchasing 2,812,725 shares
of the Corporation's common stock and the extraordinary loss on early retirement
of debt. Fiscal year 1996 operations also include $2.9 million ($.07 per diluted
share) of after-tax merger and transition related expenses from the Railroad
Financial Corporation (Railroad) acquisition accounted for as a pooling of
interests.
13
<PAGE>
Subsequent to June 30, 1998, the Corporation completed the acquisitions of
two major financial institutions and entered into a definitive agreement to
acquire one other financial institution. On July 31, 1998, the Corporation
consummated the acquisition of AmerUs Bank with 47 branches in Iowa, Missouri,
Nebraska, Kansas, Minnesota and South Dakota and on August 14, 1998, consummated
the acquisition of First Colorado Bancorp, Inc. with 27 branches in Colorado.
These two completed acquisitions added to the Corporation approximately $2.8
billion in total assets and approximately $2.1 billion in deposits. Also on
August 14, 1998, the Corporation entered into a definitive agreement to acquire
Midland First Financial Corporation, parent company of a privately-held
commercial bank headquartered in Lee's Summit, Missouri that operates eight
branches in the greater Kansas City area. These completed and pending
acquisitions provide the Corporation entry into three more states, access to
supermarket branches and significant expansion of its presence in the
metropolitan areas of Denver and Kansas City, Missouri.
This management's discussion and analysis of financial condition and
results of operations contains or incorporates by reference forward-looking
statements that involve inherent risks and uncertainties. The Corporation
cautions readers that a number of important factors could cause actual results
to differ materially from those in the forward-looking statements. Those factors
include fluctuations in interest rates, inflation, government regulations, the
progress of integrating acquisitions, economic conditions, adequacy of allowance
for credit losses, the costs or difficulties associated with the resolution of
Year 2000 issues on computer systems greater than anticipated, technology
changes and competition in the geographic and business areas in which the
Corporation conducts its operations. These statements are based on management's
current expectations. Actual results in future periods may differ materially
because of those currently expected because of various risks and uncertainties.
ACQUISITIONS DURING FISCAL YEAR 1998
On January 30, 1998, the Corporation consummated its acquisition of First
National, parent company of First United National Bank and Trust Company, a
commercial bank headquartered in Great Bend, Kansas. Under the terms of the
merger agreement, all of the outstanding shares of First National's common stock
were exchanged for 992,842 shares of the Corporation's common stock. Based on
the Corporation's closing price on January 30, 1998, the exchange of the
Corporation's common stock resulted in a total aggregate value approximating
$32.3 million. At January 30, 1998, before purchase accounting adjustments,
First National had assets of approximately $147.8 million, deposits of
approximately $131.3 million and stockholders' equity of approximately $12.0
million. First National operated seven branches located in Kansas. This
acquisition was accounted for as a purchase.
On February 13, 1998, the Corporation consummated its acquisition of
Liberty, a privately held commercial bank and thrift holding company. Pursuant
to the terms of the merger agreement, all outstanding shares of Liberty's common
stock were exchanged for 4,015,555 shares of the Corporation's common stock for
total consideration of approximately $135.3 million. Liberty operated 38
branches in Iowa and seven in the metropolitan area of Tucson, Arizona and at
January 31, 1998, had assets of approximately $658.1 million, deposits of
approximately $569.8 million and stockholders' equity of approximately $50.1
million. This acquisition was accounted for as a pooling of interests.
On February 27, 1998, the Corporation consummated its acquisition of Mid
Continent, parent company of Mid-Continent Federal Savings Bank. Pursuant to the
terms of the merger agreement, all outstanding shares of Mid Continent's common
stock were exchanged for 2,641,945 shares of the Corporation's common stock for
total consideration of approximately $87.0 million. Mid Continent operated ten
branches located in Kansas and at February 27, 1998, had total assets of
approximately $405.7 million, deposits of approximately $258.6 million and
stockholders' equity of approximately $41.2 million. This acquisition was
accounted for as a pooling of interests.
On May 29, 1998, the Corporation consummated its acquisition of Perpetual,
parent company of Perpetual Savings Bank, FSB. Under the terms of the merger
agreement, the Corporation acquired in a tax-free reorganization all outstanding
shares of Perpetual's common stock in exchange for 1,717,721 shares of the
Corporation's common stock. Based on the Corporation's closing price on May 29,
1998, this transaction had an aggregate value of approximately $57.2 million. At
May 29, 1998, Perpetual had total assets of approximately $412.2 million,
deposits of approximately $323.4 million, and stockholders' equity of
approximately $36.0 million. Perpetual operated five branches located in Iowa.
This acquisition was accounted for as a pooling of interests.
SUBSEQUENT EVENTS - COMPLETED ACQUISITIONS
On July 31, 1998, the Corporation consummated its acquisition of AmerUs
Bank (AmerUs), a wholly-owned subsidiary of AmerUs Group Co. Under the terms of
the stock purchase agreement, the Corporation acquired through a taxable
acquisition all of the outstanding shares of the common stock of AmerUs for
total consideration of
14
<PAGE>
approximately $178.3 million. Such consideration consisted of (i) certain assets
retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One single-
family residential mortgage loans and a receivable for income tax benefits)
totaling approximately $85.0 million, (ii) cash (as adjusted per the agreement)
totaling approximately $53.3 million, and (iii) a one-year promissory note for
$40.0 million bearing interest, adjusted monthly, at 150 basis points over the
one-year Treasury bill rate. AmerUs was a federally chartered savings bank
headquartered in Des Moines, Iowa and operated 47 branches in Iowa (26),
Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota (1). At
July 31, 1998, before purchase accounting adjustments, AmerUs had total assets
of approximately $1.3 billion, deposits of approximately $950.0 million and
stockholder's equity of approximately $84.8 million. This acquisition will be
accounted for as a purchase.
On August 14, 1998, the Corporation consummated its acquisition of First
Colorado Bancorp, Inc. (First Colorado). Under the terms of the agreement, the
Corporation acquired in a tax-free reorganization all 18,564,766 outstanding
shares of First Colorado's common stock in exchange for 18,278,789 shares of its
common stock. Based on the Corporation's closing stock price of $26.375 at
August 14, 1998, the total consideration for this acquisition, including cash
paid for fractional shares, approximated $482.2 million. An additional
requirement of the transaction with First Colorado was the issuance of 1,400,000
shares of First Colorado common stock immediately prior to the consummation of
the merger. Such requirement was necessary to cure the taint on the treasury
stock of First Colorado so that this transaction could be accounted for as a
pooling of interests. These shares offered directly by First Colorado resulted
in net cash proceeds totaling $32.5 million. First Colorado, headquartered in
Lakewood, Colorado, was a unitary savings and loan holding company and the
parent company of First Federal Bank of Colorado, a federally chartered stock
savings bank that operated 27 branches located in Colorado, with 23 branches
located in the Denver metropolitan area and four in Colorado's western slope
region. At July 31, 1998, on a pro forma basis including the net proceeds of
$32.5 million from the private placement of 1,400,000 shares, First Colorado had
assets of approximately $1.6 billion, deposits of approximately $1.2 billion and
stockholders' equity of approximately $254.7 million. This acquisition will be
accounted for as a pooling of interests.
MERGER EXPENSES AND OTHER
NONRECURRING CHARGES
During fiscal year 1998, the Corporation incurred merger expenses and other
nonrecurring charges totaling $29.7 million due to the Liberty, Mid Continent
and Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The $29.7 million recorded in fiscal year 1998
consists of $25.4 million in merger-related expenses and $4.3 million related to
the accelerated amortization of certain computer systems and software of the
Corporation necessitated by Year 2000 compliance and the related planned systems
conversions. The Corporation finalized its plans for systems conversions and
Year 2000 compliance in fiscal year 1998 resulting in a reduction in the
estimated useful lives of such computer systems and software.
The merger-related expenses totaling $25.4 million consists of $9.0 million
in transition costs as a result of the three acquisitions, $7.0 million in
personnel expenses for severance, retention and other employee related costs,
$4.9 million in costs to combine operations and conform certain accounting
practices and $4.5 million in additional loss reserves primarily to conform the
original loan portfolios and leasing operations to the reserve policies of the
Corporation.
SUBSEQUENT EVENT - PENDING ACQUISITION
On August 14, 1998, the Corporation entered into a reorganization and
merger agreement with Midland First Financial Corporation (Midland), parent
company of Midland Bank. Under the terms of the agreement, the Corporation will
acquire in a taxable acquisition all of the outstanding shares of Midland's
common stock. The total purchase consideration of this pending acquisition is
$83.0 million, including cash to pay off existing Midland debt totaling $5.6
million, the retirement of preferred stock of both Midland and Midland Bank
totaling $11.6 million and $810,000 for advisor fees. If under certain
conditions this transaction is terminated by Midland a breakup fee of $2.5
million would be payable to the Corporation by Midland. Midland Bank is a
privately-held commercial bank headquartered in Lee's Summit, Missouri that
operates eight branches in the greater Kansas City area. At June 30, 1998,
Midland had total assets of approximately $397.0 million, deposits of
approximately $352.0 million and stockholders' equity of approximately $25.7
million. This pending acquisition, approved by Midland's shareholders, is
subject to receipt of regulatory approvals and other conditions, and is expected
to close during the quarter ending March 31, 1999.
STOCK SPLITS
On November 17, 1997, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders of record on November 28, 1997. Par value of the common stock
remained at $.01 per share. The stock dividend was
15
<PAGE>
distributed on December 15, 1997, and totaled 10,865,530 shares of common stock.
All references to the number of shares, per share amounts and stock prices for
all periods presented have been adjusted on a retroactive basis to reflect the
effect of this stock split. The Board of Directors also increased the
Corporation's quarterly cash dividend from $.0467 per common share after
adjusting for the three-for-two stock split to $.055 per common share
representing an increase of over 17 percent.
Also, on November 18, 1996, the Board of Directors declared a three-for-two
stock split effected in the form of a 50 percent stock dividend to stockholders
of record on December 31, 1996. This stock dividend, which was distributed on
January 14, 1997, totaled 10,745,214 shares of common stock (7,163,476 shares
before adjusted for the three-for-two stock split effective December 15, 1997).
SPECIAL MEETING OF STOCKHOLDERS
At the Special Meeting of Stockholders on July 3, 1998, held primarily to
act upon the First Colorado merger, three proposals were approved. The proposals
approved were (i) the First Colorado transaction and an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock from 50,000,000 to 70,000,000 shares, (ii) an amendment
to further increase the number of authorized shares from 70,000,000 to
120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock Option
and Incentive Plan to increase the number of shares available for grant by
2,400,000.
ASSET/LIABILITY MANAGEMENT
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference, or mismatch, between the
amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. Consequently, when
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-bearing
liabilities. This mismatch in the maturity and interest rate sensitivity of
assets and liabilities is commonly referred to as the "gap." A gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
during a specified period exceeds the amount of interest rate sensitive
liabilities maturing or repricing during such period, and is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
during a specified period exceeds the amount of interest rate assets maturing or
repricing during such period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, and during a
period of declining interest rates, a negative gap would result in an increase
in net interest income while a positive gap would adversely affect net interest
income.
The Corporation has historically invested in interest-earning assets that
have a longer duration than its interest-bearing liabilities. The mismatch in
duration of the interest-sensitive liabilities indicates that the Corporation is
exposed to interest rate risk. In a rising rate environment, in addition to
reducing the market value of long-term interest-earning assets, liabilities will
reprice faster than assets, therefore decreasing net interest income. To
mitigate this risk, the Corporation has placed a greater emphasis on
shorter-term higher yielding assets that reprice more frequently in reaction to
interest rate movements. In addition, the Corporation has continued its
concentration of adjustable-rate assets as a percentage of total assets to
benefit the one-year cumulative gap as such adjustable-rate assets reprice and
are more responsive to the sensitivity of more frequently repricing
interest-bearing liabilities.
In connection with its asset/liability management program, the Corporation
has interest rate swap agreements with other counterparties under terms that
provide an exchange of interest payments on the outstanding notional amount of
the swap agreement. Such agreements are primarily used to artificially lengthen
the maturity of certain deposit liabilities. In accordance with these
arrangements, the Corporation pays fixed rates and receives variable rates of
interest according to a specified index. The Corporation increased its level of
such swap agreements to a notional principal amount of $215.0 million at June
30, 1998, from balances of $135.0 million and $10.0 million, respectively, at
June 30, 1997 and 1996. For fiscal years 1998, 1997 and 1996, the Corporation
recorded $1.9 million, $916,000 and $2.3 million, respectively, in net interest
expense from its interest rate swap agreements. The swap agreements have
maturities ranging from March 2000 to June 2001. See Note 16 to the Consolidated
Financial Statements for additional information on the Corporation's swap
agreements.
The following table represents management's projected maturity and
repricing of the Bank's interest-earning assets and interest-bearing liabilities
on an unconsolidated basis at June 30, 1998. The amounts of interest-earning
assets, interest-bearing liabilities and interest rate risk management
instruments presented which mature or reprice within a particular period were
determined in accordance with the contractual terms of such assets, liabilities
and interest rate swap agreements, except (i) adjustable-rate loans are
16
<PAGE>
included in the period in which they are first scheduled to adjust and not in
the period in which they mature and are also adjusted for prepayment rates
ranging from 0.5% to 25.0% for single-family residential loans and mortgage-
backed securities, (ii) prepayment rates ranging from 0.3% to 38.2%, based on
the contractual interest rate, were utilized for fixed-rate, single-family
residential loans and mortgage-backed securities, (iii) prepayment rates ranging
from 0.2% to 13.0%, based on the contractual interest rate, were utilized for
commercial real estate and multi-family loans and a prepayment rate of 28.5% was
utilized for consumer loans, (iv) passbook deposits and negotiable order of
withdrawal ("NOW") accounts totaling $713.2 million, all of which have fixed-
rates, are assumed to mature according to the decay rates as defined by
regulatory guidelines, which at June 30, 1998, ranged from 14.0% to 32.0%, (v)
non-indexed money market accounts totaling $443.7 million are assumed to reprice
or mature according to the decay rates as defined by regulatory guidelines,
which at June 30, 1998, was 31.0%, and (vi) indexed money market rate deposits
totaling $679.8 million are deemed to reprice or mature within the one-year
category, even though a certain portion of these deposits is not likely to be
interest rate sensitive. Management believes that these assumptions approximate
actual experience and considers such assumptions reasonable; however, the
interest rate sensitivity of the Bank's interest-earning assets and interest-
bearing liabilities could vary substantially if different assumptions were used
or actual experience differs from the assumptions used, such as actual
prepayment experience varying from estimates, early deposit withdrawals, and
caps on adjustable-rate loans and mortgage-backed securities.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Within 91 Days Over 1 3 Years
(Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate
mortgage loans (1) (2)....... $ 465,480 $ 455,378 $ 1,004,865 $1,390,388 $3,316,111
Other loans (2) (3)............ 1,369,693 1,585,815 874,266 502,693 4,332,467
Investments (4)................ 230,178 53,889 51,192 396,021 731,280
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets........ 2,065,351 2,095,082 1,930,323 2,289,102 8,379,858
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits............... 776,979 249,044 437,592 594,452 2,058,067
Other time deposits............ 888,426 1,632,744 771,666 100,389 3,393,225
Borrowings (5)................. 1,163,006 748,924 691,799 8,974 2,612,703
Impact of interest rate
swap agreements.............. (215,000) -- 215,000 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities... 2,613,411 2,630,712 2,116,057 703,815 8,063,995
- ---------------------------------------------------------------------------------------------------------------------------------
Gap position...................... (548,060) (535,630) (185,734) 1,585,287 315,863
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative gap position........... $ (548,060) $(1,083,690) $(1,269,424) $ 315,863 $ 315,863
- ---------------------------------------------------------------------------------------------------------------------------------
Gap as a percentage of the
Bank's total assets............ (6.20)% (6.06)% (2.10)% 17.93% 3.57%
Cumulative gap as a percentage
of the Bank's total assets..... (6.20)% (12.26)% (14.36)% 3.57% 3.57%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Such amounts are, as applicable, before deductions for unamortized discounts
and premiums, loans in process, deferred loan fees and allowance for loan
losses.
(3) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed
or adjustable interest rates.
(4) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of
$119.4 million.
(5) Includes advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and other borrowings.
- --------------------------------------------------------------------------------
17
<PAGE>
The Bank's one-year cumulative gap is a negative $1.084 billion, or 12.26%
of the Bank's total assets of $8.838 billion at June 30, 1998, contrasted to a
negative $664.7 million, or 9.37% of total assets at June 30, 1997. The interest
rate risk policy of the Bank authorizes a liability sensitive one-year
cumulative gap not to exceed 10.0%. Such exception to the Bank's interest rate
risk policy regarding the negative gap exceeding 10.0% was approved after noting
that, on a pro forma basis, the projected one-year cumulative gap is within
policy guidelines considering the AmerUs and First Colorado acquisitions
consummated in July and August 1998.
RESULTS OF OPERATIONS
Net income for fiscal year 1998 was $67.3 million, or $1.62 per diluted
share ($1.64 per basic share). These results compare to net income for fiscal
year 1997 of $54.9 million, or $1.34 per diluted share ($1.36 per basic share),
which includes an after-tax loss on early retirement of debt totaling $583,000,
or $.01 loss per diluted share, and to net income for fiscal year 1996 of $66.2
million, or $1.59 per diluted share ($1.61 per basic share).
The Corporation's emphasis on increasing non-interest income, consumer
lending and the promotion of community banking financial services, along with
the Corporation's growth through acquisitions, continues to have positive
effects on the Corporation's core operations. Defined as operating income before
income taxes excluding (i) gains on nonrecurring sales of mortgage-backed
securities and loan servicing rights and (ii) amortization expense of intangible
assets, core earnings totaled $142.4 million for fiscal year 1998 compared to
$127.3 million and $114.1 million, respectively, for fiscal years 1997 and 1996.
On a percentage basis, core earnings for fiscal year 1998 increased 11.9% over
fiscal year 1997, up from the 11.5% increase of fiscal year 1997 over 1996. This
increase in core earnings resulted primarily from increases in net interest
income, retail fees and charges and other non-interest operating income.
The increase in net income for fiscal year 1998 compared to fiscal year
1997 is primarily due to the $29.0 million nonrecurring Federal deposit
insurance assessment recorded in fiscal year 1997, a net increase of $16.6
million in net interest income after provision for losses, an increase of $7.1
million in total other operating income, a net reduction of $3.5 million in
amortization expense of intangible assets and the extraordinary loss on early
retirement of debt totaling $583,000 recorded in fiscal year 1997. These
increases to net income were partially offset by net increases of $33.7 million
in general and administrative expenses and $10.7 million in the provision for
income taxes. Included in the $33.7 million increase in general and
administrative expenses are merger-related expenses and other nonrecurring
charges totaling $25.2 million.
The decrease in net income for fiscal year 1997 compared to fiscal year
1996 is primarily due to the net change of $28.0 million in the Federal deposit
insurance special assessment, an increase of $5.6 million in general and
administrative expenses, an increase of $765,000 in amortization expense of
intangible assets and the extraordinary loss on early retirement of debt
totaling $583,000. These decreases to net income were partially offset by net
increases of $8.6 million in net interest income after provision for losses, a
net increase of $12.4 million in total other income and a net reduction in the
provision for income taxes totaling $2.7 million.
NET INTEREST INCOME AND INTEREST RATE SPREAD
Net interest income was $230.4 million for fiscal year 1998 compared to
$210.8 million for fiscal year 1997, an increase of $19.6 million, or 9.3%; and
compared to $197.2 million for fiscal year 1996. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.70%, 2.55% and 2.53%,
respectively, at June 30, 1998, 1997 and 1996, an increase of 15 basis points
comparing the interest rate spread at June 30, 1998, to the interest rate spread
at June 30, 1997, and an increase of two basis points comparing the spread at
June 30, 1997, to June 30, 1996. In addition, during the fiscal years 1998, 1997
and 1996, interest rate spreads were 2.59%, 2.50% and 2.41%, respectively,
representing an increase of nine basis points comparing the interest rate spread
during fiscal year 1998 to fiscal year 1997 and comparing the spread during
fiscal year 1997 to 1996. The net yield on interest-earning assets during fiscal
years 1998, 1997 and 1996 was 2.79%, 2.71% and 2.67%, respectively, representing
an increase of eight basis points comparing fiscal year 1998 to 1997 and an
increase of four basis points comparing fiscal year 1997 to 1996.
The net interest rate spread increased nine basis points during fiscal year
1998 to 2.59% from 2.50% for fiscal year 1997. The reduction in interest rates
on interest-bearing liabilities (5.25% for fiscal year 1998 compared to 5.30%
for fiscal year 1997), the increase in interest rates on interest-earning assets
(7.84% for fiscal year 1998 compared to 7.80% for fiscal year 1997), the
acquisitions of First National on January 31, 1998, Heritage Financial, Inc.
(Heritage) on October 1, 1996 and Investors Federal Savings (Investors) on May
1, 1997, and internal growth have contributed to the improvements in the
interest rate spreads for the current fiscal year compared to 1997. Net interest
income increased over fiscal 1997 primarily due to average interest-earning
assets increasing $479.4 million to $8.266 billion for fiscal year 1998 compared
to $7.786 billion for fiscal year 1997, the reduction in interest rates on
interest-bearing liabilities and the increase in interest rates on
interest-earning assets over the respective
18
<PAGE>
fiscal years. Such increases were partially offset by a net increase of $465.2
million in average interest-bearing liabilities to $7.952 billion for fiscal
year 1998, compared to $7.487 billion for fiscal year 1997. The future trend in
interest rate spreads and net interest income will be dependent upon such
factors as the composition and size of the Corporation's interest-earning assets
and interest-bearing liabilities, the interest rate risk exposure of the
Corporation and the maturity and repricing activity of interest-sensitive assets
and liabilities, as influenced by changes in and levels of both short-term and
long-term market interest rates.
The net interest rate spread increased nine basis points during fiscal year
1997 to 2.50% from 2.41% for fiscal year 1996. As discussed in the following
paragraph, the sale of approximately $230.8 million of securities
available-for-sale during the last six months of fiscal year 1996 and the
utilization of such proceeds to repay maturing Federal Home Loan Bank of Topeka
(FHLB) advances, the reduction in interest rates on interest-bearing liabilities
(5.30% for fiscal year 1997 compared to 5.40% for fiscal year 1996), a more
favorable interest-earning assets mix primarily in increased levels of
adjustable-rate mortgage loans, consumer loans and commercial real estate loans,
and the acquisitions of Conservative Savings Corporation (Conservative) on
February 1, 1996, Heritage and Investors have contributed to the improvement in
the interest rate spreads for fiscal year 1997 compared to 1996. Net interest
income increased over fiscal year 1996 due primarily to average interest-earning
assets increasing $414.0 million to $7.786 billion for fiscal year 1997 compared
to $7.372 billion for fiscal year 1996 and the reduction in interest rates on
interest-bearing liabilities over the respective fiscal years.
During fiscal year 1996, pursuant to the reassessment of the
appropriateness of the classifications of all securities held, and in accordance
with the one-time reclassification permitted under a special accounting report,
management of the Corporation developed an asset/liability management strategy
to reclassify substantially all of its 15- and 30-year fixed rate
mortgage-backed securities approximating $370.4 million and agency investment
securities approximating $49.9 million from held to maturity to available for
sale. In addition, approximately $9.4 million of adjustable-rate mortgage-backed
securities were reclassified from available for sale to held to maturity. The
purpose of this strategy was to sell such securities and use the proceeds to
fund FHLB advances as they became due, and to have the flexibility, as the
opportunity arose, to reinvest proceeds into adjustable-rate or shorter duration
interest-earning assets. During fiscal year 1996, approximately $230.8 million
of such investment and mortgage-backed securities were sold with the proceeds
used primarily to pay maturing FHLB advances.
The following table presents certain information concerning yields earned
on interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the fiscal years presented:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
For the Year
Ended June 30, At June 30,
------------------------------------ ----------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans and leases.............................. 8.19% 8.14% 8.29% 7.99% 8.19% 8.18%
Mortgage-backed securities.................... 6.34 6.56 6.48 6.65 6.74 6.67
Investments................................... 6.90 6.97 6.53 6.72 6.61 6.82
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets..................... 7.84 7.80 7.81 7.73 7.87 7.82
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits.............................. 3.18 3.12 2.84 3.05 3.11 3.05
Other time deposits........................... 5.67 5.71 6.02 5.58 5.77 5.77
Advances from FHLB............................ 5.86 5.80 5.82 5.66 5.96 5.70
Securities sold under agreements
to repurchase............................... 6.08 6.19 7.13 5.96 6.04 6.51
Other borrowings.............................. 9.71 9.93 10.21 8.75 8.70 10.33
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities................ 5.25 5.30 5.40 5.03 5.32 5.29
- --------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread......................... 2.59% 2.50% 2.41% 2.70% 2.55% 2.53%
- --------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-earning assets............. 2.79% 2.71% 2.67% 2.86% 2.68% 2.70%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
The table below presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the periods indicated. The following table includes
nonaccruing loans averaging $46.3 million, $42.5 million and $37.0 million,
respectively, for fiscal years 1998, 1997 and 1996 as interest-earning assets at
a yield of zero percent:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases....... $6,473,041 $529,880 8.19% $5,976,700 $486,586 8.14% $5,398,776 $447,580 8.29%
Mortgage-backed
securities........... 1,063,615 67,426 6.34 1,228,362 80,538 6.56 1,409,670 91,353 6.48
Investments............ 728,891 50,312 6.90 581,101 40,480 6.97 563,748 36,800 6.53
- -------------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets............... 8,265,547 647,618 7.84 7,786,163 607,604 7.80 7,372,194 575,733 7.81
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits....... 1,773,560 56,384 3.18 1,529,068 47,681 3.12 1,444,102 40,998 2.84
Other time deposits.... 3,625,881 205,557 5.67 3,833,370 218,930 5.71 3,529,716 212,356 6.02
Advances from FHLB..... 1,935,903 113,531 5.86 1,421,149 82,386 5.80 1,753,995 102,141 5.82
Securities sold
under agreements
to repurchase........ 501,979 30,533 6.08 591,288 36,615 6.19 189,568 13,525 7.13
Other borrowings....... 115,157 11,183 9.71 112,433 11,163 9.93 93,638 9,560 10.21
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities.......... 7,952,480 417,188 5.25 7,487,308 396,775 5.30 7,011,019 378,580 5.40
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings balance...... $ 313,067 $ 298,855 $ 361,175
Net interest income....... $230,430 $210,829 $197,153
Interest rate spread...... 2.59% 2.50% 2.41%
- -------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-
earning assets......... 2.79% 2.71% 2.67%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1998, the Corporation's net earnings balance (the
difference between average interest-bearing liabilities and average
interest-earning assets) improved by $14.2 million compared to fiscal year 1997.
Such increase is primarily due to the acquisition of First National (which was
acquired through the issuance of common stock), the acquisition of Heritage
(which was acquired, in part, through the issuance of common stock), the
acquisition of Investors and net internal growth with earnings retention.
During fiscal year 1997, the Corporation experienced lower costs on
interest-bearing liabilities primarily due to decreases in the interest rates
offered on certain types of time deposit products and decreases in interest
rates primarily on securities sold under agreements to repurchase and other
borrowings. The net earnings balance decreased by $62.3 million for fiscal year
1997 compared to fiscal year 1996 primarily due to cash outlays totaling (i)
approximately $51.7 million for federal and state tax liabilities principally
paid in June 1996 associated with taxable income recognized from the final
disposition of a subsidiary's interest in a nuclear generating facility, and
(ii) approximately $51.2 million for the Corporation's repurchase of its common
stock during the first quarter of fiscal year 1997. The effects of these
decreases were partially offset by improvements primarily from the acquisitions
of Conservative and Heritage (both of which were acquired, in part, through the
issuance of common stock). The percentage of average interest-earning assets to
average interest-bearing liabilities was 103.9% during fiscal year 1998 compared
to 104.0% and 105.2%, respectively, during fiscal years 1997 and 1996.
20
<PAGE>
The table below presents the dollar amount of changes in interest income
and expense for each major component of interest-earning assets and
interest-bearing liabilities, respectively, and the amount of change in each
attributable to: (i) changes in volume (change in volume multiplied by prior
year rate), and (ii) changes in rate (change in rate multiplied by prior year
volume). The net change attributable to change in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate. The following table demonstrates the effect
of the increased volume of interest-earning assets and interest-bearing
liabilities, the changes in interest rates and the effect on the interest rate
spreads previously discussed:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, Year Ended June 30,
1998 Compared to 1997 1997 Compared to 1996
--------------------------------------- ---------------------------------------
(In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to
- --------------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases..................... $ 40,616 $ 2,678 $ 43,294 $ 46,877 $(7,871) $ 39,006
Mortgage-backed securities........... (10,515) (2,597) (13,112) (11,916) 1,101 (10,815)
Investments.......................... 10,204 (372) 9,832 1,157 2,523 3,680
- --------------------------------------------------------------------------------------------------------------------------------
Interest income.................... 40,305 (291) 40,014 36,118 (4,247) 31,871
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits..................... 7,756 947 8,703 2,503 4,180 6,683
Other time deposits.................. (11,773) (1,600) (13,373) 16,008 (9,434) 6,574
Advances from FHLB................... 30,177 968 31,145 (19,301) (454) (19,755)
Securities sold under agreements
to repurchase...................... (5,442) (640) (6,082) 24,626 (1,536) 23,090
Other borrowings..................... 267 (247) 20 1,858 (255) 1,603
- --------------------------------------------------------------------------------------------------------------------------------
Interest expense................... 20,985 (572) 20,413 25,694 (7,499) 18,195
- --------------------------------------------------------------------------------------------------------------------------------
Effect on net interest income........... $ 19,320 $ 281 $ 19,601 $ 10,424 $ 3,252 $ 13,676
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net improvements due to changes in volume between fiscal years 1998 and
1997, and between fiscal years 1997 and 1996, reflect the net growth the
Corporation has experienced, both internally and from acquisitions. The
improvements due to changes in volume between fiscal years 1998, 1997 and 1996
in part reflect the changes in the difference between average interest-bearing
liabilities and average interest-earning assets of $14.2 million and $62.3
million, respectively. The net improvements due to changes in rates between
fiscal years 1998 and 1997, and between 1997 and 1996 are primarily due to
decreases in rates on interest-bearing liabilities, primarily certificates of
deposits.
21
<PAGE>
NON-INTEREST INCOME AND EXPENSE
PROVISION FOR LOAN AND LEASE LOSSES AND REAL ESTATE OPERATIONS
The Corporation recorded loan and lease loss provisions of $15.3 million,
$12.3 million and $7.2 million in fiscal years 1998, 1997 and 1996,
respectively. The loan and lease loss provision increased during fiscal year
1998 compared to 1997 due primarily to the net increase of $403.4 million in the
total loan and lease portfolio at June 30, 1998 compared to 1997, and to
additional nonrecurring loss reserves recorded in the current fiscal year to
conform reserve positions of fiscal 1998 acquisitions to the policies of the
Corporation. The loan and lease loss provision for fiscal 1997 increased
compared to fiscal 1996 due primarily to the net increase of $656.5 million in
the total loan and lease portfolio at June 30, 1997 compared to 1996, and to
additional general reserves recorded in fiscal 1997 to cover consumer loan
losses. At June 30, 1998, the Corporation's conventional, FHA and VA loans,
including loans held for sale, totaling approximately $5.5 billion, are secured
by residential properties located primarily in Nebraska (17%), Colorado (12%),
Kansas (12%) and the remaining 59% in 47 other states. At June 30, 1997, the
balance of such loans totaled $5.3 billion and were secured by residential
properties located in Nebraska (17%), Colorado (14%), Kansas (10%) and the
remaining 59% in 47 other states. The commercial real estate loan portfolio at
June 30, 1998, totaling $470.0 million is secured by properties located in Iowa
(33%), Colorado (24%), Nebraska (11%) and the remaining 32% in 13 other states.
At June 30, 1997, commercial real estate loans totaled $431.2 million and were
secured by properties located in Iowa (42%), Colorado (23%), Nebraska (16%) and
the remaining 19% in 17 other states. The allowance for loan and lease losses is
based upon management's continuous evaluation of the collectibility of
outstanding loans and leases, which takes into consideration such factors as
changes in the composition of the loan and lease portfolios and economic
conditions that may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem loans and leases
and of the overall portfolio quality and real estate market conditions in the
Corporation's lending areas.
The Corporation recorded net income from real estate operations totaling
$605,000, $980,000 and $59,000 in fiscal years 1998, 1997 and 1996,
respectively. Real estate operations reflect provisions for real estate losses,
net real estate operating activity, and gains and losses on dispositions of real
estate. The $375,000 decrease in real estate operations for fiscal year 1998
compared to fiscal year 1997 is primarily due to disposition activity. The
increase in real estate operations of $921,000 for fiscal year 1997 compared to
fiscal year 1996 is primarily due to the recognized gain of $1.1 million on the
sale of two commercial properties recorded in fiscal year 1997. Management
believes that the positive results from real estate operations are indicative of
the improvements made in the reduction of the Corporation's real estate
portfolio and to the improvement in the real estate markets in general.
Although the Corporation believes that present levels of allowances for
loan losses are adequate to reflect the risks inherent in its portfolios, there
can be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of allowances for losses on loans and leases on a
regular basis as an integral part of their examination process. Such agencies
may require additions to the allowances based on their judgments of information
available to them at the time of their examinations.
22
<PAGE>
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and asset workout groups. Nonperforming assets decreased
by $2.5 million, or 3.5%, at June 30, 1998, compared to June 30, 1997, primarily
as a result of net decreases of $6.3 million in troubled debt restructurings and
$480,000 in real estate partially offset by a net increase of $4.3 million in
nonperforming loans. Nonperforming assets at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans and leases (1)
Residential real estate................................................... $40,468 $37,028 $36,602
Commercial real estate.................................................... 1,369 900 2,444
Consumer.................................................................. 2,496 2,477 1,153
Leases and other loans.................................................... 2,134 1,765 76
- --------------------------------------------------------------------------------------------------------------------------------
Total................................................................... 46,467 42,170 40,275
- --------------------------------------------------------------------------------------------------------------------------------
Real estate (2)
Commercial................................................................ 8,432 8,417 9,323
Residential............................................................... 8,709 9,568 5,014
Other..................................................................... 459 95 253
- --------------------------------------------------------------------------------------------------------------------------------
Total................................................................... 17,600 18,080 14,590
- --------------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings (3)
Commercial................................................................ 3,524 9,489 14,533
Residential............................................................... 778 1,126 1,052
- --------------------------------------------------------------------------------------------------------------------------------
Total................................................................... 4,302 10,615 15,585
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets................................................... $68,369 $70,865 $70,450
- --------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases to total loans and leases..................... .68% .65% .69%
Nonperforming assets to total assets......................................... .77% .83% .90%
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases (4)...................................................... $51,333 $46,270 $43,886
Bulk purchased loans (5).................................................. 8,462 10,809 12,765
- --------------------------------------------------------------------------------------------------------------------------------
Total................................................................... $59,795 $57,079 $56,651
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses to total loans and leases................ .87% .88% .97%
Allowance for loan and lease losses to total nonperforming assets............ 87.46% 80.55% 80.41%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans and leases consist of nonaccruing loans (loans 90 days
or more past due) and accruing loans that are contractually past due 90
days or more. At June 30, 1997 and 1996, there were $894,000 and $144,000,
respectively, of accruing loans contractually past due 90 days or more. At
June 30, 1998, there were no accruing loans contractually past due 90 days
or more.
(2) Real estate consists of commercial and residential property acquired
through foreclosure or repossession (real estate owned and real estate in
judgment) and real estate from certain subsidiary operations, and does not
include performing real estate held for investment totaling $3.2 million,
$2.7 million and $2.8 million, respectively, at June 30, 1998, 1997 and
1996.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $97,000, $77,000 and $78,000, respectively, at June 30, 1998,
1997, and 1996, in general allowance for losses established primarily to
cover risks associated with borrowers' delinquencies and defaults on loans
held for sale.
(5) Represents the allowance for loan losses for single-family residential
whole loans purchased between January 1991 and June 30, 1992 (bulk
purchased loans), which had been allocated from the amount of net discounts
associated with the Corporation's purchase of these loans to provide for
the credit risk associated with such bulk purchased loans. These bulk
purchased loans had principal balances of $388.5 million, $494.6 million
and $574.4 million, respectively, at June 30, 1998, 1997 and 1996. These
allowances are available only to absorb losses associated with respective
bulk purchased loans, and are not available to absorb losses from other
loans.
- --------------------------------------------------------------------------------
23
<PAGE>
The ratio of nonperforming loans and leases to total loans and leases was
.68% at June 30, 1998, based on loan and lease balances of $6.853 billion,
compared to .65% and .69%, respectively, at June 30, 1997 and 1996, which were
based on loan and lease balances of $6.451 billion and $5.814 billion. The ratio
of nonperforming assets to total assets was .77%, .83% and .90%, respectively,
at June 30, 1998, 1997 and 1996. The ratio for nonperforming loans and leases to
total loans and leases at June 30, 1998, compared to 1997 increased due to net
increases in nonperforming loans and leases partially offset by an increase in
total loans and leases. The nonperforming assets to total assets ratio improved
at June 30, 1998 compared to 1997 due primarily to a decrease in nonperforming
assets and a net increase in total assets. The ratios for both nonperforming
loans and leases to total loans and leases and nonperforming assets to total
assets improved at June 30, 1997 compared to 1996 due primarily to net increases
in total loans and leases and total assets. The total allowance for loan and
lease losses increased to $59.8 million at June 30, 1998, compared to $57.1
million and $56.7 million, respectively, at June 30, 1997 and 1996, due
primarily to increases in the provision charged to operations partially offset
by decreases from loan repayments for bulk purchased loans. The percentage of
allowance for loan and lease losses to total loans and leases at June 30, 1998,
of .87% remains relatively unchanged compared to .88% at June 30, 1997, and
decreased from .97% at June 30, 1996, primarily due to net increases in total
loans. The total allowance for loan and lease losses to total nonperforming
assets of 87.46%, 80.55% and 80.41%, respectively, at June 30, 1998, 1997 and
1996, also indicates improved coverage for potential losses. Such ratio
increased at June 30, 1998, compared to June 30, 1997, primarily due to the net
decrease in total nonperforming assets and remained relatively unchanged at June
30, 1997, compared to 1996.
Nonperforming loans and leases at June 30, 1998, increased $4.3 million
compared to June 30, 1997, primarily due to increases of $3.4 million, $469,000,
$369,000 and $19,000, respectively, in delinquent residential real estate,
commercial real estate, other loans and leases and consumer loans. Nonperforming
loans and leases at June 30, 1997, increased $1.9 million compared to June 30,
1996, primarily due to net increases of $1.7 million, $1.3 million and $426,000,
respectively, in delinquent other loans and leases, consumer loans and
residential real estate loans offset by a net decrease of $1.5 million in
delinquent commercial real estate loans.
The net decrease of $480,000 in real estate at June 30, 1998 compared to
June 30, 1997, is due primarily to a net decrease totaling $859,000 in
residential real estate offset by net increases totaling $364,000 and $15,000,
respectively, in other real estate and commercial real estate. The decrease in
residential real estate is due in part to sales totaling $12.7 million partially
offset by foreclosures totaling $12.3 million. The net increase of $3.5 million
in real estate at June 30, 1997, compared to June 30, 1996, is due primarily to
a net increase in residential real estate totaling $4.6 million partially offset
by decreases of $906,000 and $158,000, respectively, in commercial and other
real estate. Real estate is located primarily in Nebraska and Colorado and at
June 30, 1998, before allowance for losses, totaled $5.4 million and $2.6
million, respectively, compared to $5.6 million and $5.2 million, respectively,
at June 30, 1997.
Troubled debt restructurings decreased $6.3 million at June 30, 1998
compared to June 30, 1997 due primarily to decreases of $6.0 million and
$348,000, respectively, in commercial and residential real estate loans. The
decrease in commercial real estate includes the payoff of $4.2 million in loans
during fiscal year 1998 and the reclassification of $1.4 million in loans to
current status. Troubled debt restructurings decreased $5.0 million at June 30,
1997, compared to June 30, 1996, primarily attributable to a net decrease of
approximately $5.0 million in commercial real estate loans, partially offset by
a net increase totaling $74,000 in residential real estate loans. The decrease
in commercial real estate loans is due primarily to loan principal repayments
and transfers to nonperforming loans.
LOAN SERVICING FEES
Loan servicing fees, which also include additional loan fees for late
payments and prepayment charges, and assumption and modification fees, totaled
$38.7 million, $41.4 million and $36.9 million for fiscal years 1998, 1997 and
1996, respectively. The level of revenue from loan servicing and other fees and
changes in comparing fiscal years is primarily due to the size of and changes in
the Corporation's loan servicing portfolio for other institutions. The mortgage
loan servicing portfolio totaled $7.115 billion, $7.396 billion and $7.265
billion at June 30, 1998, 1997 and 1996, respectively.
The value of the Corporation's loan servicing portfolio increases as
mortgage interest rates rise and loan prepayments decrease. It is expected that
income generated from the Corporation's loan servicing portfolio will increase
in such an environment. However, this positive effect on the Corporation's
income is offset, in part, by a decrease in additional servicing fee income
attributable to new loan originations, which historically decrease in periods of
higher, or increasing, mortgage interest rates, and by an increase in expenses
from loan production costs since a portion of such costs cannot be deferred due
to lower loan originations. Conversely, the value of the Corporation's loan
servicing portfolio will decrease as mortgage interest rates decline.
24
<PAGE>
RETAIL FEES AND CHARGES
Retail fees and charges totaled $24.3 million, $22.2 million and $17.6
million for fiscal years 1998, 1997 and 1996, respectively. The primary source
of this fee income is customer charges for retail financial services such as
checking account fees and service charges, charges for insufficient checks or
uncollected funds, stop payment fees, debit card fees, overdraft protection
fees, transaction fees for personal checking and automatic teller machine
services. The net increases of $2.1 million for fiscal year 1998 compared to
1997 and $4.6 million for fiscal year 1997 compared to fiscal year 1996
primarily result from an increased focus on cross-selling of products, and
increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges from the Corporation's expanding retail
customer deposit base, increasing both in number of accounts and dollar amounts,
over the last two fiscal years.
GAIN ON SALES OF LOANS
During fiscal years 1998, 1997 and 1996, the Corporation sold loans to
third parties through its mortgage banking operations totaling $1.146 billion,
$846.0 million and $900.6 million, respectively, resulting in net pre-tax gains
of $2.7 million, $1.9 million and $1.9 million, respectively, for fiscal years
1998, 1997 and 1996. Mortgage loans are generally sold in the secondary market
with loan servicing retained and without recourse to the Corporation. The net
gains recorded in fiscal years 1998, 1997 and 1996 are attributable to the
relatively stable interest rate environments over the respective periods.
GAIN ON SALES OF SECURITIES
During fiscal years 1998, 1997 and 1996, the Corporation sold securities
available for sale resulting in pre-tax gains of $2.5 million, $510,000 and
$87,000, respectively, on sales of $137.8 million, $153.1 million and $363.6
million, respectively. Mortgage-backed securities accounted for most of the
activity with pre-tax gains of $2.5 million, $476,000 and $303,000,
respectively, recorded in fiscal years 1998, 1997 and 1996.
OTHER OPERATING INCOME
Other operating income totaled $19.5 million, $14.1 million and $12.1
million for fiscal years 1998, 1997 and 1996, respectively. The major components
of other operating income are brokerage commissions, credit life and disability
commissions, insurance commissions and leasing operations.
Brokerage commission income totaled $5.3 million, $4.1 million and $3.0
million, respectively, for fiscal years 1998, 1997 and 1996. Brokerage
commission income increased by $1.2 million for fiscal year 1998 compared to
fiscal year 1997 and by $1.1 million for fiscal year 1997 compared to fiscal
year 1996 due to significant growth in the volume of transactions processed for
customers due to the focus on stocks and mutual funds as preferred investment
options. A greater focus on cross-selling, an increase in the number of sales
locations due to acquisitions and a fully-trained staff to initiate orders also
contributed to these increases.
Insurance commission income totaled $3.2 million, $3.1 million and $2.3
million, respectively, for fiscal years 1998, 1997 and 1996. The increases in
insurance commission income are due to increased volume primarily from
cross-selling efforts and an increase in sales of health and accident policies.
Credit life and disability commission income totaled $2.0 million, $2.2
million and $1.8 million, respectively, for fiscal years 1998, 1997 and 1996.
Commission income from credit life and disability is directly related to
consumer loan volume. Origination and service fees from leasing operations
totaled $3.6 million, $3.9 million and $1.9 million, respectively, for fiscal
years 1998, 1997 and 1996. Lease income is directly related to the number of
leases originated during the fiscal year and, to a lesser degree, the number of
leases serviced during the fiscal years. The net decrease in leasing operations
comparing fiscal year 1998 to 1997 is primarily due to nonrecurring charges
totaling $597,000 recorded in fiscal year 1998 for certain reserves on leasing
operations. Other operating income includes miscellaneous items that can
fluctuate significantly from year to year. Such amounts totaled approximately
$5.4 million, $800,000 and $3.1 million, respectively, for fiscal years 1998,
1997 and 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $187.8 million, $183.2 million
and $149.6 million for fiscal years 1998, 1997 and 1996, respectively.
Overall, general and administrative expenses remained at favorable levels
as illustrated by the efficiency ratio. The efficiency ratio is defined as
general and administrative expenses divided by core revenue which is the sum of
(i) net interest income before provision for loan and lease losses, (ii) loan
servicing fees, (iii) retail fees and charges and (iv) other operating income.
The Corporation's efficiency ratio for fiscal year 1998 is 51.9%, excluding
certain merger-related and nonrecurring charges totaling $25.2 million. This
ratio compares to 52.6% for fiscal year 1997, excluding the $29.0 million SAIF
special assessment and the nonrecurring expenses totaling $2.3 million
associated with the repurchase of 2,812,725 shares of the Corporation's common
stock. The ratio is 54.7% for fiscal year 1996, which excludes the nonrecurring
expenses
25
<PAGE>
totaling $5.5 million associated with the Railroad merger, the Corporation's
1995 proxy contest and the SAIF special assessment incurred by Mid Continent
with its fiscal year ending September 30, 1996 combined with the 1996 operations
of the Corporation. The efficiency ratio is lower for fiscal year 1998 compared
to 1997, although operating expenses increased approximately $10.8 million after
adjusting for the aforementioned nonrecurring expenses for both fiscal years,
due to core revenue increasing in fiscal year 1998. The 1997 efficiency ratio of
52.6%, adjusted for nonrecurring expenses, is lower compared to fiscal year 1996
due to increased core revenue partially offset by an increase in operating
expenses.
The net increase of $33.7 million in general and administrative expenses in
fiscal year 1998 compared to 1997, excluding the deposit insurance special
assessment, is primarily due to $18.0 million recorded in the current fiscal
year as nonrecurring merger expenses, $5.1 million in other operating expenses,
$4.9 million in compensation and benefits, $4.8 million in data processing, $2.7
million in occupancy and equipment and $1.9 million in advertising partially
offset by a decrease of $3.7 million in regulatory insurance and assessments.
The net increase of $33.7 million for fiscal year 1998 compared to 1997 is
partially attributable to nonrecurring expenses totaling $25.2 million
consisting of merger expenses totaling $18.0 million, the accelerated
amortization of certain computer systems and software necessitated by Year 2000
compliance and the related planned systems conversions totaling $4.3 million and
expenses totaling $2.9 million to conform accounting practices of certain
operations of Liberty, Mid Continent and Perpetual to the Corporation's
policies. The merger expenses consist of $9.0 million in transaction costs, such
as fees for investment banking, accounting and legal, $6.5 million in severance,
retention bonuses and other termination costs and $2.5 million in expenses to
combine operations. Other expenses incurred in fiscal year 1998 compared to 1997
include increased marketing costs for checking accounts and related products and
for consumer loans, increased occupancy and equipment, compensation and benefits
and other operating expenses from acquisitions and branch expansion.
The decrease in regulatory insurance and assessments of $3.7 million
comparing fiscal year 1998 to 1997 is substantially due to the revised rate
structure on insured deposits adopted by the Federal Deposit Insurance
Corporation (FDIC) after the recapitalization of the SAIF. The Corporation's
annual deposit insurance rate in effect prior to this recapitalization was .23%
of insured deposits and reduced to .064% of insured deposits effective January
1, 1997, and thereafter.
The net increase of $5.6 million in general and administrative expenses,
excluding the deposit insurance special assessment, in fiscal year 1997 compared
to 1996 is primarily due to net increases of $5.1 million in compensation and
benefits, $2.6 million in other operating expenses, $2.2 million in advertising,
$2.2 million in occupancy and equipment and $1.2 million in data processing
partially offset by decreases of $4.1 million in regulatory insurance and
assessments and $3.6 million of merger expenses associated with the Railroad
acquisition. The net increase of $5.6 million for fiscal year 1997 compared to
fiscal year 1996 is in part attributable to the nonrecurring expenses associated
with the repurchase of 2,812,725 shares of the Corporation's common stock
totaling $2.3 million, a net increase in operating expenses due to acquisitions,
increased marketing costs for checking accounts and related products and
consumer loans and other net increases in employee benefits, rent and occupancy
and other operating expenses primarily due to branch expansion over fiscal year
1996. Partially offsetting these increases are expenses incurred in fiscal year
1996 related to the Railroad merger and the Corporation's 1995 proxy contest
totaling $4.5 million and a decrease in regulatory insurance expenses totaling
$4.1 million.
The decrease in regulatory insurance and assessments of $4.1 million
comparing fiscal year 1997 to 1996, was substantially due to the revised rate
structure on insured deposits adopted by the FDIC after the recapitalization of
the SAIF previously discussed. The net increases in general and administrative
expenses from acquisitions are due to Heritage and Investors during fiscal year
1997 and a full fiscal year of operations from the 1996 Conservative acquisition
consummated February 1, 1996. Such acquisitions result in increased personnel
wages and benefits and costs of operating additional branches, as well as other
expenses also incurred on an indirect basis attributable to these acquisitions.
INTANGIBLE ASSETS
Total amortization expense of intangible assets for fiscal years 1998, 1997
and 1996 was $7.5 million, $11.0 million and $10.2 million, respectively. The
net decrease in amortization expense of intangible assets for fiscal year 1998
compared to 1997 is primarily due to the reduction totaling $3.2 million in
amortization of expense of core value of deposits from amounts that were fully
amortized as of April 1997 and the reduction in core value of deposits amortized
26
<PAGE>
on an accelerated basis. Offsetting these decreases is an increase totaling
$806,000 due to amortization expense resulting from the First National
acquisition consummated January 30, 1998. Amortization of intangible assets for
fiscal year 1997 increased over 1996 primarily due to amortization expense
totaling $957,000 resulting from the Heritage acquisition consummated October 1,
1996.
PROVISION FOR INCOME TAXES
For fiscal years 1998, 1997 and 1996 the provision for income taxes was
$40.7 million, $30.1 million and $32.7 million, respectively. The effective tax
rates for fiscal years 1998, 1997 and 1996 were 37.7%, 35.2% and 33.1%,
respectively. For the three fiscal years ended June 30, 1998, the effective tax
rates vary from the applicable statutory rates primarily due to the
nondeductibility of amortization of intangible assets in relation to the level
of taxable income for the respective fiscal years. The effective tax rate also
varied from the statutory rate for fiscal year 1998 due to the nondeductibility
of certain Liberty, Mid Continent and Perpetual merger-related expenses and
other nonrecurring charges and, for fiscal year 1996, due to the
nondeductibility of certain Railroad merger and acquisition costs offset
slightly by an income tax benefit of $1.0 million recognized for financial
reporting purposes from a leveraged lease settlement.
In August 1996, changes in the federal tax law repealed the reserve method
of accounting for tax bad debt deductions and, effective July 1, 1996, required
the Corporation to calculate the tax bad debt deduction based on actual
charge-offs. These tax law changes resulted in a charge of $191,000 to income
tax expense in fiscal year 1997.
EXTRAORDINARY ITEMS
In December 1996, the Corporation recognized extraordinary losses of
$583,000 (net of income tax benefits totaling $316,000), or $.01 loss per
diluted share, primarily as a result of the early retirement of its $40.25
million 10.25% subordinated debt originally due December 15, 1999, and its $6.9
million 10.0% senior notes originally due January 31, 1999. The extraordinary
loss consisted primarily of the write-off of the related premiums and costs
associated with the issuance and redemption of such debt that was retired on
December 27, 1996, with the proceeds from the $50.0 million subordinated
extendible notes offering completed December 2, 1996.
RATIOS
The table below sets forth certain performance ratios of the Corporation
for the periods indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets: net income divided by average total assets (1)..................... .77% .67% .86%
Return on average equity: net income divided by average equity (1)........................... 11.41 10.77 13.89
Equity-to-assets ratio: average stockholders' equity to average total assets................ 6.75 6.22 6.19
General and administrative expenses divided by average assets (2)............................ 2.15 2.24 1.94
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Return on average assets and return on average stockholders' equity for
fiscal year 1998 are 1.02% and 15.05%, respectively, excluding the
after-tax effect of merger-related and other nonrecurring charges totaling
$21.5 million. Return on average assets and return on average stockholders'
equity for fiscal year 1997 are .92% and 14.84%, respectively, excluding
the after-tax effect of the nonrecurring expenses totaling $20.7 million
associated with the SAIF special assessment, the repurchase of 2,812,725
shares of the Corporation's common stock, the extraordinary loss on early
retirement of debt and the change in income taxes for bad debt reserves.
Return on average assets and return on average stockholders' equity for
fiscal year 1996 are .91% and 14.78%, respectively, excluding the after-tax
effect of the nonrecurring expenses totaling $4.2 million associated with
the Railroad merger, the SAIF special assessment (incurred in fiscal year
1996 as a result of the pooling of interests accounting method applied to
the Mid Continent merger) and the Corporation's 1995 proxy contest.
(2) General and administrative expenses divided by average assets for fiscal
year 1998 is 1.86% excluding the merger-related and other nonrecurring
charges totaling $25.2 million on a pre-tax basis. General and
administrative expenses divided by average assets for fiscal year 1997 is
1.85% excluding the nonrecurring expenses totaling $31.3 million on a
pre-tax basis associated with the SAIF special assessment and the
repurchase of 2,812,725 shares of the Corporation's common stock. General
and administrative expenses divided by average assets for fiscal year 1996
is 1.87% excluding the nonrecurring expenses totaling $5.5 million on a
pre-tax basis associated with the Railroad merger, the Mid Continent SAIF
special assessment and the Corporation's 1995 proxy contest.
- --------------------------------------------------------------------------------
27
<PAGE>
The decrease in the ratio of general and administrative expenses to average
assets for fiscal year 1998 compared to fiscal year 1997 is primarily
attributable to an increase of $553.5 million in average assets partially offset
by a net increase of $4.7 million in total general and administrative expenses
due to the net effect of numerous items including the First National acquisition
effective January 30, 1998. The increase in the operating ratio for general and
administrative expenses for fiscal year 1997 compared to fiscal year 1996 is
attributable to a net increase of $33.6 million in such expenses primarily due
to the SAIF special assessment of $29.0 million and nonrecurring expenses
totaling $2.3 million associated with the repurchase of 2,812,725 shares of the
Corporation's common stock. This increase was partially offset by an increase of
approximately $486.9 million in average assets for fiscal year 1997 compared to
1996.
IMPLEMENTATION OF NEW ACCOUNTING
PRONOUNCEMENTS
During fiscal year 1998, the Corporation adopted the provisions of two
accounting pronouncements: Statement No. 125 entitled "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" and
Statement No. 128, entitled "Earnings Per Share." See Note 1 to the Consolidated
Financial Statements for a discussion of these new accounting pronouncements and
their effect on the Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's principal asset is its investment in the capital stock of
the Bank, and because it does not generate any significant revenues independent
of the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in
risk-based capital ratio requirement at the beginning of the calendar year. At
June 30, 1998, the Bank qualified as a Tier 1 Association, and would be
permitted to pay an aggregate amount approximating $139.1 million in dividends
under these regulations. Should the Bank's regulatory capital fall below certain
levels, applicable law would require approval by the OTS of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
At June 30, 1998, the cash of Commercial Federal Corporation, the parent
company, totaled $39.4 million. Due to the parent company's limited independent
operations, management believes that its cash balance at June 30, 1998, is
currently sufficient to meet operational needs. However, the parent company's
ability to make future interest and principal payments on its $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes),
and on its $46.4 million of 9.375% fixed-rate junior subordinated debentures due
May 15, 2027 (the Debentures), is dependent upon its receipt of dividends from
the Bank. Accordingly, during fiscal years 1998 and 1997, the parent company
received cash dividends totaling $47.4 million and $37.8 million, respectively,
from the Bank. The dividends received during fiscal year 1998 were paid to cover
(i) interest payments totaling $9.2 million on the parent company's debt, (ii)
principal payments of $3.0 million on the parent company's five-year promissory
term note, (iii) common stock cash dividends totaling $7.0 million paid by the
parent company to its shareholders through June 30, 1998, (iv ) principal and
interest payments totaling $26.3 million on a revolving credit note acquired
from the Liberty acquisition, and (v) certain fees totaling $1.9 million in
connection with the acquisition of Liberty.
Cash dividends paid by the parent company to its common stock shareholders
totaled $8.0 million and $7.2 million, respectively, during fiscal years 1998
and 1997. The payment of dividends on the common stock is subject to the
discretion of the Board of Directors of the Corporation and depends on a variety
of factors, including operating results and financial condition, liquidity,
regulatory capital limitations and other factors. The Bank will continue to pay
dividends to the parent company, pursuant to regulatory restrictions, to cover
future principal and interest payments on the parent company's debt and on cash
dividends on common stock when and as declared by the parent company on a
quarterly basis. The parent company also receives cash from the exercise of
stock options and the sale of stock under its employee benefit plans which
totaled $4.7 million and $2.4 million, respectively, during fiscal years 1998
and 1997, as well as from the Bank for income tax benefits from operating losses
of the parent company as provided in the corporate tax sharing agreement. During
fiscal year 1997, the Corporation distributed $17.2 million to the Bank for its
purchase of a support operations facility and for the cash portion of the
Heritage and Investors acquisitions.
28
<PAGE>
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB, (iv) cash generated from operations and (v) securities sold under
agreements to repurchase. As reflected in the Consolidated Statement of Cash
Flows, net cash flows used by operating activities for fiscal year 1998 totaled
$119.5 million and net cash flows provided by operating activities for fiscal
years 1997 and 1996 totaled $16.6 million and $16.7 million, respectively.
Amounts fluctuate from period to period primarily as a result of mortgage
banking activity relating to the purchase and origination of loans for resale
and the subsequent sale of such loans. The purchase and origination of loans for
resale totaling $1.3 billion for fiscal year 1998 is higher compared to $890.5
million and $908.4 million for fiscal years 1997 and 1996, respectively,
primarily due to increased prepayment and refinancing activity. Proceeds from
the sales of loans totaled $1.1 billion for fiscal year 1998 compared to $902.6
million and $844.0 million in fiscal years 1997 and 1996.
Net cash flows provided by investing activities totaled $43.5 million and
$78.7 million for fiscal years 1998 and 1996 and net cash flows used by
investing activities totaled $328.1 million for fiscal year 1997. Amounts
fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. The
acquisitions of First National, Liberty, Mid Continent and Perpetual, structured
to be consummated as an exchange of common stock between the Corporation and
these respective financial institutions, resulted in the Corporation issuing
9,368,063 shares of its common stock in fiscal year 1998. Cash outlays for
nonrecurring merger-related costs associated with these four acquisitions
approximated $19.8 million. Subsequent to June 30, 1998, the acquisition of
AmerUs resulted in a cash outlay of approximately $53.3 million, the acquisition
of First Colorado was consummated by the exchange of 18,278,789 shares of the
Corporation's common stock for First Colorado's common stock, and the pending
acquisition of Midland will result in a cash outlay of approximately $83.0
million. Also, liquidity for the AmerUs, First Colorado and Midland acquisitions
will be affected by the cash outlays for nonrecurring merger costs. The
acquisition of AmerUs was financed by $40.0 million of one-year purchase notes
from the seller bearing interest at 150 basis points over the one-year Treasury
bill rate, a $10.0 million capital distribution from the Bank and, in part, by a
$45.0 million term note borrowed by the Corporation on July 30, 1998. This note
is a five-year term note due July 31, 2003, unsecured, with quarterly principal
payments of $1.25 million and interest payable quarterly at 100 basis points
below the lender`s national base rate. It is anticipated that the acquisition of
Midland will be financed by capital distributions from the Bank whose source of
proceeds will more than likely be FHLB advances. During fiscal year 1997 the
acquisitions of Heritage and Investors resulted in cash paid totaling
approximately $3.4 million and $5.3 million, respectively, for the common stock
of these institutions in addition to the exchange of 1,016,173 shares of the
Corporation's common stock for the Heritage acquisition. During fiscal year 1996
the acquisition of Railroad had no material effect on liquidity, except for the
cash outlay totaling $3.6 million relating to nonrecurring merger related costs,
since such transaction was consummated in an exchange of common stock between
companies; and the acquisition of Conservative resulted in a cash payment
totaling approximately $18.3 million, in addition to the issuance of common
stock the Corporation exchanged for Conservative's common and preferred stock.
At December 31, 1995, pursuant to the reassessment of the appropriateness
of the classifications of all securities held and in accordance with the
one-time reclassification permitted under the special report entitled "A Guide
to Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities," management of the Corporation developed an
asset/liability management strategy to reclassify substantially all of its 15-
and 30-year fixed-rate mortgage-backed securities approximating $370.4 million
and agency investment securities approximating $49.9 million from held to
maturity to available for sale. In addition, approximately $9.4 million of
adjustable-rate mortgage-backed securities were reclassified from available for
sale to held to maturity. The purpose of this strategy was to sell such
securities and use the proceeds to fund FHLB advances as they became due, and to
have the flexibility, as opportunities arose, to reinvest proceeds into
adjustable-rate or shorter duration interest-earning assets. In addition, on
February 1, 1996, the Corporation acquired mortgage-backed and investment
securities totaling approximately $90.1 million as part of the acquisition of
Conservative and classified such securities as available for sale. During fiscal
year 1996, approximately $230.8 million of such investment and mortgage-backed
securities were sold with the proceeds used primarily to pay maturing FHLB
advances.
Net cash flows provided by financing activities totaled $87.0 million and
$364.5 million, respectively, for fiscal years 1998 and 1997 and net cash flows
used by financing activities totaled $82.7 million for fiscal year 1996.
Advances from the FHLB, retail deposits and securities sold under agreements to
repurchase have been the primary sources to balance the Corporation's funding
needs during each of the
29
<PAGE>
fiscal years presented. The Corporation experienced a net decrease in deposits
of $232.4 million for fiscal year 1998 and net increases of $30.8 million and
$191.2 million, respectively, for fiscal years ended June 30, 1997 and 1996,
excluding deposits acquired in acquisitions. The decrease in deposits during
fiscal year 1998 was primarily due to depositors leaving for higher interest
rates while increases in deposits are due to a broadened retail deposit base,
compared to previous years, created from acquisitions, opening new branches and
increasing marketing efforts and product promotion. On August 21, 1996, the
Corporation repurchased 2,812,725 shares of its common stock. Total cash
consideration for this transaction, including certain expenses and costs
associated with the seller's ownership of such stock, approximated $51.2
million. The sources of cash to consummate this stock repurchase consisted of a
promissory note totaling $28.0 million, a dividend from the Bank totaling $18.0
million and cash totaling $5.2 million paid directly by the parent company. In
December 1996, the Corporation refinanced its promissory note with a five-year
term note for $28.0 million due December 31, 2001. During fiscal years 1998 and
1997, the Corporation paid down this term note resulting in a remaining
principal balance of $1.0 million at June 30, 1998, with the final payment due
September 30, 1998. This term note was paid in full on July 29, 1998. On
December 2, 1996, the Corporation completed the issuance of $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006, which
resulted in the Corporation receiving $48.5 million net of fees. With the
proceeds from the issuance of these subordinated extendible notes, the
Corporation redeemed on December 27, 1996, its $40.25 million 10.25%
subordinated debt originally due December 15, 1999, and its $6.9 million 10.0%
senior notes originally due January 31, 1999. Also, effective May 14, 1997, the
Corporation, through CFC Preferred Trust, a special-purpose wholly-owned
Delaware trust subsidiary of the Corporation, issued $45.0 million of fixed-rate
9.375% cumulative trust preferred securities, which are fully and
unconditionally guaranteed by the Corporation.
The Deposit Insurance Funds Act of 1996 authorized the recapitalization of
the SAIF fund by imposing a one-time special assessment of .657% of SAIF-insured
deposits held as of March 31, 1995. This nonrecurring special assessment
resulted in the Corporation recording an after-tax charge of approximately $18.6
million ($29.0 million pre-tax) in the quarter ended September 30, 1996. In
addition, fiscal year 1996 reflects an after-tax charge of $706,000 ($1.1
million pre-tax), as a result of the Mid Continent acquisition, with its fiscal
year ending September 30, 1996, combined with the fiscal year 1996 operations of
the Corporation. The Corporation's annual deposit insurance rate in effect prior
to this recapitalization was .23% of insured deposits, which was reduced to
.064% of insured deposits effective January 1, 1997. Until December 31, 1999,
SAIF-insured institutions will be required to pay assessments to the FDIC at the
rate of .064% to help fund interest payments on bonds issued by an agency of the
federal government established to finance takeovers of insolvent thrifts. During
this period, Bank Insurance Fund (BIF) members will be assessed at the rate of
.013% to fund interest payments on these bonds. After December 31, 1999, both
BIF and SAIF members will be assessed at the same rate for such interest
payments. The Deposit Insurance Funds Act of 1996 provides that the BIF and the
SAIF will be merged into a single deposit insurance fund effective December 31,
1999, but only if there are no insured savings associations on that date. The
legislation directed the Department of Treasury to make recommendations to
Congress for the establishment of a single charter for banks and thrifts.
As a result of the final disposition of a subsidiary's interest in a
nuclear generating facility located in Palo Verde, Arizona in February 1996, the
Corporation recognized taxable income totaling approximately $154.9 million.
Accordingly, such income for tax purposes resulted in federal and state tax
liabilities totaling approximately $51.8 million. These tax payments were paid
in June 1996 for the federal tax liability and in September and October 1996 for
the state tax liabilities. While these payments affected the Corporation's cash
flow position, they had no material adverse impact on the Corporation's
financial condition or results of operations.
The Corporation will continue to grow its franchise through an ongoing
program of selective acquisitions of other financial institutions, as well as
through internal growth. The Corporation has considered and will continue to
consider possible mergers with and acquisitions of other selected financial
institutions. During fiscal year 1998 the Corporation consummated the
acquisitions of First National, Liberty, Mid Continent and Perpetual, and
subsequent to June 30, 1998, completed the AmerUs Bank and First Colorado
acquisitions and entered into an agreement to acquire Midland. See Notes 2, 30
and 31 to the Consolidated Financial Statements for additional information on
these completed and pending acquisitions. During fiscal years 1997 and 1996 the
Corporation consummated four acquisitions. Such acquisitions present the
Corporation with the opportunity to further expand its community banking retail
network in its existing markets; and to increase its earnings potential by
increasing its mortgage, consumer and
30
<PAGE>
commercial loan volumes funded primarily by deposits which generally bear lower
rates of interest than alternative sources of funds. Acquisition candidates are
selected based on the extent to which the candidate can enhance the
Corporation's retail presence in new or existing markets and complement the
Corporation's present retail network.
At June 30, 1998, the Corporation issued commitments totaling $566.5
million to fund and purchase loans as follows: $359.6 million of single-family
fixed-rate mortgage loans, $57.1 million of single-family adjustable-rate
mortgage loans, $18.1 million of commercial real estate loans and $131.7 million
of unused lines of credit for commercial and consumer use. These outstanding
loan commitments to extend credit in order to originate loans or fund commercial
and consumer loans lines of credit do not necessarily represent future cash
requirements since many of the commitments may expire without being drawn. The
Corporation expects to fund these commitments, as necessary, from the sources of
funds previously described.
The maintenance of an appropriate level of liquid resources to meet not
only regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Bank is required by federal
regulation to maintain a minimum average daily balance of cash and certain
qualifying liquid investments equal to 4.0% of the aggregate of the prior
month's daily average savings deposits and short-term borrowings. The Bank's
liquidity ratio was 9.35% at June 30, 1998. Liquidity levels will vary depending
upon savings flows, future loan fundings, cash operating needs, collateral
requirements and general prevailing economic conditions. The Bank does not
foresee any difficulty in meeting its liquidity requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial
information are prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant effect on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
STOCK PRICES AND DIVIDENDS
The Corporation's common stock is traded on the New York Stock Exchange
under the symbol "CFB." The following table sets forth the high and low closing
sales prices and dividends declared for the periods indicated for the common
stock of the Corporation:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- -------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock prices:
High.......................... $38.19 $36.38 $36.50 $32.13 $25.08 $26.00 $21.55 $19.11
Low........................... 31.13 30.00 31.38 25.08 21.42 20.75 18.61 16.00
Close......................... 31.63 36.38 35.56 31.42 24.75 22.50 21.33 19.11
- --------------------------------------------------------------------------------------------------------------------------------
Dividends declared............... $ .055 $ .055 $ .055 $ .047 $ .047 $ .047 $ .047 $ .045
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1998, there were 42,078,678 shares of common stock issued
and outstanding which were held by approximately 2,700 shareholders of record
and 1,488,929 shares subject to outstanding options. The number of shareholders
of record does not reflect the persons or entities who hold their stock in
nominee or "street" name.
On November 17, 1997, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders of record on November 28, 1997. Par value of the common stock
remained at $.01 per share. The stock dividend, distributed on December 15,
1997, totaled 10,865,530 shares of common stock with $109,000 transerred from
the addtional paid-in capital account to the common stock account to record this
distribution. Fractional shares resulting from the stock split were paid in cash
totaling $24,366 based on the closing price on the record date. The Board of
Directors also increased its quarterly cash dividend from
31
<PAGE>
$.047 per common share after adjusting for the three-for-two stock split to
$.055 per common share for an increase of 17 percent. In November 1996, the
Board of Directors also declared a three-for-two stock split effected in the
form of a 50 percent stock dividend to stockholders of record on December 31,
1996. This stock dividend was distributed in January 1997 and totaled 10,745,214
shares of common stock with $72,000 transferred from additional paid in capital
to the common stock account. Fractional shares paid in cash resulting from the
stock split totaled $17,792.
Cash dividends declared during fiscal year 1998 totaled $8.8 million, or
$.212 per common share, compared to fiscal year 1997 of $7.2 million, or $.185
per common share, and $7.1 million, or $.178 per common share, during fiscal
year 1996. See "Liquidity and Capital Resources" and Note 18 to the Consolidated
Financial Statements regarding the payment of future dividends and any possible
restrictions thereon.
YEAR 2000
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Corporation may be
significantly affected by the Year 2000 issue due to the nature of financial
information. Software, hardware and equipment both within and outside the
Corporation's direct control and with whom the Corporation electronically or
operationally interfaces are likely to be affected. If computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations that rely on
the data field information, such as interest, payment or due dates and other
operating functions, may generate results that could be significantly misstated,
and the Corporation could experience a temporary inability to process
transactions and engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this issue are provided by major third party vendors. The
Corporation is in the process of replacing/upgrading most of its computer
systems and programs, as well as most equipment, in order to provide cost-
effective and efficient delivery of services to its customers, information to
management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment. In
addition, during fiscal year 1998 the Corporation expensed $4.3 million due to
accelerated amortization of certain computer systems and software necessitated
by Year 2000 compliance and the related planned systems conversions. The
adjusted carrying amount of these computer systems and software will continue to
be depreciated until their disposal at the date of conversion.
The third party vendors have advised the Corporation that all such computer
systems and programs either are or shortly will be Year 2000 compliant. The
Corporation has scheduled certain operations to be converted as early as October
1998 so testing can commence and conversion problems resolved. Final conversions
are scheduled for completion early in calendar year 1999.
The Corporation has also initiated formal communications with non-mainframe
software and hardware vendors to determine the extent to which the Corporation's
interface systems may be vulnerable to those third parties' failure to remediate
their own Year 2000 issues. If the third party vendors are unable to resolve
Year 2000 issues in time, the conversion is delayed significantly or major
problems arise as a result of the conversion, the Corporation would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have significant adverse impact on the
financial condition and results of the operations of the Corporation. In
addition, there can be no assurance that the systems of the other companies on
which the Corporation's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Corporation's systems, would not have a material adverse effect on the
Corporation. The Corporation has developed a Year 2000 contingency plan that
addressess, among other issues, critical operations and potential failures
thereof, and strategies for business continuation.
32
<PAGE>
Management's Report on Internal Controls
- ----------------------------------------
Management of Commercial Federal Corporation (the Corporation) is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements and all other information presented
in this Annual Report. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, as such,
include amounts based on informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting in conformity with both
generally accepted accounting principles and the Office of Thrift Supervision
instructions for Thrift Financial Reports. The internal control structure
contains monitoring mechanisms and actions are taken to correct any deficiencies
identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statements preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and Thrift Financial Report instructions as of June 30,
1998. This assessment was based on the criteria for effective internal control
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
Management believes that the Corporation maintained an effective internal
control structure over financial reporting as of June 30, 1998.
/s/ William A. Fitzgerald
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
Independent Auditors' Report
- ----------------------------
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial
condition of Commercial Federal Corporation and subsidiaries (the Corporation)
as of June 30, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the mergers of Commercial
Federal Corporation and Liberty Financial Corporation, Mid Continent Bancshares,
Inc. and Perpetual Midwest Financial, Inc. which have been accounted for as
pooling-of-interests as described in Note 2 to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commercial
Federal Corporation and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in fiscal
year 1996 the Corporation changed its method of accounting for mortgage
servicing rights.
Deloitte & Touche LLP
Omaha, Nebraska
August 6, 1998
(August 14, 1998 as to Notes 30 and 31)
33
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Financial Condition
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) June 30,
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash (including short-term investments of $6,586 and $3,965) ................................ $ 131,336 $ 128,171
Investment securities available for sale, at fair value ..................................... 140,359 90,982
Mortgage-backed securities available for sale, at fair value ................................ 165,697 277,654
Loans held for sale, net .................................................................... 289,666 83,441
Investment securities held to maturity (fair value of $455,906 and $456,316) ................ 455,028 458,517
Mortgage-backed securities held to maturity (fair value of $751,041 and $829,929............. 748,589 829,997
Loans and leases receivable, net of allowances of $59,698 and $57,002 ....................... 6,412,712 6,215,516
Federal Home Loan Bank stock ................................................................ 119,431 85,850
Interest receivable, net of allowances of $201 and $262 ..................................... 58,119 55,793
Real estate, net ............................................................................ 20,831 20,696
Premises and equipment, net ................................................................. 111,803 105,410
Prepaid expenses and other assets ........................................................... 125,924 119,073
Intangible assets, net of accumulated amortization of $31,649 and $24,179 ................... 73,145 55,408
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets ......................................................................... $ 8,852,640 $ 8,526,508
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits ................................................................................. $ 5,363,140 $ 5,453,572
Advances from Federal Home Loan Bank ..................................................... 2,271,772 1,597,326
Securities sold under agreements to repurchase ........................................... 334,294 639,294
Other borrowings ......................................................................... 106,577 156,305
Interest payable ......................................................................... 35,925 32,028
Other liabilities ........................................................................ 97,893 100,541
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities .................................................................... 8,209,601 7,979,066
- ----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies ............................................................... -- --
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued ............... -- --
Common stock, $.01 par value; 120,000,000 and 50,000,000 shares authorized;
42,078,678 and 40,528,791 shares issued and outstanding ................................ 421 298
Additional paid-in capital ............................................................... 233,727 196,890
Retained earnings ........................................................................ 409,735 352,013
Unearned Employee Stock Ownership Plan (ESOP) shares ..................................... (1,383) (1,529)
Unrealized holding gain (loss) on securities available for sale, net ..................... 539 (230)
- ----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity ........................................................... 643,039 547,442
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ........................................... $ 8,852,640 $ 8,526,508
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans and leases receivable ...................................... $ 529,880 $ 486,586 $ 447,580
Mortgage-backed securities ....................................... 67,426 80,538 91,353
Investment securities ............................................ 50,312 40,480 36,800
- ----------------------------------------------------------------------------------------------------------------
Total interest income ........................................ 647,618 607,604 575,733
Interest Expense:
Deposits ......................................................... 261,941 266,611 253,354
Advances from Federal Home Loan Bank ............................. 113,531 82,386 102,141
Securities sold under agreements to repurchase ................... 30,533 36,615 13,525
Other borrowings ................................................. 11,183 11,163 9,560
- ----------------------------------------------------------------------------------------------------------------
Total interest expense ....................................... 417,188 396,775 378,580
Net Interest Income ................................................. 230,430 210,829 197,153
Provision for Loan and Lease Losses ................................. (15,325) (12,284) (7,211)
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses........ 215,105 198,545 189,942
Other Income:
Loan servicing fees .............................................. 38,666 41,366 36,895
Retail fees and charges .......................................... 24,266 22,218 17,643
Real estate operations ........................................... 605 980 59
Gain on sales of loans ........................................... 2,745 1,924 1,941
Gain on sales of securities ...................................... 2,505 510 87
Other operating income ........................................... 19,478 14,135 12,143
- ----------------------------------------------------------------------------------------------------------------
Total other income ........................................... 88,265 81,133 68,768
Other Expense:
General and administrative expenses -
Compensation and benefits ...................................... 70,476 65,575 60,450
Occupancy and equipment ........................................ 23,981 21,240 19,090
Data processing ................................................ 15,855 11,067 9,899
Regulatory insurance and assessments ........................... 4,349 8,097 12,154
Advertising .................................................... 11,599 9,673 7,455
Other operating expenses ....................................... 43,531 38,477 35,899
Merger expenses ................................................ 18,034 -- 3,565
- ----------------------------------------------------------------------------------------------------------------
General and administrative expenses before
Federal deposit insurance special assessment ............... 187,825 154,129 148,512
Federal deposit insurance special assessment ................... -- 29,039 1,053
- ----------------------------------------------------------------------------------------------------------------
Total general and administrative expenses .................. 187,825 183,168 149,565
Amortization of intangible assets ................................ 7,470 10,974 10,209
- ----------------------------------------------------------------------------------------------------------------
Total other expense ........................................ 195,295 194,142 159,774
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Extraordinary Items .................. 108,075 85,536 98,936
Provision for Income Taxes .......................................... 40,742 30,069 32,741
- ----------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items ................................... 67,333 55,467 66,195
Extraordinary Items - Loss on Early Retirement of Debt,
Net of Tax Benefit of $316 ....................................... -- (583) --
- ----------------------------------------------------------------------------------------------------------------
Net Income .......................................................... $ 67,333 $ 54,884 $ 66,195
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Operations (continued)
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic earnings per share calculation ......... 41,101,318 40,354,486 41,061,801
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities ........................... 591,908 665,681 630,576
- -----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in diluted earnings per share calculation........ 41,693,226 41,020,167 41,692,377
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income before extraordinary items ................................ $ 1.64 $ 1.37 $ 1.61
Extraordinary items .............................................. -- (.01) --
- -----------------------------------------------------------------------------------------------------------------
Net income ....................................................... $ 1.64 $ 1.36 $ 1.61
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income before extraordinary items ................................ $ 1.62 $ 1.35 $ 1.59
Extraordinary items .............................................. -- (.01) --
- -----------------------------------------------------------------------------------------------------------------
Net income ....................................................... $ 1.62 $ 1.34 $ 1.59
- -----------------------------------------------------------------------------------------------------------------
Dividends declared per common share ................................. $ .212 $ .185 $ .178
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Unearned Unrealized
Employee Holding
Stock Gain (Loss)
Additional Ownership on Securities
Common Paid-in Retained Plan Available
Stock Capital Earnings Shares for Sale, Net Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 ......................... $ 226 $ 194,872 $ 242,921 $ (2,127) $ (922) $ 434,970
Issuance of 255,276 shares under certain
compensation and employee plans ........... 1 2,317 -- -- -- 2,318
Issuance of 1,592,014 shares of common
stock for acquisition of business ......... 7 25,819 -- -- -- 25,826
Restricted stock and deferred
compensation plans, net ................... -- 1,382 -- -- -- 1,382
Commitment of release of ESOP shares ........ -- -- -- 297 -- 297
Cash dividends declared ($.178 per share) -- -- (7,110) -- -- (7,110)
Purchase and cancellation of
283,038 shares of common stock
of combining companies .................... -- (4,370) -- -- -- (4,370)
Net income .................................. -- -- 66,195 -- -- 66,195
Change in unrealized holding gain (loss)
on securities available for sale, net ..... -- -- -- -- (1,783) (1,783)
Liberty Financial Corporation activity for
six months ended June 30, 1996 ............ -- -- 2,371 -- (530) 1,841
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 ......................... 234 220,020 304,377 (1,830) (3,235) 519,566
Issuance of 10,745,214 shares in
three-for-two stock split effected in
the form of a 50 percent stock dividend 72 (72) -- -- -- --
Repurchase and cancellation of 2,812,725
shares of common stock .................... (12) (49,312) -- -- -- (49,324)
Issuance of 189,331 shares under certain
compensation and employee plans ........... -- 2,478 -- -- -- 2,478
Issuance of 1,016,173 shares of common
stock for acquisition of business ......... 4 19,416 -- -- -- 19,420
Restricted stock and deferred
compensation plans, net ................... -- 1,292 -- -- -- 1,292
Commitment of release of ESOP shares ........ -- -- -- 301 -- 301
Cash dividends declared ($.185 per share) -- -- (7,248) -- -- (7,248)
Goodwill related to the acquisition of
Liberty Financial Corporation ............. -- 7,055 -- -- -- 7,055
Purchase and cancellation of
119,441 shares of common stock
of combining companies .................... -- (3,987) -- -- -- (3,987)
Net income .................................. -- -- 54,884 -- -- 54,884
Change in unrealized holding gain (loss)
on securities available for sale, net ..... -- -- -- -- 3,005 3,005
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 ......................... $ 298 $ 196,890 $ 352,013 $ (1,529) $ (230) $ 547,442
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL FEDERAL CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (continued)
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Unearned Unrealized
Employee Holding
Stock Gain (Loss)
Additional Ownership on Securities
Common Paid-in Retained Plan Available
Stock Capital Earnings Shares for Sale, Net Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 ....................... $ 298 $ 196,890 $ 352,013 $ (1,529) $ (230) $ 547,442
Mid Continent Bancshares, Inc. activity for
three months ended September 30, 1997 ... -- (797) (797) (28) -- (1,622)
Issuance of 10,865,530 shares in
three-for-two stock split effected in
the form of a 50 percent stock dividend . 109 (109) -- -- -- --
Issuance of 489,221 shares under certain
compensation and employee plans ......... 4 3,644 -- -- -- 3,648
Issuance of 992,842 shares of common
stock for acquisition of business ....... 10 32,257 -- -- -- 32,267
Restricted stock and deferred
compensation plans, net ................. -- 2,046 -- -- -- 2,048
Commitment of release of ESOP shares ...... -- -- -- 174 -- 174
Purchase and cancellation of
8,333 shares of common stock
of combining companies .................. -- (204) (204)
Cash dividends declared ($.212 per share) . -- -- (8,814) -- -- (8,814)
Net income ................................ -- -- 67,333 -- -- 67,333
Change in unrealized holding gain (loss)
on securities available for sale, net ... -- -- -- -- 769 769
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 ....................... $ 421 $ 233,727 $ 409,735 $ (1,383) $ 539 $ 643,039
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
38
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Cash Flows
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................ $ 67,333 $ 54,884 $ 66,195
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary items, net of tax benefit .......................... -- 583 --
Amortization of intangible assets ................................ 7,470 10,974 10,209
Provision for losses on loans and leases and real estate ......... 15,561 12,761 6,750
Depreciation and amortization .................................... 11,218 10,086 8,915
Accretion of deferred discounts and fees, net .................... (1,708) (866) (3,582)
Amortization of mortgage servicing rights ........................ 10,092 9,530 10,717
Amortization of deferred compensation on restricted stock
and deferred compensation plans and premiums on other borrowings 1,798 1,611 1,630
Deferred tax provision ........................................... 1,546 429 (52,041)
Gain on sales of real estate, loans and loan servicing rights, net (4,837) (3,776) (3,401)
Gain on sales of securities ...................................... (2,505) (510) (87)
Stock dividends from Federal Home Loan Bank ...................... (7,573) (5,017) (4,479)
Proceeds from sales of loans ..................................... 1,149,151 847,881 902,564
Origination of loans held for sale ............................... (619,522) (486,839) (590,846)
Purchases of loans held for sale ................................. (721,703) (403,645) (317,567)
Increase in interest receivable .................................. (244) (2,323) (3,953)
(Decrease) increase in interest payable and other liabilities .... (12,270) 7,512 (12,493)
Other items, net ................................................. (13,344) (36,655) (1,834)
----------- ----------- -----------
Total adjustments .............................................. (186,870) (38,264) (49,498)
----------- ----------- -----------
Net cash provided (used) by operating activities ............. (119,537) 16,620 16,697
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans .................................................... (787,496) (730,460) (600,777)
Repayment of loans, net of originations ............................... 478,513 227,616 284,283
Principal repayments of mortgage-backed securities available for sale . 69,812 55,570 34,341
Purchases of mortgage-backed securities available for sale ............ (40,758) (25,745) (35,452)
Proceeds from sales of mortgage-backed securities available for sale .. 121,187 99,273 243,684
Principal repayments of mortgage-backed securities held to maturity ... 214,007 135,626 177,639
Purchases of mortgage-backed securities held to maturity .............. -- -- (50,197)
Maturities and repayments of investment securities held to maturity ... 349,675 141,289 136,958
Purchases of investment securities held to maturity ................... (284,675) (257,762) (137,070)
Purchases of investment securities available for sale ................. (79,753) (59,043) (96,843)
Proceeds from sales of investment securities available for sale ....... 19,161 54,366 120,030
Maturities and repayments of investment securities available for sale . 29,186 31,070 5,093
Purchases of mortgage loan servicing rights ........................... (14,483) (10,194) (16,004)
Proceeds from sales of loan servicing rights .......................... 412 -- 452
Proceeds from sales of Federal Home Loan Bank stock ................... 7,229 21,502 41,085
Purchases of Federal Home Loan Bank stock ............................. (31,528) (11,133) (7,502)
Acquisitions, net of cash received (paid) ............................. 4,197 2,595 (15,234)
Proceeds from sales of real estate .................................... 18,317 16,854 12,653
Payments to acquire real estate ....................................... (2,806) (847) (1,817)
Purchases of premises and equipment, net .............................. (15,263) (19,626) (11,513)
Other items, net ...................................................... (11,442) 999 (5,112)
----------- ----------- -----------
Net cash provided (used) by investing activities ............ 43,492 (328,050) 78,697
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Commercial Federal Corporation Consolidated Statement of Cash Flows (continued)
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits .......................................... $ (232,413) $ 30,759 $ 191,204
Proceeds from Federal Home Loan Bank advances ............................ 1,533,265 1,216,465 1,405,000
Repayments of Federal Home Loan Bank advances ............................ (853,207) (1,147,130) (1,851,084)
Proceeds from securities sold under agreements to repurchase ............. 100,000 444,856 232,423
Repayments of securities sold under agreements to repurchase ............. (405,000) (186,317) (57,618)
Proceeds from issuances of other borrowings .............................. 12,254 154,735 14,873
Repayments of other borrowings ........................................... (66,347) (88,244) (9,755)
Payments for debt issue costs ............................................ -- (2,218) --
Payments of cash dividends on common stock ............................... (7,973) (7,233) (5,614)
Repurchases of common stock .............................................. -- (53,311) (4,370)
Issuance of common stock ................................................. 4,694 2,387 2,291
Other items, net ......................................................... 1,739 (289) (2)
----------- ----------- -----------
Net cash provided (used) by financing activities ................ 87,012 364,460 (82,652)
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in net cash position ............................................ 10,967 53,030 12,742
Balance, beginning of year ............................................... 128,171 81,001 68,259
Adjustment to convert acquisitions to fiscal year end .................... (7,802) (5,860) --
----------- ----------- -----------
Balance, end of year ..................................................... $ 131,336 $ 128,171 $ 81,001
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest expense ...................................................... $ 413,746 $ 396,724 $ 379,124
Income taxes, net ..................................................... 40,799 25,875 80,048
Non-cash investing and financing activities -
Securities transferred from held to maturity to available for sale, net -- -- 448,730
Loans exchanged for mortgage-backed securities ........................ 161,189 46,165 63,445
Loans transferred to real estate ...................................... 6,847 16,739 10,432
Loans to facilitate the sale of real estate ........................... 302 557 91
Common stock issued in connection with the acquisitions of businesses . 32,267 19,420 25,826
Common stock received in connection with stock options exercised, net . (3,728) -- --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE>
COMMERCIAL FEDERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(COLUMNAR DOLLARS IN FOOTNOTES ARE IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF CONSOLIDATION - The consolidated financial statements are prepared on
an accrual basis and include the accounts of Commercial Federal Corporation (the
Corporation) and its wholly-owned subsidiary, Commercial Federal Bank, a Federal
Savings Bank (the Bank), and all majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain amounts for
years prior to fiscal year 1998 have been reclassified for comparative purposes.
POOLING OF INTERESTS - During fiscal year 1998, the Corporation consummated the
acquisitions of Liberty Financial Corporation (Liberty), Mid Continent
Bancshares, Inc. (Mid Continent) and Perpetual Midwest Financial, Inc.
(Perpetual). These acquisitions were accounted for as pooling of interests and,
accordingly, the Corporation's historical consolidated financial statements were
restated for all periods prior to these acquisitions to include the accounts and
results of operations of these financial institutions. Liberty had a calendar
year end, Mid Continent a September 30th year end and Perpetual a June 30th year
end. In restating prior periods, Liberty's accounts and results of operations
were conformed to the Corporation's fiscal year ended June 30, 1997.
Accordingly, in changing fiscal years, Liberty's accounts and results of
operations for the six months ended June 30, 1996 were excluded from reported
results of operations for the restated combined companies. Mid Continent's
accounts and results of operations were conformed to the Corporation's fiscal
year ended June 30, 1998. Therefore, in conforming fiscal years, Mid Continent's
accounts and results of operations for the three months ended September 30, 1997
were included in results of operations for the restated combined companies for
both fiscal years ended June 30, 1997 and 1998. The Corporation's Consolidated
Statement of Stockholders' Equity as of June 30, 1996 has been adjusted to
include the Liberty activity for the six months ended June 30, 1996 and, as of
June 30, 1998, to exclude the Mid Continent activity for the three months ended
September 30, 1997.
NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and
loan holding company whose primary asset is the Bank which is a consumer-
oriented financial institution that emphasizes single-family residential and
construction real estate lending, community banking operations, consumer
lending, commercial real estate lending, retail deposit activities, mortgage
banking, commercial and agribusiness lending, equipment leasing and other retail
financial services. The Bank conducts loan origination activities through its
branch office network, loan offices of its wholly-owned mortgage banking
subsidiary and a nationwide correspondent network.
USE OF ESTIMATES -The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
CASH AND CASH EQUIVALENTS -For the purpose of reporting cash flows, cash and
cash equivalents include cash, restricted cash and federal funds sold.
Generally, federal funds are purchased and sold for a one-day period.
SECURITIES - Securities are classified in one of three categories and accounted
for as follows: (i) debt securities that the Corporation has the positive intent
and ability to hold to maturity are classified as "held-to-maturity securities"
and reported at amortized cost; (ii) debt and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as "trading securities" and reported at fair value, with unrealized
gains and losses included in earnings; and (iii) debt and equity securities not
classified as either held-to-maturity securities or trading securities are
classified as "available-for-sale securities" and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity net of deferred income taxes.
Premiums and discounts are amortized over the contractual lives of the
related securities on the level yield method. Unrealized losses on securities,
if any, reflecting a decline in the fair value of such securities considered to
be other than temporary, are charged against income. Realized gains or losses on
securities available for sale are based on the specific identification method
and are included in results of operations on the trade date.
LOANS AND LEASES -Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are recorded at the
contractual amounts owed by borrowers less unamortized discounts, net of
premiums, undisbursed funds on loans in process, deferred loan fees and
allowance for loan losses. Interest on loans is accrued to income as earned,
except that interest is not accrued on first mortgage loans contractually
delinquent three months or more. Any related discounts or premiums on loans
purchased are amortized into interest income using the level yield method over
the contractual lives of the loans, adjusted for actual prepayments. Loan
origination fees, commitment fees and direct loan origination costs are deferred
and recognized over the estimated average life of the loan as a yield
adjustment.
41
<PAGE>
Loans held for sale are carried at the lower of aggregate cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis. Valuation
adjustments, if necessary, to reflect the lower of aggregate cost or market
value, are recorded in current operations.
Leases are accounted for as direct financing leases for financial statement
purposes. The total minimum rentals receivable and the residual value of leased
assets under each lease contract are recorded as assets, net of unearned income.
Unearned income is the excess of the total rentals receivable and residual value
over the cost of the leased asset. Unearned income is recognized during the
lease term utilizing the interest method. Direct origination costs are deferred
and recognized over the estimated life of the lease.
REAL ESTATE - Real estate includes real estate acquired through foreclosure,
real estate in judgment and real estate held for investment, which includes
equity in unconsolidated joint ventures and investment in real estate
partnerships.
Real estate acquired through foreclosure and in judgment are initially
recorded at the lower of cost or fair value minus estimated costs to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valuation
allowances for estimated losses on real estate are provided when the carrying
value exceeds the fair value minus estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities incurred to date. Joint
venture and partnership investments are carried on the equity method of
accounting and, where applicable, are stated at net realizable value. The
Corporation's ability to recover the carrying value of real estate held for
investment (including capitalized interest) is based upon future sales of land
or projects. The ability to effect such sales is subject to market conditions
and other factors which may be beyond the Corporation's control.
ALLOWANCE FOR LOAN AND LEASE LOSSES - The allowance for loan and lease losses is
increased by charges to income and decreased by charge-offs, net of recoveries.
Management's periodic evaluation of the adequacy of the allowance is based on
the Corporation's past loan and lease loss experience, known and inherent risks
in the respective portfolios, the estimated value of any underlying collateral
and current economic conditions. Impaired loans except large groups of smaller
balance homogeneous loans (such as residential real estate and consumer loans)
that are collectively evaluated for impairment and loans that are measured at
fair value or the lower of cost or market value, are measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as a practical expedient, at the observable market price of
the loan or the fair value of the underlying collateral if the loan is
collateral dependent.
ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation purchased single-
family residential whole loan packages (bulk purchased loans) at net discounts.
Portions of such discounts were allocated to allowance for losses (credit
allowances) relating to the credit risk associated with each mortgage loan
package purchased. These credit allowances are available to absorb possible
losses on these bulk purchased loans only or are credited to interest income as
actual prepayments of individual loans occur. Collectibility is evaluated
throughout the life of the acquired loans and if the estimate of total probable
collections is increased or decreased, the amount of the allowance on bulk
purchased loans (and the corresponding discount to be amortized) is adjusted
accordingly.
MORTGAGE SERVICING RIGHTS - Mortgage servicing rights represent the cost of
acquiring the right to service mortgage loans. Such costs are initially
capitalized and subsequently amortized in proportion to, and over the period of,
estimated net loan servicing income. Effective January 1, 1997, the Corporation
adopted Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) on a prospective basis. SFAS No. 125 supercedes Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" which was adopted by the Corporation on July 1, 1995. The adoption of
SFAS No. 125 did not have a material effect on the Corporation's financial
position or results of operations. SFAS No. 125 requires that a mortgage banking
enterprise recognize as a separate asset the rights to service mortgage loans
for unrelated third parties that have been acquired through either the purchase
or origination of a loan. This statement also provides that an institution that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing rights
retained will allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values.
Amortization of mortgage servicing rights is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the mortgage servicing rights. Projected net
servicing income is in turn determined on the basis of the estimated future
balance of the underlying mortgage loan portfolio, which decreases over time
from scheduled loan amortization and prepayments. The Corporation estimates
future prepayment rates based on relevant characteristics of the servicing
portfolio, such as loan types, interest rate stratification and recent
prepayment experience, as well as current interest rate
42
<PAGE>
levels, market forecasts and other economic conditions. Additionally, SFAS No.
125 requires that mortgage servicing rights be reported at the lower of
amortized cost or fair value. The fair value of mortgage servicing rights is
determined based on the present value of estimated expected future cash flows,
using assumptions as to current market discount rates, prepayment speeds and
servicing costs per loan. Mortgage servicing rights are stratified by loan type
and interest rate for purposes of impairment measurement. Loan types include
government, conventional and adjustable-rate mortgage loans. Impairment losses
are recognized to the extent the unamortized mortgage servicing rights for each
stratum exceed the current fair value, as reductions in the carrying value of
the asset, through the use of a valuation allowance, with a corresponding
reduction to loan servicing income. No valuation allowance for capitalized
servicing rights was necessary to be established as of June 30, 1998, 1997 or
1996.
PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building
improvements, leasehold improvements and furniture, fixtures and equipment are
stated at the lower of cost or fair value less accumulated depreciation and
amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets. Estimated lives are 10 to 50 years
for buildings and three to 15 years for furniture, fixtures and equipment.
Leasehold improvements are generally amortized on the straight-line method over
the terms of the respective leases. Maintenance and repairs are charged to
expense as incurred.
INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS -Goodwill represents the
excess of the purchase price over the fair value of the net identifiable assets
acquired in business combinations. Core value of deposits represents the
intangible value assigned to core deposit bases arising from purchase
acquisitions. The Corporation reviews its intangible assets for impairment at
least annually or whenever events or changes in circumstances indicate that the
carrying amount of such asset may not be recoverable. In such cases, the
expected future cash flows (undiscounted and without interest charges) resulting
from the use of the asset are estimated and an impairment loss recognized if the
sum of such cash flows is less than the carrying amount of the asset. Should
such an assessment indicate that the value of the intangible asset may be
impaired, an impairment loss is recognized for the difference between the
carrying value of the asset and its estimated fair value.
Core value of deposits is amortized on an accelerated basis over a period
not to exceed 10 years and goodwill is amortized on a straight-line basis over a
period not to exceed 20 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -The Corporation enters into
sales of securities under agreements to repurchase with primary dealers only,
which provide for the repurchase of the same security. Securities sold under
agreements to purchase identical securities are collateralized by assets which
are held in safekeeping in the name of the Corporation by the dealers who
arranged the transaction. Securities sold under agreements to repurchase are
treated as financings and the obligations to repurchase such securities are
reflected as a liability. The securities underlying the agreements remain in the
asset accounts of the Corporation.
DERIVATIVE FINANCIAL INSTRUMENTS - The Corporation utilizes derivative financial
instruments as part of an overall interest rate risk management strategy.
Derivative financial instruments utilized by the Corporation include interest
rate swap agreements and interest rate floor agreements. The Corporation is an
end-user of derivative financial instruments and does not conduct trading
activities for derivatives. These derivative financial instruments involve, to
varying degrees, elements of credit and market risk which are not recognized on
the balance sheet. Credit risk is defined as the possibility that a loss may
occur from the failure of another party to perform in accordance with the terms
of the contract which exceeds the value of existing collateral, if any. Market
risk is the possibility that future changes in market conditions may make the
derivative financial instrument less valuable. The Corporation evaluates the
risks associated with derivatives in much the same way as the risks with
on-balance sheet financial instruments. The derivative's risk of credit loss is
generally a small fraction of the notional value of the instrument and is
represented by the fair value of the derivative instrument. The Corporation
attempts to limit its credit risk by dealing with creditworthy counterparties
and obtaining collateral where appropriate.
Interest rate swap agreements are used principally as a tool to
synthetically extend the maturities of certain deposit liabilities for asset
liability management and interest rate risk management purposes for the
Corporation. These contracts represent an exchange of interest payment streams
based on an agreed-upon notional principal amount with at least one stream based
on a specified floating-rate index. The underlying principal balances of the
deposit liabilities are not affected. Net settlement amounts are reported as
adjustments to interest expense on an accrual basis over the lives of the
agreements. Cash flows are reported net as operating activities.
Interest rate floor agreements require the seller to pay the purchaser, at
specified dates, the amount, if any, by which the market interest rate falls
below the agreed-upon floor, applied to a notional principal amount. Such
positions are designed to protect the value of the mortgage servicing rights
from the effects of increased prepayment activity that generally result from
declining interest rates. Realized gains and losses on positions used as hedges
of capitalized mortgage servicing rights are deferred and amortized to
43
<PAGE>
expense over the remaining life of the original agreement while unrealized gains
and losses are considered in the impairment analysis of the fair value of such
mortgage servicing rights. Premiums are amortized to expense on a straight-line
basis over the life of the agreement. Unamortized premiums paid are included in
other assets. Cash payments received from these agreements are recognized upon
receipt as a reduction to amortization expense.
INCOME TAXES -The Corporation files a consolidated federal income tax return.
The Corporation and its subsidiaries entered into a tax sharing agreement that
provides for the allocation and payment of federal and state income taxes. The
provision for income taxes of each corporation is computed on a separate company
basis, subject to certain adjustments. The Corporation calculates income taxes
on the liability method, under which the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various assets and liabilities of the Corporation giving current
recognition to changes in tax rates and laws.
STOCK SPLITS - On November 17, 1997, the Board of Directors of the Corporation
declared a three-for-two stock split effected in the form of a 50 percent stock
dividend to stockholders of record on November 28, 1997. Par value of the common
stock remained at $.01 per share. The stock dividend, distributed on December
15, 1997, totaled 10,865,530 shares of common stock. Also, on November 18, 1996,
the Board of Directors declared a three-for-two stock split effected in the form
of a 50 percent stock dividend to stockholders of record on December 31, 1996.
This stock dividend, which was distributed on January 14, 1997, totaled
10,745,214 shares of common stock (7,163,476 shares before adjusted for the
three-for-two stock split effective December 15, 1997). All references to the
number of shares, per share amounts and stock prices for all periods presented
have been adjusted on a retroactive basis to reflect the effect of these stock
splits.
EARNINGS PER COMMON SHARE - The Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 128, entitled "Earnings Per Share" (SFAS
No. 128) effective December 15, 1997, and accordingly, restated all prior period
earnings per share to conform with SFAS No. 128. This statement requires dual
presentation with equal prominence of basic and diluted earnings per share (EPS)
for income from continuing operations and for net income on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. The adoption of SFAS No. 128 did not have a material effect on
previously reported EPS.
NOTE 2. ACQUISITIONS:
First National Bank Shares, LTD
On January 30, 1998, the Corporation consummated its acquisition of First
National Bank Shares, LTD (First National), parent company of First United
National Bank and Trust Company. Under the terms of the merger agreement, all of
the outstanding shares of First National's common stock were exchanged for
992,842 shares of the Corporation's common stock. Based on the Corporation's
closing price on January 30, 1998, of $32.50 per share, the exchange of the
Corporation's common stock resulted in a total aggregate value approximating
$32,267,000. At January 30, 1998, before purchase accounting adjustments, First
National had assets of approximately $147,800,000, deposits of approximately
$131,300,000 and stockholders' equity of approximately $12,000,000. First
National operated seven branches located in Kansas. This acquisition was
accounted for as a purchase with resulting core value of deposits totaling
$6,045,000 amortized on an accelerated basis over 10 years, and goodwill
totaling $19,162,000 amortized on a straight-line basis over 20 years. The
effect of the First National acquisition on the Corporation's consolidated
financial statements as if this acquisition had occurred at the beginning of
fiscal year 1998 is not material.
Liberty Financial Corporation
On February 13, 1998, the Corporation consummated its acquisition of
Liberty, a privately held commercial bank and thrift holding company. Pursuant
to the terms of the merger agreement, all 8,748,500 outstanding shares of
Liberty's common stock were exchanged for 4,015,555 shares of the Corporation's
common stock (exchange ratio of .459 based on an average closing price of
$33.7062) for total consideration of approximately $135,349,000. Liberty
operated 38 branches in Iowa and seven in the metropolitan area of Tucson,
Arizona and at January 31, 1998, had assets of approximately $658,100,000,
deposits of approximately $569,800,000 and stockholders' equity of approximately
$50,100,000. This acquisition was accounted for as a pooling of interests.
Mid Continent Bancshares, Inc.
On February 27, 1998, the Corporation consummated its acquisition of Mid
Continent, parent company of Mid-Continent Federal Savings Bank. Pursuant to the
terms of
44
<PAGE>
the merger agreement, all outstanding shares of Mid Continent's common stock
were exchanged for 2,641,945 shares of the Corporation's common stock (exchange
ratio of 1.3039 based on an average closing price of $32,9156) for total
consideration of approximately $86,961,000. Mid Continent operated ten branches
located in Kansas and at February 27, 1998, had total assets of approximately
$405,700,000, deposits of approximately $258,600,000 and stockholders' equity of
approximately $41,200,000. This acquisition was accounted for as a pooling of
interests.
Perpetual Midwest Financial, Inc.
On May 29, 1998, the Corporation consummated its acquisition of Perpetual,
parent company of Perpetual Savings Bank, FSB. Under the terms of the merger
agreement, the Corporation acquired in a tax-free reorganization all 1,989,261
outstanding shares of Perpetual's common stock in exchange for .8636 shares, or
1,717,721 shares of the Corporation's common stock. Based on the Corporation's
closing price on May 29, 1998, of $33.3125 per share, the transaction had an
aggregate value of approximately $57,222,000. At May 29, 1998, Perpetual had
total assets of approximately $412,200,000, deposits of approximately
$323,400,000, and stockholders' equity of approximately $36,000,000. Perpetual
operated five branches located in Iowa. This acquisition was accounted for as a
pooling of interests.
The following table summarizes results of operations of the Corporation,
Liberty, Mid Continent and Perpetual, as separately reported prior to the
mergers, that are included in results of operations for fiscal year 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Total
Income and Interest Net
Other Income Expense Income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the six months ended December 31, 1997 as separately reported:
Corporation ................................................... $299,735 $179,473 $ 34,868
Liberty ....................................................... 33,997 12,745 2,644
Mid Continent ................................................. 18,955 9,061 1,831
- ---------------------------------------------------------------------------------------------------------------------------
Combined ...................................................... $352,687 $201,279 $ 39,343
---------------------------------------------------------------------------------------------------------------------------
For the nine months ended March 31, 1998 as separately reported:
Corporation ................................................... $526,854 $299,811 $ 47,537
Perpetual ..................................................... 24,014 14,383 1,621
- ---------------------------------------------------------------------------------------------------------------------------
Combined ...................................................... $550,868 $314,194 $ 49,158
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reconciles total interest income and other income,
total interest expense and net income previously reported by the Corporation to
give effect to the fiscal year 1998 mergers as currently presented in the
financial statements for fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Total
Income and Interest Net
Other Income Expense Income
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fiscal year 1997:
Corporation ................................................... $563,529 $337,047 $ 44,094
Liberty ....................................................... 58,413 23,914 6,153
Mid Continent ................................................. 35,308 16,834 4,170
Perpetual ..................................................... 31,487 18,980 467
- ---------------------------------------------------------------------------------------------------------------------------
Combined ...................................................... $688,737 $396,775 $ 54,884
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal year 1996:
Corporation ................................................... $540,738 $328,317 $ 55,306
Liberty ....................................................... 46,341 19,929 6,269
Mid Continent ................................................. 28,996 12,268 3,126
Perpetual ..................................................... 28,426 18,066 1,494
- ---------------------------------------------------------------------------------------------------------------------------
Combined ...................................................... $644,501 $378,580 $ 66,195
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
Prior to merger into the Corporation, results of operations for Liberty
were reported on a calendar year basis and Mid Continent on a September 30
fiscal year basis. However, in restating prior periods, the accounts and results
of operations of Liberty and Mid Continent were conformed to the Corporation's
fiscal years ended June 30, 1997 and 1998, respectively. Accordingly, in
changing fiscal years, Liberty's accounts and results of operations for the six
months ended June 30, 1996, including total interest income and other income of
$24,952,000, total interest expense of $9,916,000 and net income $2,371,000 (net
of a cash dividend of $479,000), were excluded from reported results of
operations for the restated combined companies but are included in the
Corporation's Consolidated Statement of Stockholders' Equity. Mid Continent's
accounts and results of operations for the three months ended September 30,
1998, including total interest income and other income of $9,507,000, total
interest expense of $4,558,000 and net income of $797,000 (net of a cash
dividend of $180,000), were included in results of operations for the restated
combined companies for fiscal years 1998 and 1997, and are excluded in the
Corporation's Consolidated Statement of Stockholders' Equity for the fiscal year
ended June 30, 1998.
Heritage Financial, Ltd.
On October 1, 1996, the Corporation consummated its acquisition of Heritage
Financial, Ltd. (Heritage). The Corporation acquired all 180,762 outstanding
shares of Heritage's common stock for $18.73 per share in cash ($3,386,000) and
1,016,173 shares of the Corporation's common stock for total consideration of
approximately $22,806,000. At October 1, 1996, before purchase accounting
adjustments, Heritage had assets of $182,934,000, deposits of $158,168,000 and
stockholders' equity of $10,308,000. Heritage operated six branches located in
west-central Iowa. This acquisition was accounted for as a purchase with
resulting core value of deposits totaling $7,633,000 amortized on an accelerated
basis over 10 years and goodwill totaling $8,617,000 amortized on a
straight-line basis over 20 years.
Investors Federal Savings
On May 1, 1997, the Corporation consummated its acquisition of Investors
Federal Savings (Investors). The Corporation acquired all of the outstanding
shares of Investors' common stock for $23.00 in cash for a total consideration
of approximately $5,347,000. At April 30, 1997, before purchase accounting
adjustments, Investors had assets of $30,723,000, deposits of $26,117,000 and
stockholders' equity of $4,431,000. Investors operated three branches in
southwest Kansas with one branch closed as part of the acquisition consolidation
process. This acquisition was accounted for as a purchase with resulting
goodwill totaling $925,000.
The effect of the Heritage and Investors acquisitions on the Corporation's
consolidated financial statements as if these acquisitions had occurred at the
beginning of fiscal year 1997 is not material.
Railroad Financial Corporation
On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad) with Railroad's common stock exchanged for
approximately 3,099,637 shares of the Corporation's common stock for total
consideration of approximately $48,303,000. Railroad operated 18 branches and 71
agency offices throughout Kansas and at September 30, 1995, had assets of
approximately $602,900,000, deposits of approximately $421,400,000 and
stockholders' equity of approximately $27,700,000. This acquisition was
accounted for as a pooling of interests and accordingly, the Corporation's
historical consolidated financial statements were restated for all periods prior
to the acquisition to include the accounts and results of operations of
Railroad.
Conservative Savings Corporation
On February 1, 1996, the Corporation consummated its acquisition of
Conservative Savings Corporation (Conservative). The Corporation acquired all of
the outstanding shares of Conservative's common stock and preferred stock. Based
on the Corporation's closing stock price of $16.22 at February 1, 1996, the
total consideration for this acquisition approximated $44,114,000. At February
1, 1996, before purchase accounting adjustments, Conservative had assets of
approximately $302,871,000, deposits of approximately $197,940,000 and
stockholders' equity of approximately $35,124,000. Conservative operated nine
branches with seven located in Nebraska, one in Kansas and one in Iowa. This
acquisition was accounted for as a purchase with core value of deposits totaling
$6,842,000 amortized on an accelerated basis over 10 years and goodwill totaling
$6,158,000 amortized on a straight-line basis over 20 years. The effect of this
acquisition on the Corporation's consolidated financial statements as if this
acquisition had occurred at the beginning of fiscal year 1996 is not material.
46
<PAGE>
NOTE 3. INVESTMENT SECURITIES:
<TABLE>
<CAPTION>
Investment securities are summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1998 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and other Government agency obligations $ 123,556 $ 719 $ (29) $ 124,246
States and political subdivisions ................... 7,168 79 (127) 7,120
Other securities .................................... 8,978 20 (5) 8,993
- ---------------------------------------------------------------------------------------------------------------------------
$ 139,702 $ 818 $ (161) $ 140,359
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ...................... 6.86%
- ---------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations $ 388,199 $ 851 $ (157) $ 388,893
States and political subdivisions ................... 48,571 333 (276) 48,628
Other securities .................................... 18,258 130 (3) 18,385
- ---------------------------------------------------------------------------------------------------------------------------
$ 455,028 $ 1,314 $ (436) $ 455,906
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ...................... 6.53%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1997 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and other Government agency obligations $ 67,376 $ 164 $ (123) $ 67,417
States and political subdivisions ................... 15,940 90 (13) 16,017
Other securities .................................... 7,527 23 (2) 7,548
- ---------------------------------------------------------------------------------------------------------------------------
$ 90,843 $ 277 $ (138) $ 90,982
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ...................... 6.14%
- ---------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations $ 425,267 $ 489 $ (2,712) $ 423,044
States and political subdivisions ................... 14,068 19 (137) 13,950
Other securities .................................... 19,182 140 -- 19,322
- ---------------------------------------------------------------------------------------------------------------------------
$ 458,517 $ 648 $ (2,849) $ 456,316
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ...................... 6.77%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
As of June 30, 1998 and 1997, the Corporation recorded unrealized gains on
securities available for sale as increases to stockholders' equity totaling
$657,000 and $173,000, respectively, net of deferred income taxes of $239,000
and $54,000, respectively.
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 1998, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
--------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less ......................... $ 34,754 $ 34,863 $ 62,080 $ 62,075
Due after one year through five years............ 19,724 19,611 80,761 80,984
Due after five years through ten years........... 33,148 33,401 242,620 242,872
Due after ten years ............................. 52,076 52,484 69,567 69,975
- ----------------------------------------------------------------------------------------------------------------------------
$ 139,702 $ 140,359 $ 455,028 $ 455,906
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Activity from the sales of investment securities available for sale for the years ended June 30 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Net
Realized Realized Gain
Fiscal Year Ended Proceeds Gains Losses (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 ........................................................ $ 19,161 $ 27 $ (4) $ 23
1997 ........................................................ 54,366 91 (57) 34
1996 ........................................................ 120,030 27 (243) (216)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1996, agency-backed investment securities with an
amortized cost of $49,945,000 and a fair value of $49,570,000 were reclassified
from securities held to maturity to securities available for sale pursuant to
the reassessment of the appropriateness of the classifications of all securities
held as permitted by a special report by the Financial Accounting Standard Board
entitled "A Guide To Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities."
At June 30, 1998 and 1997, investment securities totaling $179,270,000 and
$140,898,000, respectively, were pledged primarily to secure public funds,
Federal Home Loan Bank advances and securities sold under agreements to
repurchase.
48
<PAGE>
NOTE 4. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
JUNE 30, 1998 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation .. $ 39,914 $ 557 $ (44) $ 40,427
Government National Mortgage Association 75,218 116 (686) 74,648
Federal National Mortgage Association ... 23,270 130 (155) 23,245
Collateralized Mortgage Obligations ..... 24,428 168 (26) 24,570
Other ................................... 2,817 11 (21) 2,807
- ----------------------------------------------------------------------------------------------------
$ 165,647 $ 982 $ (932) $ 165,697
- ----------------------------------------------------------------------------------------------------
Weighted average interest rate .......... 6.44%
- ----------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation .. $ 146,849 $ 1,269 $ (1,499) $ 146,619
Government National Mortgage Association 480,373 3,994 (2,091) 482,276
Federal National Mortgage Association ... 68,990 1,420 (417) 69,993
Collateralized Mortgage Obligations ..... 37,604 33 (656) 36,981
Privately Issued Mortgage Pool Securities 14,773 559 (160) 15,172
- ----------------------------------------------------------------------------------------------------
$ 748,589 $ 7,275 $ (4,823) $ 751,041
- ----------------------------------------------------------------------------------------------------
Weighted average interest rate .......... 6.76%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1997 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation .. $ 47,029 $ 155 $ (201) $ 46,983
Government National Mortgage Association 120,668 343 (1,196) 119,815
Federal National Mortgage Association ... 68,221 715 (92) 68,844
Collateralized Mortgage Obligations ..... 34,426 36 (810) 33,652
Other ................................... 8,398 4 (42) 8,360
- --------------------------------------------------------------------------------------------------------
$ 278,742 $ 1,253 $ (2,341) $ 277,654
- --------------------------------------------------------------------------------------------------------
Weighted average interest rate .......... 6.99%
- --------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation .. $ 192,267 $ 1,349 $ (3,241) $ 190,375
Government National Mortgage Association 481,259 3,597 (1,587) 483,269
Federal National Mortgage Association ... 91,610 1,608 (1,240) 91,978
Collateralized Mortgage Obligations ..... 44,499 34 (1,248) 43,285
Privately Issued Mortgage Pool Securities 20,362 747 (87) 21,022
- --------------------------------------------------------------------------------------------------------
$ 829,997 $ 7,335 $ (7,403) $ 829,929
- --------------------------------------------------------------------------------------------------------
Weighted average interest rate .......... 6.63%
- --------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
Mortgage-backed securities held to maturity at June 30 are classified by type of
interest payment and contractual maturity term as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate ................... $504,510 $504,850 6.75% $635,406 $636,152 6.64%
Fixed rate, 5-year term ........... 34,584 34,716 6.44 56,044 55,811 6.32
Fixed rate, 7-year term ........... 29,683 29,625 5.99 38,388 37,871 6.00
Fixed rate, 15-year term .......... 44,429 44,735 6.49 23,855 23,462 6.59
Fixed rate, 30-year term .......... 97,779 100,134 7.59 31,805 33,347 8.77
- ----------------------------------------------------------------------------------------------------------------
710,985 714,060 6.80 785,498 786,643 6.67
Collateralized mortgage obligations 37,604 36,981 5.94 44,499 43,286 5.89
- ----------------------------------------------------------------------------------------------------------------
$748,589 $751,041 6.76% $829,997 $829,929 6.63%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1998, the Corporation recorded unrealized gains on
securities available for sale as increases to stockholders' equity totaling
$190,000 net of deferred income taxes of approximately $69,000 and as of June
30, 1997, recorded unrealized losses on securities available for sale as
decreases to stockholders' equity totaling $567,000 net of deferred income tax
benefits of approximately $218,000.
Activity from the sales of mortgage-backed securities available for sale
for the years ended June 30 is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Gross Gross
Realized Realized Net
Fiscal Year Ended Proceeds Gains Losses Gain
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998....................... $121,187 $2,511 $ (29) $2,482
1997....................... 99,273 999 (523) 476
1996....................... 243,684 979 (676) 303
- -------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1996, mortgage-backed securities with an amortized cost
of $370,400,000 and a fair value of $375,691,000 were reclassified from
securities held to maturity to securities available for sale pursuant to the
reassessment of the appropriateness of the classifications of all securities
held, and as permitted by the aforementioned special report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." In addition, adjustable-rate mortgage-backed
securities with an amortized cost of $9,415,000 and a fair value of $9,602,000
were reclassified from available for sale to held to maturity.
At June 30, 1998 and 1997, mortgage-backed securities totaling $375,177,000
and $655,706,000, respectively, were pledged as collateral primarily for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase, interest rate swap agreements and Federal Home Loan
Bank advances.
50
<PAGE>
NOTE 5. LOANS HELD FOR SALE:
Loans held for sale from mortgage banking operations at June 30, 1998 and
1997, totaled $289,666,000 and $83,441,000, respectively, with weighted average
rates of 7.21% and 7.52%, respectively. Loans held for sale are secured by
single-family residential properties and at June 30, 1998, consisted of fixed
and adjustable rate mortgage loans totaling $289,240,000 and $426,000,
respectively, and at June 30, 1997 consisted entirely of fixed rate mortgage
loans.
NOTE 6. LOANS AND LEASES RECEIVABLE:
Loans and leases receivable at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Conventional mortgage loans .............. $ 4,578,907 $ 4,524,358
FHA and VA loans ......................... 356,406 380,888
Commercial real estate loans ............. 429,564 431,161
Construction loans ....................... 312,439 292,198
Consumer, other loans and leases ......... 888,729 738,633
- ------------------------------------------------------------------------------
6,566,045 6,367,238
Unamortized premiums, net ................ 5,681 6,231
Loans-in-process ......................... (107,651) (98,983)
Deferred loan costs (fees), net .......... 8,335 (1,968)
Allowance for loan and lease losses ...... (59,698) (57,002)
- ------------------------------------------------------------------------------
$ 6,412,712 $ 6,215,516
- ------------------------------------------------------------------------------
Weighted average interest rate ........... 7.99% 8.19%
- ------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, conventional, FHA and VA loans, including loans held for
sale, totaling $5,494,372,000 are secured by residential properties located as
follows: 17% in Nebraska, 12% in Colorado, 12% in Kansas, and the remaining 59%
in 47 other states. At June 30, 1997, conventional, FHA and VA loans, including
loans held for sale, totaling $5,259,149,000 were secured by residential
properties located as follows: 17% in Nebraska, 14% in Colorado, 10% in Kansas
and the remaining 59% in 47 other states. The commercial real estate portfolio
at June 30, 1998, is secured by properties located as follows: 33% in Iowa, 24%
in Colorado, 11% in Nebraska, and the remaining 32% in 13 other states. The
commercial real estate portfolio at June 30, 1997, was secured by properties
located as follows: 42% in Iowa, 23% in Colorado, 16% in Nebraska and the
remaining 19% in 17 other states. The lease portfolio totaling $62,182,000 and
$46,174,000 at June 30, 1998 and 1997, respectively, includes contracts to
lessees throughout the United States and involved in various industries. The
commercial operating loan portfolio, including agricultural loans, is well
diversified with no industry constituting a concentration.
Nonperforming loans and leases at June 30, 1998 and 1997, aggregated
$46,467,000 and $42,170,000, respectively. Of the nonperforming loans and leases
at June 30, 1998, approximately 13% are secured by properties located in Kansas,
9% in Iowa, 7% each in California and Oklahoma and the remaining 64% located in
46 other states. Of the nonperforming loans and leases at June 30, 1997,
approximately 8% were secured by properties located in Texas, 7% each in
California, Iowa and Kansas and the remaining 71% located in 38 other states.
Also included in loans and leases receivable at June 30, 1998 and 1997, are
loans with carrying values of $4,302,000, $10,615,000 and $15,585,000,
respectively, the terms of which have been modified in troubled debt
restructurings. During the fiscal years ended June 30, 1998, 1997 and 1996, the
Corporation recognized interest income on these loans aggregating $380,000,
$852,000 and $1,324,000, respectively, whereas under their original terms the
Corporation would have recognized interest income of $499,000, $1,087,000 and
$1,619,000, respectively. At June 30, 1998, the Corporation had no material
commitments to lend additional funds to borrowers whose loans were subject to
troubled debt restructurings. Impaired loans, a portion of which are included in
the balances for troubled debt restructurings at June 30, 1998 and 1997, and the
resulting interest income as originally contracted and as recognized, are not
material for either fiscal year 1998 or 1997.
At June 30, 1998 and 1997, the Corporation pledged real estate loans
totaling $3,045,978,000 and $3,155,556,000, respectively, as collateral for
Federal Home Loan Bank advances and other borrowings.
51
<PAGE>
NOTE 7. REAL ESTATE:
Real estate at June 30 is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned and in judgment,
net of allowance for losses of $647 and $2,097 ............................ $13,092 $11,528
Real estate held for investment, which includes equity in unconsolidated joint
ventures and investments in real estate
partnerships, net of allowance for losses of $777 and $1,058 .............. 7,739 9,168
- ----------------------------------------------------------------------------------------------------
$20,831 $20,696
- ----------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and 1997, real estate is comprised primarily of commercial
real estate (56% and 58%, respectively) and residential real estate (42% for
both periods). Real estate located by states at June 30, 1998, is as follows:
42% in Nebraska, 13% in Colorado and the remaining 45% in 23 other states. Real
estate located by states at June 30, 1997, was as follows: 40% in Nebraska, 25%
in Colorado and the remaining 35% in 23 other states.
NOTE 8. ALLOWANCES FOR LOSSES ON LOANS AND LEASES AND REAL ESTATE:
An analysis of the allowances for losses on loans and leases and real estate is
summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Loans and
Leases Real Estate Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1995 (1) .............................................. $ 55,853 $ 6,025 $ 61,878
- ---------------------------------------------------------------------------------------------------------------------------
Provision charged (credited) to operations .............................. 7,211 (461) 6,750
Charges ................................................................. (6,827) (1,246) (8,073)
Recoveries .............................................................. 985 159 1,144
Allowances acquired in acquisitions ..................................... 1,944 -- 1,944
Change in estimate of allowance for bulk purchased loans ................ (2,273) -- (2,273)
Charge-offs to allowance for bulk purchased loans ....................... (242) -- (242)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 (1) .............................................. 56,651 4,477 61,128
- ---------------------------------------------------------------------------------------------------------------------------
Provision charged to operations ......................................... 12,284 477 12,761
Charges ................................................................. (15,127) (1,873) (17,000)
Recoveries .............................................................. 2,786 43 2,829
Allowances acquired in acquisitions ..................................... 1,966 31 1,997
Liberty activity for the six months ended June 30, 1996, net ............ 475 -- 475
Change in estimate of allowance for bulk purchased loans ................ (1,878) -- (1,878)
Charge-offs to allowance for bulk purchased loans ....................... (78) -- (78)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (1) .............................................. 57,079 3,155 60,234
- ---------------------------------------------------------------------------------------------------------------------------
Provision charged to operations ......................................... 15,325 236 15,561
Charges ................................................................. (13,850) (2,092) (15,942)
Recoveries .............................................................. 2,622 61 2,683
Allowances acquired in acquisitions ..................................... 1,004 52 1,056
Mid Continent activity for the three months ended September 30, 1997, net (38) 12 (26)
Change in estimate of allowance for bulk purchased loans ................ (2,324) -- (2,324)
Charge-offs to allowance for bulk purchased loans ....................... (23) -- (23)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (1) .............................................. $ 59,795 $ 1,424 $ 61,219
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $97,000 and $77,000 at June 30, 1998 and 1997 and $78,000 at June
30, 1996 and 1995 in general allowance for losses established primarily to cover
risks associated with borrowers' delinquencies and defaults on loans held for
sale.
- --------------------------------------------------------------------------------
52
<PAGE>
Bulk loan purchases acquired at a discount are allocated an estimated
allowance for bulk purchased loans that will be available for potential losses
in the future on a particular loan package. At June 30, 1998, 1997 and 1996,
$8,462,000, $10,809,000 and $12,765,000, respectively, are included in the total
amount of allowance for losses on loans and leases.
NOTE 9. LOAN SERVICING:
The Corporation's mortgage banking subsidiary services real estate loans
for investors which are not included in the accompanying consolidated financial
statements. The mortgage banking subsidiary also services a substantial portion
of the Corporation's real estate loan portfolio. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding advance payments by borrowers for taxes and insurance, making
inspections as required of the mortgage premises, collecting amounts due from
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults and generally administering the loans for the investors to whom they
have been sold. The amount of loans serviced for others at June 30, 1998, 1997
and 1996, was $7,114,861,000, $7,396,361,000 and $7,264,747,000, respectively.
Custodial escrow balances maintained in connection with loan servicing totaled
approximately $116,990,000, $122,102,000 and $119,676,000 at June 30, 1998, 1997
and 1996, respectively.
The mortgage servicing portfolio is covered by servicing agreements
pursuant to the mortgage-backed securities programs of the Government National
Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA)
and the Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements,
the Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance, VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. The amount of funds advanced by the Corporation pursuant to
servicing agreements was not material.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "Prepaid expenses and other assets." The
activity of mortgage servicing rights at June 30 is summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance .................................. $ 61,547 $ 57,681 $ 48,038
Purchases of mortgage servicing rights ............. 14,483 10,194 16,004
Mortgage servicing rights from purchase acquisitions -- 271 38
Mortgage servicing rights
capitalized through loan originations ........... 2,908 2,712 4,355
Amortization expense ............................... (10,092) (9,530) (10,717)
Conforming accounting practices
of combining companies .......................... (1,100) -- --
Mid Continent activity for the three months
ended September 30, 1997, net ................... (382) -- --
Other items, net ................................... (210) 219 (37)
- ------------------------------------------------------------------------------------------
Ending balance ..................................... $ 67,154 $ 61,547 $ 57,681
- ------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, 1997 and 1996 the fair value of the Corporation's
mortgage servicing rights totaled approximately $86,727,000, $89,713,000 and
$96,041,000, respectively. No valuation allowances were necessary to be
established during fiscal years 1998, 1997 or 1996. At June 30, 1998 and 1997,
the Corporation utilized interest rate floor agreements with notional amounts
totaling $215,000,000 and $165,000,000, respectively, designed to hedge
impairment losses on mortgage loan servicing rights due to decreasing interest
rates. The Corporation had not entered into such agreements prior to fiscal year
1997. See Note 16 "Derivative Financial Instruments" for additional information.
At June 30, 1998, there were no commitments to purchase mortgage loan servicing
rights or to sell any bulk packages of mortgage servicing rights. Outstanding
commitments to purchase mortgage loan servicing rights totaled $1,284,000 at
June 30, 1997.
53
<PAGE>
NOTE 10. PREMISES AND EQUIPMENT:
Premises and equipment at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Land ............................................... $ 20,595 $ 18,691
Buildings and improvements ......................... 82,357 82,376
Leasehold improvements ............................. 3,798 3,077
Furniture, fixtures and equipment .................. 85,432 84,840
- -------------------------------------------------------------------------------
192,182 188,984
Less accumulated depreciation and amortization ..... 80,379 83,574
- -------------------------------------------------------------------------------
$111,803 $105,410
- -------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $11,218,000, $10,086,000 and
$8,915,000 for fiscal years ended June 30, 1998, 1997 and 1996, respectively.
The Bank has operating lease commitments on certain premises and equipment.
Rent expense totaled $3,424,000, $2,493,000 and $2,897,000 for fiscal years
ended June 30, 1998, 1997 and 1996, respectively. Annual minimum operating lease
commitments as of June 30, 1998, are as follows: 1999 - $2,379,000; 2000 -
$2,161,000; 2001 - $1,790,000, 2002 - $1,318,000; 2003 - $783,000; 2004 and
thereafter - $5,228,000.
NOTE 11. INTANGIBLE ASSETS:
An analysis of intangible assets is summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Core Value
Goodwill of Deposits Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1995 .................. $ 3,213 $ 35,431 $ 38,644
Additions relating to acquisitions ...... 6,158 6,842 13,000
Amortization expense .................... (898) (9,311) (10,209)
- -------------------------------------------------------------------------------------
Balance June 30, 1996 ................... 8,473 32,962 41,435
- -------------------------------------------------------------------------------------
Additions relating to acquisitions ...... 17,314 7,633 24,947
Amortization expense .................... (1,855) (9,119) (10,974)
- -------------------------------------------------------------------------------------
Balance, June 30, 1997 .................. 23,932 31,476 55,408
- -------------------------------------------------------------------------------------
Additions relating to acquisition ....... 19,162 6,045 25,207
Amortization expense .................... (1,804) (5,666) (7,470)
- -------------------------------------------------------------------------------------
Balance, June 30, 1998 .................. $ 41,290 $ 31,855 $ 73,145
- -------------------------------------------------------------------------------------
</TABLE>
No impairment adjustment was necessary to intangible assets during fiscal years
1998, 1997 or 1996.
54
<PAGE>
NOTE 12. DEPOSITS:
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997
------------------------ ------------------
Description and interest rates Amount % Amount %
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (average of 4.11% and 4.06%).. $ 890,181 16.6% $ 883,599 16.2%
NOW accounts (average of 1.81% and 1.63%) ...... 802,084 14.9 569,491 10.4
Market rate savings (average of 4.61% and 3.24%) 314,449 5.9 242,486 4.5
- ---------------------------------------------------------------------------------------------------
Total savings (no stated maturities) ........... 2,006,714 37.4 1,695,576 31.1
- ---------------------------------------------------------------------------------------------------
Certificates of deposits:
Less than 3.00% ............................. 4,890 0.1 7,234 0.1
3.00% - 3.99% .............................. 7,858 0.2 6,384 0.1
4.00% - 4.99% .............................. 360,732 6.7 229,375 4.2
5.00% - 5.99% .............................. 2,382,212 44.4 2,531,778 46.4
6.00% - 6.99% .............................. 552,493 10.3 838,896 15.4
7.00% - 7.99% .............................. 44,097 0.8 127,063 2.4
8.00% - 8.99% .............................. 3,598 0.1 12,272 0.2
9.00% and over ............................. 546 -- 4,994 0.1
- ---------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 5.46% and 5.71%) ................. 3,356,426 62.6 3,757,996 68.9
- ---------------------------------------------------------------------------------------------------
$5,363,140 100.0% $5,453,572 100.0%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposit accounts for the years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts ................. $ 35,303 $ 31,402 $ 26,422
NOW accounts ...................... 11,462 8,226 6,597
Market rate savings ............... 9,619 8,053 7,979
Certificates of deposit ........... 205,557 218,930 212,356
- ------------------------------------------------------------------------------
$261,941 $266,611 $253,354
- ------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ending June 30,
----------------------------------------------------------------------------------------------------
Rate 1999 2000 2001 2002 2003 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.00% $ 3,702 $ 62 $ 12 $ 1 $ 1 $ 1,112 $ 4,890
3.00% - 3.99% 7,339 505 1 13 -- -- 7,858
4.00% - 4.99% 326,611 33,332 198 102 18 471 360,732
5.00% - 5.99% 1,726,753 495,511 99,095 29,680 23,602 7,571 2,382,212
6.00% - 6.99% 429,085 73,155 26,225 17,156 5,333 1,539 552,493
7.00% - 7.99% 15,550 23,157 888 4,156 4 342 44,097
8.00% - 8.99% 1,561 776 285 741 12 223 3,598
9.00% and over 135 23 72 8 8 300 546
- ---------------------------------------------------------------------------------------------------------------------------
$2,510,736 $ 626,521 $ 126,776 $ 51,857 $ 28,978 $ 11,558 $3,356,426
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE>
Certificates of deposit in amounts of $100,000 or more totaled $267,778,000
and $297,120,000, respectively, at June 30, 1998 and 1997. There were no
brokered certificates of deposit at June 30, 1998 or 1997.
At June 30, 1998 and 1997, the Corporation utilized interest rate swap
agreements with notional amounts totaling $215,000,000 and $125,000,000,
respectively, to artificially lengthen the maturity of certain deposits. Under
these requirements, the Corporation pays fixed rates of interest and receives
variable rates of interest that are based on the same rates that the Corporation
pays on the hedged deposits. See Note 16 "Derivative Financial Instruments" for
additional information.
At June 30, 1998 and 1997, deposits of certain state and municipal agencies
and other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $94,083,000 and $17,230,000, respectively,
and investment securities with carrying values of $85,308,000 and $6,765,000,
respectively. In accordance with regulatory requirements, at June 30, 1998 and
1997, the Corporation maintained $29,554,000 and $23,256,000, respectively, in
cash on hand and deposits at the Federal Reserve Bank in noninterest earning
reserves against certain transaction checking accounts and nonpersonal
certificates of deposit.
NOTE 13. ADVANCES FROM THE FEDERAL HOME LOAN BANK:
The Corporation was indebted to the Federal Home Loan Bank at June 30 as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------ --------------------
Weighted Weighted
Interest Rate Average Average
Scheduled Maturities Due: Range Rate Amount Rate Amount
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within 1 year ........................................... 5.25% - 6.73% 5.88% $ 773,797 5.73% $ 964,029
Over 1 year to 2 years .................................. 6.05 - 6.84 6.30 214,000 6.06 160,297
Over 2 years to 3 years ................................. 5.59 - 6.78 6.30 169,000 6.73 64,000
Over 3 years to 4 years ................................. 5.38 - 6.46 6.15 280,000 6.53 119,000
Over 4 years to 5 years ................................. 5.78 - 7.19 6.17 9,350 6.15 285,000
Over 5 years ............................................ 4.87 - 6.55 5.10 825,625 6.61 5,000
- -------------------------------------------------------------------------------------------------------------------------
4.87% - 7.19% 5.66% $2,271,772 5.96% $1,597,326
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed-rate advances totaling $966,000,000 at June 30, 1998 are convertible
into adjustable-rate advances at the option of the Federal Home Loan Bank with
call dates ranging from July 1998 to May 2000. Such convertible advances consist
primarily of amounts totaling $276,000,000 with scheduled maturities due over
three years to four years and $675,000,000 with maturities due over five years.
At June 30, 1998 and 1997, outstanding advances were collateralized by real
estate loans totaling $3,045,978,000 and $3,150,932,000, respectively,
investment securities totaling $9,940,000 and $36,991,000, respectively, and
mortgage-backed securities totaling $3,805,000 and $17,317,000, respectively.
The Corporation is also required to hold shares of Federal Home Loan Bank stock
in an amount at least equal to the greater of 1.0% of certain of its residential
mortgage loans or 5.0% of its outstanding advances. The Corporation was in
compliance with this requirement at June 30, 1998 and 1997, holding Federal Home
Loan Bank stock totaling $119,431,000 and $85,850,000, respectively. At June 30,
1998 and 1997, there were no commitments for advances from the Federal Home Loan
Bank.
56
<PAGE>
NOTE 14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
At June 30, 1998 and 1997, securities sold under agreements to repurchase
identical securities totaled $334,294,000 and $639,294,000, respectively. There
were no securities sold under agreements to repurchase substantially identical
securities at June 30, 1998 or 1997. An analysis of securities sold under
agreements to repurchase identical securities for the years ended June 30 is
summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Maximum month-end balance ...................... $ 639,294 $ 696,318
- -------------------------------------------------------------------------------
Average balance ................................ $ 501,979 $ 591,288
- -------------------------------------------------------------------------------
Weighted average interest rate during the period 6.08% 6.19%
Weighted average interest rate at end of period 5.96% 6.04%
- -------------------------------------------------------------------------------
</TABLE>
At June 30, 1998, securities sold under agreements to repurchase had
maturities ranging from September 1998 to December 1999 with a weighted average
maturity of 225 days. At June 30, 1998, mortgage-backed securities and
investment securities with carrying values totaling $262,531,000 and
$79,217,000, respectively, and fair values totaling $230,501,000 and
$79,449,000, respectively, were pledged as collateral. At June 30, 1997,
mortgage-backed securities and investment securities with carrying values
totaling $599,356,000 and $73,772,000, respectively, and fair values totaling
$598,629,000 and $76,567,000, respectively, were pledged as collateral.
It is the Corporation's policy to enter into repurchase agreements only
with major brokerage firms that are primary dealers in government securities. At
June 30, 1998, there were no repurchase agreements with any broker with balances
at risk in excess of 10.0% of stockholders' equity.
NOTE 15. OTHER BORROWINGS:
Other borrowings at June 30 consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Subordinated extendible notes, interest 7.95%, due December 1, 2006 .. $ 50,000 $ 50,000
Guaranteed preferred beneficial interests in the Corporation's junior
subordinated debentures, interest 9.375%, due May 15, 2027 ....... 45,000 45,000
Term note, adjustable interest, due September 30, 1998 ............... 1,000 26,000
Class 1995 A-1 lease-backed notes, interest 9.45%, due August 15, 2000 3,799 6,760
Collateralized mortgage obligations .................................. 2,676 5,602
Revolving credit note, adjustable interest, due December 31, 1999 .... -- 15,395
Other borrowings ..................................................... 4,102 7,548
- ----------------------------------------------------------------------------------------------
$106,577 $156,305
- ----------------------------------------------------------------------------------------------
</TABLE>
On December 2, 1996, the Corporation completed the issuance of $50,000,000
of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the
Notes). Contractual interest on the Notes is set at 7.95% until December 1,
2001, and is paid monthly. The interest rate for the Notes will reset at the
Corporation's option on December 1, 2001, to a rate and for a term of one, two,
three or five years determined by the Corporation and will reset thereafter, at
its option, upon the date of expiration of each new interest period prior to
maturity. Any new interest rate shall not be less than 105% of the effective
interest rate on comparable maturity U. S. Treasury obligations. The Notes may
not be redeemed prior to December 1, 2001, and thereafter, the Corporation may
elect to redeem the Notes in whole on December 1, 2001, and on any subsequent
interest reset date at par plus accrued interest to the date fixed for
redemption. The Notes are unsecured general obligations of the Corporation. The
Indenture, among other provisions, limits the ability of the Corporation to pay
cash dividends or to make other capital distributions under certain
circumstances.
57
<PAGE>
Effective May 14, 1997, CFC Preferred Trust (the Issuer), a special-purpose
wholly-owned Delaware trust subsidiary of the Corporation completed an offering
of 1,800,000 shares (issue price of $25.00 per share) totaling $45,000,000
consisting of fixed-rate 9.375% cumulative trust preferred securities (Capital
Securities) due May 15, 2027. Also, effective May 14, 1997, the Corporation
purchased all of the common securities (Common Securities) of the Issuer for
$1,391,775. The Issuer invested the total proceeds of $46,391,775 it received in
9.375% junior subordinated deferrable interest debentures (Debentures) issued by
the Corporation. The sole assets of the Issuer are the Debentures. Interest paid
on the Debentures will be distributed to the holders of Capital Securities and
to the Corporation as holder of the Common Securities. As a result, under
current tax law, distributions to the holders of the Capital Securities are tax
deductible for the Corporation. These Debentures are unsecured and rank junior
and are subordinate in right of payment of all senior debt of the Corporation.
The Capital Securities issued by the CFC Preferred Trust rank senior to the
Common Securities. Concurrent with the issuance of the Capital Securities, the
Corporation issued guarantees for the benefit of the security holders. The
obligations of the Corporation under the Debentures, the indenture, the relevant
trust agreement and the guarantees, in the aggregate, constitute a full and
unconditional guarantee by the Corporation of the obligations of the trust under
the trust preferred securities and rank subordinate and junior in right of
payment to all liabilities of the Corporation. The distribution rate payable on
the Capital Securities is cumulative and is payable quarterly in arrears. The
Corporation has the right, subject to events of default, at any time, to defer
payments of interest on the Debentures by extending the interest payment period
thereon for a period not exceeding 20 consecutive quarters with respect to each
deferral period, provided that no extension period may extend beyond the
redemption or maturity date of the Debentures. The Capital Securities are
subject to mandatory redemption upon repayment of the Debentures. The Debentures
mature on May 15, 2027, which may be shortened to not earlier than May 15, 2002,
if certain conditions are met. The Debentures are redeemable at the option of
the Corporation on or after May 15, 2002, or at any time upon the occurrence and
continuation of certain changes in either the tax treatment or the capital
treatment of the Issuer, the Debentures or the Capital Securities. The
Corporation has the right at any time to terminate the Issuer and cause the
Debentures to be distributed to the holders of the Capital Securities in
liquidation of the Issuer, all subject to the Corporation having received prior
approval of the Federal Reserve to do so if then required under applicable
capital guidelines or policies of the Federal Reserve. The Capital Securities
would qualify as Tier 1 capital of the Corporation should the Corporation become
subject to the Federal Reserve capital requirements for bank holding companies.
As a savings and loan holding company, the Corporation is currently not subject
to Federal Reserve capital requirements for bank holding companies.
On December 31, 1996, the Corporation borrowed $28,000,000 in the form of a
five-year term note originally due December 31, 2001. Proceeds were used to
refinance a short-term promissory note obtained in the financing of the
repurchase of 2,812,725 shares of the Corporation's common stock. On August 11,
1997, the Corporation paid down this term note by $21,000,000 and made quarterly
payments of $1,000,000 with the final payment due September 30, 1998. This term
note bears a monthly adjustable interest rate which was 7.50% at June 30, 1998,
and is priced at 100 basis points below the quoted national base prime rate. The
term note is unsecured but subject to certain covenants. This term note was paid
in full on July 29, 1998.
The lease-backed notes are payable in monthly installments based on
scheduled lease payments including prepayments. At June 30, 1998 and 1997, these
notes are secured by lease financing receivables with book values totaling
$3,121,000 and $7,296,000, respectively, and restricted cash totaling $500,000
and $425,000, respectively.
At June 30, 1998, the remaining two notes issued in conjunction with
collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due
in varying amounts contractually through September 1, 2015. The notes are
secured by FNMA mortgage-backed securities with book values of approximately
$9,126,000 and $11,639,000 at June 30, 1998 and 1997, respectively. As the
principal balance on the collateral on these notes repay, the notes are
correspondingly repaid.
Pursuant to the Liberty acquisition, a revolving credit note with a total
line of credit for $20,000,000 bearing interest at 7.88% at June 30, 1997 was
outstanding at June 30, 1997. This revolving credit note was paid in full on
February 12, 1998. The line of credit was secured with the common stock of the
former subsidiaries of Liberty.
Other borrowings are collateralized by certain mortgage-backed securities
at June 30, 1998 and 1997 in addition to unencumbered first mortgage loans with
unpaid principal balances of approximately $4,625,000 at June 30, 1997.
Principal maturities of other borrowings as of June 30, 1998, for the next
five fiscal years are as follows: 1999 - $10,184,000; 2000 - $919,000; 2001 -
$474,000; 2002 and 2003 - none, and thereafter - $95,000,000.
58
<PAGE>
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS:
The following summarizes the Corporation's interest rate swap agreements, by
maturity date, at June 30:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------
Notional Interest Rate Notional Interest Rate
------------------ ------------------
Scheduled Maturities Due: Amount Paying Receiving Amount Paying Receiving
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998................... $ -- -- -- $ 10,000 13.26% 6.03%
1999................... -- -- -- -- -- --
2000................... 75,000 6.24% 5.80% 75,000 6.24 5.20
2001................... 140,000 6.00 5.29 50,000 6.21 5.11
- -------------------------------------------------------------------------------------------------------
$215,000 6.08% 5.47% $135,000 6.75% 5.23%
- -------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal year 1997, the Corporation began utilizing interest rate
swaps to artificially lengthen the maturity of certain deposit liabilities. At
June 30, 1998 and 1997, the Corporation had notional amounts outstanding
totaling $215,000,000 and $125,000,000, respectively, for such purposes. Under
these agreements, the Corporation pays fixed rates of interest and receives
variable rates of interest that are based on the same rates that the Corporation
pays on the hedged deposit liabilities. Such variable rates are based on the
13-week average yield of the three-month U.S. Treasury bill. Net interest
settlement is quarterly. The interest rate swap agreement for a notional amount
of $10,000,000, acquired in an acquisition in 1984 with an original life of 13
years, matured November 1997. Net interest expense on the swap agreements
totaled $1,926,000, $916,000 and $2,280,000, respectively, for fiscal years
1998, 1997 and 1996. The fair value of the interest rate swaps at June 30, 1998
results in a loss position of approximately $3,734,000 which represents the
amount that would be paid to terminate the swap agreements.
The interest rate swap agreements were collateralized at June 30, 1998, by
mortgage-backed securities and investment securities with carrying values of
$4,665,000 and $998,000, respectively, and at June 30, 1997, by mortgage-backed
securities with a carrying value of $7,782,000. Entering into interest rate swap
agreements involves the credit risk of dealing with intermediary and primary
counterparties and their ability to meet the terms of the respective contracts.
The Corporation is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swaps if the Corporation is in a net
interest receivable position at the time of potential default by the
counterparties. At June 30, 1998 and 1997, the Corporation was in a net interest
payable position. The Corporation does not anticipate nonperformance by the
counterparties.
At June 30, 1998 and 1997, the Corporation had interest rate floor
agreements with notional amounts totaling $215,000,000 and $165,000,000,
respectively. The Corporation had not entered into such agreements prior to
fiscal year 1997. These interest rate floor agreements with strike rates ranging
from 4.55% to 5.75%, are designed to hedge impairment losses on mortgage loan
servicing rights due to decreasing interest rates. By purchasing floor
agreements, the Corporation would be paid cash based on the differential between
a short-term rate and the strike rate, applied to the notional principal amount,
should the current short-term rate fall below the strike rate level of the
agreement. These interest rate floor agreements mature between September 1999
and March 2001. Premiums paid to enter into such agreements are deferred and
totaled $138,000 and $344,000, respectively, for fiscal years 1998 and 1997, of
which $112,000 and $61,000, respectively, was amortized to expense. During
fiscal years 1998 and 1997, two agreements were sold resulting in deferred gains
of $41,000 and $39,000, respectively, of which $27,000 and $10,000 was amortized
as a contra to expense during fiscal years 1998 and 1997. The premiums are
amortized over the three year life of the respective agreements and the deferred
gains are amortized over the remaining lives of the agreements sold. The fair
value of the interest rate floor agreements at June 30, 1998 results in a gain
position of approximately $601,000 which represents the amount that would be
received to terminate the floor agreements.
The Corporation also had one interest rate cap agreement with a notional
amount totaling $10,000,000 which expired on March 9, 1997, that paid interest
quarterly when the three-month LIBOR exceeded 7.00%. Through the life of this
agreement, the Corporation was not owed any interest from its counterpart. The
premium paid on March 9, 1995 (the effective date of this agreement) totaled
$115,000 with $38,000 and $58,000, respectively, amortized to interest expense
for fiscal years ended June 30, 1997 and 1996.
59
<PAGE>
NOTE 17. INCOME TAXES:
The following is a comparative analysis of the provision for federal and state
taxes on income:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ......................................... $ 36,869 $ 27,444 $ 80,377
State ........................................... 2,327 2,196 4,405
- -----------------------------------------------------------------------------------------------
39,196 29,640 84,782
- -----------------------------------------------------------------------------------------------
Deferred:
Federal ......................................... 1,352 705 (44,931)
State ........................................... 194 (276) (7,110)
- -----------------------------------------------------------------------------------------------
1,546 429 (52,041)
- -----------------------------------------------------------------------------------------------
Total provision for income taxes .................... $ 40,742 $ 30,069 $ 32,741
- -----------------------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate to
the consolidated effective tax rate:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate ................... 35.0% 35.0% 35.0%
Nondeductible merger-related expenses and
other nonrecurring charges ....................... 2.3 -- 0.6
Amortization of discounts, premiums and
intangible assets from acquisitions .............. 0.6 -- 0.1
Tax exempt interest ................................. (1.3) (1.1) (0.8)
Income tax credits .................................. (0.6) (0.8) (0.7)
State income taxes, net of federal income tax benefit 1.7 1.6 (1.1)
Other items, net .................................... -- 0.5 --
- -----------------------------------------------------------------------------------------------
Effective tax rate .................................. 37.7% 35.2% 33.1%
- -----------------------------------------------------------------------------------------------
</TABLE>
60
<PAGE>
The components of deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Federal Home Loan Bank stock .................................................. $ 12,412 $ 9,863
Deferred loan fees ............................................................ 6,737 1,041
Core value of acquired deposits ............................................... 6,630 5,436
Differences between book and tax basis of premises and equipment .............. 6,112 7,213
Mortgage servicing rights ..................................................... 4,054 2,889
Basis differences between tax and financial reporting arising from acquisitions 2,486 2,832
Other items ................................................................... 5,465 7,122
- ------------------------------------------------------------------------------------------------------------
43,896 36,396
- ------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible ........ 19,184 17,887
Basis differences between tax and financial reporting arising from acquisitions 4,760 5,302
Employee benefits ............................................................. 3,783 2,858
State operating loss carryforwards ............................................ 3,494 3,158
Collateralized mortgage obligations ........................................... 2,738 2,751
Accretion of discount on purchased items ...................................... 1,713 2,052
Other items ................................................................... 5,853 2,925
- ------------------------------------------------------------------------------------------------------------
41,525 36,933
Valuation allowance ............................................................... (3,582) (2,871)
- ------------------------------------------------------------------------------------------------------------
37,943 34,062
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liability ........................................................ $ 5,953 $ 2,334
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance, primarily attributable to state operating loss
carryforwards, was $3,582,000 at June 30, 1998, increasing from $2,871,000 at
June 30, 1997, primarily due to increases in such state net operating losses
available for income tax purposes.
In August 1996, changes in the federal tax law repealed the reserve method
of accounting for tax bad debt deductions and, effective July 1, 1996, required
the Corporation to calculate the tax bad debt deduction based on actual
charge-offs. These tax law changes resulted in a charge of $191,000 in income
tax expense in fiscal year 1997.
In accordance with provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," a deferred tax liability has
not been recognized for the bad debt reserves of the Bank created in the tax
years which began prior to December 31, 1987 (the base year). At June 30, 1998,
the amount of these reserves totaled approximately $85,464,000 with an
unrecognized deferred tax liability approximating $30,853,000. Such unrecognized
deferred tax liability could be recognized in the future, in whole or in part,
if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain
definitional tests and other conditions in the federal tax law, (iii) certain
distributions are made with respect to the stock of the Bank or (iv) the bad
debt reserves are used for any purpose other than absorbing bad debt losses.
During fiscal year 1998, the Internal Revenue Service completed its
examination of the Corporation's consolidated federal income tax returns through
June 30, 1995. Such examination had no effect on the Corporation's results of
operations for fiscal year 1998.
NOTE 18. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS:
Subsequent to June 30, 1998, stockholders approved an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock to 120,000,000 shares pursuant to the special meeting of
stockholders called on July 3, 1998, for shareholders of record at May 14, 1998.
On December 19, 1988, the Board of Directors of the Corporation adopted a
Shareholder Rights Plan and declared a dividend of stock purchase rights
consisting of one primary right and one secondary right for each outstanding
share of common stock payable on December 30, 1988, and with
61
<PAGE>
respect to each share of common stock issued by the Corporation at any time
after such date and prior to the earlier of the occurrence of certain events or
expiration of such rights. These rights are attached to and trade only together
with the common stock shares. The provisions of the Shareholder Rights Plan are
designed to protect the interests of the stockholders of record in the event of
an unsolicited or hostile attempt to acquire the Corporation at a price or on
terms that are not fair to all shareholders. Unless rights are exercised,
holders have no rights as a stockholder of the Corporation (other than rights
resulting from such holder's ownership of common shares), including, without
limitation, the right to vote or to receive dividends. With certain exceptions,
the rights expire December 31, 1998, unless earlier redeemed by the Corporation.
However, management expects that the Shareholder Rights Plan will be amended and
extended before expiration. At June 30, 1998, no such rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of such shares and the qualifications, limitations and restrictions
thereof. The preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights.
Under the Office of Thrift (OTS) capital distribution regulations, a
savings institution that, immediately prior to, and on a pro forma basis after
giving effect to, a proposed dividend, has total capital that is at least equal
to the amount of its fully phased-in capital requirements (a "Tier 1
Association") is permitted to pay dividends during a calendar year in an amount
equal to the greater of (i) 75.0% of its net income for the recent four
quarters, or (ii) 100.0% of its net income to date during the calendar year plus
an amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At June 30, 1998, the Bank
qualified as a Tier 1 Association, and would be permitted to pay an aggregate
amount approximating $139,085,000 in dividends under these regulations. Should
the Bank's regulatory capital fall below certain levels, applicable law and
certain other federal regulations would require prior approval of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
On August 21, 1996, the Corporation consummated the repurchase of 2,812,725
shares of its common stock, $.01 par value, from CAI Corporation, a Dallas-based
investment company, for an aggregate purchase price totaling $48,910,000
excluding $414,000 in transaction costs. The repurchased shares represented 8.3%
of the outstanding shares of the Corporation's common stock prior to the
repurchase. Pursuant to Nebraska corporate law, the 2,812,725 shares of
repurchased common stock were canceled. The Corporation also reimbursed CAI
Corporation a total of $2,262,500 for costs and expenses incurred in connection
with the 1995 proxy contest and the pro rata portion of the dividend CAI
Corporation otherwise would have received for the quarter ended September 30,
1996. These nonrecurring expenses paid to CAI Corporation are included in other
operating expenses in fiscal year 1997.
On November 17, 1997, the Board of Directors declared a three-for-two stock
split effected in the form of a 50 percent stock dividend to stockholders of
record on November 28, 1997. Par value of the common stock remained at $.01 per
share. The stock dividend was distributed on December 15, 1997, and totaled
10,865,530 shares of common stock with $109,000 transferred from the additional
paid-in capital account to the common stock account in order to record this
distribution. Fractional shares resulting from the stock split were paid in
cash. Also, on November 18, 1996, the Board of Directors declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders of record on December 31, 1996. This stock dividend, which was
distributed on January 14, 1997, totaled 10,745,214 shares of common stock
(7,163,476 shares before adjusted for the three-for-two stock split effective
December 15, 1997) with $72,000 transferred from the additional paid-in capital
account to the common stock account. Fractional shares resulting from the stock
split were paid in cash.
NOTE 19. REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators, that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
62
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Corrective Action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios as set forth in the following table. At June 30, 1998
and 1997, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital requirements:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
As of June 30, 1998
---------------------------------------------------------
Actual Capital Required Capital
-------------------------- ---------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital ............................... $609,801 6.94% $131,849 1.50%
Core capital ................................... 619,557 7.04 263,990 3.00
Risk-based capital ............................. 667,590 13.77 387,760 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital ........................ 619,557 7.04 439,983 5.00
Tier 1 risk-based capital ...................... 619,557 12.78 290,820 6.00
Total risk-based capital ....................... 667,590 13.77 484,700 10.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1997
---------------------------------------------------------
Actual Capital Required Capitalal
-------------------------- ---------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital ............................... $559,402 6.60% $127,108 1.50%
Core capital ................................... 571,198 6.73 254,570 3.00
Risk-based capital ............................. 615,214 13.77 357,380 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital ........................ 571,198 6.73 424,283 5.00
Tier 1 risk-based capital ...................... 571,198 12.79 268,035 6.00
Total risk-based capital ....................... 615,214 13.77 446,725 10.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1998, the most recent notification from the OTS categorized
the Bank as "well-capitalized" under the regulatory framework for Prompt
Corrective Action provisions under FDICIA. There are no conditions or events
since such notification that management believes have changed the Bank's
classification.
NOTE 20. COMMITMENTS AND CONTINGENCIES:
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve elements
of credit and interest rate risk in excess of the amount recognized in the
Consolidated Statement of Financial Condition. The contractual amounts of these
instruments represent the maximum credit risk to the Corporation. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At June 30, 1998, the Corporation issued commitments, excluding undisbursed
portions of loans in process, of approximately $566,548,000 as follows:
$290,670,000 to
63
<PAGE>
originate loans, $144,150,000 to purchase loans and $131,728,000 for unused
lines of credit for commercial and consumer use. At June 30, 1997, the
Corporation had issued commitments, excluding undisbursed portions of loans in
process, of approximately $405,004,000 as follows: $243,217,000 to originate
loans, $33,169,000 to purchase loans and $128,618,000 for unused lines of credit
for commercial and consumer use. There were no commitments to purchase mortgage
loan servicing rights at June 30, 1998; however, at June 30, 1997, outstanding
commitments to purchase mortgage loan servicing rights totaled $1,284,000.
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn upon. The Corporation evaluates each customer's credit worthiness on a
separate basis and requires collateral based on this evaluation. Collateral
consists mainly of residential family units and personal property.
At June 30, 1998 and 1997, the Corporation had approximately $392,609,000
and $130,545,000, respectively, in mandatory forward delivery commitments to
sell residential mortgage loans. At June 30, 1998 and 1997, loans sold subject
to recourse provisions totaled approximately $28,830,000 and $40,846,000,
respectively, which represents the total potential credit risk associated with
these particular loans. Such credit risk would, however, be offset by the value
of the single-family residential properties that collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 12, 1994, the Bank and the Corporation commenced litigation
against the United States in the United States Court of Federal Claims seeking
to recover monetary relief for the government's refusal to honor certain
contracts that it had entered into with the Bank. The suit alleges that such
governmental action constitutes a breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The Bank also assumed a
lawsuit in the merger with Mid Continent against the United States also relating
to a supervisory goodwill claim filed by the former Mid Continent. The
litigation status and process of these legal actions, as well as that of
numerous actions brought by others alleging similar claims with respect to
supervisory goodwill and regulatory capital credits, make the value of the
claims asserted by the Bank (including the Mid Continent claim) uncertain as to
their ultimate outcome, and contingent on a number of factors and future events
which are beyond the control of the Bank, both as to substance, timing and the
dollar amount of damages that may be awarded to the Bank and the Corporation if
they finally prevail in this litigation.
NOTE 21. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS:
RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred
savings 401(k) plan covering substantially all employees. The Corporation's
matching contributions are equal to 100% of the first 8% of participant
contributions. Participants vest immediately in their own contributions. For
contributions of the Corporation, participants vest over a five-year period and,
thereafter, vest 100% on an annual basis if employed on the last day of each
calendar year. Contribution expense was $2,312,000, $1,998,000 and $1,843,000
for fiscal years ended June 30, 1998, 1997 and 1996, respectively.
STOCK OPTION AND INCENTIVE PLANS - The Corporation maintains the 1996 Stock
Option and Incentive Plan (the 1996 Plan), approved by the Corporation's
stockholders on November 19, 1996, and amended on July 3, 1998; the 1984 Stock
Option and Incentive Plan, as amended (the 1984 Plan); and various stock option
and incentive plans assumed in the Mid Continent, Perpetual and Railroad
mergers. These plans permit the granting of stock options, restricted stock
awards and stock appreciation rights. Stock options are generally 100%
exercisable on the date of grant over a period not to exceed 10 years from the
date of grant with the option price equal to market value on the date of grant.
However, stock options granted to executives vest over various periods not
exceeding three years. Recipients of restricted stock have the usual rights of a
shareholder, including the rights to receive dividends and to vote the shares;
however, the common stock will not be vested until certain restrictions are
satisfied. The term of the 1984 Plan extends to July 31, 2002, and the term of
the 1996 Plan to September 11, 2006. The Mid Continent, Perpetual and Railroad
plans had 158,291 options outstanding at June 30, 1998.
64
<PAGE>
The following table presents the activity of the stock options for each of
the three fiscal years ended June 30, 1998, and the stock options outstanding at
the end of the respective fiscal years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Weighted
Stock Option Average Price Aggregate
Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at June 30, 1995.............................. 1,219,720 $ 6.59 $ 8,032
Granted................................................ 276,958 17.22 4,770
Exercised.............................................. (215,952) 5.52 (1,191)
Canceled............................................... (5,304) 11.31 (60)
- -----------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996.............................. 1,275,422 9.06 11,551
Granted................................................ 324,531 22.17 7,194
Exercised.............................................. (122,675) 7.60 (932)
Canceled............................................... (17,789) 12.65 (225)
- -----------------------------------------------------------------------------------------------------
Outstanding at June 30, 1997.............................. 1,459,489 12.05 17,588
Granted................................................ 721,050 34.16 24,631
Exercised.............................................. (686,129) 8.26 (5,668)
Canceled............................................... (5,481) 18.97 (104)
- -----------------------------------------------------------------------------------------------------
Outstanding at June 30, 1998.............................. 1,488,929 $24.48 $36,447
- -----------------------------------------------------------------------------------------------------
Exercisable at June 30, 1998.............................. 1,369,729 $23.95 $32,807
- -----------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1998:
1984 Plan.............................................. 3,100
1996 Plan.............................................. 918,200
- -----------------------------------------------------------------------------------------------------
</TABLE>
At the July 3, 1998 special meeting, stockholders approved an amendment to
increase the shares of the Corporation's common stock available for future grant
under the 1996 Plan by 2,400,000 shares for a total of 3,318,200 shares
available.
The following table summarizes information about the Corporation's stock
options outstanding at June 30, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Shares Subject to Outstanding Options Shares Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Stock Option Remaining Average Stock Option Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.11 - $ 1.69 3,092 1.88 $ 1.27 3,092 $ 1.27
2.22 - 3.11 79,624 2.32 2.45 79,624 2.45
5.36 - 6.26 11,894 5.69 6.21 11,894 6.21
9.01 - 12.14 210,771 6.53 10.46 210,771 10.46
17.22 - 22.17 462,498 8.51 20.19 426,438 20.03
34.16 721,050 9.88 34.16 637,910 34.16
- ---------------------------------------------------------------------------------------------------------------------------
$01.11 - $34.16 1,488,929 8.52 $24.48 1,369,729 $23.95
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
During fiscal years 1998 and 1997, non-incentive stock options for 55,000
and 40,500 shares, respectively, of the Corporation's common stock were granted
under the 1996 Plan to directors of the Corporation and the Bank. Stock options
under the 1984 and 1996 Plans were also granted to executives and employees
during fiscal years 1998 and 1997 for 666,050 shares (1984 Plan - 144,239 shares
and 1996 Plan - 521,811 shares) and 284,031 shares (1984 Plan), respectively.
Such grants were in accordance with a management incentive plan providing for
these awards pursuant to the attainment of certain operating goals of the
Corporation for the respective fiscal years.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option and incentive plans. Accordingly, no
compensation cost has been recognized for stock options granted. Had
compensation cost of the Corporation's two stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," the Corporation's net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the following table.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported..................... $67,333 $54,884 $66,195
Pro forma....................... 60,559 52,961 65,211
Earnings per share:
Basic -
As reported................... $ 1.64 $ 1.36 $ 1.61
Pro forma..................... 1.47 1.31 1.59
Diluted -
As reported................... $ 1.62 $ 1.34 $ 1.59
Pro forma..................... 1.47 1.29 1.56
- ------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants in fiscal years 1998, 1997 and 1996,
respectively: dividend yield of .64%, .84% and 1.05%; expected volatility of
24%, 25% and 29%; risk-free interest rates of 5.72%, 6.62% and 6.76%; and
expected lives of six years for the plans for 1998, 1997 and 1996.
Restricted stock is also granted for awards earned each fiscal year under
management incentive plans. On the grant dates of June 30, 1998, 1997 and 1996,
the Corporation issued 39,494 shares, 37,761 shares and 2,619 shares,
respectively, of restricted stock with an aggregate market value of $1,249,000,
$935,000, and $45,000, respectively. The awards of restricted stock vest 20% on
each anniversary of the grant date, provided that the employee has completed the
specified service requirement, or earlier if the employee dies or is permanently
and totally disabled or upon a change in control. Total deferred compensation on
the unvested restricted stock totaled $1,944,000, $1,435,000, and $1,068,000, at
June 30, 1998, 1997, and 1996, respectively, and is recorded as a reduction of
stockholders' equity. The value of the restricted shares is amortized to
compensation expense over the five-year vesting period. Compensation expense
applicable to the restricted stock totaled $731,000, $531,000 and $909,000 for
fiscal years 1998, 1997 and 1996, respectively.
Liberty, Mid Continent and Perpetual had certain deferred compensation and
incentive plans that were terminated as of the respective dates of acquisition
by the Corporation. At June 30, 1998 such plans were in the process of final
allocation and distribution of plan assets to participants in accordance with
the terms of those plans with all appropriate unearned compensation and employer
contributions recognized as charges to operations in fiscal year 1998.
POSTRETIREMENT BENEFITS - Statement of Financial Accounting Standards No. 106
(SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions," requires that the cost of providing postretirement benefits other
than pensions be recognized over the employee's service periods rather than on a
cash basis. Under SFAS No. 106, the determination of the accrual liability
66
<PAGE>
requires a calculation of the accumulated postretirement benefit obligation
(APBO). This APBO represents the actuarial present value of postretirement
benefits other than pensions to be paid out in the future (such as health care
benefits to be paid to retirees) that have been earned as of the end of the
year. The Corporation's postretirement benefit plan is unfunded. The following
table reconciles the status of the plan with the amounts recognized in the
Consolidated Statement of Financial Condition at June 30:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................................. $ 326 $ 425 $ 487
Fully eligible active plan participants .............................. 169 167 120
Other active plan participants ....................................... 411 518 766
- ------------------------------------------------------------------------------------------------------------------
906 1,110 1,373
Unrecognized prior service cost .......................................... 288 317 --
Unrecognized net loss .................................................... (276) (626) (783)
- ------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in other liabilities ........ $ 918 $ 801 $ 590
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the components of the net periodic postretirement
benefit cost for the fiscal years ended June 30:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the fiscal year .................... $ 63 $ 105 $ 74
Interest cost on accumulated postretirement benefit obligation ........... 81 99 69
Amortization of net loss ................................................. 4 40 29
- ------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense ............................. 148 244 172
- ------------------------------------------------------------------------------------------------------------------
Postretirement benefit claims paid for the year,
net of retiree contributions of $92, $98 and $85 ..................... $ 31 $ 33 $ 115
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used to determine the APBO was 7.0%,
7.75% and 7.5%, respectively, for fiscal years ended June 30, 1998, 1997 and
1996. The assumed health care cost trend rate used in measuring the APBO as of
July 1, 1997, was 8.0% decreasing gradually until it reaches 5.0% in 2008, when
it remains constant. A one-percentage-point increase in the assumed health care
cost trend rate for each year would increase the APBO as of June 30, 1998, by
$116,000 and the aggregate of the service and interest cost components of the
net periodic postretirement cost for fiscal year 1998 by $22,000.
The Corporation also maintains an unfunded postretirement survivor income
plan for certain key executives that provides benefits to beneficiaries based
upon the death of such executives and their employment status at the time of
death (i.e., normal retirement, termination or death prior to retirement). At
June 30, 1998, 1997 and 1996, the accrued postretirement benefit cost included
in other liabilities and the net postretirement benefit cost charged to
operations totaled $220,000, $125,000 and $33,000, respectively, and the net
postretirement benefit cost charged to operations totaled $95,000, $92,000 and
$33,000 for fiscal years 1998, 1997 and 1996, respectively. The weighted average
discount rate used to determine the APBO was 7.0%, 7.75% and 7.5%, respectively,
for fiscal years ended June 30, 1998, 1997 and 1996, and the assumed annual rate
of increase for compensation was 3.0% for fiscal years ended June 30, 1998, 1997
and 1996.
67
<PAGE>
NOTE 22. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
June 30,
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash........................................................... $ 39,448 $ 43,329
Other assets................................................... 13,601 22,689
Intangible asset............................................... 6,730 7,230
Equity in other subsidiaries................................... 2,668 4,037
Equity in CFC Preferred Trust (1).............................. 1,392 1,392
Equity in Commercial Federal Bank.............................. 681,557 610,976
- ----------------------------------------------------------------------------------------------
Total Assets................................................... $745,396 $689,653
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Liabilities:
Other liabilities.......................................... $ 4,965 $ 4,424
Other borrowings........................................... -- 15,395
Unsecured promissory term note............................. 1,000 26,000
Subordinated extendible notes.............................. 50,000 50,000
Junior subordinated deferrable interest debentures (1)..... 46,392 46,392
- ----------------------------------------------------------------------------------------------
Total Liabilities.............................................. 102,357 142,211
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity..................................... 643,039 547,442
- ----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity..................... $745,396 $689,653
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Equity in CFC Preferred Trust represents the sole beneficial ownership
interest in this trust consisting of 55,671 shares of common securities
acquired by the Corporation on May 14, 1997. The junior subordinated
deferrable interest debentures payable to the CFC Preferred Trust bear
interest at 9.375% and are due May 15, 2027.
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Dividend income from the Bank................................ $47,627 $42,993 $15,257
Interest income.............................................. 2,047 1,416 1,349
Other income................................................. 1,439 1,475 1,061
Expenses:
Interest expense............................................. (9,329) (8,586) (6,202)
Operating expenses........................................... (8,912) (7,204) (3,915)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary items
and equity in undistributed earnings of subsidiaries......... 32,872 30,094 7,550
Income tax benefit.............................................. (4,105) (4,207) (2,360)
- -------------------------------------------------------------------------------------------------------------
Income before extraordinary items
and equity in undistributed earnings of subsidiaries......... 36,977 34,301 9,910
Extraordinary items - loss on early retirement
of debt, net of tax benefit of $316.......................... -- (583) --
- -------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries.. 36,977 33,718 9,910
Equity in undistributed earnings of subsidiaries................ 30,356 21,166 56,285
- -------------------------------------------------------------------------------------------------------------
Net income...................................................... $67,333 $54,884 $66,195
- -------------------------------------------------------------------------------------------------------------
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 67,333 $ 54,884 $ 66,195
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary items, net of tax benefit ............... -- 583 --
Equity in undistributed earnings of subsidiaries ...... (30,356) (21,166) (56,285)
Other items, net ...................................... 1,597 (2,618) 2,856
-------- -------- --------
Total adjustments ................................... (28,759) (23,201) (53,429)
-------- -------- --------
Net cash provided by operating activities ......... 38,574 31,683 12,766
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of stock of and cash distributions into the Bank .. (426) (17,157) --
Purchase of common securities of CFC Preferred Trust ....... -- (1,392) --
Other items, net ........................................... 1,849 (1,606) 1,008
-------- -------- --------
Net cash used by investing activities ............. 1,423 (20,155) 1,008
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subordinated extendible notes, net -- 48,500 --
Proceeds from issuance of notes payable .................... -- 55,000 600
Payment of senior and subordinated notes ................... -- (47,150) --
Payment of notes payable ................................... (40,395) (24,293) (5,809)
Proceeds from issuance of junior
subordinated deferrable interest debentures ............. -- 46,392 --
Payments for debt issue costs .............................. -- (2,218) --
Repurchase of common stock ................................. -- (53,311) (4,370)
Issuance of common stock ................................... 4,694 2,387 2,291
Payment of cash dividends on common stock .................. (7,973) (7,233) (5,614)
Other items, net ........................................... -- (368) 199
-------- -------- --------
Net cash provided (used) by financing activities .. (43,674) 17,706 (12,703)
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position ................... (3,677) 29,234 1,071
Balance, beginning of year ................................. 43,329 13,529 12,458
Adjustments to convert acqusitions to fiscal year end ...... (204) 566 --
-------- -------- --------
Balance, end of year ....................................... $ 39,448 $ 43,329 $ 13,529
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest expense ........................................ $ 9,651 $ 7,129 $ 5,790
Income taxes, net ....................................... 39,448 22,636 73,461
Non-cash investing and financing activities -
Common stock issued in connection with the
acquisitions of businesses ............................ 32,267 19,420 25,826
Common stock received in connection with
stock options exercised, net .......................... (3,728) -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE>
NOTE 23. SEGMENT INFORMATION:
The Corporation and its subsidiaries operate primarily in the thrift and
community banking and mortgage banking industries. Thrift and community banking
operations (financial institution) involve a variety of traditional banking and
financial services. Mortgage banking operations (mortgage banking) involve the
origination and purchase of mortgage loans, sale of mortgage loans in the
secondary mortgage market, servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans.
Segment information at and for the fiscal years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Financial institution .......................................... $ 635,193 $ 598,890 $ 566,215
Mortgage banking ............................................... 12,425 8,714 9,518
--------- --------- ---------
Total ........................................................ 647,618 607,604 575,733
--------- --------- ---------
Intersegment interest income:
Financial institution .......................................... (15,424) (9,814) (7,392)
Mortgage banking ............................................... 11,404 9,688 10,201
--------- --------- ---------
(4,020) (126) 2,809
Intersegment elimination ....................................... 4,020 126 (2,809)
--------- --------- ---------
Total ........................................................ -- -- --
--------- --------- ---------
Total interest income:
Financial institution .......................................... 619,769 589,076 558,823
Mortgage banking ............................................... 23,829 18,402 19,719
Intersegment elimination ....................................... 4,020 126 (2,809)
--------- --------- ---------
Total ........................................................ $ 647,618 $ 607,604 $ 575,733
- ----------------------------------------------------------------------------------------------------------------
Other income:
Financial institution - loan servicing fees..................... $ 6,408 $ 8,206 $ 6,067
Financial institution - other income ........................... 50,516 37,979 29,188
Mortgage banking - loan servicing fees ......................... 32,258 33,160 30,828
Mortgage banking - other income (loss) ......................... (917) 1,788 2,685
--------- --------- ---------
Total ........................................................ 88,265 81,133 68,768
--------- --------- ---------
Intersegment other income:
Financial institution - loan servicing fees..................... -- -- --
Financial institution - other income ........................... -- -- --
Mortgage banking - loan servicing fees ......................... 16,776 15,971 14,516
Mortgage banking - other income ................................ -- -- --
--------- --------- ---------
16,776 15,971 14,516
Intersegment elimination ....................................... (16,776) (15,971) (14,516)
--------- --------- ---------
Total ........................................................ -- -- --
--------- --------- ---------
Total other income:
Financial institution - loan servicing fees..................... 6,128 8,206 6,067
Financial institution - other income ........................... 50,796 37,979 29,188
Mortgage banking - loan servicing fees ......................... 49,034 49,131 45,344
Mortgage banking - other income (loss) ......................... (917) 1,788 2,685
Intersegment elimination ....................................... (16,776) (15,971) (14,516)
--------- --------- ---------
Total ........................................................ $ 88,265 $ 81,133 $ 68,768
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit (1):
Financial institution .................................................. $ 87,241 $ 70,371 $ 82,452
Mortgage banking ....................................................... 31,992 30,955 26,601
----------- ----------- -----------
119,233 101,326 109,053
Less:
General corporate expenses ............................................. 2,218 6,746 3,590
Corporate interest expense ............................................. 8,940 9,044 6,527
----------- ----------- -----------
Total ................................................................ $ 108,075 $ 85,536 $ 98,936
- ---------------------------------------------------------------------------------------------------------------------------
(1) Operating profit is income before income taxes and extraordinary items
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Financial institution .................................................. $ 8,825,216 $ 8,462,701 $ 7,784,630
Mortgage banking ....................................................... 457,047 228,947 218,170
Eliminations ........................................................... (429,623) (165,140) (155,110)
----------- ----------- -----------
Total ................................................................ $ 8,852,640 $ 8,526,508 $ 7,847,690
- ---------------------------------------------------------------------------------------------------------------------------
Additions to premises and equipment:
Financial institution .................................................. $ 15,019 $ 19,106 $ 9,520
Mortgage banking ....................................................... 244 520 1,993
----------- ----------- -----------
Total ................................................................ $ 15,263 $ 19,626 $ 11,513
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
Financial institution .................................................. $ 9,727 $ 8,480 $ 7,377
Mortgage banking ....................................................... 1,491 1,606 1,538
----------- ----------- -----------
Total ................................................................ $ 11,218 $ 10,086 $ 8,915
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The mortgage banking operation originates and sells loans to the Bank.
These sales are primarily at par such that the mortgage banking operation
records losses equal to the expenses it incurs net of fees collected. Such
losses approximating $3,036,000, $1,659,000 and $986,000 were incurred during
fiscal years 1998, 1997 and 1996, respectively. All of these losses are deferred
by the Bank and amortized over the estimated life of the loans the Bank
purchased.
71
<PAGE>
NOTE 24. MERGER EXPENSES AND OTHER NONRECURRING CHARGES:
During fiscal year 1998, the Corporation incurred merger expenses and other
nonrecurring charges totaling $29,729,000 due to the Liberty, Mid Continent and
Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The Corporation finalized its plans for systems
conversions and Year 2000 compliance in fiscal year 1998 resulting in a
reduction in the estimated useful lives of such computer systems and software.
During fiscal year 1996, the Corporation incurred merger expenses totaling
$3,565,000 associated with the Railroad acquisition.
These merger expenses incurred in fiscal years 1998 and 1996 are detailed
below with other nonrecurring charges not classified in the merger expenses
category of general and administrative expenses included in other such expense
categories as noted in the following schedule.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merger expenses:
Transaction costs related to the combinations .............................. $ 8,992 $ -- $ 2,325
Employee severance and other termination costs ............................. 6,555 -- 989
Costs to combine operations ................................................ 2,487 -- 251
- -----------------------------------------------------------------------------------------------------------------------------
18,034 -- 3,565
- -----------------------------------------------------------------------------------------------------------------------------
Other nonrecurring charges:
Additional loan loss reserves - (provision for loan and lease losses)....... 3,931 -- --
Reserves on leasing operations - (other operating income) .................. 597 -- --
Accelerated amortization of computer systems and
software - (data processing) ............................................. 4,314 -- --
Conforming accounting practices of
combining companies - (compensation and benefits) ........................ 489 -- --
Conforming accounting practices of combining companies -
(other operating expenses) ............................................... 2,364 -- --
- -----------------------------------------------------------------------------------------------------------------------------
11,695 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total merger expenses and other nonrecurring charges .......................... $29,729 $ -- $ 3,565
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 25. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT:
The Deposit Insurance Funds Act of 1996 authorized the recapitalization of
the Savings Associations Insurance Fund (SAIF) by imposing a one time special
assessment on institutions with SAIF assessable deposits. Such assessment was at
the rate of .657% and was imposed in order to increase the reserve levels of the
SAIF to 1.25% of insured deposits. On September 30, 1996, the Corporation
recorded an after-tax charge of $18,585,000 ($29,039,000 pre-tax) as a result of
such special assessment. In addition, fiscal year 1996 reflects an after-tax
charge of $706,000 ($1,053,000 pre-tax), as a result of the Mid Continent
acquisition, with its fiscal year ending September 30, 1996 combined with the
operations of the Corporation. The Corporation's annual deposit insurance rate
in effect prior to this recapitalization was .23% of insured deposits, declining
to .18% of insured deposits for the three months ended December 31, 1996, and
reduced to .064% of insured deposits effective January 1, 1997.
72
<PAGE>
NOTE 26. EXTRAORDINARY ITEMS - LOSS ON EARLY RETIREMENT OF DEBT:
In fiscal year 1997, the Corporation recognized extraordinary losses of
$583,000 (net of income tax benefits totaling $316,000), or $.01 loss per share,
primarily as a result of the early retirement of its 10.25% subordinated debt
totaling $40,250,000 originally due December 15, 1999, and its 10.0% senior
notes totaling $6,900,000 originally due January 31, 1999. The extraordinary
losses consisted primarily of the write-off of the related premiums and costs
associated with the issuance and redemption of such debt that was retired on
December 27, 1996, with the proceeds from the $50,000,000 subordinated
extendible notes offering completed December 2, 1996.
NOTE 27. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for
the last three fiscal years ended June 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Quarter Ended
June 30 March 31 December 31 September 30
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1998:
Total interest income .................................... $ 162,779 $ 162,041 $ 162,201 $ 160,597
Net interest income ...................................... 59,785 58,769 56,280 55,596
Provision for loan and lease losses ...................... (3,705) (2,680) (5,932) (3,008)
Gain on sales of securities, loans
and loan servicing rights ............................. 2,573 779 1,400 878
Net income ............................................... 18,175 8,822 19,561 20,775
Earnings per common share:
Basic ................................................. .43 .21 .48 .52
Diluted ............................................... .43 .21 .47 .51
Dividends declared per share ............................. .055 .055 .055 .047
- --------------------------------------------------------------------------------------------------------------------
FISCAL 1997:
Total interest income .................................... $ 156,437 $ 151,272 $ 152,929 $ 146,966
Net interest income ...................................... 54,541 53,717 52,856 49,715
Provision for loan and lease losses ...................... (3,218) (3,399) (3,463) (2,204)
Gain on sales of securities and loans .................... 584 765 568 517
Net income (loss) ........................................ 20,410 20,040 16,257 (1,823)
Earnings (loss) per common share:
Basic -
Income (loss) before extraordinary items............. .51 .50 .42 (.04)
Extraordinary items, net of tax benefit -- -- (.01) --
Net income (loss) ................................... .51 .50 .41 (.04)
Diluted -
Income (loss) before extraordinary items............. .50 .49 .41 (.04)
Extraordinary items, net of tax benefit -- -- (.01) --
Net income (loss) ................................... .50 .49 .40 (.04)
Dividends declared per share ............................. .047 .047 .047 .045
- --------------------------------------------------------------------------------------------------------------------
FISCAL 1996:
Total interest income .................................... $ 145,857 $ 144,724 $ 142,938 $ 142,214
Net interest income ...................................... 52,757 51,424 46,799 46,173
Provision for loan and lease losses ...................... (1,957) (1,609) (1,749) (1,896)
Gain on sales of securities, loans
and loan servicing rights ............................. 624 332 825 699
Net income ............................................... 18,342 20,050 14,431 13,372
Earnings per common share:
Basic ................................................. .44 .48 .36 .33
Diluted ............................................... .44 .48 .35 .33
Dividends declared per share ............................. .045 .045 .090 --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE>
NOTE 28. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Corporation disclose estimated fair value amounts of its financial instruments.
It is management's belief that the fair values presented below are reasonable
based on the valuation techniques and data available to the Corporation as of
June 30, 1998 and 1997, as more fully described in the following table. It
should be noted that the operations of the Corporation are managed from a going
concern basis and not a liquidation basis. As a result, the ultimate value
realized for the financial instruments presented could be substantially
different when actually recognized over time through the normal course of
operations. Additionally, a substantial portion of the Corporation's inherent
value is the Bank's capitalization and franchise value. Neither of these
components have been given consideration in the following presentation of fair
values.
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation at June 30, 1998 and 1997. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
------------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------------------
SELECTED ASSETS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash (including short-term investments) ...... $ 131,336 $ 131,336 $ 128,171 $ 128,171
Investment securities ........................ 595,387 596,265 549,499 547,298
Mortgage-backed securities ................... 914,286 916,738 1,107,651 1,107,583
Loans and leases receivable, net ............. 6,702,378 6,785,825 6,298,957 6,340,235
Federal Home Loan Bank stock ................. 119,431 119,431 85,850 85,850
- ------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- ------------------------------------------------------------------------------------------------------------
Deposits
Passbook accounts ......................... 890,181 890,181 883,599 883,599
NOW checking accounts ..................... 802,084 802,084 569,491 569,491
Market rate savings account ............... 314,449 314,449 242,486 242,486
Certificates of deposit ................... 3,356,426 3,348,486 3,757,996 3,748,083
----------- ----------- ----------- -----------
Total deposits .......................... 5,363,140 5,355,200 5,453,572 5,443,659
Advances from Federal Home Loan Bank ......... 2,271,772 2,272,161 1,597,326 1,597,910
Securities sold under agreements to repurchase 334,294 334,460 639,294 641,590
Other borrowings ............................. 106,577 109,238 156,305 156,852
- ------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------
Derivative financial instruments ............. 204 (3,133) 254 (1,023)
Commitments .................................. -- -- -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Corporation's financial instruments at June 30,
1998 and 1997.
CASH AND SHORT-TERM INVESTMENTS:
The book value of cash and short-term investments is assumed to approximate
the fair value of such assets.
INVESTMENT SECURITIES:
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities.
MORTGAGE-BACKED SECURITIES:
For mortgage-backed securities available for sale and held to maturity the
Corporation utilized quotes for similar or identical securities in an actively
traded market, where such a market exists, or obtained quotes from independent
security brokers to determine the fair value of such assets.
LOANS AND LEASES RECEIVABLE, NET:
The fair value of loans and leases receivable was estimated by discounting
the future cash flows using the current market rates at which similar loans and
leases would be made to borrowers with similar credit ratings and for similar
remaining maturities. When using the discounting method to determine fair value,
loans and leases were gathered by homogeneous groups with similar terms and
conditions and discounted at derived current market rates or rates at which
similar loans and leases would be made to borrowers as of June 30, 1998 and
1997, respectively. The fair value of loans held for sale is determined by
outstanding commitments from investors or current investor yield requirements
calculated on an aggregate loan basis. In addition, when computing the estimated
fair value for all loans and leases, allowances for loan and lease losses have
been subtracted from the calculated fair value for consideration of credit
issues.
FEDERAL HOME LOAN BANK STOCK:
The fair value of such stock approximates book value since the Corporation
is able to redeem this stock with the Federal Home Loan Bank at par value.
DEPOSITS:
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, NOW checking accounts and market rate savings accounts fair
value is determined to approximate the carrying value (the amount payable on
demand) since such deposits are primarily withdrawable immediately; (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates as of June 30, 1998
and 1997, offered on certificates of deposit with similar maturities. In
accordance with provisions of SFAS No. 107, no value has been assigned to the
Corporation's long-term relationships with its deposit customers (core value of
deposits intangible) since such intangible is not a financial instrument as
defined under SFAS No. 107.
ADVANCES FROM FEDERAL HOME LOAN BANK:
The fair value of such advances was estimated by discounting the expected
future cash flows using current interest rates as of June 30, 1998 and 1997, for
advances with similar terms and remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The fair value of securities sold under agreements to repurchase was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of June 30, 1998 and 1997, over the contractual
maturity of such borrowings.
OTHER BORROWINGS:
Included in other borrowings at June 30, 1998 and 1997, are subordinated
extendible notes and guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures with carrying values of $50,000,000
and $45,000,000, respectively, with the fair value of such borrowings based on
dealer quoted market prices. The fair value of other borrowings, excluding the
aforementioned borrowings, was estimated by discounting the expected future cash
flows using derived interest rates approximating market as of June 30, 1998 and
1997, over the contractual maturity of such other borrowings.
DERIVATIVE FINANCIAL INSTRUMENTS:
The fair value of the interest rate swap and floor agreements, obtained
from market quotes from independent security brokers, is the estimated amount
that would be paid to terminate the swap agreements and the estimated amount
that would be received to terminate the floor agreements.
COMMITMENTS:
The commitments to originate and purchase loans have terms that are
consistent with current market terms. Since primarily all outstanding
commitments are short-term or adjustable rate, the fair value of the commitments
is not material for disclosure.
LIMITATIONS:
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate
75
<PAGE>
the value of anticipated future business, customer relationships and the value
of assets and liabilities that are not considered financial instruments. These
estimates do not reflect any premium or discount that could result from offering
the Corporation's entire holdings of a particular financial instrument for sale
at one time. Furthermore, since no market exists for certain of the
Corporation's financial instruments, fair value estimates may be based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with a high
level of precision. Changes in assumptions as well as tax considerations could
significantly affect the estimates. Accordingly, based on the limitations
described above, the aggregate fair value estimates as of June 30, 1998 and
1997, are not intended to represent the underlying value of the Corporation, on
either a going concern or a liquidation basis.
NOTE 29. CURRENT ACCOUNTING PRONOUNCEMENTS:
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE:
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, entitled "Disclosure of Information About Capital Structure"
(SFAS No. 129). This statement basically consolidates disclosure requirements
found in other previously existing accounting literature regarding capital
structure. SFAS No. 129 is effective for financial statements for periods ending
after December 15, 1997, and since it contains no changes in the disclosure
requirements, such adoption will not have a material effect on the Corporation's
current capital structure disclosures.
REPORTING COMPREHENSIVE INCOME:
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 entitled "Reporting Comprehensive Income" (SFAS No. 130). This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
total of reported net income and all other revenues, expenses, gains and losses
that under generally accepted accounting principles bypass reported net income.
SFAS No. 130 requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements with the aggregate amount of comprehensive income reported in that
same financial statement. SFAS No. 130 permits the statement of changes in
stockholders' equity to be used to meet this requirement. Companies are
encouraged, but not required, to display the components of other comprehensive
income below the total for net income in the statement of operations or in a
separate statement of comprehensive income. Companies are also required to
display the cumulative total of other comprehensive income for the period as a
separate component of equity in the statement of financial position.
This statement is effective for fiscal years beginning after December 15,
1997, or July 1, 1998, for the Corporation, with earlier application permitted.
Companies are also required to report comparative totals for comprehensive
income in interim reports. Management of the Corporation will adopt the
provisions of this statement, which are only of a disclosure nature, effective
July 1, 1998.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 entitled "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131). This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," and utilizes the "management
approach" for segment reporting. The management approach is based on the way
that the chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments are
based on any manner in which management disaggregates its company such as by
products and services, geography, legal structure and management structure. SFAS
No. 131 requires disclosures for each segment that are similar to those required
under current standards with the addition of quarterly disclosure requirements
and more specific and detailed geographic disclosures especially by countries as
opposed to broad geographic regions. This statement also requires descriptive
information about the way the operating segments were determined, the
products/services provided by the operating segments, the differences between
the measurements used in reporting segment information and those used in the
general purpose financial statements, and the changes in the measurement of
segment amounts from period to period.
The provisions of SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997, or July 1, 1998, for the Corporation, with earlier
application permitted. SFAS No. 131 does not need to be applied to interim
statements in the initial year of application but such comparative information
will be required in interim statements for the
76
<PAGE>
second year. Comparative information for earlier years must be restated in the
initial year of application. Management of the Corporation will adopt the
provisions of this statement, which are only of a disclosure nature, effective
July 1, 1998.
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS:
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 entitled "Employers' Disclosures About Pensions and Other
Postretirement Benefits" (SFAS No. 132). This statement amends Statement Nos. 87
and 88 relating to pension disclosures and SFAS No. 106 "Employers' Accounting
for Postretirement Benefits Other Than Pensions." Such amendment revises and
standardizes, to the extent possible, pension and other benefit plan
disclosures, but does not change the measurement or recognition rules for
pensions or other postretirement benefit plans. SFAS No. 132 amends the SFAS No.
106 disclosure requirements to disclose the effects of a one-percentage-point
decrease in the assumed health care cost trend rate as well as the required
effects of a one-percentage-point increase in the same.
The provisions of SFAS No. 132 are effective for fiscal years beginning
after December 15, 1997, or July 1, 1998, for the Corporation, with earlier
application encouraged. Restatement of disclosures for earlier periods provided
for comparable purposes is required unless the information is not readily
available, in which case the notes to financial statements should include all
available information and a description of the information not available.
Management of the Corporation will adopt the provisions of this statement, which
are only of a disclosure nature, effective July 1, 1998.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 entitled "Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This statement requires the recognition of all derivative
financial instruments as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. The
accounting for gains and losses associated with changes in the fair value of a
derivative and the effect on the consolidated financial statements will depend
on its hedge designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or liability
hedged. Under the provisions of SFAS No. 133, the method that will be used for
assessing the effectiveness of a hedging derivative, as well as the measurement
approach for determining the ineffective aspects of the hedge, must be
established at the inception of the hedge. The methods must be consistent with
the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with initial application as of the beginning of an entity's
fiscal quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application is
encouraged, but is permitted only as of the beginning of any fiscal quarter
beginning after June 15, 1999. Retroactive application to financial statements
of prior periods is prohibited. Management of the Corporation has not determined
the quarter in which to adopt the provisions of this statement and does not
believe that such adoption will have a material effect on the Corporation's
financial position, liquidity or results of operations.
NOTE 30: SUBSEQUENT EVENTS - ACQUISITIONS CONSUMMATED:
AMERUS BANK:
On July 31, 1998, the Corporation consummated its acquisition of AmerUs
Bank (AmerUs), a wholly-owned subsidiary of AmerUs Group Co. Under the terms of
the Stock Purchase Agreement, the Corporation acquired through a taxable
acquisition all of the outstanding shares of the common stock of AmerUs for
total consideration of $178,269,000. Such consideration consisted of (i) certain
assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One
single-family residential mortgage loans and a receivable for income tax
benefits) totaling approximately $85,027,000, (ii) cash (as adjusted per the
agreement) totaling $53,242,000, and (iii) a one-year promissory note for
$40,000,000 bearing interest, adjusted monthly, at 150 basis points over the
one-year Treasury bill rate.
AmerUs was a federally chartered savings bank headquartered in Des Moines,
Iowa and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas
(4), Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase
accounting adjustments, AmerUs had total assets of approximately $1.3 billion,
deposits of approximately $949,700,000 and stockholder's equity of approximately
$84,800,000. This acquisition will be accounted for as a purchase with core
value of deposits to be amortized on an accelerated basis over a period not to
exceed 10 years, goodwill to be amortized over 20 years on a straight-line basis
and a covenant not to compete over three years on a straight-line basis.
77
<PAGE>
FIRST COLORADO BANCORP, INC.:
On August 14, 1998, the Corporation consummated its acquisition of First
Colorado Bancorp, Inc. (First Colorado). Under the terms of the agreement, the
Corporation acquired in a tax-free reorganization all 18,564,766 outstanding
shares of First Colorado's common stock in exchange for 18,278,789 shares of its
common stock. Based on the Corporation's closing stock price of $26.375 at
August 14, 1998, the total consideration for this acquisition, including cash
paid for fractional shares, approximated $482,154,000.
An additional requirement of the transaction with First Colorado was the
issuance of 1,400,000 shares of First Colorado common stock immediately prior to
the consummation of the merger. Such requirement was necessary to cure the taint
on the treasury stock of First Colorado so this transaction could be accounted
for as a pooling of interests. These shares offered directly by First Colorado
resulted in gross cash proceeds (prior to any transaction costs) of $33,425,000
less the placement agent's commission of $919,000, or net proceeds to First
Colorado totaling $32,506,000.
First Colorado, headquartered in Lakewood, Colorado, was a unitary savings
and loan holding company and the parent company of First Federal Bank of
Colorado, a federally chartered stock savings bank that operated 27 branches
located in Colorado, with 23 branches located in the Denver metropolitan area
and four in Colorado's western slope region. At July 31, 1998, on a pro forma
basis, First Colorado had assets of approximately $1.6 billion, deposits of
approximately $1.2 billion and stockholders' equity of approximately $254.7
million. Total assets and stockholders' equity include the net proceeds of
$32,506,000 from the aforementioned private placement of 1,400,000 shares on
August 14, 1998. The acquisition will be accounted for as a pooling of
interests.
The following table summarizes results on a pro forma basis for the years
ended June 30, 1998, 1997 and 1996, as if this acquisition, accounted for as a
pooling of interests, had occurred at the beginning of the respective fiscal
years:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
First
Corporation Colorado Combined
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR 1998:
Total interest income and other income .. $ 735,883 $ 119,139 $ 855,022
Total interest expense .................. 417,188 60,201 477,389
Net income .............................. 67,333 20,080 87,413
Earnings per diluted common share ....... 1.62 1.23 1.48
- -------------------------------------------------------------------------------------
FISCAL YEAR 1997:
Total interest income and other income .. $ 688,737 $ 110,126 $ 798,863
Total interest expense .................. 396,775 57,194 453,969
Extraordinary items, net of tax benefit . (583) -- (583)
Net income .............................. 54,884 13,372 68,256
Earnings per diluted common share -
Income before extraordinary items ..... 1.35 .73 1.14
Extraordinary items, net of tax benefit (.01) -- (.01)
Net income ............................ 1.34 .73 1.13
- -------------------------------------------------------------------------------------
Fiscal year 1996:
Total interest income and other income .. $ 644,501 $ 099,469 $ 743,970
Total interest expense .................. 378,580 58,863 437,443
Net income .............................. 66,195 12,638 78,833
Earnings per diluted common share ....... 1.59 .63 1.26
- -------------------------------------------------------------------------------------
</TABLE>
Net income and diluted earnings per share presented on a pro forma basis
above do not include any expected cost savings and benefits of related
synergies, or any nonrecurring merger transaction assets, as a result of the
merger of First Colorado.
78
<PAGE>
NOTE 31: SUBSEQUENT EVENT - PENDING ACQUISITION:
On August 14, 1998, the Corporation entered into a reorganization and
merger agreement with Midland First Financial Corporation (Midland), parent
company of Midland Bank. Under the terms of the agreement, the Corporation will
acquire in a taxable acquisition all of the outstanding shares of Midland's
common stock. The total purchase consideration of this pending acquisition is
$83,000,000, including cash to pay off existing Midland debt totaling
$5,550,000, the retirement of preferred stock of both Midland and Midland Bank
totaling $11,562,000 and $810,000 for advisor fees. If under certain conditions
this transaction is terminated by Midland a breakup fee of $2,500,000 would be
payable to the Corporation by Midland.
Midland Bank is a privately-held commercial bank headquartered in Lee's
Summit, Missouri that operates eight branches in the greater Kansas City area.
At June 30, 1998, Midland had total assets of approximately $397,000,000,
deposits of approximately $352,000,000 and stockholders' equity of approximately
$25,700,000. This pending acquisition, approved by Midland's shareholders, is
subject to receipt of regulatory approvals and other conditions, and is expected
to close during the quarter ending March 31, 1999. This acquisition will be
accounted for as a purchase with core value of deposits resulting from this
transaction to be amortized on an accelerated basis over a period not to exceed
10 years, goodwill to be amortized on a straight-line basis over a period not to
exceed 20 years and a noncompetition agreement to be amortized over two years on
a straight-line basis.
79
<PAGE>
COMMERCIAL FEDERAL CORPORATION BOARD OF DIRECTORS
- -------------------------------------------------
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
Commercial Federal Corporation
TALTON K. ANDERSON
President
Baxter Chrysler Plymouth Inc.
MICHAEL P. GLINSKY
Retired Executive Vice President and CFO
US WEST, Inc.
W. A. KRAUSE
Chairman and CEO
Krause Gentle Corporation
ROBERT F. KROHN
Chairman and CEO PSI Group, Inc.
CARL G. MAMMEL
Chairman
Mammel & Associates
ROBERT S. MILLIGAN
President
MI Industries
JAMES P. O'DONNELL
Executive Vice President, CFO and Corporate Secretary
ConAgra, Inc.
ROBERT D. TAYLOR
President
Taylor Financial, and
Executive Vice President and Interim CEO
Executive Aircraft Corporation
ALDO J. TESI
Group President
First Data Resources Card Enterprise Group
COMMERCIAL FEDERAL BANK DIRECTORS
- ---------------------------------
SHARON G. MARVIN
Real Estate Associate
NP Dodge Company
MICHAEL T. O'NEIL, M.D.
Orthopedic Surgeon
Private Practice
EXECUTIVE OFFICERS OF THE BANK
- ------------------------------
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
JAMES A. LAPHEN
President and
Chief Operating Officer
GARY L. MATTER
Executive Vice President,
Controller and Secretary
JOY J. NARZISI
Executive Vice President and Treasurer
Lending/Asset Management
ROGER L. LEWIS
Executive Vice President
Marketing
RUSSELL G. OLSON
Executive Vice President
Commercial Banking
JON W. STEPHENSON
Executive Vice President
Retail Banking
GARY D. WHITE
Executive Vice President
Corporate Services
80
<PAGE>
SENIOR OFFICERS
- ---------------
MARGARET E. ASH
Senior Vice President
Customer Service
R. HAL BAILEY
Senior Vice President
Construction Lending
GARY L. BAUGH
Senior Vice President
State Director - Kansas
THOMAS N. PERKINS
Senior Vice President
Acquisitions and Expansion
TERRY A. TAGGART
Senior Vice President
State Director - Colorado
FIRST VICE PRESIDENTS
- ---------------------
RONALD A. AALSETH
First Vice President
Insurance and Brokerage Services
PAMELA J. ACUFF
First Vice President
Human Resources
MELISSA M. BEUMLER
First Vice President
Marketing
RICK A. CAMPBELL
First Vice President
Loan Servicing
RONALD P. CHEFFER
First Vice President
Corporate Credit
MONTE M. DEERE
First Vice President
State Director - Oklahoma
LARRY R. GODDARD
First Vice President
Investor Relations
JOHN J. GRIFFITH
First Vice President
Specialized Lending
ROBERT E. GRUWELL
First Vice President
Treasury
MICHAEL J. HOFFMAN
First Vice President
State President - Nebraska
THOMAS J. HROMATKA
First Vice President
State President - Iowa
LAUREN W. KINGRY
First Vice President
State President - Arizona
KEVIN C. PARKS
First Vice President
Internal Audit/Legal Oversight
DOUGLAS D. PULLIN
First Vice President
Consumer Lending
HAROLD G. SIEMENS
First Vice President
Correspondent Lending
MICHAEL J. WALTS
First Vice President
State Director - Western Kansas
DENNIS R. ZIMMERMAN
First Vice President
Information Systems
81
<PAGE>
<TABLE>
<CAPTION>
Investor Information
- --------------------
<S> <C>
CORPORATE HEADQUARTERS SHAREHOLDER SERVICES AND
Commercial Federal Corporation INVESTOR RELATIONS
Commerical Federal Tower Shareholders desiring to change the address or
2120 S. 72nd Street ownership of stock, report lost certificates or to
Omaha, NE 68124 consolidate accounts should contact:
GENERAL COUNSEL Transfer Agent
Fitzgerald, Schorr, Barmettler, Brennan Harris Trust & Savings Bank
1100 Woodmen Tower Shareholder Services Division
Omaha, NE 68102 311 West Monroe
P.O. Box A3504
CORPORATE COUNSEL Chicago, IL 60690
Housley Kantarian & Bronstein, P.C. (312) 360-5100
1220 19th Street, N.W.
Suite 700 Analysts, investors and others seeking a copy of
Washington, D.C. 20036 the Form 10-K without charge or other financial
information should contact:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street Investor Relations Department
New York, NY 10019 Commercial Federal Corporation
2120 S. 72nd Street
INDEPENDENT AUDITORS Omaha, NE 68124
Deloitte & Touche LLP Telephone (402) 390-6553
200 First National Center
Omaha, NE 68102
Annual Meeting Of Shareholders
- ------------------------------
The annual meeting of shareholders will convene Omaha, Nebraska, in the "Holiday C" Meeting Room.
at 10:00 a.m. on Tuesday, November 17, 1998. Further information with regard to this meeting can
The meeting will be held at the Holiday Inn Central be found in the proxy statement.
Convention Centre, 3321 South 72nd Street,
Stock Listing
- -------------
Commercial Federal Corporation's stock symbol "CFB." The Wall Street Journal
[LOGO] common stock is traded on the New York publishes daily trading information for the stock under
Stock Exchange (NYSE) using the common the abbreviation "Comrcl Fed" in the NYSE listings.
Visit Commercial Federal on the Internet
- ----------------------------------------
www.comfedbank.com
For press releases, financial information, and
services available.
</TABLE>
<PAGE>
Exhibit 21
Subsidiaries of the Corporation
<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION
-------------------------------------------
<TABLE>
<CAPTION>
Percent State of
Parent Company Subsidiaries Owned Incorporation
------------------------------------------ --------------------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Commercial Federal Corporation Commercial Federal Bank, 100% Nebraska
a Federal Savings Bank
CFC Preferred Trust 100% Delaware
Liberty Mortgage Store, 100% Iowa
Inc. (2)
Liberty Loan Store, Inc. (2) 100% Iowa
Greatland Financial Services, 100% Iowa
Inc. (4)
Liberty Leasing Company (2) 100% Iowa
Commercial Federal Bank, Commercial Federal 100% Nebraska
a Federal Savings Bank Mortgage Corporation
Commercial Federal 100% Nebraska
Investment Services, Inc.
Commercial Federal 100% Nebraska
Insurance Corporation
Commercial Federal 100% Nebraska
Service Corporation
Empire Capital 100% Colorado
Corporation I
Tower Title & Escrow 80% Nebraska
Company
Roxborough Acquisition 100% Nebraska
Corporation
CFT Company 100% Nebraska
Laredo Investments, Inc. (3) 100% Kansas
Liberty Services, Inc. (2) 100% Iowa
Liberty Marketing, Inc. (2) 100% Iowa
K101 (1) 100% Kansas
</TABLE>
<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION (CONTINUED)
- -------------------------------------------------------
<TABLE>
<CAPTION>
Percent State of
Parent Company Subsidiaries Owned Incorporation
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial Federal Service Commercial Federal 100% Nebraska
Corporation Realty Investors Corporation
Commercial Federal 100% Nebraska
Affordable Housing, Inc.
Community Service, Inc 100% Kansas
Commercial Federal Insurance ComFed Insurance Services 100% British
Corporation Company, Limited Virgin Islands
First United Insurance, Co. (1) 100% Kansas
Liberty Insurance, Inc. (2) 100% Iowa
Liberty Leasing Company (2) Liberty Leasing Funding 100% Iowa
Corp I (2)
Liberty Leasing Funding 100% Iowa
Corp II (2)
Liberty Leasing Funding 100% Iowa
Corp III (2)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Acquired in the acquisition of First National Bank Shares, LTD.
(2) Acquired in the acquisition of Liberty Financial Corporation.
(3) Acquired in the acquisition of Mid Continent Bancshares, Inc.
(4) Acquired in the acquisition of Perpetual Midwest Financial, Inc.
Note: All of the material accounts of the above listed companies are
consolidated in the Corporation's consolidated financial statements.
All significant intercompany balances and transactions eliminated in
consolidation.
Subsidiaries Dissolved During Fiscal Year 1998:
- -----------------------------------------------
Mid-Central Service Corporation
Railroad Savings Service Corporation
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 23
Consent of Independent Auditors
<PAGE>
EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statement Nos.
33-36708, 33-05616, 33-39762, 33-31685, 33-60448, 33-21068, 33-63221, 33-63629
and Post-Effective Amendment No. 1 to Registration Statement Nos. 33-01333 and
33-10396 of Commercial Federal Corporation on Form S-8 of our report dated
August 6, 1998 (August 14, 1998 as to Notes 30 and 31), which includes an
explanatory paragraph describing the change in method of accounting for mortgage
servicing rights in fiscal year 1996, incorporated by reference in the Annual
Report on Form 10-K of Commercial Federal Corporation for the year ended June
30, 1998.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
September 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
RESTATED FINANCIAL STATEMENTS FOR FISCAL YEAR 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 78,601
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 448,754
<INVESTMENTS-CARRYING> 1,280,603
<INVESTMENTS-MARKET> 1,262,368
<LOANS> 5,642,472
<ALLOWANCE> 56,573
<TOTAL-ASSETS> 7,847,690
<DEPOSITS> 5,224,331
<SHORT-TERM> 1,103,445
<LIABILITIES-OTHER> 120,370
<LONG-TERM> 881,819
0
0
<COMMON> 234
<OTHER-SE> 517,491
<TOTAL-LIABILITIES-AND-EQUITY> 7,847,690
<INTEREST-LOAN> 447,580
<INTEREST-INVEST> 128,153
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 575,733
<INTEREST-DEPOSIT> 253,354
<INTEREST-EXPENSE> 378,580
<INTEREST-INCOME-NET> 197,153
<LOAN-LOSSES> 7,211
<SECURITIES-GAINS> 87
<EXPENSE-OTHER> 159,774
<INCOME-PRETAX> 98,936
<INCOME-PRE-EXTRAORDINARY> 66,195
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,195
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 2.67
<LOANS-NON> 40,275
<LOANS-PAST> 144
<LOANS-TROUBLED> 15,585
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 55,853
<CHARGE-OFFS> 6,827
<RECOVERIES> 985
<ALLOWANCE-CLOSE> 56,651
<ALLOWANCE-DOMESTIC> 43,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 12,765
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 87,675
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,844
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 424,396
<INVESTMENTS-CARRYING> 1,306,219
<INVESTMENTS-MARKET> 1,294,982
<LOANS> 5,766,901
<ALLOWANCE> 57,304
<TOTAL-ASSETS> 7,980,351
<DEPOSITS> 5,256,338
<SHORT-TERM> 1,043,550
<LIABILITIES-OTHER> 160,803
<LONG-TERM> 1,048,939
0
0
<COMMON> 235
<OTHER-SE> 466,611
<TOTAL-LIABILITIES-AND-EQUITY> 7,980,351
<INTEREST-LOAN> 118,614
<INTEREST-INVEST> 28,352
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 146,966
<INTEREST-DEPOSIT> 75,225
<INTEREST-EXPENSE> 97,251
<INTEREST-INCOME-NET> 49,715
<LOAN-LOSSES> 2,204
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 68,834
<INCOME-PRETAX> (2,908)
<INCOME-PRE-EXTRAORDINARY> (1,823)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,823)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<YIELD-ACTUAL> 2.71
<LOANS-NON> 41,585
<LOANS-PAST> 0
<LOANS-TROUBLED> 14,456
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,651
<CHARGE-OFFS> 2,175
<RECOVERIES> 564
<ALLOWANCE-CLOSE> 57,150
<ALLOWANCE-DOMESTIC> 12,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 44,894
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 74,710
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,168
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 432,584
<INVESTMENTS-CARRYING> 1,286,572
<INVESTMENTS-MARKET> 1,280,619
<LOANS> 5,961,620
<ALLOWANCE> 57,929
<TOTAL-ASSETS> 8,226,116
<DEPOSITS> 5,452,961
<SHORT-TERM> 1,149,758
<LIABILITIES-OTHER> 127,179
<LONG-TERM> 987,604
227
0
<COMMON> 0
<OTHER-SE> 508,387
<TOTAL-LIABILITIES-AND-EQUITY> 8,226,116
<INTEREST-LOAN> 239,767
<INTEREST-INVEST> 60,128
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 299,895
<INTEREST-DEPOSIT> 133,722
<INTEREST-EXPENSE> 197,324
<INTEREST-INCOME-NET> 102,571
<LOAN-LOSSES> 5,667
<SECURITIES-GAINS> 88
<EXPENSE-OTHER> 111,275
<INCOME-PRETAX> 27,947
<INCOME-PRE-EXTRAORDINARY> 15,017
<EXTRAORDINARY> (583)
<CHANGES> 0
<NET-INCOME> 14,434
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
<YIELD-ACTUAL> 2.71
<LOANS-NON> 44,290
<LOANS-PAST> 278
<LOANS-TROUBLED> 12,749
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,651
<CHARGE-OFFS> 5,693
<RECOVERIES> 918
<ALLOWANCE-CLOSE> 58,210
<ALLOWANCE-DOMESTIC> 11,733
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 46,477
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 101,709
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,302
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 370,770
<INVESTMENTS-CARRYING> 1,338,900
<INVESTMENTS-MARKET> 1,330,901
<LOANS> 6,091,005
<ALLOWANCE> 57,686
<TOTAL-ASSETS> 8,318,505
<DEPOSITS> 5,482,532
<SHORT-TERM> 1,270,246
<LIABILITIES-OTHER> 127,192
<LONG-TERM> 915,352
0
0
<COMMON> 299
<OTHER-SE> 526,085
<TOTAL-LIABILITIES-AND-EQUITY> 8,318,505
<INTEREST-LOAN> 362,203
<INTEREST-INVEST> 88,964
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 451,167
<INTEREST-DEPOSIT> 199,999
<INTEREST-EXPENSE> 294,879
<INTEREST-INCOME-NET> 156,288
<LOAN-LOSSES> 9,066
<SECURITIES-GAINS> 120
<EXPENSE-OTHER> 150,793
<INCOME-PRETAX> 53,856
<INCOME-PRE-EXTRAORDINARY> 35,057
<EXTRAORDINARY> (583)
<CHANGES> 0
<NET-INCOME> 34,474
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
<YIELD-ACTUAL> 2.71
<LOANS-NON> 43,421
<LOANS-PAST> 545
<LOANS-TROUBLED> 12,697
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,651
<CHARGE-OFFS> 9,500
<RECOVERIES> 1,543
<ALLOWANCE-CLOSE> 57,509
<ALLOWANCE-DOMESTIC> 11,288
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 46,221
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
RESTATED FINANCIAL STATEMENTS FOR FISCAL YEAR ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 124,206
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,965
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 340,512
<INVESTMENTS-CARRYING> 1,316,638
<INVESTMENTS-MARKET> 1,314,801
<LOANS> 6,298,957
<ALLOWANCE> 57,002
<TOTAL-ASSETS> 8,526,508
<DEPOSITS> 5,453,572
<SHORT-TERM> 1,380,349
<LIABILITIES-OTHER> 132,569
<LONG-TERM> 1,012,576
0
0
<COMMON> 298
<OTHER-SE> 547,144
<TOTAL-LIABILITIES-AND-EQUITY> 8,526,508
<INTEREST-LOAN> 486,586
<INTEREST-INVEST> 121,018
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 607,604
<INTEREST-DEPOSIT> 266,611
<INTEREST-EXPENSE> 396,775
<INTEREST-INCOME-NET> 210,829
<LOAN-LOSSES> 12,284
<SECURITIES-GAINS> 510
<EXPENSE-OTHER> 194,142
<INCOME-PRETAX> 85,536
<INCOME-PRE-EXTRAORDINARY> 55,467
<EXTRAORDINARY> (583)
<CHANGES> 0
<NET-INCOME> 54,884
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 2.71
<LOANS-NON> 42,170
<LOANS-PAST> 894
<LOANS-TROUBLED> 10,615
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,651
<CHARGE-OFFS> 2,786
<RECOVERIES> 12,341
<ALLOWANCE-CLOSE> 57,079
<ALLOWANCE-DOMESTIC> 10,809
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 46,270
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 104,732
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 438,520
<INVESTMENTS-CARRYING> 1,291,042
<INVESTMENTS-MARKET> 1,296,946
<LOANS> 6,376,530
<ALLOWANCE> 56,281
<TOTAL-ASSETS> 8,658,340
<DEPOSITS> 5,362,645
<SHORT-TERM> 1,658,883
<LIABILITIES-OTHER> 146,563
<LONG-TERM> 922,219
0
0
<COMMON> 300
<OTHER-SE> 567,730
<TOTAL-LIABILITIES-AND-EQUITY> 8,658,340
<INTEREST-LOAN> 130,738
<INTEREST-INVEST> 29,859
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 160,597
<INTEREST-DEPOSIT> 66,902
<INTEREST-EXPENSE> 105,001
<INTEREST-INCOME-NET> 55,596
<LOAN-LOSSES> 3,008
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 41,789
<INCOME-PRETAX> 32,175
<INCOME-PRE-EXTRAORDINARY> 20,775
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,775
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
<YIELD-ACTUAL> 2.74
<LOANS-NON> 44,985
<LOANS-PAST> 0
<LOANS-TROUBLED> 9,108
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,079
<CHARGE-OFFS> 3,507
<RECOVERIES> 371
<ALLOWANCE-CLOSE> 57,302
<ALLOWANCE-DOMESTIC> 10,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 47,105
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 100,769
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 402,297
<INVESTMENTS-CARRYING> 1,256,403
<INVESTMENTS-MARKET> 1,260,619
<LOANS> 6,437,328
<ALLOWANCE> 58,734
<TOTAL-ASSETS> 8,661,410
<DEPOSITS> 5,410,620
<SHORT-TERM> 1,517,358
<LIABILITIES-OTHER> 117,281
<LONG-TERM> 1,031,261
0
0
<COMMON> 410
<OTHER-SE> 584,480
<TOTAL-LIABILITIES-AND-EQUITY> 8,661,410
<INTEREST-LOAN> 262,492
<INTEREST-INVEST> 60,306
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 322,798
<INTEREST-DEPOSIT> 133,050
<INTEREST-EXPENSE> 210,923
<INTEREST-INCOME-NET> 111,875
<LOAN-LOSSES> 8,940
<SECURITIES-GAINS> 1,047
<EXPENSE-OTHER> 85,887
<INCOME-PRETAX> 62,819
<INCOME-PRE-EXTRAORDINARY> 40,336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,336
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .98
<YIELD-ACTUAL> 2.73
<LOANS-NON> 46,368
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,891
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,079
<CHARGE-OFFS> 7,395
<RECOVERIES> 1,676
<ALLOWANCE-CLOSE> 59,534
<ALLOWANCE-DOMESTIC> 9,631
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 49,903
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
RESTATED INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-30-1998
<CASH> 100,703
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,002
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 407,723
<INVESTMENTS-CARRYING> 1,250,064
<INVESTMENTS-MARKET> 1,258,185
<LOANS> 6,680,205
<ALLOWANCE> 59,549
<TOTAL-ASSETS> 8,929,762
<DEPOSITS> 5,542,723
<SHORT-TERM> 1,217,848
<LIABILITIES-OTHER> 123,556
<LONG-TERM> 1,419,745
0
0
<COMMON> 420
<OTHER-SE> 625,465
<TOTAL-LIABILITIES-AND-EQUITY> 8,929,762
<INTEREST-LOAN> 394,756
<INTEREST-INVEST> 90,083
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 484,839
<INTEREST-DEPOSIT> 198,090
<INTEREST-EXPENSE> 314,194
<INTEREST-INCOME-NET> 170,645
<LOAN-LOSSES> 11,620
<SECURITIES-GAINS> 1,515
<EXPENSE-OTHER> 146,586
<INCOME-PRETAX> 78,469
<INCOME-PRE-EXTRAORDINARY> 49,158
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,158
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 2.76
<LOANS-NON> 47,335
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,968
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,079
<CHARGE-OFFS> 10,507
<RECOVERIES> 2,136
<ALLOWANCE-CLOSE> 59,638
<ALLOWANCE-DOMESTIC> 9,075
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50,563
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 124,750
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,586
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 351,529
<INVESTMENTS-CARRYING> 1,158,144
<INVESTMENTS-MARKET> 1,161,474
<LOANS> 6,702,378
<ALLOWANCE> 59,698
<TOTAL-ASSETS> 8,852,640
<DEPOSITS> 5,363,140
<SHORT-TERM> 1,009,099
<LIABILITIES-OTHER> 133,818
<LONG-TERM> 1,703,544
0
0
<COMMON> 421
<OTHER-SE> 642,618
<TOTAL-LIABILITIES-AND-EQUITY> 8,252,640
<INTEREST-LOAN> 529,880
<INTEREST-INVEST> 117,738
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 647,618
<INTEREST-DEPOSIT> 261,941
<INTEREST-EXPENSE> 417,188
<INTEREST-INCOME-NET> 230,430
<LOAN-LOSSES> 15,325
<SECURITIES-GAINS> 2,505
<EXPENSE-OTHER> 195,295
<INCOME-PRETAX> 108,075
<INCOME-PRE-EXTRAORDINARY> 67,333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,333
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 2.79
<LOANS-NON> 46,467
<LOANS-PAST> 0
<LOANS-TROUBLED> 4,302
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,079
<CHARGE-OFFS> 13,850
<RECOVERIES> 2,622
<ALLOWANCE-CLOSE> 59,795
<ALLOWANCE-DOMESTIC> 8,462
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 51,333
</TABLE>
