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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-11515
COMMERCIAL FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 South 72nd Street, Omaha, Nebraska 68124
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
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(Title of Each Class) (Name of Each Exchange
on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 20, 1999, was
$1,200,017,631. As of September 20, 1999, there were issued and outstanding
59,362,412 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1999 - Parts I, II and IV.
2. Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
- Part III.
<PAGE>
PART I
Item 1. Business
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GENERAL
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Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. At June 30, 1999, the
Corporation incurred interest expense on $50.0 million of subordinated
extendible notes, $46.4 million of junior subordinated deferrable interest
debentures, $40.0 million of one-year purchase notes from the acquisition of
AmerUs Bank ("AmerUs") and an unsecured promissory term note totaling $32.5
million. The $32.5 million unsecured note was paid in full on July 1, 1999, and
the $40.0 million of one-year purchase notes were paid in full on July 30, 1999.
Both of these notes were repaid from the borrowing of a $72.5 million term note
dated July 1, 1999 and due June 30, 2004 and bearing interest adjusted monthly
at 100 basis points below the lender's national base rate. Interest is payable
monthly on the subordinated extendible notes and quarterly on the junior
subordinated deferrable interest debentures. See Note 15 of the Notes to
Consolidated Financial Statements in the Corporation's 1999 Annual Report to
Stockholders (the "Annual Report") which is incorporated herein by reference,
for additional information on the debt of the Corporation. The Corporation also
pays operating expenses primarily for shareholder and stock related expenditures
such as the annual report, proxy, corporate filing fees and assessments and
certain costs directly attributable to the holding company. In addition, common
stock cash dividends totaling $15.1 million, or $.25 per common share, were
declared during fiscal year 1999.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt and for the common stock cash dividends paid to the Corporation's
shareholders. During fiscal year 1999 the Corporation received, in cash,
dividends totaling $73.3 million from the Bank which were made primarily to
cover (i) the cash payment of $25.0 million related to the acquisition of
Midland First Financial Corporation ("Midland") on March 1, 1999, (ii) common
stock cash dividends totaling $17.4 million paid by the parent company to its
shareholders during fiscal year 1999, (iii) interest payments totaling $15.2
million on the parent company's debt, (iv) the cash payment of $10.0 million
related to the acquisition of AmerUs on July 31, 1998, and (v) principal
payments of $5.7 million on the parent company's five-year promissory term note.
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank has transitioned from
a thrift institution to a community banking institution offering commercial and
consumer banking, mortgage banking and trust and investment services. The
Corporation completed three acquisitions in fiscal year 1999 and four
acquisitions in fiscal year 1998. These acquisitions, three of which were
commercial banks, have allowed the Bank to further expand its banking services,
commercial and agricultural loans, business checking, equipment leasing and
trust services. In addition, the fiscal year 1999 acquisitions created new
customer franchises in Missouri, Minnesota and South Dakota and greatly expanded
the Bank's franchises in Iowa, Colorado, Nebraska and Kansas. The Bank has
moved from primarily a single-family residential lender to a full service
banking institution with branches not only in traditional locations but also in
supermarkets and convenience stores, more ATM outlets and expanded services in
telephone bill paying and Internet banking. All loan origination activities are
conducted through the Bank's branch office network, through the loan offices of
Commercial Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage
banking subsidiary, and through a nationwide correspondent network of mortgage
loan originators. The Corporation also provides insurance and securities
brokerage and other retail financial services.
2
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The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage and commercial
financing, consumer loans and other types of loans, which, in turn, are affected
by the interest rates at which such financings may be offered, the availability
of funds, and other factors, such as the supply of housing for mortgage loans
and regional economic situations.
At June 30, 1999, the Corporation had assets of $12.8 billion and stockholders'
equity of $966.9 million, and through the Bank operated 256 branches in Iowa
(77), Colorado (44), Nebraska (42), Kansas (41), Oklahoma (21), Missouri (19),
Arizona (7), Minnesota (4) and South Dakota (1). The increase in branches over
fiscal year 1998 was the result of three acquisitions during fiscal year 1999.
Effective September 23, 1999 the Bank entered into an agreement to sell the
branch located in Watertown, South Dakota. This was the only branch the Bank
had in South Dakota. Such sale is subject to regulatory approval and is
anticipated to close in November 1999.
The Corporation consummated the acquisitions of AmerUs on July 31, 1998, First
Colorado Bancorp, Inc. ("First Colorado") on August 14, 1998, and Midland on
March 1, 1999. On a combined basis, these institutions operated 82 branches and
had assets of approximately $3.2 billion and deposits of approximately $2.5
billion. These acquisitions provided the Corporation entry into three new
states, access to supermarket branches and significant expansion of its presence
in the metropolitan areas of Denver, Colorado and Kansas City, Missouri. The
accounts and results of operations of AmerUs and Midland are reflected in the
Corporation's consolidated financial statements beginning July 31, 1998, and
March 1, 1999, respectively, since these acquisitions were accounted for as
purchases. The First Colorado acquisition was accounted for under the pooling
of interests accounting method and, accordingly, the Corporation's historical
consolidated financial statements were restated for all prior periods to include
the accounts and results of operations of First Colorado.
The Bank is one of the largest retail financial institutions in the Midwest,
and, based upon total assets at June 30, 1999, the Corporation was the 11th
largest publicly-held thrift institution holding company in the United States.
In addition, CFMC serviced a loan portfolio totaling $13.5 billion at June 30,
1999, with approximately $7.5 billion in loans serviced for third parties and
$6.0 billion in loans serviced for the Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General" in the
Annual Report.
The Corporation's strategy for of its existing network growth emphasizes both
internal and external growth. Operations focus on increasing deposits,
primarily demand accounts and public funds, making loans (primarily consumer,
commercial real estate, single-family residential, business lending and
agribusiness loans) and providing customers with a full array of financial
products and a high level of customer service. As part of its long-term
strategic plan, the Corporation intends to continue to expand its operations
within its market areas through direct marketing efforts aimed at increasing
market share and opening additional branches. The Corporation's retail strategy
will continue to be centered on attracting new customers and selling both new
and existing customers multiple products and services. Additionally, the
Corporation will continue to build and leverage an infrastructure designed to
increase non-interest income. The Corporation's operations are also continually
reviewed in order to gain efficiencies to increase productivity and reduce
costs. Complementing its strategy of internal growth, the Corporation continues
to grow its current franchise through an ongoing program of selective
acquisitions of other financial institutions. Acquisition candidates have been,
and will continue to be, selected based on the extent to which the candidates
can enhance the Corporation's retail presence in both new and underserved
markets and enhance the Corporation's existing retail network. See
"Acquisitions During Fiscal Year 1999" herein.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
3
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RECENT DEVELOPMENTS
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Acquisitions During Fiscal Year 1999.
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AmerUs Bank. On July 31, 1998, the Corporation consummated its acquisition of
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AmerUs, a wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired
through a taxable acquisition all of the outstanding shares of the common stock
of AmerUs for total consideration of approximately $178.3 million. Such
consideration consisted of (i) certain assets retained by AmerUs Group Co. in
lieu of cash (primarily FHA Title One single-family residential mortgage loans
and a receivable for income tax benefits) totaling approximately $85.0 million,
(ii) cash (as adjusted per the agreement) totaling approximately $53.2 million,
and (iii) one-year promissory notes for $40.0 million bearing interest, adjusted
monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a
federally chartered savings bank headquartered in Des Moines, Iowa and operated
47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2)
and South Dakota (1). At July 31, 1998, before purchase accounting adjustments,
AmerUs had total assets of approximately $1.3 billion, deposits of approximately
$949.7 million and stockholder's equity of approximately $84.8 million. This
acquisition was accounted for as a purchase. The one-year promissory notes were
paid in full on July 30, 1999. See Note 2 of Notes to Consolidated Financial
Statements in the Annual Report for additional information.
First Colorado Bancorp, Inc. On August 14, 1998, the Corporation consummated
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its acquisition of First Colorado. The Corporation acquired in a tax-free
reorganization all of the outstanding shares of First Colorado's common stock in
exchange for 18,278,789 shares of its common stock. Based on the Corporation's
closing stock price of $26.375 at August 14, 1998, the total consideration for
this acquisition, including cash paid for fractional shares, approximated $482.2
million. An additional requirement of the transaction with First Colorado was
the issuance of 1,400,000 shares of First Colorado common stock immediately
prior to the consummation of the merger. Such requirement was necessary to cure
the taint on the treasury stock of First Colorado so this transaction could be
accounted for as a pooling of interests. First Colorado, headquartered in
Lakewood, Colorado, was a unitary savings and loan holding company and the
parent company of First Federal Bank of Colorado, a federally chartered stock
savings bank that operated 27 branches located in Colorado, with 23 branches
located in the Denver metropolitan area and four in Colorado's western slope
region. At July 31, 1998, First Colorado had assets of approximately $1.6
billion, deposits of approximately $1.2 billion and stockholders' equity of
approximately $254.7 million. The acquisition was accounted for as a pooling of
interests. See Note 2 of Notes to Consolidated Financial Statements in the
Annual Report for additional information.
Midland First Financial Corporation. On March 1, 1999, the Corporation
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consummated its acquisition of Midland, parent company of Midland Bank. The
Corporation acquired in a taxable acquisition all of the outstanding shares of
Midland's common stock. The total purchase consideration of this acquisition was
$83.0 million in cash, including cash to pay off existing Midland debt totaling
$5.6 million, the retirement of preferred stock of both Midland and Midland Bank
totaling $11.6 million and $810,000 for advisor fees. Midland Bank was a
privately-held commercial bank headquartered in Lee's Summit, Missouri that
operated eight branches in the greater Kansas City area. At February 28, 1999,
Midland had total assets of approximately $399.2 million, deposits of
approximately $353.1 million and stockholders' equity of approximately $24.2
million. This acquisition was accounted for as a purchase. See Note 2 of Notes
to Consolidated Financial Statements in the Annual Report for additional
information.
4
<PAGE>
Merger Expenses and Other Nonrecurring Charges.
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During fiscal year 1999 the Corporation incurred merger expenses and other
nonrecurring charges totaling approximately $30.0 million. Such amounts for
fiscal year 1999 are associated with the First Colorado acquisition totaling
$16.0 million and the termination of three employee stock ownership plans
totaling $14.0 million acquired in mergers during the past two fiscal years.
These employee stock ownership plans were terminated following consummation of
the mergers and receipt of determination letters from the Internal Revenue
Service to terminate such plans. The merger-related expenses totaling $16.0
million consists of $8.0 million in transition costs as a result of the First
Colorado acquisition, $6.7 million in costs to combine operations and conform
certain accounting practices, $1.4 million in personnel expenses for severance,
retention and other employee related costs and $1.0 million in additional loss
reserves to conform First Colorado's loan portfolios to the reserve policies of
the Corporation. These expenses were offset by a gain of $1.1 million on the
sale of a First Colorado branch that was located in close proximity to another
branch of the Bank.
Common Stock Repurchase.
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Effective April 28, 1999, the Corporation's Board of Directors authorized the
repurchase of up to five percent of the Corporation's outstanding common stock
during the next 18 months. Such repurchase is expected to approximate 3,000,000
shares of common stock. Repurchases will be made depending upon market
conditions and various other factors. Any repurchase generally would be on the
open-market, although privately negotiated transactions are also possible. In
compliance with Nebraska law, all repurchased shares will be cancelled. During
the fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled
1,500,000 shares of its common stock at a cost of approximately $36.2 million.
In the first quarter of fiscal year 2000, through September 23, 1999, the
Corporation repurchased and canceled an additional 423,500 shares of its common
stock at a cost of approximately $9.7 million.
Special Meeting of Stockholders.
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At the Special Meeting of Stockholders on July 3, 1998, three proposals were
approved. The proposals approved were (i) the First Colorado transaction and an
amendment to the Corporation's Articles of Incorporation to increase the number
of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii)
an amendment to further increase the number of authorized shares from 70,000,000
to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock
Option and Incentive Plan to increase the number of shares available for grant
by 2,400,000 shares.
Year 2000.
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The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year are expected to read entries for the year 2000 as the year 1900. Like
most financial service providers, the Corporation may be significantly affected
by the Year 2000 issue due to the nature of financial information. Software,
hardware and equipment both within and outside the Corporation's direct control
and with whom the Corporation electronically or operationally interfaces are
likely to be affected. If computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations that rely on the data field
information, such as interest, payment or due dates and other operating
functions, may generate results that could be significantly misstated, and the
Corporation could experience a temporary inability to process transactions and
engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this issue are provided by major third party vendors. The
Corporation has completed the process of replacing/upgrading its computer
systems and programs, as well as most equipment, in order to provide cost-
effective and efficient delivery of services to its customers, information to
management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment.
During fiscal year 1999 approximately $4.4 million was expensed that related to
systems conversion costs, internal staff costs, as well as consulting and other
Year 2000 expenses. In addition, during fiscal year 1998 the Corporation
expensed $4.3 million due to accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The adjusted carrying amount of these computer
systems and software was depreciated until their disposal at the date of
conversion.
5
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The third party vendors have advised the Corporation that all such mission
critical computer systems and programs are Year 2000 compliant. The Corporation
tested all such systems for Year 2000 compliance before integration into its
computer environment. The Corporation scheduled certain operations that began
conversions in October 1998. These conversions allowed the Corporation to
resolve application and conversion problems that arose and to do further testing
to enhance software programs and future conversions. Final conversions that are
Year 2000 compliant were completed by the end of fiscal year 1999. Other
mission critical systems were tested in conjunction with certain nationwide
financial industry test programs. All Year 2000 testing was substantially
completed June 30, 1999. In addition, as a financial services institution, the
Corporation is under the supervision of federal regulatory agencies that have
guidelines and perform ongoing monitoring and evaluation of the Corporation's
Year 2000 readiness.
The Corporation is also working with non-mainframe software and hardware vendors
to determine the extent to which the Corporation's interface systems may be
vulnerable to those third parties' failure to remediate their own Year 2000
issues. If the third party vendors are unable to resolve Year 2000 issues in
time, the conversion is delayed significantly or problems arise as a result of
the conversion, the Corporation would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have significant adverse impact on the financial condition and results of
operations of the Corporation. In addition, there can be no assurance that the
systems of other companies on which the Corporation's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Corporation's systems, would not have a
material adverse effect on the Corporation. The Corporation has developed and
tested a Year 2000 contingency plan that addresses, among other issues, critical
operations and potential failures thereof, and strategies for business
continuation such as contracting with alternative vendors and re-deployment of
internal staff as needed in critical areas. The Corporation has also evaluated
non-technical systems that rely on imbedded technology in their critical
processes so that such systems will continue to operate without interruption.
Supervisory Goodwill Lawsuit.
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On September 12, 1994, the Bank and the Corporation commenced litigation against
the United States in the United States Court of Federal Claims seeking to
recover monetary relief for the government's refusal to honor certain contracts
that it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States. The Corporation and the Bank are pursuing
alternative damage claims of up to approximately $230,000,000. The Bank also
assumed a lawsuit in the merger with Mid Continent Bancshares, Inc. ("Mid
Continent'), a fiscal year 1998 acquisition, against the United States also
relating to a supervisory goodwill claim filed by the former Mid Continent. The
litigation status and process of these legal actions, as well as that of
numerous actions brought by others alleging similar claims with respect to
supervisory goodwill and regulatory capital credits, make the value of the
claims asserted by the Bank (including the Mid Continent claim) uncertain as to
their ultimate outcome, and contingent on a number of factors and future events
which are beyond the control of the Bank, both as to substance, timing and the
dollar amount of damages that may be awarded to the Bank and the Corporation if
they finally prevail in this litigation.
Regulatory Capital Compliance.
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The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios as set forth in the following tables of
tangible, core and total risk-based capital. Prompt Corrective Action
provisions contained in the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") require specific supervisory actions as capital levels
decrease. To be considered well-capitalized under the regulatory framework for
Prompt Corrective Action under FDICIA, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in
the following tables. At June 30, 1999, the Bank exceeded the minimum
requirements for the well-capitalized category. As of June 30, 1999, the most
recent notification from the OTS categorized the Bank as "well-capitalized"
under the regulatory framework for Prompt Corrective Action provisions under
FDICIA. There are no conditions or events since such notification that
management believes have changed the Bank's classification.
6
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The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements as of June 30, 1999:
<TABLE>
<CAPTION>
Actual Capital Required Capital
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(Dollars in Thousands) Amount Ratio Amount Ratio
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<S> <C> <C> <C> <C>
OTS Capital Adequacy:
Tangible capital $ 880,400 6.97% $ 189,412 1.5%
Core capital 890,967 7.05 379,142 3.0
Risk-based capital 957,676 13.70 559,279 8.0
FDICIA Regulations to be Classified Well-Capitalized:
Tier 1 leverage capital 890,967 7.05 631,903 5.0
Tier 1 risk-based capital 890,967 12.74 419,459 6.0
Total risk-based capital 957,676 13.70 699,099 10.0
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</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.
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During fiscal year 1999, the Corporation adopted the provisions of the following
accounting pronouncements: Statement No. 129 entitled "Disclosure of Information
About Capital Structure," Statement No. 130 "Reporting Comprehensive Income,"
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information," and Statement No. 132 "Employers' Disclosure About Pensions and
Other Postretirement Benefits." All of these pronouncements were only of a
disclosure nature, and therefore the adoption of these statements did not have a
material effect on the Corporation's financial position, liquidity or results of
operations. See Notes 1, 21 and 23 and the Consolidated Statement of
Comprehensive Income to the Consolidated Financial Statements in the Annual
Report for a discussion of these new accounting pronouncements, their effect on
the Corporation and implementation of such.
Other Information.
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Additional information concerning the general development of the business of the
Corporation during fiscal year 1999 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
Forward Looking Statements.
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This document contains or incorporates by reference forward-looking statements
that involve inherent risks and uncertainties. The Corporation cautions readers
that a number of important factors could cause actual results to differ
materially from those in the forward looking statements. Those factors include
fluctuations in interest rates, inflation, government regulations, the progress
of integrating acquisitions, economic conditions, adequacy of allowance for
credit losses, levels of charge-offs, the costs or difficulties associated with
the resolution of Year 2000 issues on computer systems greater than anticipated,
technology changes and competition in the geographic and business areas in which
the Corporation conducts its operations. These statements are based on
management's current expectations. Actual results in future periods may differ
materially from those currently expected because of various risks and
uncertainties.
7
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MARKET RISK
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The Corporation's Asset Liability Management Committee ("ALCO"), which includes
senior management representatives, monitors and considers methods of managing
the rate sensitivity and repricing characteristics of the balance sheet
components, consistent with maintaining acceptable levels of changes in the net
portfolio value ("NPV") ratio and net interest income. A primary purpose of the
Corporation's asset and liability management is to manage interest rate risk to
invest effectively the Corporation's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on the NPV rate and net interest income.
The Bank's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors and the ALCO. Interest rate risk exposure is
measured using interest rate sensitivity analysis to determine the change in the
Bank's NPV ratio in the event of hypothetical changes in interest rates. The
NPV ratio is defined as the market value of the Bank's capital divided by the
market value of its assets. Interest rate sensitivity gap analysis is used to
determine the repricing characteristics of the Bank's assets and liabilities.
If estimated changes to the NPV ratio and the sensitivity gap are not within the
limits established by the Board of Directors, the Board may direct management to
adjust its asset and liability mix to bring the interest rate risk within Board-
approved limits.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to increase the interest rate sensitivity of its asset
base. Management has sought to decrease the average maturity of its assets by
emphasizing the origination of adjustable-rate residential mortgage loans,
residential construction loans, consumer loans and short-term commercial
operating and agricultural loans. In addition, long-term, fixed-rate single-
family residential mortgage loans are underwritten according to guidelines of
the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National
Mortgage Association ("GNMA") and the Federal National Mortgage Association
("FNMA"), and are either swapped with the FHLMC, GNMA and the FNMA in exchange
for mortgage-backed securities, sold directly for cash in the secondary market,
or are retained for the Corporation's loan portfolio if such loans have
characteristics which are consistent with the Corporation's asset and liability
goals and long-term interest rate yield requirements.
On December 1, 1998, the provisions of Thrift Bulletin 13a (TB-13a) became
effective. This bulletin requires that the Corporation's Board of Directors set
interest rate risk limits that would prohibit the Bank from exhibiting a post-
shock NPV ratio and interest rate sensitivity measure of "significant risk" or
greater. The Bank's interest rate risk sensitivity is measured by computing
estimated changes in the NPV ratio over a range of hypothetical changes in
market interest rates. The NPV ratio represents the market value of the Bank's
capital (defined as the market value of assets minus the market value of
liabilities, with adjustments made for the fair value of interest rate swap,
cap, and floor agreements as well as the loan servicing portfolio) divided by
the market value of the Bank's assets, and can be thought of as a market value
capital ratio. The Corporation's Board of Directors has adopted an interest
rate risk policy which establishes a minimum allowable NPV ratio of 7.0% over a
range of hypothetical interest rates extending from 300 basis points below
current levels to 300 basis points above current levels. In addition, the
policy establishes a maximum allowable change in the NPV ratio of 3.0% in the
event of an instantaneous and adverse change in interest rates of 200 basis
points. The Board limits are more conservative than the limits set by the OTS
to maintain a risk rating better than "significant risk." The OTS limits set a
minimum NPV ratio of 6.0% at the 200 basis point rate shock level, and a maximum
change in the NPV ratio of 4.0%, or 400 basis points, at the same level.
8
<PAGE>
The following table presents the projected change in the Bank's NPV ratio for
various hypothetical rate shock levels as of June 30, 1999.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Hypothetical Market Market Change
Change in Value of Value of NPV Board in NPV Board
Interest Rates Capital Assets Ratio Limit Ratio Limit
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
300 basis point rise $ 715,383 $11,683,648 6.12% 7.00% (4.85)%
200 basis point rise 933,184 12,001,312 7.78% 7.00% (3.19)% (3.00)%
100 basis point rise 1,155,763 12,323,116 9.38% 7.00% (1.59)%
Base scenario 1,388,535 12,661,113 10.97% 7.00% --
100 basis point decline 1,633,824 12,952,691 12.61% 7.00% 1.64%
200 basis point decline 1,680,213 13,129,818 12.80% 7.00% 1.83% (3.00)%
300 basis point decline 1,539,414 13,293,314 11.58% 7.00% 0.61%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The preceding table indicates that at June 30, 1999 the Bank's NPV ratio would
decrease in the event of an immediate rise in interest rates, while the Bank's
NPV ratio would increase in the event of immediate decline in interest rates. At
June 30, 1999 the Bank's NPV ratios were within the targets set by the Board of
Directors in all rate scenarios except the 300 basis point rise scenario.
TheBank was outside the limit set by the Board of Directors for the change in
NPV ratio in the 200 basis point rise scenario. Such interest rate sensitivity
measures per TB-13a classifies the Bank with a risk rating of "moderate risk."
Therefore, at June 30, 1999 the Bank was within the limits set by the OTS to
maintain a risk rating of better than "significant risk."
The NPV ratio is calculated by the Corporation pursuant to guidelines
established by the OTS. The modeling calculation is based on the net present
value of discounted estimated cash flows utilizing prepayment assumptions and
market rates of interest provided by independent brokers and other public
sources as of June 30, 1999, with adjustments made to reflect the shift in
interest rates as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
9
<PAGE>
The following table presents the Bank's projected change in net interest income
for the various hypothetical changes in interest rates at June 30, 1999 compared
to June 30, 1998 and is presented for comparative purposes since the Corporation
utilized the market value of portfolio equity last fiscal year.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1999 June 30, 1998
---------------------------------------------- --------------------------------------------------
Hypothetical Net Interest Net Interest
Change in Net Interest Income Percent Net Interest Income Percent
Interest Rates Income Change Change Income Change Change
- ---------------------------- ---------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
300 basis point rise $ 263,230 $(108,532) (29.2)% $ 219,531 $ (32,716) (13.0)%
200 basis point rise 304,392 (67,370) (18.1) 237,011 (15,236) (6.0)
100 basis point rise 342,296 (29,466) (7.9) 248,741 (3,506) (1.4)
Base Scenario 371,762 -- -- 252,247 -- --
100 basis point decline 387,498 15,736 4.2 258,150 5,903 2.3
200 basis point decline 388,938 17,176 4.6 264,632 12,385 4.9
300 basis point decline 388,746 16,984 4.6 277,295 25,048 9.9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The preceding table indicates that the Bank's net interest income sensitivity to
rising interest rates has increased at June 30, 1999 compared to June 30, 1998,
while the Bank's sensitivity to falling interest rates has decreased for the 200
and 300 basis point scenarios. As of June 30, 1999, both the size and the mix of
the Corporation's assets and liabilities have changed as compared to June 30,
1998. These changes are primarily the result of the acquisitions of AmerUs,
First Colorado and Midland and the asset/liability strategies implemented by
management. The Corporation has also increased its balance of callable
investment securities and fixed-rate mortgage assets, leveraged its balance
sheet by taking down callable FHLB advances, and expanded its community banking
operations with increased emphasis on commercial, agricultural, and consumer
loans.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. The Bank's one-year
cumulative gap is a negative $1.3 billion, or 9.88% of the Bank's total assets
at June 30, 1999. The interest rate risk policy of the Bank authorizes a
liability sensitive one-year cumulative gap not to exceed 10.0%.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" and Note 16 of Notes to Consolidated
Financial Statements for additional information in the Annual Report.
10
<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.
Emphasis on consumer loans during fiscal years 1999 and 1998 increased
substantially over previous fiscal years. Residential construction lending has
also increased over fiscal years 1998 and 1997. Residential loan origination
activity, including activity through correspondents, was lower for fiscal year
1999 compared to fiscal year 1998 due primarily to a larger volume of loan
refinancing activity in fiscal year 1998. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 256 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's various loan offices
located in its existing market areas, loan offices of CFMC and through its
nationwide correspondent network.
At June 30, 1999, the Corporation's total loan and mortgage-backed securities
portfolio was $10.6 billion, representing over 83.0% of its $12.8 billion of
total assets at that date. The carrying value of mortgage-backed securities
totaled $1.3 billion at June 30, 1999, representing 12.1% of the Corporation's
total loan and mortgage-backed securities portfolio at such date. The
Corporation's total loan and mortgage-backed securities portfolio was secured
primarily by real estate at June 30, 1999. Commercial real estate and land loans
(collectively referred to as "income property loans") are secured by various
types of commercial properties including office buildings, shopping centers,
warehouses and other income producing properties. Commercial real estate lending
increased in fiscal year 1999 and is expected to be a growth area for the
Corporation in fiscal year 2000. Management of the Corporation believes that is
has a number of potentially productive markets available to it pursuant to its
fiscal years 1999 and 1998 acquisitions. The Corporation's single-family
residential construction lending activity is primarily attributable to
operations in Las Vegas, Nevada, Florida and in its primary market areas.
Residential construction lending also operates in Tucson, Arizona, Des Moines
and Cedar Rapids, Iowa and Springfield, Missouri, in addition to the
Corporation's current markets. Lending operations have continued in fiscal year
1999 in the Dallas/Fort Worth area that began in 1998 on a limited basis.
Multi-family residential loans consist of loans secured by various types of
properties, including townhomes, condominiums and apartment projects with more
than four dwelling units.
Agricultural lending began in fiscal year 1998 for the Corporation that was
assumed from 1998 acquisitions. The Corporation expects to moderately expand
this business line in the markets served by these former institutions and to its
contiguous branches. The agricultural lending is primarily for equipment, land
and production. At June 30, 1999, agricultural business and agricultural real
estate loans totaled $128.2 million. Another line of business acquired from a
1998 acquisition is lease financing that consists of the origination, servicing
and securitization of commercial equipment leases. The type of equipment leased
consists primarily of office equipment and commercial equipment.
11
<PAGE>
The Corporation's primary area of loan production continues to be in the
origination of loans secured by existing single-family residences.
Adjustable-rate single-family residential loans are originated primarily for
retention in the Corporation's loan portfolio to match more closely the
repricing of the Corporation's interest-bearing liabilities as a result of
changes in interest rates. Fixed-rate single-family residential loans are
originated using underwriting guidelines, appraisals and documentation which are
acceptable to the FHLMC, GNMA and the FNMA to facilitate the sale of such loans
to such agencies in the secondary market. The Corporation also originates
fixed-rate single-family residential loans using internal lending policies in
accordance with what management believes are prudent underwriting standards but
which may not strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate
single-family residential loans are originated or purchased for the
Corporation's loan portfolio if such loans have characteristics which are
consistent with the Corporation's asset and liability goals and long-term
interest rate yield requirements. At June 30, 1999, fixed-rate single-family
residential loans increased $527.5 million over last fiscal year to $4.320
billion compared to $3.793 billion at June 30, 1998. The adjustable-rate
portfolio increased to $2.412 billion at June 30, 1999 compared to $2.152
billion at June 30, 1998. The net changes in both the fixed-rate and
adjustable-rate portfolios are due to the loan refinancing activity in fiscal
year 1998 and from the AmerUs and Midland acquisitions.
In past years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. However, in fiscal
year 1998 the Corporation initiated commercial and multi-family real estate
lending with such loans secured by properties located within the Corporation's
primary market areas. This lending activity increased in fiscal year 1999. Such
loans, which are subject to prudent credit review and other underwriting
standards and collection procedures, are expected to constitute a greater
portion of the Corporation's lending business in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, agricultural loans, commercial business and saving account loans
through the Corporation's branch and loan office network and direct mail
solicitation. Management intends to continue to increase its consumer loan
origination activity with strict adherence to prudent underwriting and credit
review procedures.
Regulatory guidelines generally limit loans and extensions of credit to one
borrower. At June 30, 1999, all loans and leases were within the Corporation's
limitation of $241.0 million to one borrower. See "Regulation - Limitation on
Loans to One Borrower."
12
<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, leases and mortgage-backed securities available for sale)
as of the dates indicated:
<TABLE>
<CAPTION>
June 30,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $ 6,268,958 57.8% $ 5,476,608 60.2% $ 5,142,629 57.7%
Multi-family residential 182,510 1.7 169,860 1.9 156,127 1.8
Land 105,504 0.9 22,582 0.2 62,944 0.7
Commercial real estate 756,412 7.0 494,325 5.4 499,575 5.6
---------- --------- ---------- --------- ---------- ---------
Total 7,313,384 67.4 6,163,375 67.7 5,861,275 65.8
Construction loans -
Single-family residential 241,548 2.2 279,437 3.1 283,271 3.2
Multi-family residential 25,893 0.2 2,979 -- 6,320 0.1
Land -- -- 2,803 -- 10,445 0.1
Commercial real estate 78,908 0.8 40,479 0.5 20,093 0.2
---------- --------- ---------- --------- ---------- ---------
Total 346,349 3.2 325,698 3.6 320,129 3.6
FHA and VA loans 463,437 4.3 468,503 5.1 439,398 4.9
Mortgage-backed securities 1,277,575 11.8 1,083,789 11.9 1,378,162 15.5
---------- --------- ---------- --------- ---------- ---------
Total real estate loans 9,400,745 86.7 8,041,365 88.3 7,998,964 89.8
Consumer, leases and other loans -
Home improvement and other
consumer loans 1,094,292 10.1 809,671 8.9 760,945 8.5
Savings account loans 19,125 0.2 21,948 0.2 19,516 0.2
Leases 122,704 1.1 73,395 0.8 46,174 0.5
Commercial loans 206,533 1.9 155,617 1.8 79,818 1.0
---------- --------- ---------- --------- ---------- ---------
Total consumer and other loans 1,442,654 13.3 1,060,631 11.7 906,453 10.2
---------- --------- ---------- --------- ---------- ---------
Total loans $10,843,399 100.0% $ 9,101,996 100.0% $ 8,905,417 100.0%
---------- --------- ---------- --------- ---------- ---------
<CAPTION>
June 30,
- --------------------------------------------------------------------------------------------------
1996 1995
------------------------ -----------------------
(Dollars in Thousands) Amount Percent Amount Percent
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $ 4,690,580 56.3% $ 4,361,900 54.1%
Multi-family residential 146,217 1.8 140,095 1.7
Land 52,279 0.6 42,048 0.5
Commercial real estate 469,901 5.6 398,392 5.0
--------- --------- --------- ---------
Total 5,358,977 64.3 4,942,435 61.3
Construction loans -
Single-family residential 277,903 3.3 255,731 3.2
Multi-family residential 4,448 0.1 1,380 --
Land 3,115 -- 7,659 --
Commercial real estate 21,678 0.3 13,949 0.2
--------- --------- --------- ---------
Total 307,144 3.7 278,719 3.4
FHA and VA loans 395,337 4.7 441,170 5.5
Mortgage-backed securities 1,577,806 18.9 1,896,276 23.5
--------- --------- --------- ---------
Total real estate loans 7,639,264 91.6 7,558,600 93.7
Consumer, leases and other loans -
Home improvement and other
consumer loans 577,661 6.9 406,968 5.0
Savings account loans 16,471 0.2 13,877 0.2
Leases 33,236 0.4 35,902 0.4
Commercial loans 74,265 0.9 52,191 0.7
--------- --------- --------- ---------
Total consumer and other loans 701,633 8.4 508,938 6.3
--------- --------- --------- ---------
Total loans $ 8,340,897 100.0% $ 8,067,538 100.0%
--------- --------- --------- ---------
</TABLE>
(Continued on next page)
13
<PAGE>
Composition of Loan Portfolio (continued):
- -------------------------------------------
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
(Dollars in Thousands) Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance forward of total loans $10,843,399 100.0% $ 9,101,996 100.0% $ 8,905,417 100.0%
===== ===== =====
Add (subtract):
Unamortized premiums, net
of discounts 10,138 14,161 17,805
Unearned income (22,543) (13,253) *
Deferred loan fees (costs), net 11,809 24,178 (3,882)
Loans in process (153,124) (112,781) (108,741)
Allowance for loan and
lease losses (80,419) (64,757) (60,929)
Allowance for losses on
mortgage-backed securities (322) (419) (678)
----------- ----------- -----------
Loan portfolio $10,608,938 $ 8,949,125 $ 8,748,992
=========== =========== ===========
<CAPTION>
1996 1995
---------------------------------------------------
Amount Percent Amount Percent
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance forward of total loans $ 8,340,897 100.0% $ 8,067,538 100.0%
====== ======
Add (subtract):
Unamortized premiums, net
of discounts 16,757 13,364
Unearned income * *
Deferred loan fees (costs), net (7,537) (5,461)
Loans in process (125,096) (111,425)
Allowance for loan and
lease losses (59,577) (59,163)
Allowance for losses on
mortgage-backed securities (913) (2,336)
----------- -----------
Loan portfolio $ 8,164,531 $ 7,902,517
=========== ===========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not restated from a fiscal year 1998 acquisition accounted for as a pooling of
interests.
For additional information regarding the Corporation's loan and lease portfolio
and mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated
Financial Statements in the Annual Report.
14
<PAGE>
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities, consumer
loans, leases, and other loans, and before any reduction for unamortized
premiums (net of discounts), undisbursed loan proceeds, deferred loan fees,
unearned income and allowance for loan and lease losses) as of the dates
indicated:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------- --------------------- --------------------- -------------------- ---------------------
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>
Colorado $ 1,686,667 20.8% $ 1,710,256 24.6% $ 1,660,721 25.1% $ 1,569,553 25.9% $ 1,487,547 26.3%
Nebraska 1,014,198 12.5 985,906 14.2 937,025 14.2 929,982 15.3 836,054 14.8
Kansas 860,740 10.6 678,734 9.8 557,657 8.4 510,159 8.4 443,428 7.8
Iowa 737,677 9.1 676,099 9.7 618,177 9.3 500,986 8.3 455,741 8.1
Oklahoma 382,474 4.7 318,198 4.6 264,710 4.0 229,563 3.8 211,984 3.7
Missouri 329,985 4.1 185,282 2.7 175,900 2.7 181,174 3.0 191,019 3.4
Arizona 253,480 3.1 180,740 2.6 155,315 2.4 108,972 1.8 98,122 1.7
California 247,835 3.0 148,401 2.1 195,114 2.9 230,412 3.8 223,890 3.9
Florida 242,972 3.0 123,528 1.8 116,881 1.8 111,770 1.8 100,533 1.8
Georgia 232,128 2.9 227,971 3.3 235,665 3.6 217,957 3.6 202,331 3.6
Virginia 206,814 2.5 161,793 2.3 140,498 2.1 123,806 2.0 111,081 2.0
Texas 184,313 2.3 158,614 2.3 187,189 2.8 204,339 3.4 226,132 4.0
Maryland 183,460 2.2 157,180 2.3 138,886 2.1 112,160 1.9 100,768 1.8
Nevada 160,643 2.0 130,159 1.9 109,475 1.7 80,696 1.3 51,874 0.9
Illinois 131,098 1.6 111,142 1.6 92,381 1.4 79,626 1.3 78,088 1.4
Ohio 122,146 1.5 93,325 1.3 76,049 1.1 47,396 0.8 47,851 0.9
North Carolina 118,207 1.4 60,634 0.9 69,465 1.0 31,601 0.5 23,260 0.4
Washington 93,956 1.2 91,670 1.3 91,054 1.4 64,967 1.1 55,947 1.0
Minnesota 92,964 1.1 62,765 0.9 63,885 1.0 42,144 0.7 32,866 0.6
Alabama 90,675 1.1 50,285 0.7 37,653 0.6 39,544 0.7 38,171 0.7
New Jersey 82,068 1.0 98,061 1.4 107,022 1.6 113,824 1.9 119,223 2.1
Connecticut 71,696 0.9 64,975 0.9 72,154 1.1 75,946 1.3 81,418 1.4
Indiana 66,727 0.8 40,357 0.6 34,689 0.5 27,191 0.4 25,048 0.4
Massachusetts 62,233 0.8 55,902 0.8 68,061 1.0 44,300 0.7 45,233 0.8
Pennsylvania 55,130 0.7 59,083 0.8 68,728 1.0 59,943 1.0 53,421 0.9
Utah 39,336 0.5 25,444 0.4 20,729 0.3 18,815 0.3 15,587 0.2
New York 39,146 0.5 38,382 0.5 48,395 0.7 38,794 0.6 40,532 0.7
Michigan 29,505 0.4 38,495 0.5 46,762 0.7 46,650 0.8 45,865 0.8
Other States 304,897 3.7 224,195 3.2 230,562 3.5 219,188 3.6 219,310 3.9
------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------ ------
$ 8,123,170 100.0% $ 6,957,576 100.0% $ 6,620,802 100.0% $ 6,061,458 100.0% $ 5,662,324 100.0%
============ ====== ============ ====== ============ ====== ============ ====== ============ ======
</TABLE>
15
<PAGE>
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities, consumer loans, leases,
and other loans, and before any reduction for unamortized premiums (net of
discounts), undisbursed loan proceeds, deferred loan fees, unearned income and
allowance for loan and lease losses) by state and property type at June 30,
1999:
<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>
Colorado $1,354,606 $ 12,646 $ 69,873 $ 9,438 $1,446,563 $ 240,104 $1,686,667 20.8%
Nebraska 858,895 65,645 17,938 14,636 957,114 57,084 1,014,198 12.5
Kansas 582,144 138,430 16,698 1,884 739,156 121,584 860,740 10.6
Iowa 527,411 17,190 40,194 38,741 623,536 114,141 737,677 9.1
Oklahoma 312,149 27,943 13,423 334 353,849 28,625 382,474 4.7
Missouri 184,907 20,130 19,333 2,974 227,344 102,641 329,985 4.1
Arizona 166,676 9,069 5,002 23,445 204,192 49,288 253,480 3.1
California 234,201 5,935 228 796 241,160 6,675 247,835 3.0
Florida 227,068 7,821 -- -- 234,889 8,083 242,972 3.0
Georgia 216,711 15,381 -- -- 232,092 36 232,128 2.9
Virginia 185,642 21,172 -- -- 206,814 -- 206,814 2.5
Texas 133,487 13,876 12,887 34 160,284 24,029 184,313 2.3
Maryland 149,981 33,479 -- -- 183,460 -- 183,460 2.2
Nevada 81,519 3,593 8,736 11,761 105,609 55,034 160,643 2.0
Illinois 120,742 8,025 -- -- 128,767 2,331 131,098 1.6
Ohio 115,389 5,590 579 381 121,939 207 122,146 1.5
North Carolina 113,981 2,205 -- -- 116,186 2,021 118,207 1.4
Washington 81,403 9,084 -- 397 90,884 3,072 93,956 1.2
Minnesota 87,349 4,150 -- 371 91,870 1,094 92,964 1.1
Alabama 78,885 11,790 -- -- 90,675 -- 90,675 1.1
New Jersey 81,490 578 -- -- 82,068 -- 82,068 1.0
Connecticut 71,588 108 -- -- 71,696 -- 71,696 0.9
Indiana 57,223 8,349 -- -- 65,572 1,155 66,727 0.8
Massachusetts 62,149 84 -- -- 62,233 -- 62,233 0.8
Pennsylvania 53,643 1,487 -- -- 55,130 -- 55,130 0.7
Utah 36,327 3,009 -- -- 39,336 -- 39,336 0.5
New York 36,459 258 -- -- 36,717 2,429 39,146 0.5
Michigan 26,801 2,397 -- -- 29,198 307 29,505 0.4
Other States 271,680 14,013 3,512 312 289,517 15,380 304,897 3.7
------------ ---------- ---------- ---------- ---------- ----------- ----------- --------
Total $6,510,506 $ 463,437 $ 208,403 $ 105,504 $7,287,850 $ 835,320 $8,123,170 100.0%
============ ========== ========== ========== ========== =========== =========== ========
% of Total 80.1% 5.7% 2.6% 1.3% 89.7% 10.3% 100.0%
==== === === === ==== ==== =====
</TABLE>
16
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
- --------------------------------
information at June 30, 1999, regarding the dollar amount of all loans, leases
and mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of possible prepayments. Demand loans (loans having no stated schedule
of repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of loans,
leases and mortgage-backed securities, management believes that the following
table will bear little resemblance to what will be the actual repayments of the
loans, leases and mortgage-backed securities portfolios. Loan and lease balances
have not been reduced for (i) unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees and allowance for loan and lease
losses or (ii) nonperforming loans and leases.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Due During the Year Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
After
2000 2001-2004 2004 Total
----------------- --------------- ------------ ---------------------
Principal Repayments (In Thousands)
- --------------------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) -
Fixed-rate $ 131,296 $ 792,176 $ 3,396,655 $ 4,320,127
Adjustable-rate 76,749 345,742 1,989,777 2,412,268
Multi-family residential, land
and commercial real estate -
Fixed-rate 48,136 206,703 172,008 426,847
Adjustable-rate 37,992 150,686 428,901 617,579
----------- ----------- ----------- -----------
294,173 1,495,307 5,987,341 7,776,821
----------- ----------- ----------- -----------
Construction loans:
Fixed-rate 82,767 -- -- 82,767
Adjustable-rate 242,438 21,144 -- 263,582
----------- ----------- ----------- -----------
325,205 21,144 -- 346,349
----------- ----------- ----------- -----------
Mortgage-backed securities:
Fixed-rate 47,362 102,223 653,076 802,661
Adjustable-rate 9,453 44,681 420,780 474,914
----------- ----------- ----------- -----------
56,815 146,904 1,073,856 1,277,575
----------- ----------- ----------- -----------
Consumer, other loans and leases:
Fixed-rate 207,660 640,743 391,112 1,239,515
Adjustable-rate 30,269 97,633 75,237 203,139
----------- ----------- ----------- -----------
237,929 738,376 466,349 1,442,654
----------- ----------- ----------- -----------
Principal repayments $ 914,122 $ 2,401,731 $ 7,527,546 $10,843,399
=========== =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional mortgage loans, FHA and VA loans.
17
<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, 2000 (July 1, 2000 and
thereafter), which have fixed interest rates and those which have adjustable
interest rates. Such loans, leases and mortgage-backed securities have not been
reduced for (i) unamortized premiums (net of discounts), undisbursed loan
proceeds, deferred loan fees and allowance for loan and lease losses or (ii)
nonperforming loans and leases.
<TABLE>
<CAPTION>
Adjustable
Fixed-Rate Rate Total
-----------------------------------------------------
(Dollars In Thousands)
<S> <C> <C> <C>
Real estate loans:
Single-family residential $4,188,831 $2,335,519 $6,524,350
Multi-family residential,
land and commercial 378,711 579,587 958,298
Construction loans -- 21,144 21,144
Mortgage-backed securities 755,299 465,461 1,220,760
Consumer, other loans and leases 1,031,855 172,870 1,204,725
---------- ---------- ----------
Principal repayments due after June 30, 2000 $6,354,696 $3,574,581 $9,929,277
========== ========== ==========
</TABLE>
18
<PAGE>
LOAN ORIGINATIONS
- -----------------
Residential Loans. The Corporation, through its 256 branch network and CFMC's
- -----------------
loan offices and nationwide correspondent network, originates and purchases both
fixed-rate and adjustable-rate mortgage loans secured by single-family units.
Such residential mortgage loans are either (i) conventional mortgage loans which
comply with the requirements for sale to, or conversion into securities issued
by, FNMA or FHLMC ("conventional conforming loans"), (ii) mortgage loans which
exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise
generally comply with FNMA and FHLMC loan requirements ("conventional
nonconforming loans") or (iii) FHA/VA loans which qualify for sale in the form
of securities guaranteed by GNMA. The Corporation originates substantially all
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans") with loan-to-value ratios at or below 80.0% unless the
borrower obtains private mortgage insurance (through the Corporation's mortgage
banking subsidiary, which premium the borrower pays with their mortgage payment)
for the Corporation's benefit covering that portion of the loan in excess of
80.0% of the appraised value. Occasional exceptions to the 80.0% loan-to-value
ratio for conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans are also originated
with terms of 15 and 30 years. However, certain adjustable-rate loans contain
provisions which permit the borrower, at the borrower's option, to convert at
certain periodic intervals over the life of the loan to a long-term fixed-rate
loan. The adjustable-rate loans currently have interest rates which are
scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Cost of Funds Index. The amount of any such interest rate
increase is limited to one or two percentage points annually and four to six
percentage points over the life of the loan. Certain adjustable-rate loans are
also offered which have interest rates fixed over annual periods ranging from
two through seven years, and also ten year loans, with such loans repricing
annually after the fixed interest-rate term. Adjustable-rate loans are primarily
offered at the fully indexed contractual rate. The Corporation applies its
underwriting criteria to such loans based on the amount of the loan for which
the borrower could qualify at the indexed rate. At June 30, 1999, approximately
.74%, or $47.6 million, of the Corporation's residential real estate loan
portfolio was 90 days or more delinquent. See "Asset Quality" herein.
Residential Construction Loans. During fiscal years 1999, 1998 and 1997, the
- ------------------------------
Corporation originated $475.1 million, $350.5 million and $285.1 million,
respectively, of residential construction loans. The Corporation conducts its
single-family residential construction lending operations predominantly in its
primary nine-state market area, Florida, Las Vegas, Nevada, and Dallas/Fort
Worth, Texas. The residential construction lending operations, which loans are
subject to prudent credit review and other underwriting standards and
procedures, are expected to increase from fiscal year 1999. At June 30, 1999,
approximately .87%, or $2.3 million, of the Corporation's residential
construction loan portfolio was 90 days or more delinquent.
Construction financing is considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction and the estimated cost
(including interest) thereof. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of construction costs
proves to be inaccurate, the Corporation may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value proves to be inaccurate, the Corporation may be confronted, at
or prior to the maturity of the loan, with a project having a value which is
insufficient to assure full repayment.
19
<PAGE>
Commercial Real Estate and Land Loans. The Corporation originated commercial
- -------------------------------------
real estate loans totaling $280.7 million, $191.2 million and $90.5 million,
respectively, during fiscal years 1999, 1998 and 1997. Commercial real estate
lending may entail significant additional risks compared with residential real
estate lending. These additional risks are due to larger loan balances which are
more sensitive to economic conditions, business cycle downturns and construction
related risks. The payment of principal and interest due on the Corporation's
commercial real estate loans is substantially dependent upon the performance of
the projects securing such loans. As an example, to the extent that the
occupancy and rental rates are not high enough to generate the income necessary
to make such payments, the Corporation could experience an increased rate of
delinquency and could be required either to declare such loans in default and
foreclose upon such properties or to make concessions on the terms of the
repayment of such loans. At June 30, 1999, approximately 1.2%, or $11.4 million
of the Corporation's commercial real estate and land loans were 90 days or more
delinquent. See "Asset Quality" herein.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $3.831
billion at June 30, 1999, compared to $940.8 million of such loans outstanding
at June 30, 1999. This restriction has not and is not expected to materially
affect the Corporation's business.
Consumer Loans. Federal regulations permit federal savings institutions to make
- --------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. Consumer loans originated by the Corporation are primarily second
mortgage loans, loans to depositors on the security of their savings accounts
and loans secured by automobiles. The Corporation has increased its secured
consumer lending activities in order to meet its customers' financial needs and
will continue to increase such lending activities in the future in its primary
market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Corporation, and a borrower may be able to
assert against such assignee claims and defenses which it has against the seller
of the underlying collateral. At June 30, 1999, approximately .42%, or $4.5
million, of the Corporation's consumer loans are 90 days or more delinqu ent.
See "Asset Quality" herein.
20
<PAGE>
Bulk Loan Purchases. Between January 1991 and June 30, 1992, as part of its
- -------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the Resolution Trust Corporation ("RTC"),
comprised of 46,500 loans primarily collateralized by single-family residential
properties with principal balances aggregating $2.5 billion. These purchased
loans had a weighted average yield of 8.71%. At June 30, 1999, 1998 and 1997,
the aggregate principal balance of these bulk purchased loans associated with
such restructuring was $286.4 million, $388.5 million and $494.6 million,
respectively. Based upon both a review and analysis of the information provided
by the seller with respect to each loan package and management's own due
diligence review of a certain percentage (usually 5.0% to 10.0%) of the loans
within a loan package, management established specific estimated allowance
amounts which were allocated from the discount amounts on the loan packages. At
June 30, 1999, 1998 and 1997, $6.5 million, $8.5 million and $10.8 million,
respectively, of the discount amount relating to these purchased loans was
allocated to an estimated allowance amount for potential credit risk associated
with such bulk purchased loans. These allowances are available to absorb losses
associated with the respective purchased loan packages and are not available to
absorb losses from other loans. At June 30, 1999, 1998 and 1997, $12.6 million,
$15.4 million and $18.3, respectively, of these purchased loans were past due 90
days or more. To the extent opportunities to make similar bulk purchases of
discounted loans become available, the Corporation will consider making such
purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1999, 1998 and 1997, the
Corporation purchased $618.8 million, $232.4 million and $300.2 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
Loan Sales. In addition to originating loans for its portfolio, the Corporation,
- ----------
through its mortgage banking subsidiary, participates in secondary mortgage
market activities by selling whole and securitized loans to institutional
investors or other financial institutions with the Corporation generally
retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole loans
to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC
which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1999, 1998 and 1997, the Corporation sold an aggregate of
$2.0 billion, $1.2 billion and $871.0 million, respectively, in mortgage loans
resulting in net gains of $3.4 million, $3.1 million and $2.1 million,
respectively, in fiscal years 1999, 1998 and 1997. Of the amount of mortgage
loans sold during fiscal year 1999, $1.9 billion were sold in the secondary
market, of which 36.5% were converted into GNMA securities, 60.2% were sold
directly to FNMA or FHLMC for cash or were exchanged for securities issued by
FNMA or FHLMC, and the remaining were sold to other institutional investors. At
June 30, 1999, the carrying value of loans held for sale totaled $104.3 million.
The net gains recorded in fiscal years 1999 and 1998 are attributable to the
relatively stable interest rate environments over the respective periods.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on an annual basis. However, in connection with a 1987 acquisition of
a financial institution, the Bank assumed agreements providing for recourse in
the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1999, the remaining balance
of such loans sold with recourse totaled $13.9 million.
21
<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>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans-
Residential loans $1,287,556 $1,476,982 $1,076,812
Construction loans 475,073 350,475 285,060
Commercial real estate and land loans 280,723 191,167 90,459
Consumer loans and leases 996,948 795,226 626,534
---------- ---------- ----------
Loans and leases originated $3,040,300 $2,813,850 $2,078,865
========== ========== ==========
Loans purchased:
Conventional mortgage loans-
Residential loans $2,323,781 $1,276,846 $ 833,893
Bulk loan purchases 618,814 232,353 300,212
Mortgage-backed securities 664,665 40,758 60,811
---------- ---------- ----------
Loans purchased $3,607,260 $1,549,957 $1,194,916
========== ========== ==========
Loans securitized:
Conventional mortgage loans securitized
into mortgage-backed securities $ 20,773 $ 161,189 $ 46,165
========== ========== ==========
Acquisitions:
Residential real estate loans $ 560,521 $ 39,469 $ 83,413
Consumer and other loans 616,755 73,703 51,639
Mortgage-backed securities 87,231 17,054 36,194
---------- ---------- ----------
Loans from acquisitions $1,264,507 $ 130,226 $ 171,246
========== ========== ==========
Loans sold:
Conventional mortgage loans $1,955,384 $1,175,152 $ 870,997
Mortgage-backed securities 205,904 118,705 98,797
---------- ---------- ----------
Loans sold $2,161,288 $1,293,857 $ 969,794
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Loan Servicing. The Corporation, through its mortgage banking subsidiary,
- --------------
services substantially all of the mortgage loans that it originates and
purchases (whether retained for the Bank's portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1999, the Bank's
mortgage banking subsidiary was servicing approximately 122,800 loans and
participations for others with principal balances aggregating $7.449 billion,
compared to 125,900 loans (excluding loans serviced by First Colorado) with
principal balances totaling $7.240 billion at June 30, 1998. At June 30, 1999,
adjustable-rate mortgage loans represented 12.8% of the aggregate dollar amount
of loans in the servicing portfolio. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General," -- "Loan Servicing
Fees" and -- "Note 23 Segment Information" in the Annual Report for information
pertaining to revenue from servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .53% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .39% and .41%,
respectively, for fiscal years 1999 and 1998. The Corporation's servicing
portfolio is subject to reduction primarily by reason of normal amortization and
prepayment of outstanding mortgage loans. In general, the value of the
Corporation's loan servicing portfolio may also be adversely affected as
mortgage interest rates decline and loan prepayments increase. It is expected
that income generated from the Corporation's loan servicing portfolio also will
decline in such an environment. This negative effect on the Corporation's income
may be offset somewhat by a rise in origination and servicing fee income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates. The weighted average mortgage loan note
rate of the Corporation's servicing portfolio at June 30, 1999, was 7.48%
compared to 7.80% at June 30, 1998.
At June 30, 1999, approximately 95.6% of the Corporation's mortgage servicing
portfolio for other institutions was covered by servicing agreements pursuant to
the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these
agreements, the Corporation may be required to advance funds temporarily to make
scheduled payments of principal, interest, taxes or insurance if the borrower
fails to make such payments. Although the Corporation cannot charge any interest
on such advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1999, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $2.5 million.
23
<PAGE>
Interest Rates and Loan Fees. Interest rates charged by the Corporation on its
- ----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. In addition to interest
earned on loans, the Corporation receives loan origination fees for originating
certain loans. These fees are a percentage of the principal amount of the
mortgage loan and are charged to the borrower.
Loan Commitments. At June 30, 1999, the Corporation had issued commitments of
- ----------------
$771.8 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are generally expected to settle within three
months following June 30, 1999. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in the Annual Report.
Collection Procedures. If a borrower fails to make required payments on a loan,
- ---------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
24
<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 loan balance increased to $9.7 million at June 30, 1999, compared to $4.3
million at June 30, 1998 but remains low compared to fiscal years ended 1997,
1996 and 1995. The increase at June 30, 1999 is due primarily to the addition of
13 loans classified commercial troubled debt restructurings.
The Corporation's nonperforming assets totaling $101.8 million increased by
$30.4 million, or 42.5%, at June 30, 1999, compared to June 30, 1998, primarily
as a result of net increases of $20.7 million in nonperforming loans and leases,
$5.4 million in troubled debt restructurings and $4.3 million in real estate.
These increases are due to the AmerUs and Midland acquisitions and to growth in
the respective loan portfolios.
25
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans and leases accounted for on a nonaccrual basis: (1)
Real estate -
Residential $ 49,891 $ 43,212 $ 37,506 $ 38,164 $ 32,593
Commercial 11,390 1,369 905 2,649 1,053
Consumer, other loans and leases 8,734 4,785 4,322 1,660 857
-------- -------- -------- -------- --------
Total 70,015 49,366 42,733 42,473 34,503
-------- -------- -------- -------- --------
Accruing loans which are contractually
past due 90 days or more -- -- 894 144 88
-------- -------- -------- -------- --------
Total nonperforming loans and leases 70,015 49,366 43,627 42,617 34,591
-------- -------- -------- -------- --------
Real estate:
Commercial 7,657 8,465 9,631 10,970 12,577
Residential 14,384 8,821 9,759 5,014 4,785
Other -- 480 147 253 114
-------- -------- -------- -------- --------
Total 22,041 17,766 19,537 16,237 17,476
-------- -------- -------- -------- --------
Troubled debt restructurings: (2)
Commercial 9,534 3,524 9,489 14,533 22,461
Residential 195 778 1,126 1,052 1,944
-------- -------- -------- -------- --------
Total 9,729 4,302 10,615 15,585 24,405
-------- -------- -------- -------- --------
Nonperforming assets $101,785 $ 71,434 $ 73,779 $ 74,439 $ 76,472
======== ======== ======== ======== ========
Nonperforming loans and leases to total loans and leases (3) 0.73% 0.62% 0.58% 0.63% 0.56%
Nonperforming assets to total assets 0.80% 0.69% 0.73% 0.80% 0.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases $ 73,916 $ 56,295 $ 50,120 $ 46,812 $ 43,883
Bulk purchased loans (4) 6,503 8,462 10,809 12,765 15,280
-------- -------- -------- -------- --------
Total $ 80,419 $ 64,757 $ 60,929 $ 59,577 $ 59,163
======== ======== ======== ======== ========
Allowance for bulk purchased loan
losses to bulk purchased loans (4) 2.27% 2.18% 2.19% 2.22% 2.18%
Allowance for loan and lease losses
to total loans and leases (less bulk purchased loans) 0.80% 0.74% 0.71% 0.76% 0.80%
Allowance for loans and lease losses
to total loans and leases (3) 0.84% 0.81% 0.81% 0.88% 0.96%
Allowance for loan and lease losses
to total nonperforming assets 79.01% 90.65% 82.58% 80.03% 77.37%
Allowance for loan and lease losses
to total nonperforming loans and leases
(less nonperforming bulk purchased loans) (5) 128.74% 165.64% 197.89% 188.63% 261.35%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
26
<PAGE>
(1) During fiscal years 1997 and 1996, the Corporation recorded interest income
totaling $49,000 and $51,000, respectively, on accruing loans contractually
past due 90 days or more. During fiscal years 1999 and 1998, no interest
income was recorded. Had these nonaccruing loans been current in accordance
with their original terms and outstanding throughout this fiscal year or
since origination, the Corporation would have recorded gross interest
income on these loans totaling $4.2 million, $4.3 million, $3.7 million,
$3.3 million and $1.9 million (excluding acquisitions during fiscal years
1999 and 1998 accounted for as pooling of interests), respectively, during
fiscal years 1999, 1998, 1997, 1996 and 1995.
(2) During fiscal years 1999, 1998, 1997, 1996 and 1995, the Corporation
recognized interest income on loans classified as troubled debt
restructurings aggregating $470,000, $380,000, $852,000, $1.3 million and
$1.7 million (excluding First Colorado), respectively, whereas under their
original terms the Corporation would have recognized interest income of
$475,000, $499,000, $1.1 million, $1.6 million and $1.9 million (excluding
First Colorado), respectively. At June 30, 1999, the Corporation had no
material commitments to lend additional funds to borrowers whose loans were
subject to troubled debt restructuring.
(3) Based on the total balance of loans and leases receivable (before any
reduction for unamortized discounts net of premiums, undisbursed loan
proceeds, deferred loan fees and allowance for loan and lease losses) at
the respective dates.
(4) At June 30, 1999, 1998, 1997, 1996 and 1995, $6.5 million, $8.5 million,
$10.8 million, $12.8 million and $15.3 million, respectively, of allowance
for loan losses for bulk purchased loans, which had been allocated from the
amount of net discounts associated with the Corporation's purchase of these
loans is included in the total allowance for loan losses to provide for the
credit risk associated with these bulk purchased loans, which had balances
of $286.4 million, $388.5 million, $494.6 million, $574.4 million and
$701.9 million, respectively, at June 30, 1999, 1998, 1997, 1996 and 1995.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(5) Nonperforming bulk purchased loans approximating $12.6 million, $15.4
million, $18.3 million, $17.8 million, and $17.8 million, respectively, at
June 30, 1999, 1998, 1997, 1996 and 1995, and the allowance for loan losses
associated with the total bulk purchased loans, have been excluded from
this calculation since these allowances are not available to absorb the
losses associated with other loans in the portfolio.
- --------------------------------------------------------------------------------
For a discussion of the major components of the $30.4 million increase in
nonperforming assets during the fiscal year ended June 30, 1999, compared to
June 30, 1998 see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Provision for Loan Losses and Real Estate
Operations" in the Annual Report.
27
<PAGE>
The geographic concentration of nonperforming loans and leases at June 30 was as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
State (In Thousands)
- -----
<S> <C> <C> <C> <C> <C>
Kansas $15,552 $ 6,030 $ 2,973 $ 2,496 $ 861
Iowa 6,111 4,013 3,477 2,052 989
Florida 4,356 1,502 1,389 891 1,553
California 3,988 3,377 3,206 4,624 3,758
Oklahoma 3,568 3,178 2,303 1,496 1,019
Missouri 3,241 1,944 2,402 2,018 1,864
Georgia 2,752 2,127 2,601 3,389 2,559
Maryland 2,712 2,258 1,623 1,548 743
Colorado 2,646 4,065 2,717 5,131 4,034
Nebraska 2,455 2,595 2,629 2,352 2,037
Ohio 1,818 722 342 348 178
Virginia 1,691 1,479 656 880 446
Nevada 1,651 1,198 438 648 271
New Jersey 1,414 1,277 1,060 1,069 1,680
Texas 1,378 2,028 3,274 3,290 3,601
Illinois 1,325 1,579 1,754 1,158 1,234
North Carolina 907 293 392 205 455
Alabama 863 1,307 510 517 381
Pennsylvania 844 852 855 663 715
Michigan 725 310 142 628 125
Washington 690 182 449 647 745
New York 686 671 606 447 855
Connecticut 605 752 860 739 643
Minnesota 590 1,004 610 117 113
Arizona 450 1,195 973 469 596
Other States 6,997 3,428 5,386 4,795 3,136
------- ------- ------- ------- -------
Nonperforming loans and leases $70,015 $49,366 $43,627 $42,617 $34,591
======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming loans and leases totaled $70.0 million at June 30, 1999, and
consisted of 1,552 loans with an average balance of $45,113. Such loans and
leases consisted of $11.4 million (16 loans) collateralized by commercial real
estate, $47.6 million (836 loans) collateralized by residential real estate,
$2.3 million (28 loans) collateralized by residential construction real estate,
$4.5 million (482 loans) of consumer loans, $2.5 million (164 loans) of
commercial and other operating loans and leases and $1.7 million (26 loans) of
agribusiness loans.
28
<PAGE>
The geographic concentration of nonperforming real estate at June 30 was as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
State 1999 1998 1997 1996 1995
- ----- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Missouri $ 4,811 $ 465 $ 522 $ 125 $ 262
Colorado 2,768 2,825 6,589 7,841 11,523
Iowa 2,372 1,345 1,129 834 609
Illinois 2,069 373 13 185 90
Kansas 1,809 1,876 873 64 234
Oklahoma 1,292 1,299 509 384 391
Nebraska 1,196 5,417 5,565 5,356 5,770
Florida 1,180 297 277 312 197
California 1,098 52 1,382 187 109
Ohio 678 -- -- -- --
Nevada 657 138 603 -- --
Minnesota 627 456 13 -- --
Arizona 582 -- -- 128 77
Maryland 471 1,315 436 190 33
Indiana 395 29 -- 271 --
Pennsylvania 377 111 102 116 326
Georgia 301 140 933 187 510
New Jersey 122 317 240 270 280
Texas 85 445 220 1,608 999
Other states 2,224 1,338 1,478 1,289 543
Unallocated reserves (3,073) (472) (1,347) (3,110) (4,477)
-------- -------- -------- -------- --------
Nonperforming real estate $ 22,041 $ 17,766 $ 19,537 $ 16,237 $ 17,476
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, total nonperforming real estate totaling $22.0 million (521
properties) consisted of residential real estate totaling $14.4 million (495
properties) or 65.3% of the total and commercial real estate totaling $7.6
million (26 properties). The Corporation's nonperforming commercial real estate
at June 30, 1999 is located primarily in Missouri, Colorado, Kansas and Iowa.
Under the Corporation's credit policies and practices, certain real estate loans
meet the definition of impaired loans under Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." A loan is
considered impaired when it is probable that the Corporation, based upon current
information, will not collect amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Certain loans are
exempt from the provisions of the aforementioned accounting statements,
including large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment which, for the Corporation, include one-to-four family
first mortgage loans, consumer loans and leases. Loan impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the observable
market price of the loan or the fair value of the collateral if the loan is
collateral dependent.
Loans reviewed for impairment by the Corporation are primarily commercial real
estate loans and loans modified in a troubled debt restructuring which, after
July 1, 1994, are considered impaired. The Corporation's impaired loan
identification and measurement processes are conducted in conjunction with the
Corporation's review of classified assets and adequacy of its allowance for
possible loan losses. Specific factors utilized in the impaired loan
identification process include, but are not limited to, delinquency status,
loan-to-value ratio, debt coverage and certain other conditions pursuant to the
Corporation's classification policy. At June 30, 1999, the Corporation had
impaired loans totaling $30.5 million, net of specific reserves, of which $6.1
million were classified as troubled debt restructurings and included in the
Corporation's $9.7 million balance as shown in the table for nonperforming
assets. At June 30, 1998, impaired loans totaled approximately $3.4 million.
29
<PAGE>
Classification of Assets. Savings institutions are required to review their
- ------------------------
assets on a regular basis and, as warranted, classify them as "substandard,"
"doubtful," or "loss" as defined by OTS regulations. Adequate general valuation
allowances are required to be established for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as loss
or charge off such amount. An asset which does not currently warrant
classification as substandard but which possesses credit deficiencies or
potential weaknesses deserving close attention is required to be designated as
"special mention." In addition, a savings institution is required to set aside
adequate valuation allowances to the extent that any affiliate possesses assets
which pose a risk to the savings institution. The OTS has the authority to
approve, disapprove or modify any asset classification or any amount established
as an allowance pursuant to such classification. Based on a review of the
Corporation's portfolio at June 30, 1999, pursuant to reporting on the quarterly
thrift financial report, the Corporation had $118.5 million in assets classified
as special mention, $135.7 million in assets classified as substandard, $1.4
million in assets classified as doubtful and no assets classified as loss. As
required, specific valuation allowances have been established in an amount equal
to 100.0% of all assets classified as loss. Substantially all nonperforming
assets at June 30, 1999, are classified as either substandard or loss pursuant
to applicable asset classification standards. Of the Corporation's loans and
leases which were not classified at June 30, 1999, there were no loans or leases
where known information about possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrowers to comply
with present loan or lease repayment terms.
Loan and Real Estate Review Policy. Management of the Corporation has the
- ----------------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan, lease and real estate portfolios.
Management is also responsible for the determination of all specific and general
provisions for loan and real estate losses, taking into consideration a number
of factors, including changes in the composition of the Corporation's loan and
lease portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
affect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
lease and real estate portfolios, and regular review of specific problem loans
and real estate. See "Nonperforming Assets" herein.
Management also has the responsibility of ensuring timely charge-offs of loan,
lease and real estate balances, as appropriate, when general and economic
conditions warrant a change in the value of these loans, leases and real estate.
To ensure that credit risk is properly and timely monitored, this responsibility
has been delegated to a credit review group which consists of key personnel of
the Corporation knowledgeable in the specific areas of loan, lease and real
estate valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and leases and the likelihood of
liquidation of real estate and other assets and their book value, (ii) to
identify problem assets at the earliest possible time, (iii) to assure an
adequate level of allowances for possible losses to cover identified and
anticipated credit risks, (iv) to monitor the Corporation's compliance with
established policies and procedures, and (v) to provide the Corporation's
management with information obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loan, lease or real estate value weakness. Accordingly, these types
of loans, leases and real estate are assigned a credit risk rating ranging from
one (excellent) to six (loss). Loans, leases and real estate with minimal credit
risk (not adversely classified or with a credit risk rating of one to four)
generally have general reserves established on the basis of the Corporation's
historical loss experience. Loans, leases and real estate adversely classified
(substandard, loss or with a credit risk rating of five or six) generally have
greater levels of general reserves similarly established on the basis of the
Corporation's historical loss experience, as well as specific reserves
established as applicable to recognize permanent declines in the value of loans,
leases or real estate.
30
<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.
Management determines each element of the allowance through either the
application of loss percentages to homogeneous groups of loans and leases, or
the application of specific reserves to individual loans and leases based on
loss exposure. Homogeneous groups of loans and leases include like type loans
and leases with similar risk ratings or payment status. Loss percentages applied
to the homogeneous groups are determined through an analysis of the company's
loss history with respect to the individual loan groups. The loss results are
tracked quarterly, with adjustment made to loss allocations when deemed
necessary.
Significant commercial real estate, commercial operating, agricultural, and
construction loans are evaluated individually by the credit review group to
determine an appropriate credit risk rating. Based on the assigned credit risk
rating, a reserve allocation percentage is applied to the loan amount. Specific
reserves may also be established based on the degree of exposure present.
Residential loans, consumer loans, and commercial leases are evaluated as
individual groups based on payment status.
The allocated portion of the allowance is determined by applying the loss
percentages to the graded and ungraded loans and leases, after consideration of
the established specific reserves. The unallocated portion is determined by
subtracting the allocated portion of any credit allowances for purchased package
loans from the allowance balance. The periodic loss analysis serves as a
self-correcting mechanism as provisions are targeted to meet actual losses, and
are adjusted as losses change.
32
<PAGE>
The Corporation's policy is to charge-off loans or leases or portions thereof
against the allowance for loan and lease losses in the period in which loans or
leases or portions thereof are determined to be uncollectible. A majority of the
Corporation's loans are collateralized by residential or commercial real estate.
Therefore, the collectibility of such loans is susceptible to changes in
prevailing real estate market conditions and other factors which can cause the
fair value of the collateral to decline below the loan balance. When the
Corporation records charge-offs on these loans, it also begins the foreclosure
process of taking possession of the real estate which served as collateral for
such loans. Recoveries of loan and lease charge-offs generally occur only when
the loan deficiencies are completely cured. Upon foreclosure and conversion of
the loan into real estate owned, the Corporation may realize a credit to real
estate operations through the disposition of such real estate when the sale
proceeds exceed the carrying value of the real estate.
During fiscal years 1999 and 1998, consumer loan charge-offs, net of recoveries,
totaled $9.7 million and $9.6 million, respectively, compared to $10.1 million
during fiscal year 1997. Consumer loan balances increased to $1.113 billion at
June 30, 1999, compared to $831.6 million and $780.5 million, respectively, at
June 30, 1998 and 1997. Net consumer loan charge-offs of the Corporation reflect
the overall increase in its consumer loan portfolio. Management does not
anticipate increases in the loan loss provisions or in net charge-offs for
consumer loans in fiscal 2000 to be any greater than in the last three fiscal
years. In addition, management expects the same approximate net amount of
charge-offs by loan category during fiscal year 2000 compared to the actual net
charge-off results for fiscal year 1999. The loan and lease loss provision
decreased during fiscal year 1999 compared to 1998 due primarily to nonrecurring
loss reserves totaling $3.9 million recorded in fiscal year 1998 to conform the
reserve positions of fiscal 1998 pooled acquisitions to the policies of the
Corporation compared to $1.0 million for fiscal year 1999.
Although management believes that the Corporation's allowance for loan and lease
losses is adequate to reflect the risk inherent in its portfolios, there can be
no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans and leases on
a regular basis as an integral part of their examination process. Such agencies
may require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
33
<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>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for losses on
loans and leases at beginning of year $ 64,757 $ 60,929 $ 59,577 $ 59,163 $ 54,627
-------- -------- -------- -------- --------
Loans and leases charged-off:
Single-family residential (2,542) (2,838) (2,535) (1,347) (1,304)
Multi-family residential
and commercial real estate (71) -- (300) (214) (842)
Consumer, leases and other (13,147) (11,319) (12,597) (5,387) (2,199)
-------- -------- -------- -------- --------
Loans and leases charged-off (15,760) (14,157) (15,432) (6,948) (4,345)
-------- -------- -------- -------- --------
Recoveries:
Single-family residential 210 254 101 267 291
Multi-family residential
and commercial real estate -- 2,822 297 56 1,090
Consumer, leases and other 3,464 1,740 2,474 894 720
-------- -------- -------- -------- --------
Recoveries 3,674 4,816 2,872 1,217 2,101
-------- -------- -------- -------- --------
Net loans and leases charged-off (12,086) (9,341) (12,560) (5,731) (2,244)
-------- -------- -------- -------- --------
Provision charged to operations 12,400 13,853 13,427 6,716 7,119
-------- -------- -------- -------- --------
Activity of combining companies to convert
to June 30 fiscal year -- 390 475 -- (116)
Allowances acquired in acquisitions 17,307 1,273 1,966 1,944 1,818
Change in estimate of allowance
for bulk purchased loans (1,959) (2,324) (1,878) (2,273) (1,705)
Charge off to allowance
for bulk purchased loans -- (23) (78) (242) (336)
-------- -------- -------- -------- --------
Allowances for losses on loans and leases at end of year $ 80,419 $ 64,757 $ 60,929 $ 59,577 $ 59,163
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net loans and leases charged-off to average
loans and leases outstanding during the year 0.14% 0.12% 0.18% 0.09% 0.04%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<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) in each calendar quarter of at least 4.0% of its
net withdrawable deposits plus short-term borrowings or 4.0% of the average
daily balance of its net withdrawable accounts plus short-term borrowings during
the preceding quarter.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1999,
the Corporation had total average liquid assets of $1.146 billion, which
consisted of $273.3 million in cash and $872.6 million in agency-backed
securities. The Corporation's liquidity ratio was 11.69% as of June 30, 1999.
See "Regulation -- Liquidity Requirements." The Corporation's management
objective is to maintain liquidity at a level sufficient to assure adequate
funds, taking into account anticipated cash flows and available sources of
credit, to allow future flexibility to meet withdrawal requests, to fund loan
commitments, to maximize income while protecting against credit risks and to
manage the repricing characteristics of the Corporation's assets and
liabilities. Such liquid funds are managed in an effort to produce the highest
yield consistent with maintaining safety of principal and within regulations
governing the thrift industry. The relative size and mix of investment
securities in the Corporation's portfolio are based on management's judgment
compared to the yields and maturities available on other investment securities.
The Corporation emphasizes low credit risk in selecting investment options.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury and other Government agency obligations $755,195 $465,359 $486,909
Obligations of states and political subdivisions 49,857 48,571 14,068
Other securities 57,708 18,258 19,182
-------- -------- --------
Total investment securities held to maturity 862,760 532,188 520,159
Interest-earning cash on deposit (federal funds) 39,585 62,886 18,965
-------- -------- --------
Total Investments $902,345 $595,074 $539,124
======== ======== ========
</TABLE>
35
<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, 1999:
<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>
U.S. Treasury and
other Government
agency obligations $ 20,526 5.33% $ 11,926 5.97% $ 59,866 6.73%
States and political subdivisions 4,973 4.67 10,971 4.38 24,311 4.93
Other debt securities 6,589 6.61 1,901 5.63 7,579 7.82
--------- -------- ---------- -------- --------- --------
Total $ 32,088 5.49% $ 24,798 5.24% $ 91,756 6.34%
========= ======== ========== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
More Than
Ten Years Total
---------------------- ----------------------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
other Government
agency obligations $ 662,877 6.66% $ 755,195 $ 739,554 6.62%
States and political subdivisions 9,602 6.59 49,857 49,543 5.10
Other debt securities 41,639 6.85 57,708 57,708 6.91
--------- -------- --------- --------- --------
Total $714,118 6.67% $ 862,760 $ 846,805 6.53%
========= ======== ========= ========= ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to Consolidated Financial Statements in the Annual
Report.
36
<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, 1999, deposits made up 65.8% of total
interest-bearing liabilities compared to 69.9% at June 30, 1998. Deposit levels
are significantly influenced by general interest rates, economic conditions and
competition. Other borrowings, primarily FHLB advances, are utilized to
compensate for any decreases in the normal or expected inflow of deposits.
The Corporation anticipates that it will in the future continue to grow its
franchise through an ongoing program of selective acquisitions of other
financial institutions. During fiscal years 1999 and 1998 the Corporation
consummated the acquisitions of seven financial institutions. See Note 2 to the
Consolidated Financial Statements for additional information on these
acquisitions. These acquisitions presented the Corporation with the opportunity
to further expand its retail network in the Iowa, Nebraska, Kansas, and Colorado
markets and to enter the Missouri, Minnesota and South Dakota markets, as well
as to increase its earnings potential by increasing its mortgage and consumer
loan volumes funded primarily by deposits which generally bear lower rates of
interest than alternative sources of funds.
Deposits. The Corporation's deposit strategy is to emphasize retail branch
- ---------
deposits through extensive marketing efforts and product promotion, such as by
offering a variety of checking accounts and deposit programs to satisfy customer
needs. As such, during fiscal year 1999, NOW accounts increased $156.9 million,
from $880.0 million at June 30, 1998, to $ 1.037 billion at June 30, 1999. At
June 30, 1999 non-interest bearing deposits totaled $541.2 million, or 7.1% of
total deposits, compared to $405.1 million, or 6.2% at June 30, 1998, an
increase of $136.1 million. As a community bank, the Corporation has increased
its non-interest bearing NOW accounts and plans to increase such non-interest
bearing accounts in the future. In addition, the Corporation intends to continue
pricing its certificates of deposit products at rates that minimize the
Corporation's total costs of funds. The competition for certificates of deposit
is very strong in a market of shrinking funds as individuals continually seek
the most attractive investment alternatives available. Rates on deposits are
priced based on investment opportunities as the Corporation attempts to control
the flow of funds in its deposit accounts according to its business objectives
and the cost of alternative sources of funds.
Fixed-term, fixed-rate retail certificates at June 30, 1999, represented 59.7%
(or $4.6 billion) of total deposits compared to 61.7% at June 30, 1998 (or $4.0
billion). The Corporation offers certificate accounts with terms ranging from
one month to 120 months.
Excluding deposits acquired in acquisitions, total deposits decreased $211.1
million during fiscal year 1999 compared to $212.9 million during fiscal year
1998. This net decrease is primarily a result of depositors leaving for higher
interest rates for more attractive investment alternatives. Including such
acquisitions, total deposits decreased $31.2 million during fiscal year 1998 and
increased $ 1.097 billion during fiscal year 1999.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 12 in the Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
37
<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, 1999 June 30, 1998 June 30, 1997
--------------------------------- ------------------------------------ ----------------------
% 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 $1,137,282 14.9% $ 146,286 $ 990,996 15.1% $ (32,092) $1,023,088 15.5%
NOW accounts 1,036,921 13.5 156,920 880,001 13.4 200,216 679,785 10.3
Market rate savings 909,233 11.9 268,746 640,487 9.8 176,177 464,310 7.1
Certificates of deposit 4,571,979 59.7 525,256 4,046,723 61.7 (375,489) 4,422,212 67.1
--------- ------- ---------- --------- ------- --------- --------- -----
Total Deposits $7,655,415 100.0% $1,097,208 $6,558,207 100.0% $ (31,188) $6,589,395 100.0%
--------- ------- ---------- --------- ------- --------- --------- --------
</TABLE>
38
<PAGE>
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ----------------------- ------------------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
--------- ------ -------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts $1,125,632 3.70% $1,012,228 3.93% $ 867,831 3.91%
NOW accounts 1,020,345 1.20 820,819 1.23 652,869 1.57
Market rate savings 745,265 3.62 521,421 3.51 468,001 3.67
Certificates of deposit 4,497,729 5.38 4,223,217 5.81 4,473,809 5.68
---------- ------ ---------- ------ ---------- ------
Average deposit accounts $7,388,971 4.37% $6,577,685 4.77% $6,462,510 4.88%
========== ====== ========== ====== ========== ======
</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:
- --------------------------------------------------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Rate
----
Less than 3.00% $ 6,555 $ 4,894 $ 7,238
3.00% - 3.99% 73,342 7,858 6,384
4.00% - 4.99% 1,816,539 371,298 368,091
5.00% - 5.99% 2,310,800 2,983,982 2,932,968
6.00% - 6.99% 307,487 622,235 962,012
7.00% - 7.99% 53,311 51,282 127,311
8.00% - 8.99% 3,488 4,273 12,894
9.00% and over 457 901 5,314
---------- ---------- ----------
Certificates of deposit $4,571,979 $4,046,723 $4,422,212
========== ========== ==========
- --------------------------------------------------------------------------------
The following table presents the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity for the three
fiscal years ended June 30 as indicated:
- --------------------------------------------------------------------------------
Maturity Period 1999 1998 1997
-------------------------------- ---------- ---------- ----------
(In Thousands)
Three months or less $482,996 $160,536 $128,530
Over three through six months 124,793 87,625 58,389
Over six through twelve months 143,127 100,087 71,510
Over twelve months 41,427 89,463 85,936
-------- -------- --------
Total $792,343 $437,711 $344,365
======== ======== ========
- --------------------------------------------------------------------------------
39
<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, 1999, the Corporation had pledged $3.4 billion of its real estate
loans and held FHLB stock of $194.1 million.
At June 30, 1999, the Corporation had advances totaling approximately $3.6
billion from the FHLB at interest rates ranging from 3.86% to 8.31% and at a
weighted average rate of 5.05%. At June 30, 1998, such advances from the FHLB
totaled $2.4 billion at a weighted average rate of 5.69%. Fixed-rate advances
totaling $3.0 billion at June 30, 1999 with a weighted average rate of 4.85% are
convertible into adjustable-rate advances at the option of the FHLB with call
dates ranging from July 1999 to March 2003. Such convertible advances consist
primarily of amounts totaling $316,000,000 with scheduled maturities due over
two years to three years and $2.7 billion with maturities due over five years.
The Corporation also borrows funds under repurchase agreements. During fiscal
years 1999 and 1998 the Corporation utilized securities sold under agreements to
repurchase primarily for liquidity and asset liability management purposes.
Under a repurchase agreement, the Corporation sells securities (generally,
government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued
mortgage-backed securities) and agrees to buy such securities back at a
specified price at a subsequent date. Repurchase agreements arc generally made
for terms ranging from one day to four years, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold, At June 30, 1999,
the Corporation's repurchase agreements aggregated $128.5 million at an average
rate of 5.72%. The Corporation's repurchase agreements were collateralized by
$123.6 million and $16.4 million, respectively, of mortgage-backed securities
and investment securities at June 30, 1999. At June 30, 1999, these repurchase
agreements had $3.5 million that matured overnight with the remaining balance of
$125.0 million had maturities ranging from November 1999 to September 2000 with
a weighted average maturity of 213 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at end of year $128,514 $334,294 $639,294
Maximum month-end balance $334,294 $639,294 $696,318
Average balance $209,111 $501,979 $591,288
Weighted average interest rate during the year 5.94% 6.08% 6.19%
Weighted average interest rate at end of year 5.72% 5.96% 6.04%
- ---------------------------------------------------------------------------------------
</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 Notes to the Consolidated Financial Statements in the Annual Report.
40
<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, 1999, there were 240 strategically
located proprietary automatic teller machines ("ATMs") in use. These ATMs are
also linked with a series of regional, national and international ATM services,
including CASHBOX, SHAZAM, CIRRUS and NETS. As a result of the Corporation's
participation in these ATM services, electronic banking machines are currently
available worldwide for the convenience of the Corporation's customers.
SUBSIDIARIES
- ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1999, the Bank was authorized to invest up to
$379.4 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1999, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $8.5
million plus unsecured loans totaling $264,000 for a net investment of $8.7
million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has two subsidiaries, Commercial Federal Service Corporation
and First Savings Investment Corporation, engaged in activities not permissible
for national banks. Investments in such subsidiaries must be 100% deducted from
capital. See "Regulation -- Regulatory Capital Requirements." At June 30, 1999,
the total investment in such subsidiaries was $6.3 million which was deducted
from capital. Capital deductions are not required for investment in subsidiaries
engaged in non-national bank activities as agent for customers rather than as
principal, subsidiaries engaged solely in mortgage banking activities, and
certain other exempted subsidiaries.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
At June 30, 1999, the Bank had twelve wholly-owned subsidiaries, three of which
own and operate certain real estate properties of the Bank. As such, these
subsidiaries are considered engaged in permissible activities and do not require
deductions from capital as discussed above. CFMC was approved by the OTS in 1994
to be classified as an "operating subsidiary" and as such, CFMC ceased to be
subject to the regulatory investment in service corporation. Liberty Leasing
Company is also an operating subsidiary. The remaining wholly owned
subsidiaries, exclusive of CFMC and Liberty Leasing Company, are classified as
service corporations. Descriptions of the principal active subsidiaries of the
Bank follow.
See Exhibit 21 "Subsidiaries of the Corporation" herein for a complete listing
of all subsidiaries of the Corporation.
Commercial Federal Mortgage Corporation ("CFMC"). CFMC is a full-service
- -------------------------------------------------
mortgage banking company. The Corporation's real estate lending, secondary
marketing, mortgage servicing and foreclosure activities are conducted primarily
through CFMC. At June 30, 1999, CFMC serviced 79,100 loans for the Bank and
122,800 loans for others. See "Loan Originations -- Loan Servicing."
41
<PAGE>
Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers customers
- ------------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 48 of the Corporation's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities. CFIS also offers these same services through Financial
Network Investment Corporation ("FNIC") in 14 branches. FNIC operations were
added to CFIS as a result of the AmerUs acquisition.
Commercial Federal Insurance Corporation ("CFIC"). CFIC was formed in November
- --------------------------------------------------
1983 and serves as a full." service independent insurance agency, offering a
full line of homeowners, commercial (including property and casualty), health,
auto and life insurance products. Additionally, a wholly-owned subsidiary of
CFIC provides reinsurance on credit life and disability policies written by an
unaffiliated carrier for consumer loan borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to
- ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC are fully excluded from regulatory capital. See
"Regulation -- Regulatory Capital Requirements."
Tower Title & Escrow Company ("TTE"). TTE was formed in 1996 with operations
- -------------------------------------
consisting of escrow closings, title insurance and title searches. TTE services
the Corporation's loan production process and offers its services to other
lending institutions.
EMPLOYEES
- ---------
At June 30, 1999, the Corporation and its wholly-owned subsidiaries had 3,631
employees (3,438 full-time equivalent employees). The Corporation provides its
employees with a comprehensive benefit program, including basic and major
medical insurance, dental plan, a deferred compensation 401(k) plan, life
insurance, accident insurance, short and long-term disability coverage and sick
leave. The Corporation also offers discounts on loan fees to its employees who
qualify based on term of employment (except that no preferential rates or terms
are offered to executive officers and senior management). The Corporation
considers its employee relations to be good.
EXECUTIVE OFFICERS
- ------------------
For certain information concerning the Registrant's directors and executive
officers as of June 30, 1999, refer to Part 11.1 -- Item 10. "Directors and
Executive Officers of the Registrant" of this report.
COMPETITION
- -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate, consumer and commercial loans. Its most direct
competition for savings deposits has come historically from commercial banks and
from thrift institutions located in its primary market areas. The Corporation's
primary market area for savings deposits includes Colorado, Iowa, Nebraska,
Kansas, Oklahoma, Missouri, Arizona, Minnesota and South Dakota and, for loan
originations, includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri,
Arizona, Minnesota, South Dakota, Florida and Las Vegas, Nevada (primarily
residential construction lending). Management believes that the Corporation's
extensive branch network has enabled the Corporation to compete effectively for
deposits and loans against other financial institutions. The Corporation has
been able to attract savings deposits primarily by offering depositors a wide
variety of deposit accounts, convenient branch locations, a full range of
financial services and competitive rates of interest.
The Corporation's competition for real estate, consumer and commercial loans
comes principally from other thrift institutions, mortgage banking companies,
commercial banks, insurance companies and other institutional lenders. The
Corporation competes for loans principally through the efficiency and quality of
the service provided to borrowers and the interest rates and loan fees charged.
See "Regulation -- Proposed Legislative and Regulatory Changes."
42
<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 within this
"Regulation" section or appear elsewhere herein.
The laws and regulations governing savings institutions have been through at
least two major revisions in recent years. First, the Riegel-Neal Interstate
Banking and Efficiency Act of 1994, effective June 1, 1997, permitted commercial
banks interstate branching that has resulted in more intense competition from
out of state banks. Second, on September 30, 1996, the Regulatory Paperwork
Reduction Act was signed into law. Among other things, this legislation
substantially eliminated the premium differential between SAIF-insured
institutions and BIF-insured institutions.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES
- -------------------------------------------
The U.S. Congress is in the process of drafting legislation which may have a
profound effect on the financial services industry. In January 1999 legislation
was reintroduced in both houses of the U.S. Congress restructuring the
activities and regulations oversight of the financial services industry. The
stated purposes of this legislation are to enhance consumer choices in the
financial services marketplace, level the playing field among providers of
financial services and increase competition. This legislation would also permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises allowing
holding companies to offer new services and products. In particular, the
legislation would repeal the Glass-Steagall Act prohibitions on banks
affiliating with securities firms, and thereby allow holding companies to engage
in securities underwriting and dealing without limits and to sponsor and act as
a distributor for mutual funds. The legislation also (i) would remove the Bank
Holding Company Act's prohibitions on insurance underwriting, allowing holding
companies to underwrite and broker any type of insurance product, (ii) calls for
a new regulatory framework for financial institutions and their holding
companies and (iii) preserves the thrift charter and all existing thrift powers.
The Senate version (S. 900) was approved by the Senate on May 6, 1999. The House
Version (H.R. 10) was approved by the House on July 1, 1999. A conference
committee has been appointed to reconcile the differences between the two bills.
The two versions differ principally with respect to the powers of operating
subsidiaries, permissible activities of well-managed holding companies and
restrictions on nonfinancial activities of unitary thrift holding companies. At
this time, it is unknown how the legislation will be modified, or if enacted,
what form the final version of the legislation might take and how it will affect
the Corporation's and the Bank's business and operations and competitive
environment.
43
<PAGE>
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
At June 30, 1999, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1999:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Dollars in Thousands Actual Requirement Excess
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank's stockholder's equity $ 1,129,851
Less unrealized holding gain on securities
available for sale, net 9,562
Less intangible assets (252,676)
Less investments in non-includable subsidiaries (6,337)
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible capital $ 880,400 $ 189,412 $ 690,988
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1) 6.97% 1.50% 5.47%
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible capital $ 880,400
Plus certain restricted amounts of other intangible assets 10,567
- ------------------------------------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital) $ 890,967 $ 379,142 $ 511,825
- ------------------------------------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2) 7.05% 3.00% 4.05%
- ------------------------------------------------------------------------------------------------------------------------------------
Core capital $ 890,967
Plus general loan loss allowances 66,714
Less amount of land loans and non-residential
construction loans in exess of an 80.0% loan-to-value
ratio and other assets required to be deducted (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital) $ 957,676 $ 559,279 $ 398,397
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3) 13.70% 8.00% 5.70%
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $12,627,493.
(2) Based on adjusted total assets totaling $12,638,059.
(3) Based on risk-weighted assets totaling $6,990,985.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized,
adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized; and authorized banking regulatory agencies to take
prompt corrective action with respect to institutions in the three
undercapitalized categories. These corrective actions become increasingly more
stringent as an institution's regulatory capital declines. In addition, the OTS
has adopted a prompt corrective action rule under which a savings institution
that has a core capital ratio of less than 4.0% would be deemed to be
"undercapitalized" and may be subject to certain sanctions. At June 30, 1999,
the Bank exceeded the minimum requirements for the well-capitalized category as
shown in the following table:
<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 7.05% 12.74% 13.70%
Minimum requirements to be
classified well-capitalized 5.00% 6.00% 10.00%
- --------------------------------------------------------------------------------------
</TABLE>
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has regulations which impose certain restrictions
on savings associations that have a total risk-based capital ratio that is less
than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%
or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0%
if the institution is rated a Composite 1 under the regulatory CAMELS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "Regulation -- Prompt Corrective
Regulatory Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights. Purchased mortgage servicing rights may be
included in tangible capital to the extent they are permitted to be included
within the calculation of core capital.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. Effective December 31, 1994, no newly added
intangible assets other than purchased mortgage servicing rights and purchased
credit relationships to the extent described below are permitted to be included
in core capital. Purchased mortgage servicing rights and certain qualifying
intangible assets may be included in the calculation of core capital, subject to
a maximum aggregate limitation of the lesser of (i) 100% of the amount of core
capital computed before the deduction for any disallowed qualifying intangible
assets or mortgage servicing rights; and (ii) the lesser of 90% of their fair
market value or 100% of the remaining unamortized book value. In addition, a
sublimit applies for purchased credit card relationships equal to the lesser of
(i) 25% of the amount of core capital computed before the deduction of any
disallowed qualifying intangible assets and (ii) the lesser of 90% of the fair
market value of such credit card relationships and 100% of the unamortized book
value of such relationships. The Bank's core capital of $891.0 million at June
30, 1999, includes no qualifying supervisory goodwill and $10.6 million of
restricted amounts of certain intangible assets (core value of deposits).
45
<PAGE>
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempt from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not applied
to federal savings associations existing as of August 9, 1989, that were either
chartered as a state savings bank or state cooperative bank prior to October 1,
1982, or that acquired their principal assets from such an association.
Accordingly, at June 30, 1999, the Bank had approximately $6.3 million of debt
and equity invested in two subsidiaries which are engaged in activities not
permissible for national banks that was deducted from capital. See "Business --
Subsidiaries."
Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loan and lease loss allowances.
Allowances for loan and lease losses includable in capital are includable only
up to 1.25% of risk-weighted assets and totaled $66.7 million at June 30, 1999.
In addition, equity investments, reciprocal holdings of depositor's
institutional capital instruments, and those portions of nonresidential
construction and land loans, and loans with loan-to-value ratios in excess of
80.0% must be deducted from total capital under the same phase-out period as is
applied to investments in subsidiaries engaged in activities not permissible for
national banks. The Bank's investments subject to this deduction totaled $5,000
at June 30, 1999, which was deducted from capital in accordance with applicable
regulations.
46
<PAGE>
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of every on-balance-sheet asset and the credit-equivalent
amount of every off-balance-sheet item after being multiplied by an assigned
risk weight. Under the OTS risk-weighting system, cash and securities backed by
the full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest by the FNMA or FHLMC, and the book value of FHLB stock are assigned a
20.0% risk weight. Single-family first mortgage loans not more than 90 days past
due with loan-to-value ratios at origination not exceeding 80.0%, multi-family
mortgage loans (maximum 36 dwelling units) with loan-to-value ratios not
exceeding 80.0% and average annual occupancy rates over 80.0%, that were in
existence on March 18, 1994 and continue to satisfy these criteria, certain
other multi-family mortgage loans and certain qualifying loans for the
construction of one- to four-family residences pre-sold to home purchasers are
assigned a risk weight of 50.0%. Consumer loans, non-qualifying single-family,
multi-family and residential construction loans and commercial real estate
loans, repossessed assets and assets more than 90 days past due, as well as all
other assets not specifically categorized, are assigned a risk weight of 100.0%.
The portion of equity investments not deducted from core or supplementary
capital is assigned a 100.0% risk-weight. OTS capital regulations require
savings institutions to maintain minimum total capital, consisting of core
capital plus supplemental capital, equal to 8.0% of risk-weighted assets.
The OTS' risk-based capital requirements require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
is considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
A savings institution with a greater than normal interest rate risk is required
to deduct from total capital, for purposes of calculating its risk-based capital
requirement, an amount (the "interest rate risk component") equal to one-half
the difference between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic value of its
total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
information filed with the institution's Thrift Financial Report two quarters
earlier. The Bank has determined that, on the basis of current financial data,
it will not be deemed to have more than a normal level of interest rate risk
under the rule and therefore will not be required to increase its total capital
as a result of the rule.
The OTS has adopted a prompt corrective action rule under which a savings
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. See " Regulation
- --Prompt Corrective Regulatory Action."
In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of the
OTS may treat the failure of any savings institution to maintain capital at or
above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an order
issued by the FDIC.
47
<PAGE>
FEDERAL HOME LOAN BANK SYSTEM
- -----------------------------
The Bank is a member of the FHLB System. The FHLB System consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. The FHLB of Topeka serves as
a reserve or central bank for its member institutions within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHLB and the Board of
Directors of the FHLB of Topeka. Under applicable law, long-term advances may
only be made for the purpose of providing funds for residential housing lending.
Pursuant to acquisitions the last two fiscal years, the Bank acquired advances
from the FHLB of Des Moines. Except for these acquired FHLB advances from the
Des Moines district, the Bank has not borrowed additional advances from this
district the last two fiscal years. At June 30, 1999 the Bank had advances of
$3.6 billion from the FHLB of Topeka and Des Moines.
As a member of the FHLB, the Bank is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to the greater of (i) 1.0%
of the Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
(ii) 5.0% of its then outstanding advances (borrowings) from the FHLB. The Bank
was in compliance with this requirement at June 30, 1999, with an investment in
FHLB stock totaling $194.1 million compared to a required amount of
$181.6million. During fiscal years 1999, 1998 and 1997 the Bank received
dividend income from its investment in FHLB stock totaling $10.8 million, $8.4
million and $5.6 million, respectively.
LIQUIDITY REQUIREMENTS
- ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquid assets (defined as cash, deposits maintained pursuant Federal
Reserve Board requirements, time and savings deposits in certain institutions,
U.S. Treasury and other government agency obligations, obligations of states and
political subdivisions thereof, shares in mutual funds with certain restricted
investment policies, highly rated corporate debt, and mortgage loans and
mortgage-related securities with less than one year to maturity or subject to
purchase within one year) in each calendar quarter of not less than 4.0% of its
net withdrawable deposits plus short-term borrowings or 4.0% of the average
daily balance of its net withdrawable accounts plus short term borrowings during
the preceding quarter. In addition to meeting this minimum requirement, each
savings association is required to maintain sufficient liquidity to ensure its
safe and sound operations. Monetary penalties may be imposed for failure to meet
liquidity requirements. The average liquidity ratio of the Bank as of June 30,
1999, was 11.69%.
48
<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
(including homes equity loans), (ii) stock in an FHLB and (iii) loans for
educational purposes, loans to small businesses and loans made through credit
cards or credit card accounts. In addition, subject to a 20.0% of portfolio
assets limit, savings institutions are able to treat as Qualified Thrift
Investments: (i) 50% of the dollar amount of residential mortgage loans
originated for sale and sold within 90 days of origination, (ii) 200.0% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small businesses in "credit-needy" areas, (iii) 200.0% of loans for
the purchase or construction of churches, schools, nursing homes and hospitals,
other than those covered in (ii) and loans for the improvement and upkeep of
such properties, (iv) loans for personal family or household purposes, (v)
shares of stock issued by the FHLMC or the FNMA and (vi) investments in the
capital stock of or obligation of, any security issued by any service
corporation if such service corporation derives at least 80% of its annual gross
revenues from activities directly related to purchasing, financing ,
constructing, improving or repairing domestic residential real estate or
manufactured housing. In order to maintain QTL status, the savings institution
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65.0% on a monthly average basis in nine out of 12
months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired.
At June 30, 1999, approximately 82.97% of the Bank's portfolio assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
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RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution must submit notice to the
OTS prior to making a capital distribution if (i) they would not be well
capitalized after the distribution, (ii) the distribution would result in the
retirement of any of the association's common or preferred stock or debt counted
as its regulatory capital, or (iii) the association is a subsidiary of a holding
company. A savings association must make application to the OTS to pay a capital
distribution if (i) the association would not be adequately capitalized
following the distribution, (ii) the association's total distributions for the
calendar year exceeds the association's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (iii)
the distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the OTS. Under these regulations, at June
30, 1999, the Bank is permitted to pay an aggregate amount of approximately
$113.8 million in capital distributions. Despite the above authority, the OTS
may prohibit any savings institution from making a capital distribution that
would otherwise be permitted by the regulation if the OTS were to determine that
the distribution constituted an unsafe or unsound practice. Furthermore, under
the OTS's prompt corrective action regulations, which took effect on December
19, 1992, the Bank would be prohibited from making any capital distributions if,
after making the distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less
than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "Regulation --
Prompt Corrective Regulatory Action."
ENFORCEMENT
- -----------
Under the Federal Deposit Insurance Act of 1996 (the "FDI Act"), the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-related parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on a savings institution. Civil penalties cover a wide range of
violations and actions and range up to $25,000 per day unless a finding of
reckless disregard is made, in which case penalties may be as high as $1.0
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1.0 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
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DEPOSIT INSURANCE
- -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment is based on the capital adequacy
and supervisory rating of the institution and is assigned by the FDIC.
The FDIC has a risk-based deposit insurance assessment system under which the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC which is determined
by the institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- based on the data reported to regulators for
the date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well capitalized institutions are institutions satisfying the
following capital ratio standards: (i) total risk-based capital ratio of 10.0%
or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well capitalized
institutions but which satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Undercapitalized institutions consist of institutions that do not qualify as
either "well capitalized" or "adequately capitalized." Within each capital
group, institutions are assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
fund. Subgroup A consists of financially sound institutions with only a few
minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
The FDIC's assessment schedule for SAIF deposit insurance mandates the
assessment rate for well-capitalized institutions with the highest supervisory
ratings be reduced to zero and institutions in the lower risk assessment
classification be assessed at the rate of .27% of insured deposits. Until
December 31, 1999, however, SAIF-insured institutions will be required to pay
assessments to the FDIC at the rate of .064% of insured deposits to help fund
interest payments on certain bonds issued by the Financing Corporation ("FICO"),
an agency of the federal government established to finance takeovers of
insolvent thrifts. During this period, BIF members will be assessed for FICO
obligations at the rate of .013% of insured deposits. After December 31, 1999,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination proceedings of deposit
insurance. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, and to increase its Tier 1 capital to such level as the FDIC
deems appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain subsidiaries. Insured depository institutions with Tier 1 capital equal
to or greater than 2.0% of total assets may also be deemed to be operating in an
unsafe or unsound condition notwithstanding such capital level. The regulation
further provides that in considering applications that must be submitted to it
by savings institutions, the FDIC will take into account whether the savings
association is meeting the Tier 1 capital requirement for state non-member banks
of 4.0% of total assets for all but the most highly rated state non-member
banks.
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TRANSACTIONS WITH RELATED PARTIES
- ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company context,
the parent holding company of a savings institution (such as the Corporation)
and any companies which are controlled by such parent holding company are
affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit
the extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10.0% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and to
a greater than 10.0% stockholder of a savings institution and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. Section 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers, directors
and principal shareholders of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. Section 1972 (i) prohibits a depository institution
from extending credit to or offering any other services, or fixing or varying
the consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or certain of
its affiliates or not obtain services of a competitor of the institution,
subject to certain exceptions, and (ii) prohibits extensions of credit to
executive officers, directors, and greater than 10.0% stockholders of a
depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
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CLASSIFICATION OF ASSETS
- ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets, Doubtful
Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. That portion of an asset classified loss is
considered uncollectible and of such little value that its continuance as an
asset, without establishment of a specific valuation allowance or charge-off, is
not warranted. This classification does not necessarily mean that an asset has
absolutely no recovery or salvage value; but rather, it is not practical or
desirable to defer writing off a basically worthless asset (or portion thereof)
even though partial recovery may be effected in the future.
With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for
off-balance sheet items, such as letters of credit, when loss becomes probable
and estimable.
Since August 1993, the OTS has had revised guidance outstanding for the
classification of assets and a new policy on the classification of
collateral-dependent loans (where proceeds from repayment can be expected to
come only from the operation and sale of the collateral). With limited
exceptions, effective September 30, 1993, for troubled collateral-dependent
loans where it is probable that the lender will be unable to collect all amounts
due, an institution must classify as "loss" any excess of the recorded
investment in the loan over its "value", and classify the remainder as
"substandard". The "value" of a loan is either all present value of the expected
future cash flows, the loan's observable market price or the fair value of the
collateral. The Bank has not had any adverse impact from the implementation of
the revised guidance for classification of assets or collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all
credit losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit
losses forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international
loans. Additionally, an adequate level of ALLL should reflect an
additional margin for imprecision inherent in most estimates of
expected credit losses.
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The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs examiners
to check the reasonableness of ALLL methodology by comparing the reported ALLL
against the sum of the following amounts:
(a) 50.0% of the portfolio that is classified doubtful,
(b) 15.0% of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified
(including those loans designated special mention), estimated
credit losses over the upcoming twelve months given the facts and
circumstances as of the evaluation date (based on the
institution's average annual rate of net charge-offs experienced
over the previous two or three years on similar loans, adjusted
for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable, supported by the
weight of reliable evidence and that all relevant factors have been
appropriately considered. The Bank has reviewed the Policy Statement and does
not believe that it will adversely affect the level of the Bank's allowances for
loan losses.
PROMPT CORRECTIVE REGULATORY ACTION
- -----------------------------------
Under FDICIA, the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must include
a guarantee by the institution's holding company that the institution will
comply with the plan until it has been adequately capitalized on average for
four consecutive quarters, under which the holding company would be liable up to
the lesser of 5.0% of the institution's total assets or the amount necessary to
bring the institution into capital compliance as of the date it failed to comply
with its capital restoration plan. A significantly undercapitalized institution,
as well as any undercapitalized institution that does not submit an acceptable
capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution may also be required to
divest the institution. The senior executive officers of such an institution may
not receive bonuses or increases in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt, with certain exceptions. If an institution's ratio of
tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution is
subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
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Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). A savings institution that is not subject to
an order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater;
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is a savings institution that does not meet the definition
of well capitalized and has: (i) a total risk-based capital ratio of 8.0% or
greater; (ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a
leverage ratio of 4.0% or greater (or 3.0% or greater if the savings institution
has a composite 1 regulatory CAMELS rating). An "undercapitalized institution"
is a savings institution that has (i) a total risk-based capital ratio less than
8.0%; or (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
regulatory CAMELS rating). A "significantly undercapitalized" institution is
defined as a savings institution that has: (i) a total risk-based capital ratio
of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than 3.0%;
or (iii) a leverage ratio of less than 3.0%. A "critically undercapitalized"
savings institution is defined as a savings institution that has a ratio of core
capital to total assets of less than 2.0%. The OTS may reclassify a well
capitalized savings institution as adequately capitalized and may require an
adequately capitalized or undercapitalized institution to comply with the
supervisory actions applicable to institutions in the next lower capital
category if the OTS determines, after notice and an opportunity for a hearing,
that the savings institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any regulatory CAMELS rating category. The Bank is classified as "well
capitalized" under the OTS regulations.
STANDARDS FOR SAFETY AND SOUNDNESS
- ----------------------------------
Under FDICIA, as amended by the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "CDRI Act"), each federal banking agency is
required to establish safety and soundness standards for institutions under its
authority. The final rule and the guidelines took effect on August 9, 1995. The
guidelines require savings associations to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the association's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings associations should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings association is not in compliance with the safety and soundness
guidelines, it may require the association to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
association to regulatory sanctions. Management believes that the Bank meets
substantially all the standards adopted in these interagency guidelines.
Additionally, under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings standards,
in the form proposed by the banking agencies, would not have a material effect
on the Bank's operations.
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FEDERAL RESERVE SYSTEM
- ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$46.5 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1999, the Bank met its reserve
requirements.
LIMITATIONS ON LOANS TO ONE BORROWER
- ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000 (ii) the
savings association is in compliance with its fully phased-in capital standards,
(iii) the loans comply with applicable loan-to-value requirements, (iv) the
aggregate amount of loans made under this authority does not exceed 150.0% of
unimpaired capital and surplus and (v) the savings association is, and continues
to be, in compliance with its fully phased in capital requirements. At June 30,
1999, the Bank's loan to one borrower limitation was $241.0 million and all
loans to one borrower were within such limitation.
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $3.8 billion. At June 30,
1999 the Bank's nonresidential real property loans totaled $940.8 million.
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SAVINGS AND LOAN HOLDING COMPANY REGULATION
- -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA. As
such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- -----------------------
The Board of Directors of the Corporation operates the Corporation as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose such
restrictions as deemed necessary to address such risk including limiting: (i)
payment of dividends by the savings institution, (ii) transactions between the
savings institution and its affiliates, and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company. See "Regulation --
Qualified Thrift Lender Test."
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
57
<PAGE>
RESTRICTIONS ON ACQUISITIONS
- ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an
under-capitalized savings institution pursuant to a "qualified stock issuance"
without that savings institution being deemed controlled by the holding company.
In order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
58
<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.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) required recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These tax law
changes resulted in the recognition to income tax expense of additional deferred
tax liabilities of approximately $191,000 in fiscal year 1997. The recapture of
excess reserves has no effect on the Corporation's results of operations since
income taxes were provided for in prior years in accordance with SFAS No.
109, "Accounting for Income Taxes."
In accordance with provisions of SFAS No. 109, a deferred tax liability has not
been recognized for the bad debt reserves of the Bank created in the tax years
which began prior to December 31, 1987 (the base year). At June 30, 1999, the
amount of these reserves totaled approximately $105,266,000 with an unrecognized
deferred tax liability approximating $38,527,000. Such unrecognized deferred tax
liability could be recognized in the future, in whole or in part, if (i) there
is a change in federal tax law, (ii) the Bank fails to meet certain definitional
tests and other conditions in the federal tax law, (iii) certain distributions
are made with respect to the stock of the Bank or (iv) the bad debt reserves are
used for any purpose other than absorbing bad debt losses.
During fiscal year 1998, the Internal Revenue Service completed its examination
of the Corporation's consolidated federal income tax returns through June 30,
1995. Such examination had no effect on the Corporation's results of operations
for fiscal year 1998.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation (which is filed separately) and will be assessed at
a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to
3.81% of the Bank's income before tax (including subsidiaries) as reported on
the regular books and records. The Corporation also pays franchise or state
income taxes in a number of jurisdictions in which the Corporation or its
subsidiaries conduct business. For further information regarding federal income
taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated
Financial Statements.
59
<PAGE>
Item 2. Properties
- --------------------------------------------------------------------------------
At June 30, 1999, the Corporation conducted business through 256 branch offices
in nine states: Iowa (77), Colorado (44), Nebraska (42), Kansas (41), Oklahoma
(21), Missouri (19), Arizona (7), Minnesota (4) and South Dakota (1). See Item
1. Business - "Recent Developments - Acquisitions Consummated."
At June 30, 1999, the Corporation owned the buildings for 152 of its branch
offices and leased the remaining 104 offices under leases expiring (not assuming
exercise of renewal options) between July 1999 and August 2031. The Corporation
has 240 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma,
Iowa, Arizona Missouri, Minnesota and South Dakota. At June 30, 1999, the total
net book value of land, office properties and equipment owned by the Corporation
was $185.3 million. Management believes that the Corporation's premises are
suitable for its present and anticipated needs.
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill
Lawsuit" for other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
None; no matters were submitted during the fourth quarter of fiscal year 1999.
60
<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 34 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
The presentation of selected financial data for the years ended June 30, 1995
through 1999 is included in the "Selected Consolidated Financial Data" section
appearing on pages 14 and 15 of the Annual Report and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1999 compared
to fiscal year 1998 and fiscal year 1998 compared to fiscal year 1997 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 16 through 35 of the Annual
Report and are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained under "Business - Market Risk" in Part I of this
Report is incorporated herein by reference. In addition, included in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section under the sub-section "Asset/Liability Management" on pages
18 through 20 of the Annual Report is additional information incorporated by
reference.
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
The "Independent Auditors' Report," "Consolidated Financial Statements" and
"Notes to Consolidated Financial Statements" set forth on pages 36 through 82 of
the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
- --------------------------------------------------------------------------------
None.
61
<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
1999 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
The executive officers of the Corporation and the Bank as of June 30, 1999, are
as follows:
Age at Current Position(s) as of
Name June 30, 1999 June 30, 1999
- ---- ------------- -------------------------
William A. Fitzgerald 61 Chairman of the Board and Chief
Executive Officer of the
Corporation and the Bank
James A. Laphen 51 President, Chief Operating Officer
and Chief Financial Officer of the
Corporation and the Bank
Gary L. Matter 54 Senior Vice President, Controller
and Secretary of the Corporation
and Executive Vice President,
Controller and Secretary of the
Bank
Joy J. Narzisi 44 Senior Vice President, Treasurer
and Assistant Secretary of the
Corporation and Executive Vice
President, Treasurer and Assistant
Secretary of the Bank
Roger L. Lewis 49 Executive Vice President and
Assistant Secretary of the Bank
Russell G. Olson 45 Executive Vice President of the
Bank
Gary D. White 54 Executive Vice President of the
Bank
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the
- ---------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Heartland
Community Bankers, the board of America's Community Bankers and the Board of
Governors of the Federal Reserve System Thrift Institutions Advisory Council.
Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973.
James A. Laphen is President, Chief Operating Officer and Chief Financial
- ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania and, prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
Gary L. Matter was named Executive Vice President of the Bank and Director of
- --------------
Finance in April 1998. Mr. Matter, a Senior Vice President of the Corporation
and Controller and Secretary of the Corporation and the Bank since November
1993, joined the Bank in December 1990, as First Vice President and Controller.
Mr. Matter, a certified public accountant, was the Treasurer of Anchor Glass
Container Corporation from June 1983 to November 1990.
62
<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.
Gary D. White was named Executive Vice President and Director of Corporate
- -------------
Services in April 1998. Previous positions held include Senior Vice President
for Administration and Special Projects in February 1997, Director of
Nebraska/Iowa in July 1995, Director of Residential Mortgage Lending in May
1994, and First Vice President and Director of Human Resources in March 1984.
Mr. White joined the Bank in 1976 as an Investment Account Executive and also
has held the positions of Branch Manager and Employment Manager.
Item 11. Executive Compensation
- --------------------------------------------------------------------------------
The information under the section captioned "Proposal I -- Election of
Directors -- Executive Compensation" in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders" and "Proposal I -- Election
of Directors" in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
63
<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, 1999
and 1998
(c) Consolidated Statement of Operations for the Years Ended
June 30, 1999, 1998 and 1997
(d) Consolidated Statement of Comprehensive Income for the Years
Ended June 30, 1999, 1998 and 1997
(e) Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997
(f) Consolidated Statement of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997
(g) Notes to Consolidated Financial Statements
(2.) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is not applicable, not required or is included in the
consolidated financial statements or related notes thereto included
in Item 8.
(3.) Exhibits:
3.1 Articles of Incorporation of Registrant, as amended and
restated (incorporated by reference to the Registrant's
Current Report on Form 8-K dated July 3, 1998)
3.2 Bylaws of Registrant, as amended and restated (incorporated
by reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-00330)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Harris Trust and Savings Bank, as amended
(incorporated by reference to the Registrant's Form 10-Q
Quarterly Report for the Quarterly Period Ended
September 30, 1998)
4.3 The Corporation hereby agrees to furnish upon request to the
Securities and Exchange Commission a copy of each instrument
defining the rights of holders of the Cumulative Trust
Preferred Securities and the Subordinated Extendible Notes
of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June
8, 1995 (incorporated by reference to the Registrant's Form
S-4 Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreements
entered into with Executive Vice Presidents, Senior Vice
Presidents and First Vice Presidents (incorporated by
reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
64
<PAGE>
10.4 Commercial Federal Corporation Incentive Plan Effective
July 1, 1994 (incorporated by reference to the Registrant's
Form 10-K Annual Report for the Fiscal Year Ended June 30,
1994 -File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated Effective August 1,
1992 (incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal
Year Ended June 30, 1996 - File No. 1-11515)
10.8 Employment Agreement with William A. Fitzgerald, dated
May 15, 1974, as Amended February 14, 1996 (incorporated by
reference to the Registrant's Form 10-K Annual Report for
the Fiscal Year Ended June 30, 1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor
Income Plan, as Amended February 14, 1996 (incorporated by
reference to the Registrant's Form 10-K Annual Report for
the Fiscal Year Ended June 30, 1996 - File No. 1-11515)
10.10 Employee Agreement with James A. Laphen dated June 1, 1997
(incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended June 30, 1997 - File No. 1-11515)
10.11 Commercial Federal Corporation 1996 Stock Option and
Incentive Plan as Amended (incorporated by reference to the
Registrant's Form S-8 Registration Statement Nos. 333-20739
and 333-58607)
10.12 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as Amended
February 22, 1991 (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 33-63221
and Post-Effective Amendment No. 1 to Registration Statement
No. 33-01333 and No. 33-10396
10.13 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 33-63629)
10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan
(incorporated by reference to the Registrant's Post-
Effective Amendment No. 1 to Form S-4 under cover of Form
S-8 -File No. 333-42817)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and
Incentive Plan (incorporated by reference to the
Registrant's Post-Effective Amendment No. 1 to Form S-4
under cover of Form S-8 -File No. 333-45613)
10.16 First Colorado Bancorp, Inc. 1992 Stock Option Plan and
First Colorado Bancorp, Inc. 1996 Stock Option Plan
(incorporated by reference to the Registrant's Post-
Effective Amendment No. 1 to Form S-4 under cover of Form
S-8; File No. 333-49967)
10.17 Employment Agreement with Russell G. Olson dated
February 10, 1999 (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders
for the Fiscal Year Ended June 30, 1999 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
65
<PAGE>
(B.) Reports on Form 8-K:
On May 4 1999, the Corporation filed a Form 8-K regarding a common stock
repurchase program. Effective April 28, 1999, the Corporation's Board of
Directors authorized the repurchase of up to five percent of the
Corporation's outstanding common stock during the next 18 months. Such
repurchase is expected to approximate 3,000,000 shares of common stock.
Repurchases will be made at any time and in any amount, depending upon
market conditions and various other factors. Any repurchase generally
would be on the open-market, although privately negotiated transactions
are also possible. In compliance with Nebraska law, all repurchased
shares will be cancelled.
On May 14, 1999, the Corporation filed a Form 8-K regarding the
resignation of board member W. A. Krause effective May 10, 1999.
(C.) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(D.) No financial statement schedules required by Regulation S-X are filed,
and as such are excluded from the Annual Report as provided by Exchange
Act Rule 14a-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1999 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 27, 1999 By: /s/ William A. Fitzgerald
-------------------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
Date: September 27, 1999 By: /s/ William A. Fitzgerald
-------------------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Principal Financial Officer:
Date: September 27, 1999 By: /s/ James A. Laphen
-------------------------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
Principal Accounting Officer:
Date: September 27, 1999 By: /s/ Gary L. Matter
-------------------------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
Directors:
Date: September 27, 1999 By: /s/ Talton K. Anderson
-------------------------------------
Talton K. Anderson
Director
67
<PAGE>
Date: September 15, 1999 By: /s/ Michael P. Glinsky
-------------------------------------
Michael P. Glinsky
Director
Date: September 15, 1999 By: /s/ Robert F. Krohn
-------------------------------------
Robert F. Krohn
Director
Date: September 27, 1999 By: /s/ Carl G. Mammel
-------------------------------------
Carl G. Mammel
Director
Date: September --, 1999 By:
-------------------------------------
Sharon G. Marvin
Director
Date: September 27, 1999 By: /s/ Robert S. Milligan
-------------------------------------
Robert S. Milligan
Director
Date: September 27, 1999 By: /s/ James P. O'Donnell
-------------------------------------
James P. O'Donnell
Director
Date: September 27, 1999 By: /s/ Robert D. Taylor
-------------------------------------
Robert D. Taylor
Director
Date: September 27, 1999 By: /s/ Aldo J. Tesi
-------------------------------------
Aldo J. Tesi
Director
68
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibits
- ------ --------------------
3.1 Articles of Incorporation of Registrant, as amended and restated
(incorporated by reference to the Registrant's Current Report on Form 8-K
dated July 3, 1998)
3.2 Bylaws of Registrant, as amended and restated (incorporated by reference
to the Registrant's Form S-4 Registration Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated by
reference to the Registrant's Form S-1 Registration Statement No.
33-00330)
4.2 Shareholder Rights Agreement between Commercial Federal Corporation and
Harris Trust and Savings Bank, as amended (incorporated by reference to
the Registrant's Form 10-Q Quarterly Report for the Quarterly Period
Ended September 30, 1998)
4.3 The Corporation hereby agrees to furnish upon request to the Securities
and Exchange Commission a copy of each instrument defining the rights of
holders of the Cumulative Trust Preferred Securities and the Subordinated
Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William A.
Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated by
reference to the Registrant's Form S-4 Registration Statement No.
33-60589)
10.3 Form of Change in Control Executive Severance Agreements entered into
with Executive Vice Presidents, Senior Vice Presidents and First Vice
Presidents (incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994
(incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan Effective July
1, 1994 (incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan, as
Amended and Restated Effective August 1, 1992 (incorporated by reference
to the Registrant's Form S-8 Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and Registrant, dated
August 21, 1996 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1996 - File No. 1-11515)
<PAGE>
10.8 Employment Agreement with William A. Fitzgerald, dated May 15, 1974, as
Amended February 14, 1996 (incorporated by reference to the Registrant's
Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File
No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor Income Plan, as
Amended February 14, 1996 (incorporated by reference to the Registrant's
Form 10-K Annual Report for the Fiscal Year Ended June 30, 1996 - File
No. 1-11515)
10.10 Employee Agreement with James A. Laphen dated June 1, 1997 (incorporated
by reference to the Registrant's Form 10-K for the fiscal year ended June
30, 1997 - File No. 1-11515)
10.11 Commercial Federal Corporation 1996 Stock Option and Incentive Plan as
Amended (incorporated by reference to the Registrant's Form S-8
Registration Statement Nos. 333-20739 and 333-58607)
10.12 Railroad Financial Corporation 1994 Stock Option and Incentive Plan,
Railroad Financial Corporation 1991 Directors' Stock Option Plan and
Railroad Financial Corporation 1986 Stock Option and Incentive Plan, as
Amended February 22, 1991 (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 33-63221 and Post-Effective Amendment
No. 1 to Registration Statement No. 33-01333 and No. 33-10396
10.13 Railroad Financial Corporation 1994 Stock Option and Incentive Plan
(incorporated by reference to the Registrant's Form S-8 Registration
Statement No. 33-63629)
10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan (incorporated by
reference to the Registrant's Post-Effective Amendment No.1 to Form S-4
under cover of Form S-8 - File No. 333-42817)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan
(incorporated by reference to the Registrant's Post-Effective Amendment
No.1 to Form S-4 under cover of Form S-8-File No. 333-45613)
10.16 First Colorado Bancorp, Inc. 1992 Stock Option Plan and First Colorado
Bancorp, Inc. 1996 Stock Option Plan (incorporated by reference to the
Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of
Form S-8; File No. 333-49967)
10.17 Employment Agreement with Russell G. Olson dated February 10, 1999 (filed
herewith).
13 Commercial Federal Corporation Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1999 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
<PAGE>
Exhibit 10.17
Employment Agreement with Russell G. Olson
dated February 10, 1999
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT ("Agreement") is entered into as of the 10th day of
------
February, 1999, by and between COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
- --------
(the "Bank"), referred to herein sometimes as the "Employer," and RUSSELL G.
OLSON ("Olson").
R E C I T A L S:
---------------
A. Olson has agreed to become a key member of the senior management of
the Bank and to devote substantial skill to the affairs of the Bank, and the
Board of Directors of the Bank (the "Board") wishes to retain his services under
the terms of this Agreement.
B. It is in the best interest of the Bank to provide an inducement to
Olson to accept employment under the terms of this Agreement.
NOW, THEREFORE, the Bank and Olson hereby agree to the following terms of
employment:
1. Employment. The Employer agrees to employ Olson and Olson agrees to be
----------
employed in the capacity as Executive Vice President of the Bank for a period of
one (1) year beginning the date of this Agreement. The Board will review this
Agreement annually to consider additional one (1) year extensions.
2. Time and Effort. Olson shall diligently and conscientiously devote his
---------------
full time and best efforts to the discharge of his duties.
3. Compensation.
------------
a. The Employer shall pay to Olson a base salary at a rate no less
than Two Hundred Fifty-Two Thousand Three Hundred Sixty Dollars ($252,360.00)
per year. The base salary may be increased from time to time as the Board may
approve.
b. Olson shall be entitled to participate in all benefits available to
executive officers of the Employer in effect as of this date, and as may be
amended from time to time by the Board, including, but not limited to (i) all
short-term and long-term incentive plans (both cash and stock) and all deferred
compensation plans; (ii) all benefit plans (such as, but not limited to,
medical, life insurance, retirement, vacation); and (iii) any perquisite
program.
<PAGE>
4. Termination of Employment.
-------------------------
a. The Employer may terminate Olson's employment at any time upon thirty
(30) days notice. However, if the Employer terminates Olson's employment at any
time during the term of this Agreement for any reason other than cause, as
defined herein, Olson will receive all compensation and benefits detailed in
Section 3 through the effective date of termination, together with a severance
payment equal to twelve (12) months base salary. Such amount shall be payable
monthly beginning on the first day of the month following the month in which
such termination occurs.
b. Olson shall have no right to receive such severance payment if his
employment is terminated for cause. Termination for cause shall mean termination
because of Olson's personal dishonesty, incompetence, willful misconduct, breach
of fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement.
5. Regulatory Provisions.
---------------------
a. If Olson is suspended and/or temporarily prohibited from participating
in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or
(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(e)(3) and
(g)(1)), the Bank's obligations under this Agreement shall be suspended as of
the date of service unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Bank may in its discretion (i) pay Olson all or
part of the compensation withheld while its contract obligations were suspended;
and (ii) reinstate (in whole or in part) any of its obligations which were
suspended.
b. If Olson is removed and/or permanently prohibited from participating
in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or
(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(e)(4) or
(g)(1)), all obligations of the Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the contracting parties
shall not be affected.
c. If the Bank is in default (as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act), all obligations of the Bank under this Agreement
shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
d. All obligations of the Bank under this Agreement shall be terminated,
except to the extent determined that continuation of this Agreement is necessary
for the continued operation of the Bank:
i. At any time the Federal Deposit Insurance Corporation ("FDIC") or
the Resolution Trust Corporation ("RTC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act; or
ii. At any time the FDIC or RTC approves a supervisory merger to
resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
2
<PAGE>
6. Disability, Death, Retirement. If Olson should become disabled while
-----------------------------
this Agreement is in effect, the compensation, benefits, and severance payment
specified in Section 4 of this Agreement shall be payable, as in the case of a
termination for reasons other than cause, to Olson. If Olson should die while
this Agreement is in effect, a severance payment equal to twelve (12) months
base salary shall be paid to his heirs at law, payable monthly beginning on the
first day of the month following the month in which such death occurs. If Olson
retires, this Agreement shall terminate and no severance payments shall be due
hereunder. The benefits provided pursuant to this Agreement shall be in addition
to any other benefits provided by the Employer.
"Disability" shall mean Olson's absence from his duties with the Employer
on a full-time basis for one hundred eighty (180) consecutive business days, as
a result of Olson's incapacity due to physical or mental illness, unless within
thirty (30) days thereafter Olson shall have returned to the full-time
performance of his duties.
7. Agreement Not to Compete. Should Olson's employment be terminated
------------------------
hereunder for any reason, either voluntarily or involuntarily, Olson agrees that
he will not, for a period of one (1) year from the date of such termination, in
any capacity, whether as an employee, employer, stockholder, officer, director,
partner, associate, consultant, advisor, proprietor, or in any other manner,
engage in or have any interest in, direct or indirect, any business in direct
competition with the Bank within any service area served by the Bank as of the
date of such termination. Olson further agrees during such period that he will
not in any manner solicit or interfere with the business, goodwill, or customers
of the Bank. Olson further acknowledges that all information pertaining to the
business or the customers of the Bank are the property of the Bank, and Olson
agrees that he will not, at any time after termination of employment, divulge or
communicate any such information to any person or business organization without
the express authorization of the Bank. Should Olson violate the terms of this
Paragraph 7, the parties agree that in addition to any other remedy available at
law and equity, the Bank may cease the payment of any severance payments
otherwise due under Paragraph 4 hereof as of the date of such breach.
8. Severability. In the event that any portion of this Agreement is held
------------
to be invalid or unenforceable for any reason, it is hereby agreed
that invalidity or unenforce-ability shall not affect the other
portions of this Agreement and that the remaining covenants, terms,
and conditions, or portions thereof shall remain in full force and
effect, and any court of competent jurisdiction may so modify the
objectionable provisions as to make it valid and enforceable.
3
<PAGE>
9. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the Employer, its successors, and assigns, including any
corporation which may merge or consolidate with Employer, or acquire all, or
substantially all of the assets and business of the Employer.
10. Change of Control. The parties hereto have, in addition to this
-----------------
Agreement, entered into a Change of Control Agreement. To the extent that Olson
receives a severance payment under this Agreement, such amount shall reduce the
amount to which Olson would otherwise be entitled under such Change of Control
Agreement.
11. Federal Deposit Insurance Act. Notwithstanding anything in this
-----------------------------
Agreement to the contrary, no payment shall be made under this Agreement
contrary to the requirements or prohibitions of Section 18(k) of the Federal
Deposit Insurance Act (12 U.S.C. ss. 1828(k) or regulations or orders issued
thereunder and applicable to and binding upon the Bank.
12. Prior Agreements. The parties acknowledge that this Agreement
----------------
supersedes all prior agreements with respect to the subject matter hereof,
including specifically that certain agreement between Liberty Financial
Corporation and Olson dated January 1, 1997. The parties acknowledge that Olson
will be given the company automobile provided for in Paragraph 6A of such
agreement. Olson will be reimbursed for business use of his automobile under the
Bank's policies. The parties further acknowledge that Olson will have received
from Liberty Financial Corporation the amounts due as a golden parachute payment
under Paragraph 9 of such agreement, in cash or other good funds. The parties
further acknowledge that the Employer may elect to relocate Olson, in which case
the Employer will pay moving expenses as provided to executive officers under
its policies in effect as of the date of such transfer.
13. Governing Law. This Agreement shall be construed and enforced in
-------------
accordance with the laws of the State of Nebraska.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMMERCIAL FEDERAL BANK,
A FEDERAL SAVINGS BANK
By /s/ James A. Laphen
-------------------------------------
James A. Laphen, President
/s/ Russell G. Olson
-------------------------------------
RUSSELL G. OLSON
4
<PAGE>
Exhibit 13
Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1999
<PAGE>
- --------------------------------------------------------------------------------
Commercial Federal Corporation
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
WE WERE READY FOR BUSINESS THEN.
AND WE'RE READY FOR A
new century NOW.
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS
1999 HERE]
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
BUILDING ON A HERITAGE OF
SUCCESSFUL GROWTH TO ENHANCE SHAREHOLDER VALUE,
CUSTOMER SERVICE AND
EMPLOYEE SUCCESS.
- --------------------------------------------------------------------------------
AS WE ENTER INTO THE NEW CENTURY, OUR PRIMARY OBJECTIVES WILL BE TO:
Build a powerful and profitable community banking franchise throughout the
Midwest, rank in the upper quartile of our industry in financial performance and
provide shareholders with the return they expect on their investment.
Provide customers with the means to bank when, where and how they choose.
Foster a work environment that promotes professional growth for all employees,
recognizes and rewards excellent personal and team performance in achieving
corporate goals and offers flexibility in meeting individual employee needs.
CONTENTS
- --------------------------------------------------------------------------------
Financial Highlights ...................................................... 1
Letter to Shareholders .................................................... 2
Financial Information ..................................................... 13
Board, Executive Officers and Senior Management ...........................83-84
Investor Information (inside back cover)
<PAGE>
-1-
Financial Highlights
<TABLE>
<CAPTION>
Amounts in Thousands Except Per Share Data
FOR THE YEAR 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income ................................................. $ 839,354 $ 757,688
Net interest income after provision for loan and lease losses ... 319,933 266,446
Other income .................................................... 101,535 97,521
General and administrative expenses (1) ......................... 250,114 216,384
Amortization of intangible assets ............................... 15,702 7,814
Provision for income taxes ...................................... 63,260 52,356
Net income ...................................................... 92,392 87,413
Earnings per common share:
Basic ........................................................ 1.55 1.55
Diluted ...................................................... 1.54 1.52
Dividends declared per common share ............................. .25 .212
Return on average assets (2) .................................... .77% .85%
Return on average equity (2) .................................... 9.95% 10.96%
Average stockholders' equity to average total assets ............ 7.79% 7.76%
General and administrative expenses divided by average assets (2) 2.10% 2.10%
- -------------------------------------------------------------------------------------------------------
AT JUNE 30
- -------------------------------------------------------------------------------------------------------
Total assets .................................................... $ 12,775,462 $ 10,399,229
Investment and mortgage-backed securities ....................... 2,229,116 1,765,153
Loans and leases receivable, net ................................ 9,326,393 7,857,276
Deposits ........................................................ 7,655,415 6,558,207
Other borrowings ................................................ 3,986,138 2,824,150
Stockholders' equity ............................................ 966,883 861,195
Book value per common share ..................................... 16.22 14.67
Tangible book value per common share ............................ 11.98 13.35
Stock market price .............................................. 23.19 31.63
Nonperforming assets to total assets ............................ .80% .69%
Net yield on interest-earning assets ............................ 2.95% 2.99%
- -------------------------------------------------------------------------------------------------------
Regulatory capital ratios of the Bank:
Tangible capital ............................................. 6.97% 7.88%
Core capital (Tier 1 capital) ................................ 7.05% 7.99%
Risk-based capital -
Tier 1 capital ............................................. 12.74% 14.58%
Total capital .............................................. 13.70% 15.49%
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes on a pre-tax basis $30.1 million and $25.2 million in
merger-related and other nonrecurring charges for fiscal years 1999 and
1998, respectively.
(2) Return on average assets and return on average stockholders' equity for
fiscal year 1999 are 1.00% and 12.86%, respectively, excluding the after-tax
effect of merger-related and other nonrecurring charges totaling $27.1
million. Return on average assets and return on average stockholders' equity
for fiscal year 1998 are 1.06% and 13.65%, respectively, excluding the
after-tax effect of merger-related and other nonrecurring charges totaling
$21.5 million. General and administrative expenses divided by average assets
for fiscal year 1999 is 1.85% excluding the merger-related and other
nonrecurring charges totaling $30.1 million on a pre-tax basis. General and
administrative expenses divided by average assets for fiscal year 1998 is
1.86% excluding the merger-related and other nonrecurring charges totaling
$25.2 million on a pre-tax basis.
Commercial Federal Corporation
<PAGE>
- -2-
TO OUR
shareholders
[PHOTO APPEARS HERE]
William A. Fitzgerald, James A. Laphen
- --------------------------------------------------------------------------------
THE PRIME OBJECTIVE AS WE BUILD COMMERCIAL FEDERAL'S FUTURE IS TO CONTINUE TO
FOCUS ON LONG-TERM SUSTAINABLE GROWTH IN EARNINGS PER SHARE. WE INTEND TO
ENHANCE THE VALUE OF OUR FRANCHISE THROUGH THE GROWTH OF OUR EXISTING RETAIL
NETWORK, ADDING DE NOVO BRANCHES AND SELECTIVE ACQUISITIONS THAT ARE ACCRETIVE
TO OUR EARNINGS. WE WILL CONTINUE TO UTILIZE FAST FORWARD, OUR SALES DEVELOPMENT
PROCESS, TO PROFITABLY EXPAND EXISTING CUSTOMER RELATIONSHIPS WITHIN OUR CURRENT
ACCOUNT BASE AND TO GROW OUR RELATIONSHIPS WITH NEW CUSTOMERS. ALSO, WE ARE
CONTINUING TO BE PROACTIVE IN EVALUATING OUR ON-GOING OPERATIONS AS WE LOOK TO
GAIN EFFICIENCIES THAT WILL ENHANCE SHAREHOLDER VALUE.
- --------------------------------------------------------------------------------
<PAGE>
-3-
- --------------------------------------------------------------------------------
GROWTH The Company has achieved considerable growth in all its
activities: we have acquired more branches, increased the number of households
served and added the necessary expertise to direct our transition to a Community
Bank.
During fiscal year 1999, we significantly expanded our customer franchise
in Iowa, Colorado, Nebraska and Kansas, and began to serve customers in
Missouri, Minnesota and South Dakota, with the completion of three acquisitions.
The Company acquired AmerUs Bank, headquartered in Des Moines, Iowa, First
Colorado Bancorp, Inc., parent company of First Federal Bank of Colorado,
headquartered in Lakewood, Colorado, and Midland First Financial Corporation,
parent company of Midland Bank, headquartered in Lee's Summit, Missouri. These
acquisitions operated 82 branches, and had approximately $3.2 billion in assets
and approximately $2.5 billion in deposits. As of June 30, 1999, the Company had
256 branches in nine states: Iowa (77), Colorado (44), Nebraska (42), Kansas
(41), Oklahoma (21), Missouri (19), Arizona (7), Minnesota (4) and South Dakota
(1). Each of these markets provides the Company with growth opportunities to
help make our franchise stronger.
We have now grown to 256 branches with $12.8 billion in assets. We now
serve over 703,000 households. What's more, we have expanded our franchise in
what is projected to be one of the strongest growth markets, with population and
estimated average household income growth among the highest in the country.
Fiscal year 1999 was a year of challenge and opportunity for Commercial
Federal Corporation. The completion of the acquisitions from 1998 and the
subsequent integration of those acquisitions, while converting to a totally new
Y2K compliant data processing system, could not have been accomplished without
the hard work and talent of our staff. We'd like to thank them for providing the
best possible service to our customers each and every working day. Our new
corporate vision, "Customer-Centered, Employee-Driven," underlines their
commitment to the continued success of our business. As we start fiscal 2000, we
have renewed our commitment to customer service and to enhancing your Company's
franchise and shareholder value.
EARNINGS Commercial Federal reported record operating earnings for
the seventh consecutive year. Operating earnings reflect the Company's ability
to generate income from its core banking business, without the effect of any
one-time or nonrecurring items. Commercial Federal reported operating earnings
of $119.5 million, or $1.99 per diluted share, for the fiscal year ended June
30, 1999. This represents a 10 percent increase
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[GRAPHIC APPEARS HERE]
<PAGE>
- -4-
[2 BAR GRAPHS APPEAR HERE]
- --------------------------------------------------------------------------------
compared with 1998 fiscal year operating earnings of $108.9 million, or $1.89
per diluted share. The Company's return on average equity was 12.9 percent,
while return on average assets was 1.00 percent for fiscal 1999.
Reported net income for fiscal 1999 - which includes the effect of
nonrecurring income and expenses - was $92.4 million, or $1.54 per diluted
share. These results were affected primarily by merger-related and other
nonrecurring charges, which totaled $30.0 million pretax ($27.1 million
after-tax, or $.45 per diluted share) associated primarily with the Company's
acquisition of First Colorado Bancorp, Inc. and the termination of the employee
stock ownership plans (ESOP) acquired by the Company. The Company's fiscal year
1998 reported net income was $87.4 million, or $1.52 per diluted share. These
results include merger-related and other nonrecurring charges which amounted to
an after-tax charge of $21.5 million, or $.37 per diluted share.
Fiscal year 1999 cash operating earnings were equivalent to $2.19 per
diluted share compared to $1.98 per diluted share for fiscal 1998. Cash
operating earnings represent operating earnings excluding the amortization
expense of intangible assets, net of applicable income taxes.
Core profitability is closely tied to net interest income - the difference
between what is earned on interest-earning assets and what is paid on
interest-earning liabilities - as well as income derived from non-interest
sources such as retail fees and charges and loan servicing fees. In fiscal 1999,
net interest income and net interest rate spreads continued to increase. Net
interest income, after provision for losses, for fiscal 1999 was $319.9 million,
up from $266.4 million for the prior year. The net yield on interest earning
assets for fiscal 1999 was 2.99 percent, compared to 2.88 percent for fiscal
1998. The Company's strategic management of its cost of funds and the positive
impact of acquisitions led to the improvements.
Growth was also experienced in non-interest income during the fiscal year.
Total non-interest income increased to $101.5 million in fiscal 1999, compared
with $97.5 million the prior year. Our loan servicing portfolio increased to
$13.5 billion, of which $7.4 billion were serviced for others.
INCREASING CUSTOMER RELATIONSHIPS
Adding new customers while increasing the services used by existing customers
are key elements in building the value of our banking franchise for our
shareholders. Both objectives are met through external and internal marketing
and sales/service efforts. Advertising campaigns are aimed at acquiring new
customers through two lead products - checking
- --------------------------------------------------------------------------------
<PAGE>
-5-
- --------------------------------------------------------------------------------
and consumer loans. Direct mail and other direct marketing techniques are geared
to increasing customer relationships once that household has joined Commercial
Federal.
During fiscal 1999, excluding the impact of acquisitions, Commercial
Federal added 84,400 new households throughout our franchise, up 71 percent from
49,400 added in fiscal 1998. Total households served within our branch market
areas reached 604,700 through both acquisitions and new household growth by
year-end, up 50 percent from the prior year. Total households served nationwide
reached 703,000. We established 156,100 new service relationships within those
households, a 58 percent increase over the prior year. We increased the number
of households with checking accounts by 60 percent to 291,000, through both new
account growth and our various acquisitions. This growth in checking households
is significant because consumers normally consider the bank where they have
their checking account to be their "primary" bank for additional services.
Once customers establish an initial relationship, our objective is to
deepen that relationship by providing them with multiple services. FAST FORWARD,
our sales development process, has been in full force now for three years and
has made a significant impact on household relationship growth. FAST FORWARD
focuses on the fact that outstanding customer service comes from working
proactively and cooperatively with customers to discover their financial needs
and then matching our services with those needs. The relationship-building
strategies derived from the FAST FORWARD process since its introduction at
Commercial Federal has resulted in an average 31 percent increase in daily sales
of "core" financial products by personal bankers and an average 69 percent
increase in total daily sales activity.
In addition, this proactive effort to uncover customer needs has led to
increased teamwork and referral efforts among employees involved in our retail,
commercial, mortgage and INVEST operations.
YEAR 2000 The Company is Year 2000 compliant. We have been
working diligently to assure a smooth transition into the next century. We have
completed testing of our mission-critical computer systems and contingency
planning for those systems in accordance with the timetables established by
federal banking regulators. Maintaining our customer's confidence is a top
priority.
INTERNET BANKING Commercial Federal is currently working to
provide home banking via the Internet through our website - www.comfedbank.com.
The delivery of services
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[2 LINE GRAPHS APPEAR HERE]
<PAGE>
- -6-
[2 BAR GRAPHS APPEAR HERE]
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via the Internet continues our commitment to make banking easy and convenient
for our customers. It is anticipated that our online banking services will be
fully operational in January 2000.
COMMUNITY INVESTMENT Commercial Federal has long championed
a strong commitment to increasing housing opportunities in the cities, towns and
neighborhoods it serves. Over the past year, we've provided both technical and
financial resources to numerous affordable housing projects. These efforts have
resulted in new housing opportunities for the elderly, farm workers, those with
special needs and homeless populations.
One such project dealt with the rehabilitation of 30 housing units in a
distressed area of Omaha. The project, in collaboration with New Creations, Inc.
and the Sienna Francis House, provides formerly homeless people, most of whom
are recovering from chemical addictions, the needed preparation to live in homes
on their own. People are eligible to live in the apartments if they complete a
recovery program at one of several area facilities. The project allows people to
live with their families, which is a major factor in motivating them to complete
the recovery programs. Tenants must also either have a job or have a strong lead
on employment.
By giving people a decent place to live and providing the support services
and counseling they need to get back on track, this project has given them hope
for a brighter future. The long-term plan is to place a portion of the rental
fee into a fund to be used by the tenants to rent their own apartments or
purchase a home.
Commercial Federal worked with the City of Omaha and the Equity Fund of
Nebraska on financing this project. In addition to providing a permanent loan
for this project, Commercial Federal participated through the Equity Fund as an
investor in the project's low-income housing tax credits. Commercial Federal
also provided a Federal Home Loan Bank Affordable Housing Program subsidy to the
project.
This project is just one example of how Commercial Federal has partnered
with a non-profit group or organization to bring continuity and stability to a
neighborhood. It is through partnerships such as these that Commercial Federal
seeks to advance the quality of the social and economic life of the communities
we serve.
STOCK BUYBACK The Company announced a share repurchase plan
on April 29, 1999, authorizing the Company to repurchase, from time to time, up
to 5% of Commercial
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<PAGE>
-7-
- --------------------------------------------------------------------------------
Federal's outstanding common stock, or approximately 3 million shares. In the
quarter ended June 30, 1999, 1.5 million shares were repurchased at an average
price of $24.11.
GOODWILL Commercial Federal's goodwill lawsuits are still
pending at this time. In the goodwill lawsuit from the Mid Continent Bancshares
acquisition, the government has admitted liability, but discussions concerning a
possible settlement are on hold. We believe it is possible that Commercial
Federal's lawsuit, to determine the government's liability, could be heard by
the courts in early 2000. Although the outcome of the lawsuits cannot be
predicted, we are pursuing alternative damage claims of up to approximately $230
million.
NEW CORPORATE HEADQUARTERS Construction of new corporate
headquarters was announced during May with construction slated to begin in the
fall of 1999 and completion anticipated by the end of 2000. The new headquarters
will improve operational efficiencies to support the growth of the franchise.
Employees from 11 locations in Omaha will move to the new headquarters building.
This is an opportunity to combine our support units and management operations in
one central location. The new headquarters will provide an opportunity for
improved communication, strengthening the customer-oriented service that
distinguishes Commercial Federal.
A HERITAGE OF ADDING VALUE Commercial Federal was founded in
1887 in Omaha, Nebraska. There have been many changes in the banking business
since those early years. As we prepare to start a new century, we will continue
to look for new ways to enhance shareholder value by meeting the needs of our
customers. We will continue to provide our customers with the means to bank
When, Where and How they choose. Above all, we look forward to providing them
with the best possible service. As long as we remain committed to serving our
customers, we will continue to earn their confidence and reach our ultimate
destination of 100% customer satisfaction day in, day out.
The Board of Directors, management and employees of Commercial Federal
remain focused on the objective of further enhancing the value of your
investment in the Company. We look forward to meeting the challenges ahead and
taking advantage of opportunities that will add value.
We thank you, our fellow shareholders, for your confidence and continued
support.
<TABLE>
<S> <C>
/s/ William A. Fitzgerald /s/ James A. Laphen
William A. Fitzgerald James A. Laphen
Chairman of the Board and Chief Executive Officer President and Chief Operating Officer
</TABLE>
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<PAGE>
[PHOTO APPEARS HERE]
COMMERCIAL FEDERAL
- ----------------------------------
CUSTOMER PROFILE
Location: OMAHA, NEBRASKA
------------------------
BOGGESS FAMILY / CHECKING ACCOUNTS
CONSUMER LOAN
[GRAPHIC MORTGAGE LOAN
APPEARS HERE] SAVINGS ACCOUNTS
AM|PM
<PAGE>
-9-
AS A COMMUNITY BANK,
WE CARE ABOUT OUR CUSTOMERS. AFTER ALL,
THEY'RE OUR
neighbors, TOO.
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A smile at the counter. A FRIENDLY greeting. People who know their customers by
name. Many banks act like this kind of personal service disappeared a long time
ago. But at Commercial Federal, we're doing everything we can to make sure it
never does. So we LISTEN to our customers' suggestions and promptly act upon
them. We make sure our customers can bank whenever, wherever and however they
choose. For example, banking on a Sunday at the supermarket. Or paying bills
from home using our telephone banking service. Of course, in times of trouble,
the communities we serve can always depend on our SUPPORT. In the past year, we
established emergency relief funds to aid those stricken by tornadoes and school
violence. And we've kept the good times rolling by funding events such as free
concerts. After all, keeping our customers HAPPY is what Commercial Federal is
all about.
- --------------------------------------------------------------------------------
CONVENIENT SERVICE
RETAIL BRANCHES
COMMUNITY SUPPORT
- --------------------------------------------------------------------------------
INTERNET BANKING Coming soon in 2000, customers will have direct [GRAPHIC
access to account information from their home or APPEARS
office computer. HERE]
<PAGE>
WE'RE FOCUSED ON THE
business OF BANKING.
AND WE SEE GREAT THINGS JUST AHEAD.
- --------------------------------------------------------------------------------
Two years ago, Commercial Federal Bank was the 14th largest publicly-held thrift
in the U.S. Today, we're the 11th largest with $12.8 BILLION in assets and 256
branches in nine states. Targeted acquisitions have fueled our growth and added
to our banking expertise. As a result, we now offer more BANKING services than
ever before. Including personal checking and savings accounts, business
accounts, home mortgages, plus personal, business and agricultural loans. We're
also making it easier than ever for our customers to reach us, with new retail
locations, new ATMs, 24/7 phone banking and, early next year, Internet banking.
How are CUSTOMERS responding? Well, in the last fiscal year we've opened more
than 86,000 new checking accounts. And established over 156,000 account
RELATIONSHIPS with new households. We're quickly becoming the bank of choice in
all the communities we serve. Because we're focused on our customers' needs.
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DIVERSIFIED SERVICES
NEW CUSTOMERS
STRONGER RELATIONSHIPS
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[GRAPHIC Y2K COMPLIANT By July 1, 1999, we had already passed every test
APPEARS for Year 2000 compliance. Roll on, the new millennium.
HERE]
<PAGE>
[GRAPHIC APPEARS HERE]
COMMERCIAL FEDERAL
------------------------------------
CUSTOMER PROFILE
Location: JoMax GREAT BEND, KANSAS
--------------------------
MAX NICHOLS / BUSINESS CHECKING
PAYROLL ACCOUNTS
[GRAPHIC OPERATING ACCOUNTS
APPEARS HERE] BUSINESS LOANS
AM|PM
<PAGE>
[GRAPHIC APPEARS HERE]
COMMERCIAL FEDERAL
- ----------------------------------------
CUSTOMER PROFILE
Location: Mondo's WEST DES MOINES, IOWA
------------------------------
JIM MONDANARO / CHECKING & SAVINGS
COMMERCIAL LOANS
[GRAPHIC MERCHANT SERVICES
APPEARS HERE] LINE OF CREDIT-BUSINESS/PERSONAL
AM|PM
NO RED TAPE. NO RUNAROUND.
NO WAITING ON decisions
FROM HEADQUARTERS.
- --------------------------------------------------------------------------------
The last thing anyone wants is a bank that moves in slow motion. But all too
often, that's what happens when banks reach a certain size. Management becomes
LAYERED. Decisions get deferred. And service slow-w-w-s down. Fortunately,
that's not the case at Commercial Federal. We've EMPOWERED our employees to
solve customer problems on their own. In fact, we're committed to serving our
customers' needs at first contact at least 95% of the time. It's a unique
"customer-centered, employee-driven" policy that makes a big difference. Because
our employees know it's within their power to provide outstanding SERVICE,
they're eager to provide it. Which, of course, makes our customers very happy.
- --------------------------------------------------------------------------------
EMPOWERED EMPLOYEES
IMMEDIATE DECISIONS
SATISFIED CUSTOMERS
<PAGE>
-13-
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Selected Consolidated Financial Data....................................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16
Management's Report on Internal Controls................................................................... 36
Independent Auditors' Report............................................................................... 36
Consolidated Statement of Financial Condition.............................................................. 37
Consolidated Statement of Operations....................................................................... 38
Consolidated Statement of Comprehensive Income............................................................. 39
Consolidated Statement of Stockholders' Equity............................................................. 40
Consolidated Statement of Cash Flows....................................................................... 42
Notes to Consolidated Financial Statements................................................................. 44
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- -14-
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended June 30,
-----------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) 1999 1998(1) 1997(1) 1996(1) 1995(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income................................. $ 839,354 $ 757,688 $ 717,592 $ 673,470 $ 604,647
Interest expense................................ 507,021 477,389 453,969 437,443 384,127
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income............................. 332,333 280,299 263,623 236,027 220,520
Provision for loan and lease losses............. (12,400) (13,853) (13,427) (6,716) (7,119)
Loan servicing fees............................. 34,481 34,784 35,190 32,522 29,442
Retail fees and charges......................... 36,740 30,284 26,198 21,207 16,939
Real estate operations.......................... (1,674) 1,894 1,314 1,376 2,262
Gain (loss) on sales of loans................... 3,423 3,092 2,142 1,940 (760)
Gain (loss) on sales of securities, net......... 4,376 3,765 510 (294) 131
Gain on sales of loan servicing rights.......... - 380 - 452 5,480
Other operating income.......................... 24,189 23,322 15,914 13,392 10,875
General and administrative expenses (2)......... 250,114 216,384 213,410 170,707 152,797
Amortization of intangible assets (3)........... 15,702 7,814 11,235 10,479 32,925
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary items........................... 155,652 139,769 106,819 118,720 92,048
Provision for income taxes...................... 63,260 52,356 37,980 39,887 36,863
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items............... 92,392 87,413 68,839 78,833 55,185
Extraordinary items, net (4).................... - - (583) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income...................................... $ 92,392 $ 87,413 $ 68,256 $ 78,833 $ 55,185
====================================================================================================================================
Diluted earnings per share:
Income before extraordinary items............. $ 1.54 $ 1.52 $ 1.17 $ 1.28 $ .91
Extraordinary items, net (4).................. - - (.01) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income.................................... $ 1.54 $ 1.52 $ 1.16 $ 1.28 $ .91
====================================================================================================================================
Dividends declared per common share............. $ .250 $ .212 $ .185 $ .178 $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average diluted common
shares outstanding............................ 60,126,846 57,685,281 59,093,615 61,409,356 60,622,330
- ------------------------------------------------------------------------------------------------------------------------------------
Other data:
Net interest rate spread...................... 2.85% 2.62% 2.58% 2.45% 2.45%
Net yield on interest-earning assets.......... 2.99% 2.88% 2.86% 2.72% 2.68%
Return on average assets (5).................. .77% .85% .70% .87% .64%
Return on average equity (5).................. 9.95% 10.96% 9.18% 13.34% 10.84%
Dividend payout ratio (6)..................... 16.23% 13.95% 15.95% 13.91% -
Total number of branches at end of period..... 256 195 190 175 154
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-15-
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
For the Year Ended June 30,
-----------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) 1999 1998(1) 1997(1) 1996(1) 1995(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets............................... $12,775,462 $10,399,229 $10,040,596 $ 9,330,187 $ 8,945,398
Investment securities (7).................. 946,571 673,304 622,240 528,115 505,803
Mortgage-backed securities (8)............. 1,282,545 1,091,849 1,388,940 1,590,907 1,913,667
Loans and leases receivable, net (9)....... 9,326,393 7,857,276 7,360,481 6,573,624 5,988,850
Intangible assets.......................... 252,677 77,186 58,166 44,453 41,933
Deposits................................... 7,655,415 6,558,207 6,589,395 6,304,620 5,862,929
Advances from Federal Home Loan Bank....... 3,632,241 2,379,182 1,719,841 1,643,160 2,039,300
Securities sold under
agreements to repurchase................. 128,514 334,294 639,294 380,755 208,373
Other borrowings........................... 225,383 110,674 161,314 92,562 86,328
Stockholders' equity....................... 966,883 861,195 764,066 756,443 542,984
Book value per common share 16.22 14.67 13.08 12.19 8.98
Tangible book value per common share (10).. 11.98 13.35 12.08 11.48 8.29
Regulatory capital ratios of the Bank:
Tangible capital......................... 6.97% 7.88% 7.40% 7.27% 5.98%
Core capital (Tier 1 capital)............ 7.05% 7.99% 7.53% 7.46% 6.24%
Risk-based capital -
Tier 1 capital................... 12.74% 14.58% 14.37% 14.32% 13.20%
Total capital.................... 13.70% 15.49% 15.25% 15.19% 14.15%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On August 14, 1998, the Corporation consummated its acquisition of First
Colorado Bancorp, Inc. (First Colorado). The First Colorado acquisition was
accounted for as a pooling of interests and, accordingly, the Corporation's
historical consolidated financial statements were restated for all periods
prior to this acquisition to include the accounts and results of operations
of First Colorado.
(2) Includes merger-related and other nonrecurring charges, the Savings
Association Insurance Fund (SAIF) special assessment, and expenses
associated with the 1997 common stock repurchase and the 1995 proxy
contest. These amounts totaled $30.1 million, $25.2 million, $38.3 million
and $5.5 million on a pre-tax basis for fiscal years 1999, 1998, 1997 and
1996, respectively.
(3) Includes accelerated amortization of goodwill totaling $21.4 million in
fiscal year 1995.
(4) Represents the loss on early retirement of debt, net of income tax
benefits.
(5) Return on average assets (ROAA) and return on average stockholders' equity
(ROAE) for fiscal year 1999 are 1.00% and 12.86%, respectively, excluding
the after-tax effect of merger-related and other nonrecurring charges
totaling $27.1 million. ROAA and ROAE for fiscal year 1998 are 1.06% and
13.65%, respectively, excluding the after-tax effect of merger-related and
other nonrecurring charges totaling $21.5 million. ROAA and ROAE for fiscal
year 1997 are .97% and 12.58%, respectively, excluding the after-tax effect
of the nonrecurring expenses totaling $25.1 million associated with the
SAIF special assessment, the repurchase of 2,812,725 shares of the
Corporation's common stock, the extraordinary loss on early retirement of
debt and the change in income taxes for tax bad debt reserves. ROAA and
ROAE for fiscal year 1996 are .92% and 14.05%, respectively, excluding the
after-tax effect of the nonrecurring expenses totaling $4.2 million
associated with the Railroad Financial Corporation merger, the SAIF special
assessment (incurred in fiscal year 1996 as a result of the pooling of
interests accounting method applied to the Mid Continent Bancshares, Inc.
merger) and the Corporation's 1995 proxy contest. ROAA and ROAE for fiscal
year 1995 are .89% and 15.03%, respectively, excluding the accelerated
amortization of goodwill totaling $21.4 million.
(6) Represents dividends declared per share divided by net income per dilutive
share. The Corporation established a quarterly common stock cash dividend
policy on October 4, 1995, and paid its first dividend on October 31, 1995.
(7) Includes investment securities available for sale totaling $83.8 million,
$141.1 million, $102.1 million, $144.4 million and $105.1 million,
respectively, at June 30, 1999, 1998, 1997, 1996 and 1995.
(8) Includes mortgage-backed securities available for sale totaling $419.7
million, $171.4 million, $285.3 million, $371.7 million and $186.3 million,
respectively, at June 30, 1999, 1998, 1997, 1996 and 1995.
(9) Includes loans and leases held for sale totaling $104.3 million, $290.4
million, $84.4 million, $105.9 million and $136.6 million, respectively, at
June 30, 1999, 1998, 1997, 1996 and 1995.
(10) Calculated by dividing stockholders' equity, reduced by the amount of
intangible assets, by the number of shares of common stock outstanding at
the respective dates.
<PAGE>
- -16-
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- --------------------------------------------------------------------------------
Commercial Federal Corporation (the Corporation) is a unitary non-diversified
savings and loan holding company whose primary asset is Commercial Federal Bank,
a Federal Savings Bank (the Bank), which is one of the largest financial
institutions in the Midwest and the 11th largest publicly held thrift holding
company in the United States. The Bank, a thrift chartered institution, has
transitioned to a community banking institution, offering commercial and
consumer banking, mortgage banking, and trust and investment services. The
Corporation completed three acquisitions in fiscal year 1999 and four
acquisitions in fiscal year 1998. These acquisitions, three of which were
commercial banks, allowed the Bank to further expand its banking services,
commercial and agricultural loans, business checking, equipment leasing and
trust services. In addition, the fiscal year 1999 acquisitions created new
customer franchises in Missouri, Minnesota and South Dakota and greatly expanded
the Bank's franchises in Iowa, Colorado, Nebraska and Kansas. The Bank has moved
from primarily a single-family residential lender to a full service banking
institution with branches not only in traditional locations but also in
supermarkets and convenience stores, increased ATM outlets and expanded services
in telephone bill paying and Internet banking.
At June 30, 1999, the Corporation, headquartered in Omaha, Nebraska, operated
256 branches with 77 located in Iowa, 44 in Colorado, 42 in Nebraska, 41 in
Kansas, 21 in Oklahoma, 19 in Missouri, seven in Arizona, four in Minnesota and
one in South Dakota. Throughout its 112 year history, the Corporation has
emphasized customer service. To serve its customers, the Corporation conducts
community banking operations through its branch network, and loan origination
activities through its branches, offices of its wholly-owned mortgage banking
subsidiary and a nationwide correspondent network of mortgage loan originators.
The Corporation also provides insurance and securities brokerage and other
retail financial services.
The Corporation's strategy for growth of its existing retail network emphasizes
both internal and external growth. Operations focus on increasing deposits,
primarily demand accounts and public funds, making loans (primarily consumer,
commercial real estate, single-family residential, business lending and
agribusiness loans) and providing customers with a full array of financial
products and a high level of customer service. As part of its long-term
strategic plan, the Corporation intends to continue to expand its operations
within its market areas through direct marketing efforts aimed at increasing
market share and opening additional branches. The Corporation's retail strategy
will continue to be centered on attracting new customers and selling both new
and existing customers multiple products and services. Additionally, the
Corporation will continue to build and leverage an infrastructure designed to
increase noninterest income. The Corporation's operations are also continually
reviewed in order to gain efficiencies to increase productivity and reduce
costs.
Complementing its strategy of internal growth, the Corporation continues to grow
its current franchise through an ongoing program of selective acquisitions of
other financial institutions. Acquisition candidates have been, and will
continue to be, selected based on the extent to which the candidates can expand
the Corporation's retail presence in both new and underserved markets and
enhance the Corporation's existing retail network. Accordingly, during fiscal
year 1999, the Corporation consummated the acquisitions of three financial
institutions: AmerUs Bank (AmerUs) on July 31, 1998, First Colorado Bancorp,
Inc. (First Colorado) on August 14, 1998, and Midland First Financial
Corporation (Midland) on March 1, 1999. On a combined basis, these institutions
operated 82 branches and had assets of approximately $3.2 billion and deposits
of approximately $2.5 billion. These acquisitions provided the Corporation entry
into three new states, access to supermarket branches and significant expansion
of its presence in the metropolitan areas of Denver, Colorado and Kansas City,
Missouri. The accounts and results of operations of AmerUs and Midland are
reflected in the Corporation's consolidated financial statements beginning July
31, 1998, and March 1, 1999, respectively, since these acquisitions were
accounted for as purchases. The First Colorado acquisition was accounted for
under the pooling of interests accounting method and, accordingly, the
Corporation's historical consolidated financial statements were restated for all
prior periods to include the accounts and results of operations of First
Colorado.
Net income for fiscal year 1999 was $92.4 million, or $1.54 per diluted share,
compared to net income of $87.4 million, or $1.52 per diluted share for fiscal
year 1998, and $68.3 million, or $1.16 per diluted share for fiscal year 1997.
Fiscal year 1999 net income was reduced by an after-tax charge of $27.1 million,
or $.45 per diluted share ($30.0 million pre-tax) associated primarily with the
First Colorado acquisition and the termination of employee stock ownership plans
acquired in the mergers of three financial institutions the past two fiscal
years. Fiscal year 1998 net income was reduced by an after-tax charge of $21.5
million, or $.37 per diluted share,
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-17-
- --------------------------------------------------------------------------------
($29.7 million pre-tax), associated with merger-related expenses and other
nonrecurring charges. The Corporation incurred these expenses due to the
Corporation's fiscal year 1998 acquisitions and the accelerated amortization of
certain computer systems and software necessitated by Year 2000 compliance and
the related planned systems conversions. Fiscal year 1997 net income was
affected by an after-tax charge of $23.1 million, or $.39 per diluted share,
($36.1 million pre-tax), as a result of the Corporation's share of the one-time
industry-wide special assessment to recapitalize the Savings Association
Insurance Fund (SAIF), and after-tax charges totaling $2.1 million ($.03 per
diluted share) primarily from the expenses incurred in repurchasing 2,812,725
shares of the Corporation's common stock and the extraordinary losses on early
retirement of debt.
Operating earnings, which excludes the effect of merger-related expenses and
other nonrecurring charges, totaled $119.5 million, or $1.99 per diluted share,
for fiscal year 1999 compared to $108.9 million, or $1.89 per diluted share, for
fiscal year 1998 and $93.5 million, or $1.58 per diluted share, for fiscal year
1997.
Fiscal year 1999 cash operating earnings totaled $131.9 million ($2.19 per
diluted share) compared to $114.2 million ($1.98 per diluted share) for fiscal
year 1998 and $101.0 million ($1.71 per diluted share) for fiscal year 1997.
Cash operating earnings are operating earnings less the effect of the
amortization of intangible assets, net of applicable income taxes. Management
believes that cash operating earnings are a significant measure of a company's
performance, and reflect the Corporation's ability to generate capital that
could be leveraged for future growth.
The statements in this management's discussion and analysis of financial
condition and results of operations that are not historical fact are
forward-looking statements that involve inherent risks and uncertainties. The
Corporation cautions readers that a number of important factors could cause
actual results to differ materially from those in the forward-looking
statements. Those factors include fluctuations in interest rates, inflation,
government regulations, the progress of integrating acquisitions, economic
conditions, adequacy of allowance for credit losses, the costs or difficulties
associated with the resolution of Year 2000 issues on computer systems greater
than anticipated, technology changes and competition in the geographic and
business areas in which the Corporation conducts its operations. These
statements are based on management's current expectations. Actual results in
future periods may differ materially from those currently expected because of
various risks and uncertainties.
ACQUISITIONS DURING FISCAL YEAR 1999
- --------------------------------------------------------------------------------
On July 31, 1998, the Corporation consummated its acquisition of AmerUs, a
wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a
taxable acquisition all of the outstanding shares of the common stock of AmerUs
for total consideration of approximately $178.3 million. Such consideration
consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash
(primarily FHA Title One single-family residential mortgage loans and a
receivable for income tax benefits) totaling approximately $85.0 million, (ii)
cash, as adjusted per the agreement, totaling approximately $53.2 million, and
(iii) one-year promissory notes for $40.0 million bearing interest, adjusted
monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a
federally chartered savings bank headquartered in Des Moines, Iowa and operated
47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2)
and South Dakota (1). At July 31, 1998, before purchase accounting adjustments,
AmerUs had total assets of approximately $1.3 billion, deposits of approximately
$949.7 million and stockholder's equity of approximately $84.8 million. This
acquisition was accounted for as a purchase. The one-year promissory notes were
paid in full on July 30, 1999.
On August 14, 1998, the Corporation consummated its acquisition of First
Colorado. The Corporation acquired in a tax-free reorganization all of the
outstanding shares of First Colorado's common stock in exchange for 18,278,789
shares of its common stock. Based on the Corporation's closing stock price of
$26.375 at August 14, 1998, the total consideration for this acquisition,
including cash paid for fractional shares, approximated $482.2 million. An
additional requirement of the transaction with First Colorado was the issuance
of 1,400,000 shares of First Colorado common stock immediately prior to the
consummation of the merger. Such requirement was necessary to cure the taint on
the treasury stock of First Colorado so such transaction could be accounted for
as a pooling of interests. First Colorado, headquartered in Lakewood, Colorado,
was a unitary savings and loan holding company and the parent company of First
Federal Bank of Colorado, a federally chartered stock savings bank that operated
27 branches located in Colorado, with 23 branches located in the Denver
metropolitan area and four in Colorado's western slope region. At July 31, 1998,
First Colorado had assets of approximately $1.6 billion, deposits of
approximately $1.2 billion and stockholders' equity of approximately $254.7
million. The acquisition was accounted for as a pooling of interests.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -18-
- --------------------------------------------------------------------------------
On March 1, 1999, the Corporation consummated its acquisition of Midland, parent
company of Midland Bank. The Corporation acquired in a taxable acquisition all
of the outstanding shares of Midland's common stock. The total purchase
consideration of this acquisition was $83.0 million in cash, including cash to
pay off existing Midland debt totaling $5.6 million, the retirement of preferred
stock of both Midland and Midland Bank totaling $11.6 million and $810,000 for
advisor fees. Midland Bank was a privately-held commercial bank headquartered in
Lee's Summit, Missouri that operated eight branches in the greater Kansas City
area. At February 28, 1999, Midland had total assets of approximately $399.2
million, deposits of approximately $353.1 million and stockholders' equity of
approximately $24.2 million. This acquisition was accounted for as a purchase.
MERGER EXPENSES AND OTHER NONRECURRING CHARGES
- --------------------------------------------------------------------------------
During fiscal year 1999 the Corporation incurred merger expenses and other
nonrecurring charges totaling approximately $30.0 million. Such amounts for
fiscal year 1999 are associated with the First Colorado acquisition totaling
$16.0 million and the termination of three employee stock ownership plans
totaling $14.0 million acquired in mergers during the past two fiscal years.
These employee stock ownership plans were terminated following consummation of
the mergers and receipt of determination letters from the Internal Revenue
Service to terminate such plans. The merger-related expenses totaling $16.0
million consists of $8.0 million in transition costs as a result of the First
Colorado acquisition, $6.7 million in costs to combine operations and conform
certain accounting practices, $1.4 million in personnel expenses for severance,
retention and other employee related costs and $1.0 million in additional loss
reserves to conform First Colorado's loan portfolios to the reserve policies of
the Corporation. These expenses were offset by a gain of $1.1 million on the
sale of a First Colorado branch that was located in close proximity to another
branch of the Bank.
During fiscal year 1998, the Corporation also incurred merger expenses and other
nonrecurring charges totaling $29.7 million due to three fiscal year
acquisitions ($25.4 million) and the accelerated amortization of certain
computer systems necessitated by Year 2000 compliance and the related planned
systems conversions ($4.3 million). In fiscal year 1998 the Corporation
finalized its plans for systems conversions and Year 2000 compliance resulting
in a reduction in the estimated useful lives of such computer systems and
software. The merger-related expenses totaling $25.4 million consisted of $9.0
million in transition costs as a result of the three acquisitions, $7.0 million
in personnel expenses for severance, retention and other employee related costs,
$4.9 million in costs to combine operations and conform certain accounting
practices and $4.5 million in additional loss reserves primarily to conform the
acquired loan portfolios and leasing operations to the reserve policies of the
Corporation.
COMMON STOCK REPURCHASE
- --------------------------------------------------------------------------------
Effective April 28, 1999, the Corporation's Board of Directors authorized the
repurchase of up to five percent of the Corporation's outstanding common stock
during the next 18 months. Such repurchase is expected to approximate 3,000,000
shares of common stock. Repurchases will be made depending upon market
conditions and various other factors. Any repurchase generally would be on the
open-market, although privately negotiated transactions are also possible. In
compliance with Nebraska law, all repurchased shares will be cancelled. During
the fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled
1,500,000 shares of its common stock at a cost of approximately $36.2 million.
SPECIAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
At the Special Meeting of Stockholders on July 3, 1998, three proposals were
approved. The proposals approved were (i) the First Colorado transaction and an
amendment to the Corporation's Articles of Incorporation to increase the number
of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii)
an amendment to further increase the number of authorized shares from 70,000,000
to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock
Option and Incentive Plan to increase the number of shares available for grant
by 2,400,000.
ASSET/LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference, or mismatch, between the
amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. Consequently, when
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-bearing
liabilities. This mismatch in the maturity and interest rate sensitivity of
assets and liabilities is commonly referred to as the "gap." A gap is considered
positive when the interest rate sensitive
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-19-
- --------------------------------------------------------------------------------
assets maturing or repricing during a specified period exceed the interest rate
sensitive liabilities maturing or repricing during the same period, and is
considered negative when the interest rate sensitive liabilities maturing or
repricing during a specified period exceed the interest rate sensitive assets
maturing or repricing during the same period. Generally, during a period of
rising interest rates, a negative gap would adversely affect net interest income
while a positive gap would result in an increase in net interest income.
Similarly, during a period of declining interest rates, a negative gap would
result in an increase in net interest income while a positive gap would
adversely affect net interest income.
The Corporation has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The mismatch in duration
of the interest-sensitive liabilities indicates that the Corporation is exposed
to interest rate risk. In a rising rate environment the liabilities reprice
faster than assets, therefore decreasing net interest income. To mitigate this
risk the Corporation has placed a greater emphasis on shorter-term higher
yielding assets that reprice more frequently in reaction to interest rate
movements.
In connection with its asset/liability management program, the Corporation has
interest rate swap agreements with other counterparties under terms that provide
for an exchange of interest payments on the outstanding notional amount of the
swap agreement. Such agreements are primarily used to artificially lengthen the
maturity of certain deposit liabilities. In accordance with these arrangements
the Corporation pays fixed rates and receives variable rates of interest
according to a specified index. The Corporation's level of such swap agreements
was a notional principal amount of $215.0 million at June 30, 1999 and 1998,
compared to $135.0 million at June 30, 1997. For fiscal years 1999, 1998 and
1997, the Corporation recorded $2.8 million, $1.9 million and $916,000,
respectively, in net interest expense from its interest rate swap agreements.
The swap agreements have maturities ranging from March 2000 to June 2001. See
Note 16 to the Consolidated Financial Statements for additional information on
the Corporation's swap agreements.
The following table represents management's projected maturity and repricing of
the Bank's interest-earning assets and interest-bearing liabilities at June 30,
1999. The amounts of interest-earning assets, interest-bearing liabilities and
interest rate swap agreements presented which mature or reprice within a
particular period were determined in accordance with the contractual terms and
expected behavior of such assets, liabilities and interest rate swap agreements.
Adjustable-rate loans and mortgage-backed securities are included in the period
in which they are first scheduled to adjust and not in the period in which they
mature. All loans and mortgage-backed securities are adjusted for prepayment
rates based on information from independent brokers and the Bank's historical
prepayment experience. Fixed-rate passbook deposits, negotiable order of
withdrawal (NOW) accounts and non-indexed money market accounts are assumed to
reprice or mature according to the decay rates as defined by regulatory
guidelines. Indexed money market rate deposits are deemed to reprice or mature
within the one-year category. Management believes that these assumptions
approximate actual experience and considers such assumptions reasonable;
however, the interest rate sensitivity of the Bank's interest-earning assets and
interest-bearing liabilities could vary substantially if actual experience
differs from the assumptions used.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -20-
<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) ........... $ 261,024 $ 445,292 $ 1,160,636 $3,150,489 $ 5,017,441
Other loans (2) ......................... 1,693,053 1,895,973 1,423,966 610,895 5,623,887
Investments (3) ......................... 340,935 10,138 31,035 839,787 1,221,895
- ---------------------------------------------------------------------------------------------------------------
Interest-earning assets ............... 2,295,012 2,351,403 2,615,637 4,601,171 11,863,223
- ---------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits ........................ 940,971 399,815 704,687 1,037,963 3,083,436
Other time deposits ..................... 1,854,558 1,850,439 757,918 109,064 4,571,979
Borrowings (4) .......................... 366,490 636,737 1,262,735 1,672,777 3,938,739
Impact of interest rate swap agreements . (215,000) 75,000 140,000 - -
- ---------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities .......... 2,947,019 2,961,991 2,865,340 2,819,804 11,594,154
- ---------------------------------------------------------------------------------------------------------------
Gap position ............................... (652,007) (610,588) (249,703) 1,781,367 269,069
- ---------------------------------------------------------------------------------------------------------------
Cumulative gap position .................... $ (652,007) $(1,262,595) $(1,512,298) $ 269,069 $ 269,069
===============================================================================================================
Gap as a percentage of the Bank's total
assets .................................. (5.10)% (4.78)% (1.96)% 13.95% 2.11%
Cumulative gap as a percentage of the
Bank's total assets ..................... (5.10)% (9.88)% (11.84)% 2.11% 2.11%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed
or adjustable interest rates.
(3) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of
$194.1 million.
(4) Includes advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and other borrowings.
- --------------------------------------------------------------------------------
The Bank's one-year cumulative gap is a negative $1.3 billion, or 9.88% of the
Bank's total assets at June 30, 1999, contrasted to a negative $1.1 billion, or
12.26% of the Bank's total assets at June 30, 1998. The interest rate risk
policy of the Bank authorizes a liability sensitive one-year cumulative gap not
to exceed 10.0%. The one-year cumulative gap at June 30, 1998, was within policy
guidelines on a pro forma basis after considering the AmerUs and First Colorado
acquisitions.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net income for fiscal year 1999 was $92.4 million, or $1.54 per diluted share
($1.55 per basic share). These results compare to net income for fiscal year
1998 of $87.4 million, or $1.52 per diluted share ($1.55 per basic share) and to
net income for fiscal year 1997 of $68.3 million, or $1.16 per diluted share
($1.17 per basic share), including an after-tax loss on early retirement of debt
totaling $583,000, or $.01 loss per share.
The Corporation's emphasis on increasing non-interest income, consumer lending
and the promotion of community banking financial services, along with the
Corporation's growth through acquisitions, continues to have positive effects on
the Corporation's core operations. Defined as operating income before income
taxes excluding (i) gains on nonrecurring sales of mortgage-backed and
investment securities and loan servicing rights and (ii) amortization expense of
intangible assets, core earnings totaled $197.0 million for fiscal year 1999
compared to $173.2 million and $155.9 million, respectively, for fiscal years
1998 and 1997. On a percentage basis, core earnings for fiscal year 1999
increased 13.8% over fiscal year 1998, and 11.1% for fiscal year 1998 over 1997.
These increases in core earnings resulted primarily from increases in net
interest income, retail fees and charges and other non-interest operating
income.
The increase in net income for fiscal year 1999 compared to 1998 is primarily
due to net increases of $53.5 million in net interest income after provision for
losses and $4.0 million in total other operating income. These increases to net
income were partially offset by net increases of $33.7 million in total general
and administrative expenses (including an increase of $11.9 million in merger
expenses), $7.9 million in amortization of intangible assets and $10.9 million
in the provision for income taxes.
The increase in net income for fiscal year 1998 compared to 1997 is primarily
due to the $36.1 million nonrecurring Federal deposit insurance special
assessment recorded in
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-21-
- --------------------------------------------------------------------------------
fiscal year 1997, a net increase of $16.3 million in net interest income after
provision for losses, an increase of $16.3 million in total other operating
income, a net reduction of $3.4 million in amortization expense of intangible
assets and the extraordinary loss on early retirement of debt totaling $583,000
recorded in fiscal year 1997. These increases to net income were partially
offset by net increases of $39.0 million in general and administrative expenses
(including $25.2 million in merger-related expenses and other nonrecurring
charges) and $14.4 million in the provision for income taxes.
NET INTEREST INCOME AND INTEREST RATE SPREAD
- --------------------------------------------------------------------------------
Net interest income was $332.3 million for fiscal year 1999 compared to $280.3
million for fiscal year 1998, an increase of $52.0 million, or 18.6%; and
compared to $263.6 million for fiscal year 1997. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.84%, 2.78% and 2.55%,
respectively, at June 30, 1999, 1998 and 1997, an increase of six basis points
comparing the interest rate spread at June 30, 1999, to the interest rate spread
at June 30, 1998, and an increase of 23 basis points comparing the spreads at
June 30, 1998, to June 30, 1997. In addition, during fiscal years 1999, 1998 and
1997, interest rate spreads were 2.85%, 2.62% and 2.58%, respectively,
representing an increase of 23 basis points comparing the interest rate spread
during fiscal year 1999 to fiscal year 1998 and an increase of four basis points
comparing the spread during fiscal year 1998 to 1997. The net yield on
interest-earning assets during fiscal years 1999, 1998 and 1997 was 2.99%, 2.88%
and 2.86%, respectively, representing an increase of 11 basis points comparing
fiscal year 1999 to 1998 and an increase of two basis points comparing fiscal
year 1998 to 1997.
Net interest income for fiscal year 1999 increased over fiscal year 1998
primarily due to average interest-earning assets increasing $1.4 billion to
$11.1 billion for fiscal year 1999 compared to $9.7 billion for fiscal year 1998
and the 44 basis point reduction in interest rates on interest-bearing
liabilities over the respective fiscal years. Such increases were partially
offset by a net increase of $1.5 billion in average interest-bearing liabilities
to $10.8 billion for fiscal year 1999 compared to $9.3 billion for fiscal year
1998 and the 21 basis point decrease in interest rates on interest-earning
assets over the respective fiscal years. The increases in the average balances
are due to the acquisitions of AmerUs on July 31, 1998, and Midland on March 1,
1999. Contributing to the 23 basis point increase in the fiscal year 1999
interest rate spread over 1998 is the reduction in the cost of long-term
callable advances from the Federal Home Loan Bank (FHLB). In the fiscal year
1999 flat yield curve environment, the Corporation increased its borrowing of
long term fixed-rate FHLB advances that are convertible at the option of the
FHLB into adjustable-rate advances. These advances were borrowed in lieu of
other short-term funding alternatives and decreased the rate on FHLB advances by
63 basis points for fiscal year 1999 over 1998. The future trend in interest
rate spreads and net interest income will be dependent upon such factors as the
composition and size of the Corporation's interest-earning assets and
interest-bearing liabilities, the interest rate risk exposure of the Corporation
and the maturity and repricing activity of interest-sensitive assets and
liabilities, as influenced by changes in and levels of both short-term and
long-term market interest rates.
The net interest rate spread increased four basis points during fiscal year 1998
to 2.62% from 2.58% for fiscal year 1997. The reduction in interest rates on
interest-bearing liabilities (5.15% for fiscal year 1998 compared to 5.21% for
fiscal year 1997), the acquisitions of First National Bank Shares, LTD (First
National) on January 30, 1998, Heritage Financial, Inc. (Heritage) on October 1,
1996, and Investors Federal Savings (Investors) on May 1, 1997, and internal
growth contributed to the improvements in the interest rate spreads for fiscal
year 1998 compared to 1997. Net interest income increased over fiscal year 1997
primarily due to average interest-earning assets increasing $535.9 million to
$9.7 billion for fiscal year 1998 compared to $9.2 billion for fiscal year 1997
and the reduction in interest rates on interest-bearing liabilities over the
respective fiscal years. Such increases were partially offset by a net increase
of $545.7 million in average interest-bearing liabilities to $9.3 billion for
fiscal year 1998 compared to $8.7 billion for fiscal year 1997 and a two basis
points decrease in interest rates on interest-earning assets from 7.79% during
fiscal year 1997 compared to 7.77% during 1998.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -22-
- --------------------------------------------------------------------------------
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the fiscal years presented:
<TABLE>
<CAPTION>
For the Year
Ended June 30, At June 30,
-------------------------- -------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans and leases .................... 7.85% 8.13% 8.18% 7.70% 7.95% 8.14%
Mortgage-backed securities .......... 6.25 6.34 6.50 6.31 6.68 6.69
Investments ......................... 6.54 6.76 6.70 6.45 6.58 6.33
- ---------------------------------------------------------------------------------------------
Interest-earning assets ........... 7.56 7.77 7.79 7.41 7.69 7.79
- ---------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits .................... 2.80 2.90 3.09 2.88 2.84 3.09
Other time deposits ................. 5.38 5.81 5.68 5.17 5.49 5.76
Advances from FHLB .................. 5.26 5.89 5.84 5.05 5.69 5.98
Securities sold under agreements
to repurchase ..................... 5.94 6.08 6.19 5.72 5.96 6.04
Other borrowings .................... 8.10 9.73 9.91 7.27 8.75 8.70
- ---------------------------------------------------------------------------------------------
Interest-bearing liabilities ...... 4.71 5.15 5.21 4.57 4.91 5.24
- ---------------------------------------------------------------------------------------------
Net interest rate spread ............... 2.85% 2.62% 2.58% 2.84% 2.78% 2.55%
- ---------------------------------------------------------------------------------------------
Net yield on interest-earning assets ... 2.99% 2.88% 2.86% 2.95% 2.99% 2.76%
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-23-
- --------------------------------------------------------------------------------
The table below presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the periods indicated. The following table includes
nonaccruing loans averaging $63.6 million, $48.5 million and $44.4 million,
respectively, for fiscal years 1999, 1998 and 1997 as interest-earning assets at
a yield of zero percent:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases ... $8,933,834 $700,911 7.85% $7,629,067 $619,851 8.13% $6,974,724 $570,788 8.18%
Mortgage-backed
securities ....... 1,231,838 77,039 6.25 1,280,279 81,168 6.34 1,534,417 99,661 6.50
Investments ........ 939,179 61,404 6.54 838,921 56,669 6.76 703,263 47,143 6.70
- -------------------------------------------------------------------------------------------------------------------
Interest-earning
assets ........... 11,104,851 839,354 7.56 9,748,267 757,688 7.77 9,212,404 717,592 7.79
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits ... 2,891,242 80,832 2.80 2,354,468 68,204 2.90 1,988,701 61,375 3.09
Other time deposits. 4,497,729 242,026 5.38 4,223,217 245,548 5.81 4,473,809 254,228 5.68
Advances from FHLB . 3,000,837 157,787 5.26 2,061,056 121,414 5.89 1,543,583 90,088 5.84
Securities sold
under agreements
to repurchase .... 209,111 12,419 5.94 501,979 30,533 6.08 591,288 36,615 6.19
Other borrowings ... 172,379 13,957 8.10 120,106 11,690 9.73 117,709 11,663 9.91
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities ...... 10,771,298 507,021 4.71 9,260,826 477,389 5.15 8,715,090 453,969 5.21
- -------------------------------------------------------------------------------------------------------------------
Net earnings balance .. $ 333,553 $ 487,441 $ 497,314
Net interest income ... $332,333 $280,299 $263,623
Interest rate spread .. 2.85% 2.62% 2.58%
- -------------------------------------------------------------------------------------------------------------------
Net yield on interest-
earning assets ... 2.99% 2.88% 2.86%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's net earnings balance (the difference between average
interest-bearing liabilities and average interest-earning assets) decreased
$153.9 million during fiscal year 1999 compared to 1998 and decreased $9.9
million during fiscal year 1998 compared to 1997. The ratio of average
interest-earning assets to average interest-bearing liabilities was 103.1%
during fiscal year 1999 compared to 105.3% and 105.7%, respectively, during
fiscal years 1998 and 1997.
The decrease in the net earnings balance for fiscal year 1999 compared to 1998
is primarily due to (i) the acquisition of AmerUs that was financed by $40.0
million of one year notes, in part by the $45.0 million unsecured term note due
July 31, 2003, and by the outlay of existing cash, (ii) the acquisition of
Midland that was financed entirely by existing cash and (iii) the repurchase of
1,500,000 shares of the Corporation's common stock paid in cash.
The fiscal year 1998 decrease in the net earnings balance compared to 1997 is
primarily due to cash outlays for the purchase of treasury stock (from the
merger with First Colorado accounted for as a pooling of interests) partially
offset by the acquisitions of First National (which was acquired through the
issuance of common stock), Heritage (which was acquired, in part, through the
issuance of common stock), Investors and net internal growth with earnings
retention.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -24-
- --------------------------------------------------------------------------------
The table below presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, respectively, and the amount of change in each attributable to: (i)
changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The net change
attributable to change in both volume and rate, which cannot be segregated, has
been allocated proportionately to the change due to volume and the change due to
rate. The following table demonstrates the effect of the increased volume of
interest-earning assets and interest-bearing liabilities, the changes in
interest rates and the effect on the interest rate spreads previously discussed:
<TABLE>
<CAPTION>
Year Ended June 30, Year Ended June 30,
1999 Compared to 1998 1998 Compared to 1997
----------------------------------- ----------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
(In Thousands) Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases ............. $106,775 $(25,715) $81,060 $ 53,191 $(4,128) $49,063
Mortgage-backed securities ... (3,040) (1,089) (4,129) (16,162) (2,331) (18,493)
Investments .................. 6,601 (1,866) 4,735 9,161 365 9,526
- ---------------------------------------------------------------------------------------------------------------
Interest income ............ 110,336 (28,670) 81,666 46,190 (6,094) 40,096
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits ............. 14,772 (2,144) 12,628 10,769 (3,940) 6,829
Other time deposits .......... 15,407 (18,929) (3,522) (14,473) 5,793 (8,680)
Advances from FHLB ........... 50,549 (14,176) 36,373 30,476 850 31,326
Securities sold under agreements
to repurchase .............. (17,409) (705) (18,114) (5,442) (640) (6,082)
Other borrowings ............. 4,472 (2,205) 2,267 235 (208) 27
- ---------------------------------------------------------------------------------------------------------------
Interest expense ........... 67,791 (38,159) 29,632 21,565 1,855 23,420
- ---------------------------------------------------------------------------------------------------------------
Effect on net interest income ... $ 42,545 $ 9,489 $52,034 $ 24,625 $(7,949) $16,676
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The net improvement due to changes in volume between fiscal years 1999 and 1998
reflect the net growth from the acquisitions of AmerUs and Midland. The net
improvement due to changes in rate is primarily due to decreases in rates on
certificates of deposits and FHLB advances.
The net improvements due to changes in volume between fiscal years 1998 and 1997
reflect the net growth the Corporation has experienced, both internally and from
acquisitions. The net decrease due to changes in rates between fiscal years 1998
and 1997 is primarily due to increases in rates on interest-bearing liabilities,
primarily certificates of deposits.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-25-
- --------------------------------------------------------------------------------
PROVISION FOR LOAN AND LEASE LOSSES AND REAL ESTATE OPERATIONS
- --------------------------------------------------------------------------------
The Corporation recorded loan loss provisions of $12.4 million, $13.9 million
and $13.4 million in fiscal years 1999, 1998 and 1997, respectively. For fiscal
years 1999 and 1998 loss reserves totaling $1.0 million and $3.9 million,
respectively, were recorded to conform the reserve portions of pooled
acquisitions to the policies of the Corporation. Excluding these reserves, the
loan loss provisions totaled $11.4 million for fiscal year 1999, an increase of
approximately $1.4 million, compared to $10.0 million for fiscal year 1998. Such
increase is primarily due to additional general reserves recorded to cover
consumer loan losses. The loan and lease loss provision increased during fiscal
year 1998 compared to 1997 due primarily to the net increase in the total loan
and lease portfolio at June 30, 1998, compared to 1997, and to additional
nonrecurring loss reserves recorded in fiscal year 1998 to conform the reserve
positions of the fiscal 1998 acquisitions to the policies of the Corporation. At
June 30, 1999, the Corporation's residential loan portfolio totaling $7.3
billion is secured by properties located in Colorado (20%), Nebraska (13%) and
Kansas (10%) and the remaining 57% in 47 other states. At June 30, 1998, the
balance of such loans totaled $6.4 billion and were secured by residential
properties located primarily in Colorado (24%), Nebraska (15%), Kansas (10%) and
the remaining 51% in 47 other states. The commercial real estate loan portfolio
at June 30, 1999, totaling $835.3 million is secured by properties located in
Colorado (29%), Kansas (15%), Iowa (14%) and the remaining 42% in 22 other
states. At June 30, 1998, commercial real estate loans totaled $534.8 million
and were secured by properties located in Colorado (34%), Iowa (29%), Nebraska
(9%) and the remaining 28% in 13 other states. The allowance for loan and lease
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans and leases, which takes into consideration such factors as
changes in the composition of the loan and lease portfolios and economic
conditions that may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem loans and leases
and of the overall portfolio quality and real estate market conditions in the
Corporation's lending areas.
The Corporation recorded a net loss from real estate operations in fiscal year
1999 totaling $1.7 million and net income of $1.9 million and $1.3 million in
fiscal years 1998 and 1997, respectively. Real estate operations reflect
provisions for real estate losses, net real estate operating activity, and gains
and losses on dispositions of real estate. The net decrease in real estate
operations for fiscal year 1999 compared to 1998 is due primarily to a decrease
in net gains on dispositions of real estate totaling $1.5 million, a net
increase in operating expenses of approximately $600,000 and a net increase in
provisions for real estate losses. The $580,000 increase in real estate
operations for fiscal year 1998 compared to 1997 is primarily due to the level
of sales activity.
Although the Corporation believes that present levels of allowances for loan
losses are adequate to reflect the risks inherent in its portfolios, there can
be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -26-
- --------------------------------------------------------------------------------
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and problem asset groups. Nonperforming assets increased
by $30.4 million, or 42.5%, at June 30, 1999, compared to June 30, 1998,
primarily as a result of net increases of $20.7 million in nonperforming loans,
$5.4 million in troubled debt restructurings and $4.3 million in real estate.
Nonperforming assets at June 30 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans and leases (1)
Residential real estate ............................................. $ 49,891 $43,212 $38,400
Commercial real estate .............................................. 11,390 1,369 905
Consumer ............................................................ 4,859 2,651 2,557
Leases and other loans .............................................. 3,875 2,134 1,765
- ---------------------------------------------------------------------------------------------------------------
Total ............................................................. 70,015 49,366 43,627
- ---------------------------------------------------------------------------------------------------------------
Real estate (2)
Commercial .......................................................... 7,657 8,465 9,631
Residential ......................................................... 14,384 8,821 9,759
Other ............................................................... - 480 147
- ---------------------------------------------------------------------------------------------------------------
Total ............................................................. 22,041 17,766 19,537
- ---------------------------------------------------------------------------------------------------------------
Troubled debt restructurings (3)
Commercial .......................................................... 9,534 3,524 9,489
Residential ......................................................... 195 778 1,126
- ---------------------------------------------------------------------------------------------------------------
Total ............................................................. 9,729 4,302 10,615
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets ............................................. $101,785 $71,434 $73,779
- ---------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases to total loans and leases ............... .73% .62% .58%
Nonperforming assets to total assets ................................... .80% .69% .73%
- ---------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases (4) ................................................ $ 73,916 $56,295 $50,120
Bulk purchased loans (5) ............................................ 6,503 8,462 10,809
- ---------------------------------------------------------------------------------------------------------------
Total ............................................................. $ 80,419 $64,757 $60,929
- ---------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses to total loans and leases .......... .84% .81% .81%
Allowance for loan and lease losses to total nonperforming assets ...... 79.01% 90.65% 82.58%
- ---------------------------------------------------------------------------------------------------------------
</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, 1999 and 1998, there were no accruing loans
contractually past due 90 days or more. At June 30, 1997, there were
$894,000 of accruing loans contractually past due 90 days or more.
(2) Real estate consists of commercial and residential property acquired through
foreclosure or repossession (real estate owned and real estate in judgment)
and real estate from certain subsidiary operations, and does not include
performing real estate held for investment totaling $9.5 million, $4.4
million and $4.7 million, respectively, at June 30, 1999, 1998 and 1997.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $75,000, $97,000 and $77,000, respectively, at June 30, 1999, 1998
and 1997, in general allowance for losses established primarily to cover
risks associated with borrowers' delinquencies and defaults on loans held
for sale.
(5) Represents the allowance for loan losses for single-family residential whole
loans purchased between January 1991 and June 30, 1992 (bulk purchased
loans), which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans to provide for the credit
risk associated with such bulk purchased loans. These bulk purchased loans
had principal balances of $286.4 million, $388.5 million and $494.6 million,
respectively, at June 30, 1999, 1998 and 1997. These allowances are
available only to absorb losses associated with respective bulk purchased
loans, and are not available to absorb losses from other loans.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-27-
- --------------------------------------------------------------------------------
Nonperforming loans and leases at June 30, 1999, increased $20.7 million
compared to 1998 primarily due to increases of $10.0 million, $6.7 million, $2.2
million and $1.8 million, respectively, in delinquent commercial real estate,
residential real estate, consumer loans and other loans. The increases are due
to the AmerUs and Midland acquisitions and to growth in the respective
portfolios. Nonperforming loans and leases at June 30, 1998, increased $5.7
million compared to June 30, 1997, primarily due to an increase of $4.8 million
in delinquent residential real estate from growth in the portfolio.
The net increase of $4.3 million in real estate at June 30, 1999, compared to
1998 is due primarily to a net increase of $5.6 million in residential real
estate offset by a net decrease of $808,000 in commercial real estate. Such net
increase is due primarily to real estate acquired from the AmerUs and Midland
acquisitions partially offset by real estate sales. The net decrease of $1.8
million in real estate at June 30, 1998, compared to June 30, 1997, is due
primarily to net decreases totaling $1.2 million and $938,000, respectively, in
commercial and residential real estate offset by a net increase totaling
$333,000 in other real estate. The decreases in commercial and residential real
estate are due in part to the sale of commercial real estate acquired in the
First Colorado acquisition totaling approximately $1.1 million and the sale of
residential real estate of approximately $12.7 million, partially offset by
foreclosures totaling $12.3 million. Real estate is located primarily in
Missouri and Colorado at June 30, 1999, and, before allowance for losses,
totaled $4.8 million and $2.8 million, respectively. At June 30, 1998, real
estate was located primarily in Nebraska and Colorado and totaled $5.4 million
and $2.8 million, respectively, before allowance for losses.
Troubled debt restructurings increased $5.4 million at June 30, 1999, compared
to June 30, 1998, due to the addition of 13 loans classified as commercial
troubled debt restructurings totaling approximately $16.1 million offset
primarily by the reclassifications of $7.1 million (to nonperforming loan
status) and $1.6 million (to current loan status) and payoffs totaling
approximately $1.9 million. Troubled debt restructurings decreased $6.3 million
at June 30, 1998, compared to June 30, 1997, due primarily to decreases of $6.0
million and $348,000, respectively, in commercial and residential real estate
loans. The decrease in commercial real estate includes the payoff of $4.2
million in loans during fiscal year 1998 and the reclassification of $1.4
million in loans to current status.
The ratio of nonperforming loans and leases to total loans and leases increased
to .73% at June 30, 1999, based on loan and lease balances of $9.6 billion,
compared to .62% and .58%, respectively, at June 30, 1998 and 1997, which were
based on loan and lease balances of $8.0 billion and $7.5 billion. This ratio at
June 30, 1999, increased compared to 1998 and June 30, 1998, compared to 1997,
due to net increases in nonperforming loans and leases, primarily delinquent
residential and commercial loans, partially offset by increases in the total
balance of loans and leases. Increasing nonperforming assets accounts for the
.80% ratio for nonperforming assets to total assets at June 30, 1999, compared
to .69% at June 30, 1998, even though total assets also increased. The ratio of
.69% for nonperforming assets to total assets decreased at June 30, 1998,
compared to 1997 due to the decrease in total nonperforming assets combined with
an increase in total assets. The total allowance for loan and lease losses
increased to $80.4 million at June 30, 1999, compared to $64.8 million at June
30, 1998, due primarily to increases in allowances acquired in purchase
acquisitions partially offset by decreases in allowances for bulk purchased
loans due to loan repayments for such loans. The total allowance increased to
$64.8 million at June 30, 1998, compared to $60.9 million at June 30, 1997, due
to a lower level of net charge-offs for 1998 compared to 1997 and the decrease
in allowances for bulk purchased loans. The percentage of allowance for loan and
lease losses to total loans and leases at June 30, 1999, of .84% increased
compared to .81% at June 30, 1998, and was unchanged at June 30, 1998, compared
to 1997. The increase comparing June 30, 1999, to 1998 is due primarily to the
net increase in the allowance for loan and lease losses. The total allowance for
loan and lease losses to total nonperforming assets decreased to 79.01% at June
30, 1999, compared to 90.65% at June 30, 1998, due primarily to the increase in
total nonperforming assets partially offset by the increase in the allowance for
loan and lease losses. The total allowance for loan and lease losses to total
nonperforming assets increased at June 30, 1998, compared to 82.58% at June 30,
1997, due primarily to the increase in the allowance for loan and lease losses.
NON-INTEREST INCOME
- --------------------------------------------------------------------------------
LOAN SERVICING FEES
Loan servicing fees totaled $34.5 million, $34.8 million and $35.2 million for
fiscal years 1999, 1998 and 1997, respectively. The amount of revenue generated
from loan servicing fees, and changes in comparing fiscal years, is primarily
due to the average size of the Corporation's portfolio of mortgage loans
serviced for other institutions and the level of rates for service fees
collected. The decreases in loan servicing fees comparing fiscal year 1999 to
1998, and fiscal year 1998 to 1997, are primarily due to slightly lower average
service fee rates collected for the respective years. The portfolio of mortgage
loans serviced for other institutions totaled $7.4 billion, $7.2 billion and
$7.5 billion at June 30, 1999, 1998 and 1997, respectively.
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COMMERCIAL FEDERAL CORPORATION
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The value of the Corporation's loan servicing portfolio increases as mortgage
interest rates rise and loan prepayments decrease. It is expected that income
generated from the Corporation's loan servicing portfolio will increase in such
an environment. However, this positive effect on the Corporation's income is
offset, in part, by a decrease in additional servicing fee income attributable
to new loan originations, which historically decrease in periods of higher, or
increasing, mortgage interest rates, and by an increase in expenses from loan
production costs since a portion of such costs cannot be deferred due to lower
loan originations. Conversely, the value of the Corporation's loan servicing
portfolio will decrease as mortgage interest rates decline.
RETAIL FEES AND CHARGES
Retail fees and charges totaled $36.7 million, $30.3 million and $26.2 million
for fiscal years 1999, 1998 and 1997, respectively. The primary source of this
fee income is customer charges for retail financial services such as checking
account fees and service charges, charges for insufficient checks or uncollected
funds, stop payment fees, debit card fees, overdraft protection fees,
transaction fees for personal checking and automatic teller machine services.
The net increase for fiscal year 1999 compared to 1998 primarily results from
the AmerUs and Midland acquisitions, accounted for as purchases and included in
operations since their respective dates of consummation, which together
contributed approximately $3.6 million in retail fees and charges for fiscal
year 1999. Also contributing to such increases is a greater focus on
cross-selling of products, and increases in certain checking account fees and
related ancillary fees for overdraft and insufficient funds charges from the
Corporation's increased retail customer deposit base. The net increase of $4.1
million for fiscal year 1998 compared to 1997 is primarily a result of the
increased focus to cross-sell products and generate fees from the Corporation's
sales development programs.
GAIN ON SALES OF LOANS
During fiscal years 1999, 1998 and 1997, the Corporation sold loans to third
parties through its mortgage banking operations totaling approximately $2.0
billion, $1.2 billion and $871.0 million, respectively, resulting in net pre-tax
gains of $3.4 million, $3.1 million and $2.1 million, respectively, for fiscal
years 1999, 1998 and 1997. Mortgage loans are generally sold in the secondary
market with loan servicing retained and without recourse to the Corporation. The
net gains recorded in fiscal years 1999, 1998 and 1997 are attributable to the
relatively stable interest rate environments over the respective periods.
GAIN ON SALES OF SECURITIES
During fiscal years 1999, 1998 and 1997, the Corporation sold securities
available for sale resulting in pre-tax gains of $4.4 million, $3.8 million and
$510,000, respectively, on sales of $235.6 million, $137.6 million and $153.1
million, respectively. Mortgage-backed securities accounted for most of the
activity with pre-tax gains of $3.9 million, $2.5 million and $476,000,
respectively, recorded in fiscal years 1999, 1998 and 1997.
OTHER OPERATING INCOME
Other operating income totaled $24.2 million, $23.7 million and $15.9 million
for fiscal years 1999, 1998 and 1997, respectively. The major components of
other operating income are brokerage commissions, credit life and disability
commissions, insurance commissions and leasing operations.
Brokerage commission income totaled $9.2 million, $5.3 million and $4.1 million,
respectively, for fiscal years 1999, 1998 and 1997. Brokerage commission income
increased for fiscal year 1999 compared to 1998 primarily as a result of the
AmerUs acquisition and by $1.2 million for fiscal year 1998 compared to 1997 due
to significant growth in the volume of customer transactions for stocks and
mutual funds as preferred investment options. A greater focus on cross-selling,
an increase in the number of sales locations due to acquisitions and a more
qualified staff also contributed to these increases.
Insurance commission income totaled $2.8 million, $3.2 million and $3.5 million,
respectively, for fiscal years 1999, 1998 and 1997. The decreases in insurance
commission income over the last two fiscal years are due primarily to increased
competition, and decreases in property and casualty insurance and net
reinsurance operations.
Credit life and disability commission income totaled $2.0 million, $2.0 million
and $2.3 million, respectively, for fiscal years 1999, 1998 and 1997. Commission
income from credit life and disability is directly related to consumer loan
volume. However, credit life and disability commission income from leasing
activity continues to decrease. Such decrease accounts for the decline comparing
fiscal year 1998 to 1997 and is the reason credit life and disability commission
income is unchanged comparing fiscal year 1999 to 1998. Origination and service
fees from leasing operations totaled $618,000, $3.6 million and $3.9 million,
respectively, for fiscal years 1999, 1998 and 1997. The net decrease in leasing
operations comparing fiscal year 1999 to 1998 is due to the Corporation
significantly curtailing leasing operations. The net decrease comparing fiscal
year 1998 to 1997 is primarily due to
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COMMERCIAL FEDERAL CORPORATION
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nonrecurring charges totaling $597,000 recorded in fiscal year 1998 for certain
reserves on leasing operations. Other operating income includes miscellaneous
items that can fluctuate significantly from year to year. Such amounts totaled
approximately $9.6 million, $9.6 million and $2.1 million, respectively, for
fiscal years 1999, 1998 and 1997.
NON-INTEREST EXPENSE
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GENERAL AND ADMINISTRATIVE EXPENSES
Total general and administrative expenses totaled $250.1 million, $216.4 million
and $213.4 million for fiscal years 1999, 1998 and 1997, respectively. Excluding
merger-related expenses and certain other nonrecurring charges, general and
administrative expenses totaled $220.0 million, $191.2 million and $175.0
million, respectively, for fiscal years 1999, 1998, and 1997.
Overall, general and administrative expenses remained at consistent levels as
illustrated by the efficiency ratio. The efficiency ratio is defined as general
and administrative expenses divided by core revenue which is the sum of (i) net
interest income before provision for loan and lease losses, (ii) loan servicing
fees, (iii) retail fees and charges and (iv) other operating income. The
Corporation's efficiency ratio for fiscal year 1999 is 51.6%, excluding certain
merger-related and nonrecurring charges totaling $30.1 million. This ratio
compares to 51.8% for fiscal year 1998, excluding certain merger-related and
nonrecurring charges totaling $25.2 million. The ratio is 51.4% for fiscal year
1997, excluding the $36.1 million SAIF special assessment and the nonrecurring
expenses totaling $2.3 million associated with the repurchase of 2,812,725
shares of the Corporation's common stock. The efficiency ratio is lower for
fiscal year 1999 compared to 1998, even though operating expenses increased
approximately $28.8 million after adjusting for the aforementioned nonrecurring
expenses for both fiscal years, due to core revenue increasing in fiscal year
1999.
The net increase of $33.7 million in general and administrative expenses for
fiscal year 1999 compared to 1998 is primarily due to net increases in the
merger expenses category of $11.9 million, compensation and benefits of $10.7
million, occupancy and equipment of $8.2 million, other expenses of $6.9
million, advertising of $1.3 million and regulatory insurance and assessments of
$688,000. These increases were slightly offset by a net decrease of $5.9 million
in data processing. Such net increase comparing the two fiscal years is
primarily due to the current fiscal year merger expenses totaling $30.1 million
associated with the First Colorado acquisition and the termination of three
employee stock ownership plans compared to the $20.9 million of merger expenses
recorded in fiscal year 1998. The AmerUs and Midland acquisitions, which were
accounted for under the purchase method of accounting, contributed a net
increase of approximately $16.1 million in general and administrative expenses
for fiscal year 1999 over 1998. These acquisitions result in increased personnel
wages and benefits and costs of operating additional branches, as well as other
expenses incurred on an indirect basis attributable to these acquisitions. The
net decrease in data processing for fiscal year 1999 compared to 1998 is due to
accelerated amortization totaling $4.3 million recorded in fiscal year 1998 for
certain computer systems and software necessitated by the Year 2000 compliance
and the related planned systems conversions. Merger expenses totaling $16.1
million associated with the First Colorado acquisition consisted of $8.0 million
in transaction costs, such as fees for investment banking, accounting and legal,
$6.7 million in costs to combine operations and $1.4 million in severance and
other termination costs. The remaining amount of the merger expenses totaled
$14.0 million and related to the termination of three employee stock ownership
plans acquired in mergers the past two fiscal years. Such amount represents the
market value of unallocated shares distributed to plan participants upon the
termination of these employee stock ownership plans.
The net increase of approximately $39.0 million in general and administrative
expenses for fiscal year 1998 compared to 1997, excluding the deposit insurance
special assessment totaling $36.1 million, is partially attributable to
nonrecurring expenses totaling $25.2 million consisting of merger expenses
totaling $18.0 million, the accelerated amortization of certain computer systems
and software necessitated by Year 2000 compliance and the related planned
systems conversions totaling $4.3 million and expenses totaling $2.9 million to
conform accounting practices of certain operations of three pooled acquisitions
to the Corporation's policies. The merger expenses consist of $9.0 million in
transaction costs, such as fees for investment banking, accounting and legal,
$6.5 million in severance and other termination costs and $2.5 million in
expenses to combine operations. Other expenses incurred in fiscal year 1998
compared to 1997 include increased marketing costs for checking accounts and
related products and for consumer loans, increased occupancy and equipment,
compensation and benefits and other operating expenses from acquisitions and
branch expansion. The decrease in regulatory insurance and assessments of $5.4
million is substantially due to the revised rate structure on insured deposits
adopted by the Federal Deposit Insurance Corporation after the recapitalization
of the SAIF. The Corporation's annual deposit insurance rate in effect prior to
this recapitalization
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COMMERCIAL FEDERAL CORPORATION
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was .23% of insured deposits reduced to .064% of insured deposits effective
January 1, 1997, and thereafter.
INTANGIBLE ASSETS
Total amortization expense of intangible assets for fiscal years 1999, 1998 and
1997 was $15.7 million, $7.8 million and $11.2 million, respectively. The net
increase in amortization expense of intangible assets for fiscal year 1999
compared to 1998 is primarily due to the AmerUs and Midland acquisitions
consummated this fiscal year. The amortization expense of intangible assets
associated with these two acquisitions totaled $7.8 million for fiscal year
1999. The net decrease in amortization expense of intangible assets for fiscal
year 1998 compared to 1997 is primarily due to the reduction totaling $3.2
million in amortization expense of core value of deposits from amounts that were
fully amortized as of April 1997 and the reduction in core value of deposits
amortized on an accelerated basis. Offsetting these decreases is an increase
totaling $806,000 due to amortization expense resulting from the First National
acquisition consummated January 30, 1998.
PROVISION FOR INCOME TAXES
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For fiscal years 1999, 1998 and 1997 the provision for income taxes totaled
$63.3 million, $52.4 million and $38.0 million, respectively. The effective tax
rates for fiscal years 1999, 1998 and 1997 were 40.6%, 37.5% and 35.6%,
respectively. The effective tax rate varied from the statutory rate of 35.0% for
fiscal years 1999 and 1998 due to the nondeductibility of certain merger-related
expenses and other nonrecurring charges. A significant nondeductible
merger-related expense for fiscal year 1999 is the $14.0 million associated with
the termination of the employee stock ownership plans acquired in mergers. For
the three fiscal years ended June 30, 1999, the effective tax rates also vary
from the statutory rate due to the nondeductibility of amortization of
intangible assets in relation to the level of taxable income for the respective
fiscal years.
EXTRAORDINARY ITEMS
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In fiscal year 1997 the Corporation recognized extraordinary losses of $583,000
(net of income tax benefits totaling $316,000), or $.01 loss per diluted share,
primarily as a result of the early retirement of the $40.25 million 10.25%
subordinated debt originally due December 15, 1999, and the $6.9 million 10.0%
senior notes originally due January 31, 1999. The extraordinary losses consisted
primarily of the write-off of the related premiums and costs associated with the
issuance and redemption of such debt that was retired with the proceeds from the
$50.0 million subordinated extendible notes offering completed December 2, 1996.
RATIOS
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The table below sets forth certain performance ratios of the Corporation for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
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<S> <C> <C> <C>
Return on average assets: net income divided by average total assets (1) ........ .77% .85% .70%
Return on average equity: net income divided by average equity (1) .............. 9.95 10.96 9.18
Equity-to-assets ratio: average stockholders' equity to average total assets .... 7.79 7.76 7.68
General and administrative expenses divided by average assets (2) ............... 2.10 2.10 2.20
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</TABLE>
(1) Return on average assets and return on average stockholders' equity for
fiscal year 1999 are 1.00% and 12.86%, respectively, excluding the
after-tax effect of merger-related and other nonrecurring charges totaling
$27.1 million. Return on average assets and return on average stockholders'
equity for fiscal year 1998 are 1.06% and 13.65%, respectively, excluding
the after-tax effect of merger-related and other nonrecurring charges
totaling $21.5 million. Return on average assets and return on average
stockholders' equity for fiscal year 1997 are .97% and 12.58%,
respectively, excluding the after-tax effect of the nonrecurring expenses
totaling $25.1 million associated with the SAIF special assessment, the
repurchase of 2,812,725 shares of the Corporation's common stock, the
extraordinary loss on early retirement of debt and the change in income
taxes for tax bad debt reserves.
(2) General and administrative expenses divided by average assets for fiscal
year 1999 is 1.85% excluding the merger-related and other nonrecurring
charges totaling $30.1 million on a pre-tax basis. General and
administrative expenses divided by average assets for fiscal year 1998 is
1.86% excluding the merger- related and other nonrecurring charges totaling
$25.2 million on a pre-tax basis. General and administrative expenses
divided by average assets for fiscal year 1997 is 1.81% excluding the
nonrecurring expenses totaling approximately $38.4 million on a pre-tax
basis associated with the SAIF special assessment and the repurchase of
2,812,725 shares of the Corporation's common stock.
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The operating ratio for general and administrative expenses for fiscal year 1999
is unchanged compared to 1998 due to a net increase of $33.7 million in such
expenses offset by an increase of approximately $1.6 billion in average assets
over the same periods. The increase in general and administrative expenses is
primarily due to the AmerUs and Midland acquisitions accounted for as purchases
and the termination of the three employee stock ownership plans acquired
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COMMERCIAL FEDERAL CORPORATION
<PAGE>
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in mergers the past two fiscal years. The increase in the average assets is
attributable to the AmerUs and Midland acquisitions. The decrease in the ratio
of general and administrative expenses to average assets for fiscal year 1998
compared to 1997 is primarily attributable to an increase of $600.6 million in
average assets partially offset by a net increase of $3.0 million in total
general and administrative expenses.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
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During fiscal year 1999 the Corporation adopted the provisions of four
accounting pronouncements: Statement No. 129 entitled "Disclosure of Information
About Capital Structure," Statement No. 130 "Reporting Comprehensive Income,"
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information," and Statement No. 132 "Employers' Disclosure About Pensions and
Other Postretirement Benefits." All of these pronouncements were only of a
disclosure nature, and therefore the adoption of these statements did not have a
material effect on the Corporation's financial position, liquidity or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
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The Corporation's principal asset is its investment in the capital stock of the
Bank, and because it does not generate any significant revenues independent of
the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Effective April 1,
1999, the Office of Thrift Supervision (OTS) issued a final rule revising its
capital distribution regulation. This revised regulation reflects the OTS's
implementation of the system of prompt corrective action established under the
Federal Deposit Insurance Corporation Improvement Act of 1991 and conforms the
OTS's capital distribution requirements more closely to those of the other
banking agencies. Under the terms of this regulation, the Bank is permitted to
pay capital distributions during a calendar year up to 100.0% of its retained
net income (net income determined in accordance with generally accepted
accounting principles less total capital distributions declared) for the current
calendar year combined with the Bank's retained net income for the preceding two
calendar years without prior approval of the OTS. At June 30, 1999, the Bank
would be permitted to pay an aggregate amount approximating $113.8 million in
dividends under this regulation. Should the Bank's regulatory capital fall below
certain levels, applicable law would require approval by the OTS of such
proposed dividends and, in some cases, would prohibit the payment of dividends.
At June 30, 1999, the cash of Commercial Federal Corporation (the parent
company) totaled $10.4 million. Due to the parent company's limited independent
operations, management believes that its cash balance at June 30, 1999, is
currently sufficient to meet operational needs. However, the parent company's
ability to make future interest and principal payments on its $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes),
on its $46.4 million of 9.375% fixed-rate junior subordinated debentures due May
15, 2027 (the Debentures) and on its promissory notes, is dependent upon its
receipt of dividends from the Bank. Accordingly, during fiscal years 1999 and
1998, the parent company received cash dividends totaling $73.3 million and
$47.4 million, respectively, from the Bank. The dividends received during fiscal
year 1999 were paid to cover (i) the cash payment of $25.0 million related to
the acquisition of Midland on March 1, 1999, (ii) common stock cash dividends
totaling $17.4 million paid by the parent company to its shareholders during
fiscal year 1999, (iii) interest payments totaling $15.2 million on the parent
company's debt, (iv) the cash payment of $10.0 million related to the
acquisition of AmerUs on July 31, 1998, and (v) principal payments of $5.7
million on the parent company's five-year promissory term note.
Cash dividends paid by the parent company to its common stock shareholders
totaled $13.5 million and $16.1 million, respectively, during fiscal years 1999
and 1998. Such cash dividends for fiscal year 1998 include approximately $9.1
million from acquisitions accounted for as pooling of interests. The payment of
dividends on the common stock is subject to the discretion of the Board of
Directors of the Corporation and depends on a variety of factors, including
operating results and financial condition, liquidity, regulatory capital
limitations and other factors. The Bank will continue to pay dividends to the
parent company, pursuant to regulatory restrictions, to cover future principal
and interest payments on the parent company's debt and quarterly cash dividends
on common stock when and as declared by the parent company. The parent company
also receives cash from the exercise of stock options and the sale of stock
under its employee benefit plans which totaled $9.7 million and $6.5 million,
respectively, during fiscal years 1999 and 1998, as well as from the Bank for
income tax benefits from operating losses of the parent company as provided in
the corporate tax sharing agreement.
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COMMERCIAL FEDERAL CORPORATION
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Effective April 28, 1999, the Corporation's Board of Directors authorized the
repurchase of up to five percent, or approximately 3,000,000 shares, of the
Corporation's outstanding common stock during the next 18 months. During the
fourth quarter of fiscal year 1999 the Corporation repurchased and cancelled
1,500,000 shares of its common stock at a cost of approximately $36.2 million.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB and (iv) cash generated from operations. As reflected in the
Consolidated Statement of Cash Flows, net cash flows provided by operating
activities for fiscal years 1999 and 1997 totaled $251.5 million and $32.4
million, respectively, and net cash flows used by operating activities for
fiscal year 1998 totaled $96.8 million. Amounts fluctuate from period to period
primarily as a result of mortgage banking activity relating to the purchase and
origination of loans for resale and the subsequent sale of such loans. The
purchase and origination of loans for resale totaling $1.9 billion for fiscal
year 1999 is higher compared to $1.4 billion and $915.8 million for fiscal years
1998 and 1997, respectively, primarily due to increased prepayment and
refinancing activity. Proceeds from the sales of loans totaled $2.0 billion for
fiscal year 1999 compared to $1.2 billion and $873.1 million in fiscal years
1998 and 1997.
Net cash flows used by investing activities totaled $840.0 million and $425.6
million for fiscal years 1999 and 1997, respectively, and net cash flows
provided by investing activities totaled $112.4 million for fiscal year 1998.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. The acquisition
of First Colorado consummated August 14, 1998, had no material effect on
liquidity, except for the net cash outlays totaling $16.1 million relating to
nonrecurring merger related costs, since such transaction was consummated in an
exchange of common stock between the financial institutions. The acquisition of
AmerUs on July 31, 1998, resulted in a cash outlay of approximately $53.2
million and the acquisition of Midland on March 1, 1999, resulted in a cash
outlay of $83.0 million. The acquisition of AmerUs was financed by $40.0 million
of one-year purchase notes due July 31, 1999, from the seller bearing interest
at 150 basis points over the one-year Treasury bill rate, a $10.0 million
capital distribution from the Bank and, in part, by a $45.0 million term note
borrowed by the Corporation on July 30, 1998. This note was a five-year term
note due July 31, 2003, unsecured, with quarterly principal payments of $1.25
million and interest payable quarterly at 100 basis points below the lender's
national base rate. In November 1998 this term note was partially paid down by
an additional $8.75 million, resulting in a remaining principal balance of $32.5
million at June 30, 1999. The one-year notes for $40.0 million from the AmerUs
transaction were paid in full on July 30, 1999, and the term note due July 31,
2003, was refinanced on July 1, 1999, from the same lender with a note due June
30, 2004, in the same amount and at the same interest rate. The acquisition of
Midland on March 1, 1999, was financed by parent company funds and a $25.0
million capital distribution from the Bank. The Corporation's four fiscal year
1998 acquisitions, structured to be consummated as an exchange of common stock
between the Corporation and these respective financial institutions, resulted in
the Corporation issuing 9,368,063 shares of its common stock in fiscal year
1998. Cash outlays for nonrecurring merger-related costs associated with these
acquisitions approximated $19.8 million. The fiscal year 1997 acquisitions
resulted in cash paid totaling approximately $8.7 million for the common stock
of these institutions and the exchange of 1,016,173 shares of the Corporation's
common stock.
Net cash flows provided by financing activities totaled $724.7 million, $56.6
million and $381.8 million, respectively, for fiscal years 1999, 1998 and 1997.
Advances from the FHLB, retail deposits and securities sold under agreements to
repurchase have been the primary sources to balance the Corporation's funding
needs during each of the fiscal years presented. Excluding deposits acquired in
acquisitions, the Corporation experienced net decreases in deposits of $211.1
million and $212.9 million for fiscal years 1999 and 1998, respectively, and a
net increase of $86.3 million for the fiscal year ended June 30, 1997. The
decreases in deposits during fiscal years 1999 and 1998 were primarily due to
depositors leaving for higher interest rates. During fiscal year 1999 the
Corporation continued to borrow long-term FHLB advances that are callable at the
option of the FHLB. Such advances provide the Corporation with lower
interest-bearing liabilities than other funding alternatives. At June 30, 1999
and 1998, the Corporation had fixed-rate advances totaling $3.0 billion and $1.0
billion, respectively, that were convertible into adjustable-rate advances. At
June 30, 1999, these convertible advances had call dates ranging from July 1999
to March 2003. On August 14, 1998, First Colorado issued 1,400,000 shares of
common stock prior to its merger with the Corporation, resulting in the receipt
of proceeds totaling $32.5 million. On April 28, 1999, the Corporation's Board
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COMMERCIAL FEDERAL CORPORATION
<PAGE>
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of Directors authorized the repurchase of up to five percent of the
Corporation's outstanding common stock over the next 18 months. As of June 30,
1999, the Corporation had repurchased 1,500,000 shares at a cost totaling $36.2
million. In August 1996 the Corporation repurchased 2,812,725 shares of its
common stock for $51.2 million including certain expenses and costs associated
with the seller's ownership of such stock. The sources of cash to consummate
this stock repurchase consisted of a promissory note totaling $28.0 million, a
dividend from the Bank totaling $18.0 million and cash totaling $5.2 million
paid directly by the parent company. In December 1996, the Corporation completed
the issuance of $50.0 million of 7.95% fixed-rate subordinated extendible notes
due December 1, 2006, which resulted in the Corporation receiving $48.5 million
net of fees. With the proceeds from the issuance of these subordinated
extendible notes, the Corporation redeemed $47.2 million of subordinated debt
and senior notes. Effective May 1997 the Corporation, through a special-purpose
wholly-owned trust subsidiary of the Corporation, issued $45.0 million of fixed-
rate 9.375% cumulative trust preferred securities.
The Deposit Insurance Funds Act of 1996 authorized the recapitalization of the
SAIF fund by imposing a one-time special assessment of .657% of SAIF-insured
deposits resulting in the Corporation recording an after-tax charge of
approximately $23.1 million ($36.1 million pre-tax) in fiscal year 1997. The
Corporation's annual deposit insurance rate in effect prior to this
recapitalization was .23% of insured deposits, which was reduced to .064% of
insured deposits effective January 1, 1997. Until December 31, 1999,
SAIF-insured institutions will be required to pay assessments to the FDIC at the
rate of .064% to help fund interest payments on bonds issued by an agency of the
federal government established to finance takeovers of insolvent thrifts. During
this period, Bank Insurance Fund (BIF) members will be assessed at the rate of
.013% to fund interest payments on these bonds. After December 31, 1999, both
BIF and SAIF members will be assessed at the same rate for such interest
payments. The Deposit Insurance Funds Act of 1996 provides that the BIF and the
SAIF will be merged into a single deposit insurance fund effective December 31,
1999, but only if there are no insured savings associations on that date.
The Corporation will continue to grow its franchise through an ongoing program
of internal growth and selective acquisitions of other financial institutions.
The Corporation has considered and will continue to consider possible mergers
with and acquisitions of other selected financial institutions. During fiscal
year 1999, the Corporation consummated the acquisitions of AmerUs, First
Colorado and Midland. During fiscal year 1998 the Corporation consummated four
acquisitions and during fiscal year 1997 consummated two acquisitions. See Note
2 to the Consolidated Financial Statements for additional information on these
completed acquisitions. Such acquisitions present the Corporation with the
opportunity to further expand its community banking retail network in its
existing markets; and to increase its earnings potential by increasing its
mortgage, consumer and commercial loan volumes funded primarily by deposits
which generally bear lower rates of interest than alternative sources of funds
and by lower costing callable FHLB advances. Acquisition candidates are selected
based on the extent to which the candidate can enhance the Corporation's retail
presence in new or existing markets and complement the Corporation's present
retail network.
At June 30, 1999, the Corporation issued commitments totaling $771.8 million to
fund and purchase loans, investment securities and mortgage-backed securities as
follows: $345.6 million of single-family fixed-rate mortgage loans, $37.7
million of single-family adjustable-rate mortgage loans, $19.5 million of
commercial real estate loans, $81.5 million of investment securities, $10.0
million of mortgage-backed securities and $277.5 million of unused lines of
credit for commercial and consumer use. These outstanding loan commitments to
extend credit in order to originate loans or fund commercial and consumer loans
lines of credit do not necessarily represent future cash requirements since many
of the commitments may expire without being drawn. The Corporation expects to
fund these commitments, as necessary, from the sources of funds previously
described.
The maintenance of an appropriate level of liquid resources to meet not only
regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Bank is required by federal
regulation to maintain a minimum average daily balance of liquid assets in each
calendar quarter of not less than 4.0% of net withdrawable deposits plus
short-term borrowings or 4.0% of the average daily balance of net withdrawable
accounts plus short-term borrowings during the preceding quarter. The Bank's
liquidity ratio was 11.69% at June 30, 1999. Liquidity levels will vary
depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The Bank
does not foresee any difficulty in meeting its liquidity requirements.
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COMMERICAL FEDERAL CORPORATION
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IMPACT OF INFLATION AND CHANGING PRICES
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The consolidated financial statements and related consolidated financial
information are prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant effect on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
STOCK PRICES AND DIVIDENDS
- --------------------------------------------------------------------------------
The Corporation's common stock is traded on the New York Stock Exchange under
the symbol "CFB." The following table sets forth the high, low and closing sales
prices and dividends declared for the periods indicated for the common stock of
the Corporation:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ------------------------------------
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 ..................... $25.00 $24.00 $24.44 $32.38 $38.19 $36.38 $36.50 $32.13
Low ...................... 22.00 21.06 19.63 22.00 31.13 30.00 31.38 25.08
Close .................... 23.19 23.19 23.19 23.56 31.63 36.38 35.56 31.42
- --------------------------------------------------------------------------------------------------------------
Dividends declared ......... $ .065 $ .065 $ .065 $.055 $ .055 $ .055 $ .055 $ .047
==============================================================================================================
</TABLE>
As of June 30, 1999, there were 59,593,849 shares of common stock issued and
outstanding which were held by approximately 5,400 shareholders of record and
2,589,107 shares subject to outstanding options. The number of shareholders of
record does not reflect the persons or entities who hold their stock in nominee
or "street" name.
On November 16, 1998, the Board of Directors increased the quarterly common
stock cash dividend from $.055 per share to $.065 per share for stockholders of
record on December 30, 1998. On November 17, 1997, the Board of Directors of the
Corporation declared a three-for-two stock split effected in the form of a 50
percent stock dividend to stockholders of record on November 28, 1997. The stock
dividend was distributed on December 15, 1997, and totaled 10,865,530 shares of
common stock with fractional shares paid in cash. Also in November 1997 the
Board of Directors increased the quarterly cash dividend from $.047 per common
share to $.055 per common share.
In November 1996 the Board of Directors declared a three-for-two stock split
effected in the form of a 50 percent stock dividend to stockholders of record on
December 31, 1996. This stock dividend was distributed in January 1997 and
totaled 10,745,214 shares of common stock with fractional shares paid in cash.
Cash dividends declared during fiscal year 1999 totaled $15.1 million, or $.25
per common share, compared to fiscal year 1998 of $7.8 million, or $.212 per
common share, and fiscal year 1997 of $5.9 million, or $.185 per common share.
The total amount for cash dividends declared and the per share amounts are the
amounts authorized by the Corporation's Board of Directors only and are not
restated for any of the Corporation's acquisitions accounted for as a pooling of
interests. See "Liquidity and Capital Resources" and Note 18 to the Consolidated
Financial Statements regarding the payment of future dividends and any possible
restrictions thereon.
YEAR 2000
- --------------------------------------------------------------------------------
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year are expected to read entries for the year 2000 as the year 1900. Like
most financial service providers, the Corporation may be significantly affected
by the Year 2000 issue due to the nature of financial information. Software,
hardware and equipment both within and outside the Corporation's direct control
and with whom the Corporation electronically or operationally interfaces are
likely to be affected. If computer systems are not adequately changed to
identify the Year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations that rely on the data field
information, such as interest, payment or due dates and other operating
functions, may generate results that could be significantly misstated, and the
- --------------------------------------------------------------------------------
COMMERICAL FEDERAL CORPORATON
<PAGE>
-35-
- --------------------------------------------------------------------------------
Corporation could experience a temporary inability to process transactions and
engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this problem are provided by major third party vendors. The
Corporation has completed the process of replacing/upgrading its integral
computer systems and programs, as well as most equipment, in order to provide
cost-effective and efficient delivery of services to its customers, information
to management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment.
During fiscal year 1999 approximately $4.4 million was expensed that related to
systems conversion costs, internal staff costs, as well as consulting and other
Year 2000 expenses. In addition, during fiscal year 1998 the Corporation
expensed $4.3 million due to accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The adjusted carrying amount of these computer
systems and software was depreciated until their disposal at the date of
conversion.
The third party vendors have advised the Corporation that all such mission
critical computer systems and programs are Year 2000 compliant. The Corporation
tested all such systems for Year 2000 compliance before integration into its
computer environment. The Corporation scheduled certain operations that began
conversions in October 1998. These conversions allowed the Corporation to
resolve application and conversion problems that arose and to do further testing
to enhance software programs and future conversions. Final conversions that are
Year 2000 compliant were completed by the end of fiscal year 1999. Other mission
critical systems were tested in conjunction with certain nationwide financial
industry test programs. All Year 2000 testing was substantially completed June
30, 1999. In addition, as a financial services institution, the Corporation is
under the supervision of federal regulatory agencies that have guidelines and
perform ongoing monitoring and evaluation of the Corporation's Year 2000
readiness.
The Corporation is also working with non-mainframe software and hardware vendors
to determine the extent to which the Corporation's interface systems may be
vulnerable to those third parties' failure to remediate their own Year 2000
issues. If the third party vendors are unable to resolve Year 2000 issues in
time, the conversion is delayed significantly or problems arise as a result of
the conversion, the Corporation would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have significant adverse impact on the financial condition and results of
operations of the Corporation. In addition, there can be no assurance that the
systems of other companies on which the Corporation's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Corporation's systems, would not have a
material adverse effect on the Corporation. The Corporation has developed and
tested a Year 2000 contingency plan that addresses, among other issues, critical
operations and potential failures thereof, and strategies for business
continuation such as contracting with alternative vendors and re-deployment of
internal staff as needed in critical areas. The Corporation has also evaluated
non-technical systems that rely on imbedded technology in their critical
processes so that such systems will continue to operate without interruption.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -36-
- --------------------------------------------------------------------------------
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
- --------------------------------------------------------------------------------
Management of Commercial Federal Corporation (the Corporation) is responsible
for the preparation, integrity, and fair presentation of its published
consolidated financial statements and all other information presented in this
Annual Report. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining effective internal
control over financial reporting. The internal control structure contains
monitoring mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any structure of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed the Corporation's internal control over financial reporting
as of June 30, 1999. This assessment was based on the criteria for effective
internal control described in "Internal Control-Integrated Framework" issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based upon
this assessment, Management believes that the Corporation maintained effective
internal control over financial reporting as of June 30, 1999.
/s/ William A. Fitzgerald
William A. Fitzgerald
Chairman of the Board and Chief Executive Officer
/s/ James A. Laphen
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial condition
of Commercial Federal Corporation and subsidiaries (the Corporation) as of June
30, 1999 and 1998, and the related consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended June 30, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of Commercial Federal
Corporation and First Colorado Bancorp, Inc. which has been accounted for as a
pooling-of-interests as described in Note 2 to the consolidated financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Federal
Corporation and subsidiaries as of June 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
August 12, 1999
- --------------------------------------------------------------------------------
COMMERICAL FEDERAL CORPORATION
<PAGE>
<TABLE>
<CAPTION>
-37-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30,
(Dollars in Thousands) --------------------------
ASSETS 1999 1998
===============================================================================================================
<S> <C> <C>
Cash (including short-term investments of $39,585 and $62,886) .................... $ 353,275 $ 217,012
Investment securities available for sale, at fair value ........................... 83,811 141,116
Mortgage-backed securities available for sale, at fair value ...................... 419,707 171,393
Loans and leases held for sale, net ............................................... 104,347 290,380
Investment securities held to maturity (fair value of $846,805 and $533,078) ...... 862,760 532,188
Mortgage-backed securities held to maturity (fair value of $849,488 and $922,042) . 862,838 920,456
Loans and leases receivable, net of allowances of $80,344 and $64,660 ............. 9,222,046 7,566,896
Federal Home Loan Bank stock ...................................................... 194,129 131,132
Interest receivable, net of allowances of $319 and $201 ........................... 77,513 66,353
Real estate, net .................................................................. 31,513 22,195
Premises and equipment, net ....................................................... 185,302 134,951
Prepaid expenses and other assets ................................................. 125,544 127,971
Intangible assets, net of accumulated amortization of $49,260 and $33,558 ......... 252,677 77,186
- ---------------------------------------------------------------------------------------------------------------
Total Assets ................................................................... $12,775,462 $10,399,229
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
===============================================================================================================
Liabilities:
Deposits ....................................................................... $ 7,655,415 $ 6,558,207
Advances from Federal Home Loan Bank ........................................... 3,632,241 2,379,182
Securities sold under agreements to repurchase ................................. 128,514 334,294
Other borrowings ............................................................... 225,383 110,674
Interest payable ............................................................... 48,759 36,261
Other liabilities .............................................................. 118,267 119,416
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities ............................................................ 11,808,579 9,538,034
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies ..................................................... - -
- ---------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued - -
Common stock, $.01 par value; 120,000,000 shares authorized;
59,593,849 and 58,714,826 shares issued and outstanding ...................... 596 587
Additional paid-in capital ..................................................... 364,320 337,697
Retained earnings .............................................................. 611,529 534,245
Accumulated other comprehensive income (loss), net ............................. (9,562) 70
Unearned Employee Stock Ownership Plan (ESOP) shares ........................... - (11,404)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity ................................................... 966,883 861,195
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ................................... $12,775,462 $10,399,229
===============================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -38-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
------------------------------------
1999 1998 1997
===============================================================================================================
<S> <C> <C> <C>
Interest Income:
Loans and leases receivable ......................................... $700,911 $619,851 $570,788
Mortgage-backed securities .......................................... 77,039 81,168 99,661
Investment securities ............................................... 61,404 56,669 47,143
- ---------------------------------------------------------------------------------------------------------------
Total interest income ............................................. 839,354 757,688 717,592
Interest Expense:
Deposits ............................................................ 322,858 313,752 315,603
Advances from Federal Home Loan Bank ................................ 157,787 121,414 90,088
Securities sold under agreements to repurchase ...................... 12,419 30,533 36,615
Other borrowings .................................................... 13,957 11,690 11,663
- ---------------------------------------------------------------------------------------------------------------
Total interest expense ............................................ 507,021 477,389 453,969
Net Interest Income .................................................... 332,333 280,299 263,623
Provision for Loan and Lease Losses .................................... (12,400) (13,853) (13,427)
- ---------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses .......... 319,933 266,446 250,196
Other Income (Loss):
Loan servicing fees ................................................. 34,481 34,784 35,190
Retail fees and charges ............................................. 36,740 30,284 26,198
Real estate operations .............................................. (1,674) 1,894 1,314
Gain on sales of loans .............................................. 3,423 3,092 2,142
Gain on sales of securities ......................................... 4,376 3,765 510
Other operating income .............................................. 24,189 23,702 15,914
- ---------------------------------------------------------------------------------------------------------------
Total other income ................................................ 101,535 97,521 81,268
Other Expense:
General and administrative expenses -
Compensation and benefits ......................................... 98,869 88,129 77,790
Occupancy and equipment ........................................... 36,528 28,316 25,045
Data processing ................................................... 12,360 18,276 12,367
Regulatory insurance and assessments .............................. 5,777 5,089 10,467
Advertising ....................................................... 13,893 12,633 10,675
Other operating expenses .......................................... 52,770 45,907 41,005
Merger expenses ................................................... 29,917 18,034 -
- ---------------------------------------------------------------------------------------------------------------
General and administrative expenses before
Federal deposit insurance special assessment .................. 250,114 216,384 177,349
Federal deposit insurance special assessment ........................ - - 36,061
- ---------------------------------------------------------------------------------------------------------------
Total general and administrative expenses ......................... 250,114 216,384 213,410
Amortization of intangible assets ................................... 15,702 7,814 11,235
- ---------------------------------------------------------------------------------------------------------------
Total other expense ................................................ 265,816 224,198 224,645
- ---------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Extraordinary Items ...................... 155,652 139,769 106,819
Provision for Income Taxes .............................................. 63,260 52,356 37,980
- ---------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items ....................................... 92,392 87,413 68,839
Extraordinary Items, Net of Tax Benefit ................................. - - (583)
- ---------------------------------------------------------------------------------------------------------------
Net Income .............................................................. $ 92,392 $ 87,413 $ 68,256
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-39-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
---------------------------------------
1999 1998 1997
================================================================================================================
<S> <C> <C> <C>
Weighted Average Number of Common Shares
Outstanding Used in Basic Earnings Per Share Calculation .......... 59,539,111 56,381,051 58,142,355
Add Assumed Exercise of Outstanding Stock Options
as Adjustments for Dilutive Securities ............................ 587,735 1,304,230 951,260
- ----------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted Earnings Per Share Calculation ........ 60,126,846 57,685,281 59,093,615
================================================================================================================
Basic Earnings Per Share:
Income before extraordinary items ................................. $1.55 $1.55 $1.18
Extraordinary items ............................................... - - (.01)
- ----------------------------------------------------------------------------------------------------------------
Net income ........................................................ $1.55 $1.55 $1.17
================================================================================================================
Diluted Earnings Per Share:
Income before extraordinary items ................................. $1.54 $1.52 $1.17
Extraordinary Items ............................................... - - (.01)
- ----------------------------------------------------------------------------------------------------------------
Net Income ........................................................ $1.54 $1.52 $1.16
================================================================================================================
Dividends Declared Per Common Share .................................. $.250 $.212 $.185
================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended June 30,
-------------------------------------
1999 1998 1997
================================================================================================================
<S> <C> <C> <C>
Net Income ........................................................... $ 92,392 $87,413 $68,256
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities available for sale. (10,443) 3,935 5,778
Less net gains on securities included in net income ............... (4,376) (3,765) (510)
- ----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) Before Income Taxes ................ (14,819) 170 5,268
Income Tax Provision (Benefit) ....................................... (5,187) 59 1,844
- ----------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) .................................... (9,632) 111 3,424
- ----------------------------------------------------------------------------------------------------------------
Comprehensive Income ................................................. $ 82,760 $87,524 $71,680
================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -40-
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in Thousands) Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income Plan
Stock Capital Earnings (Loss), Net Shares Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996....................... $431 $371,480 $404,896 $(3,289) $(15,234) $758,284
Issuance of 10,745,214 shares in
three-for-two stock split effected in
the form of a 50 percent stock dividend.. 72 (72) - - - -
Repurchase and cancellation of 2,812,725
shares of common stock................... (12) (49,312) - - - (49,324)
Issuance of 298,552 shares under
certain compensation and employee plans.. 11 2,739 - - - 2,750
Issuance of 1,016,173 shares of common
stock for acquisition of business........ 4 19,416 - - - 19,420
Restricted stock and deferred
compensation plans, net.................. - 3,059 - - - 3,059
Commitment of release of ESOP shares....... - - - - 1,642 1,642
Goodwill related to the Liberty
Financial Corporation reorganization..... - 7,055 - - - 7,055
Purchase and cancellation of 2,039,751 shares
of common stock of combining companies... (29) (36,946) - - - (36,975)
Cash dividends declared.................... - - (13,525) - - (13,525)
Net income................................. - - 68,256 - - 68,256
Change in unrealized holding gain (loss)
on securities available for sale, net.... - - - 3,424 - 3,424
First Colorado Bancorp, Inc. activity
for six months ended June 30, 1997...... (16) (27,082) 5,363 (176) - (21,911)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997....................... 461 290,337 464,990 (41) (13,592) 742,155
Mid Continent Bancshares, Inc. activity for
three months ended September 30, 1997... - (797) (797) - (28) (1,622)
Issuance of 10,865,530 shares in
three-for-two stock split effected in
the form of a 50 percent stock dividend. 109 (109) - - - -
Issuance of 613,548 shares under certain
compensation and employee plans......... 7 4,346 - - - 4,353
Issuance of 1,290,174 shares of common
stock for acquisition of business....... 10 38,181 - - - 38,191
Restricted stock and deferred
compensation plans, net................. - 7,625 - - - 7,625
Commitment of release of ESOP shares...... - - - - 2,216 2,216
Purchase and cancellation of 101,879 shares
of common stock of combining companies.. - (1,886) - - - (1,886)
Cash dividends declared................... - - (17,361) - - (17,361)
Net income................................ - - 87,413 - - 87,413
Change in unrealized holding gain
(loss) on securities available for
sale, net............................... - - - 111 - 111
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998....................... $ 587 $337,697 $534,245 $ 70 $(11,404) $861,195
===========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-41-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands) Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income Plan
Stock Capital Earnings (Loss), Net Shares Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 ....................... $587 $337,697 $534,245 $ 70 $(11,404) $861,195
Issuance of 979,856 shares under certain
compensation and employee plans ......... 10 14,279 - - - 14,289
Issuance of 1,378,580 shares of
common stock ........................ 14 32,401 - - - 32,415
Restricted stock and deferred
compensation plans, net ................. - 2,192 - - - 2,192
Commitment of release of ESOP shares ...... - - - - 11,404 11,404
Termination of ESOP plans ................. - 13,954 - - - 13,954
Purchase and cancellation of 1,500,000
shares of common stock .................. (15) (36,203) - - - (36,218)
Cash dividends declared ................... - - (15,108) - - (15,108)
Net income ................................ - - 92,392 - - 92,392
Change in unrealized holding gain (loss)
on securities available for sale, net ... - - - (9,632) - (9,632)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 ....................... $596 $364,320 $611,529 $(9,562) $ - $966,883
===========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -42-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
(Dollars in Thousands) -----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................................. $ 92,392 $87,413 $68,256
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary items, net of tax benefit ........................... - - 583
Amortization of intangible assets ................................. 15,702 7,814 11,235
Provision for losses on loans and leases and real estate .......... 13,974 13,902 13,907
Depreciation and amortization ..................................... 18,172 13,135 11,880
Amortization (accretion) of deferred discounts and fees, net ...... 2,542 (2,163) (271)
Amortization of mortgage servicing rights ......................... 12,021 10,177 9,534
Amortization of deferred compensation on restricted stock
and deferred compensation plans and premiums on other borrowings. 1,754 1,798 1,611
Termination of employee stock ownership plans ..................... 13,954 - -
Deferred tax provision ............................................ 17,093 2,504 438
Gain on sales of real estate, loans and loan servicing rights, net. (4,618) (6,144) (4,190)
Gain on sales of securities ....................................... (4,376) (3,765) (510)
Gain on sale of branch ............................................ (1,076) - -
Stock dividends from Federal Home Loan Bank ....................... (10,827) (8,413) (5,606)
Proceeds from sales of loans ...................................... 1,958,807 1,178,244 873,139
Origination of loans for resale ................................... (479,852) (648,969) (512,115)
Purchases of loans for resale ..................................... (1,411,210) (721,703) (403,645)
Decrease (increase) in interest receivable ........................ 1,261 5 (2,575)
(Decrease) increase in interest payable and other liabilities ..... (22,804) (12,531) 5,960
Other items, net .................................................. 38,588 (8,107) (35,210)
- ---------------------------------------------------------------------------------------------------------------
Total adjustments ............................................... 159,105 (184,216) (35,835)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities .............. 251,497 (96,803) 32,421
===============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------
Purchases of loans ..................................................... (1,531,385) (787,496) (730,460)
Repayment of loans, net of originations ................................ 1,122,811 465,595 96,246
Principal repayments of mortgage-backed securities available for sale .. 69,559 70,770 56,798
Purchases of mortgage-backed securities available for sale ............. (446,186) (40,758) (25,745)
Proceeds from sales of mortgage-backed securities available for sale ... 209,789 121,187 99,273
Principal repayments of mortgage-backed securities held to maturity .... 290,726 287,135 198,357
Purchases of mortgage-backed securities held to maturity ............... (218,479) - (35,066)
Maturities and repayments of investment securities held to maturity .... 339,089 430,084 225,739
Purchases of investment securities held to maturity .................... (666,574) (368,084) (347,785)
Purchases of investment securities available for sale .................. (33,901) (81,778) (59,043)
Proceeds from sales of investment securities available for sale ........ 30,153 20,189 54,366
Maturities and repayments of investment securities available for sale .. 170,196 35,336 43,070
Purchases of mortgage loan servicing rights ............................ (21,959) (14,483) (10,194)
Proceeds from sales of loan servicing rights ........................... - 412 -
Proceeds from sales of Federal Home Loan Bank stock .................... 13,691 7,229 21,502
Purchases of Federal Home Loan Bank stock .............................. (51,213) (31,547) (11,269)
Acquisitions, net of cash received (paid) .............................. (88,351) 7,283 2,595
Proceeds from sales of real estate ..................................... 17,183 21,780 18,104
Payments to acquire real estate ........................................ (613) (2,806) (847)
Purchases of premises and equipment, net ............................... (40,675) (16,668) (22,562)
Other items, net ....................................................... (3,820) (11,012) 1,293
- ---------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities .............. (839,959) 112,368 (425,628)
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-43-
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended June 30,
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Decrease) increase in deposits .................................... $ (211,102) $ (212,908) $ 86,293
Proceeds from Federal Home Loan Bank advances ...................... 2,400,000 1,665,165 1,362,765
Repayments of Federal Home Loan Bank advances ...................... (1,386,781) (1,022,207) (1,296,585)
Proceeds from securities sold under agreements to repurchase ....... 25,000 100,000 444,856
Repayments of securities sold under agreements to repurchase ....... (235,955) (405,000) (186,317)
Proceeds from issuances of other borrowings ........................ 152,200 12,254 154,735
Repayments of other borrowings ..................................... (23,423) (67,181) (88,797)
Payments for debt issue costs ...................................... - - (2,218)
Proceeds from loan repayments from employee stock ownership plans .. 11,058 - -
Payments of cash dividends on common stock ......................... (13,539) (16,147) (12,354)
Repurchases of common stock ........................................ (36,218) (1,886) (86,299)
Issuance of common stock ........................................... 45,095 6,519 4,000
Other items, net ................................................... (1,610) (1,982) 1,720
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ................. 724,725 56,627 381,799
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CASH AND CASH EQUIVALENTS
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in net cash position ........................... 136,263 72,192 (11,408)
Balance, beginning of year ......................................... 217,012 177,403 194,671
Adjustments to convert acquisitions to fiscal year end ............. - (32,583) (5,860)
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Balance, end of year ............................................... $ 353,275 $217,012 $177,403
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -----------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest expense ................................................ $ 506,137 $426,832 $409,899
Income taxes, net ............................................... 54,110 53,075 34,161
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities .................. 20,773 161,189 46,165
Loans transferred to real estate ................................ 17,671 7,205 17,285
Loans to facilitate the sale of real estate ..................... 259 302 557
Common stock issued in connection with the
aquisitions of businesses .................................... - 32,267 19,420
Common stock received in connection with employee
benefit plans, net ........................................... (475) (4,180) (320)
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</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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COMMERCIAL FEDERAL CORPORATION
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NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The consolidated financial statements are prepared on an accrual basis and
include the accounts of Commercial Federal Corporation (the Corporation) and its
wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank (the
Bank), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. Certain amounts for years prior
to fiscal year 1999 have been reclassified for comparative purposes.
POOLING OF INTERESTS
On August 14, 1998, the Corporation consummated the acquisition of First
Colorado Bancorp, Inc. (First Colorado). This acquisition was accounted for as a
pooling of interests and, accordingly, the Corporation's historical consolidated
financial statements were restated for all periods prior to this acquisition to
include the accounts and results of operations of First Colorado. First Colorado
had a calendar year end, and in restating prior periods its accounts and results
of operations were conformed to the Corporation's fiscal year ended June 30,
1998. In changing to the Corporation's fiscal year, First Colorado's accounts
and results of operations for the six months ended June 30, 1997, were excluded
from reported results of operations for the restated combined companies. The
Corporation's Consolidated Statement of Stockholders' Equity as of June 30,
1997, has been adjusted to include the First Colorado activity for the six
months ended June 30, 1997.
NATURE OF BUSINESS
The Corporation is a unitary non-diversified savings and loan holding company
whose primary asset is the Bank which is a consumer-oriented financial
institution that emphasizes single-family residential and construction real
estate lending, community banking operations, consumer lending, commercial real
estate lending, retail deposit activities, mortgage banking, commercial and
agribusiness lending, equipment leasing and other retail financial services. The
Bank conducts loan origination activities through its branch office network,
loan offices of its wholly-owned mortgage banking subsidiary and a nationwide
correspondent network.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, cash and cash equivalents include cash,
amounts due from banks and federal funds sold. Generally, federal funds are
purchased and sold for a one-day period.
SECURITIES
Securities are classified in one of three categories and accounted for as
follows: (i) debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as "held-to-maturity securities" and
reported at amortized cost; (ii) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as "trading securities" and reported at fair value, with unrealized gains and
losses included in earnings; and (iii) debt and equity securities not classified
as either held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity net of deferred income taxes.
Premiums and discounts are amortized over the contractual lives of the related
securities on the level yield method. Any unrealized losses on securities
reflecting a decline in the fair value of such securities considered to be other
than temporary are charged against income. Realized gains or losses on
securities available for sale are based on the specific identification method
and are included in results of operations on the trade date.
LOANS AND LEASES
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are recorded at the contractual
amounts owed by borrowers less unamortized discounts, net of premiums,
undisbursed funds on loans in process, deferred loan fees and allowance for loan
losses. Interest on loans is accrued to income as earned, except that interest
is not accrued on first mortgage loans contractually delinquent three months or
more. Any related discounts or premiums on loans purchased are amortized into
interest income using the level yield method over the contractual lives of the
loans, adjusted for actual prepayments. Loan origination fees, commitment fees
and direct loan origination costs are deferred and recognized over the estimated
average life of the loan as a yield adjustment.
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COMMERCIAL FEDERAL CORPORATION
<PAGE>
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A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All impaired loans are
classified as substandard for risk classification purposes. Impaired loans are
charged-off, to the estimated value of collateral associated with the loan, when
management believes principal and interest are deemed uncollectible. The accrual
of interest on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet the payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent that cash payments are
received.
Loans held for sale are carried at the lower of aggregate cost or market value
as determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation adjustments,
if necessary, to reflect the lower of aggregate cost or market value, are
recorded in current operations.
Leases are accounted for as direct financing leases for financial statement
purposes. The total minimum rentals receivable and the residual value of leased
assets under each lease contract are recorded as assets, net of unearned income.
Unearned income is the excess of the total rentals receivable and residual value
over the cost of the leased asset. Unearned income is recognized during the
lease term utilizing the interest method. Direct origination costs are deferred
and recognized over the estimated life of the lease.
REAL ESTATE
Real estate includes real estate acquired through foreclosure, real estate in
judgment and real estate held for investment, which includes equity in
unconsolidated joint ventures and investment in real estate partnerships.
Real estate acquired through foreclosure and in judgment are initially recorded
at the lower of cost or fair value minus estimated costs to sell at the date of
foreclosure establishing a new cost basis. After foreclosure, valuation
allowances for estimated losses on real estate are provided when the carrying
value exceeds the fair value minus estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net realizable
value. Cost includes acquisition costs plus construction costs of improvements,
holding costs and costs of amenities incurred to date. Joint venture and
partnership investments are carried on the equity method of accounting and,
where applicable, are stated at net realizable value. The Corporation's ability
to recover the carrying value of real estate held for investment (including
capitalized interest) is based upon future sales of land or projects. The
ability to effect such sales is subject to market conditions and other factors
which may be beyond the Corporation's control.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Management's periodic evaluation of
the adequacy of the allowance is based on the Corporation's past loan and lease
loss experience, known and inherent risks in the respective portfolios, the
estimated value of any underlying collateral and current economic conditions.
Impaired loans except large groups of smaller balance homogeneous loans (such as
residential real estate and consumer loans) that are collectively evaluated for
impairment and loans that are measured at fair value or the lower of cost or
market value, are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, or as a practical
expedient, at the observable market price of the loan or the fair value of the
underlying collateral if the loan is collateral dependent.
ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS
The Corporation purchased single-family residential whole loan packages (bulk
purchased loans) at net discounts. Portions of such discounts were allocated to
allowance for losses (credit allowances) relating to the credit risk associated
with each mortgage loan package purchased. These credit allowances are available
to absorb possible losses on these bulk purchased loans only or are credited to
interest income as actual prepayments of these individual loans occur.
Collectibility is evaluated throughout the life of the acquired loans and if the
estimate of total probable collections is increased or decreased, the amount of
the allowance on bulk purchased loans, and the corresponding discount to be
amortized is adjusted accordingly.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the cost of acquiring the right to service
mortgage loans. Such costs are initially capitalized and subsequently amortized
in proportion to, and over the period of, estimated net loan servicing income.
Amortization of mortgage servicing rights is based on the ratio of net servicing
income received in the current period to
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COMMERCIAL FEDERAL CORPORATION
<PAGE>
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total net servicing income projected to be realized from the mortgage servicing
rights. Projected net servicing income is in turn determined on the basis of the
estimated future balance of the underlying mortgage loan portfolio, which
decreases over time from scheduled loan amortization and prepayments. The
Corporation estimates future prepayment rates based on relevant characteristics
of the servicing portfolio, such as loan types, interest rate stratification and
recent prepayment experience, as well as current interest rate levels, market
forecasts and other economic conditions.
The Corporation reports mortgage servicing rights at the lower of amortized cost
or fair value. The fair value of mortgage servicing rights is determined based
on the present value of estimated expected future cash flows, using assumptions
as to current market discount rates, prepayment speeds and servicing costs per
loan. Mortgage servicing rights are stratified by loan type and interest rate
for purposes of impairment measurement. Loan types include government,
conventional and adjustable-rate mortgage loans. Impairment losses are
recognized to the extent the unamortized mortgage servicing rights for each
stratum exceed the current fair value, as reductions in the carrying value of
the asset, through the use of a valuation allowance, with a corresponding
reduction to loan servicing income. No valuation allowance for capitalized
servicing rights was necessary to be established as of June 30, 1999, 1998 or
1997.
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, building improvements, leasehold
improvements and furniture, fixtures and equipment are stated at the lower of
cost or fair value less accumulated depreciation and amortization. Depreciation
is calculated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings and three to 15
years for furniture, fixtures and equipment. Leasehold improvements are
generally amortized on the straight-line method over the terms of the respective
leases. Maintenance and repairs are charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and core value of deposits.
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets acquired in business combinations. Core value of
deposits represents the intangible value assigned to core deposit bases arising
from purchase acquisitions. The Corporation reviews its intangible assets for
impairment at least annually or whenever events or changes in circumstances
indicate that the carrying amount of such asset may not be recoverable. In such
cases, the expected future cash flows (undiscounted and without interest
charges) resulting from the use of the asset are estimated and an impairment
loss recognized if the sum of such cash flows is less than the carrying amount
of the asset. Should such an assessment indicate that the value of the
intangible asset may be impaired, an impairment loss is recognized for the
difference between the carrying value of the asset and its estimated fair value.
Core value of deposits established by the Corporation is amortized on an
accelerated basis over a period not to exceed 10 years and goodwill is amortized
on a straight-line basis over periods up to 25 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Corporation enters into sales of securities under agreements to repurchase
with primary dealers only, which provide for the repurchase of the same
security. Securities sold under agreements to purchase identical securities are
collateralized by assets which are held in safekeeping in the name of the
Corporation by the dealers who arranged the transaction. Securities sold under
agreements to repurchase are treated as financings and the obligations to
repurchase such securities are reflected as a liability. The securities
underlying the agreements remain in the asset accounts of the Corporation.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes derivative financial instruments as part of an overall
interest rate risk management strategy. Derivative financial instruments
utilized by the Corporation include interest rate swap agreements and interest
rate floor agreements. The Corporation is an end-user of derivative financial
instruments and does not conduct trading activities for derivatives. These
derivative financial instruments involve, to varying degrees, elements of credit
and market risk which are not recognized on the balance sheet. Credit risk is
defined as the possibility that a loss may occur from the failure of another
party to perform in accordance with the terms of the contract which exceeds the
value of existing collateral, if any. Market risk is the possibility that future
changes in market conditions may make the derivative financial instrument less
valuable. The Corporation evaluates the risks associated with derivatives in
much the same way as the risks with on-balance sheet financial instruments. The
derivative's risk of credit loss is
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COMMERCIAL FEDERAL CORPORATION
<PAGE>
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generally a small fraction of the notional value of the instrument and is
represented by the fair value of the derivative instrument. The Corporation
attempts to limit its credit risk by dealing with creditworthy counterparties
and obtaining collateral where appropriate.
Interest rate swap agreements are used principally as a tool to synthetically
extend the maturities of certain deposit liabilities for asset liability
management and interest rate risk management purposes for the Corporation. These
contracts represent an exchange of interest payment streams based on an
agreed-upon notional principal amount with at least one stream based on a
specified floating-rate index. The underlying principal balances of the deposit
liabilities are not affected. Under these agreements, the Corporation pays fixed
rates of interest and receives variable rates of interest that are based on the
same rates the Corporation pays on the hedged deposit liabilities. As the swaps
have the opposite interest rate characteristics of the hedged deposit
liabilities, the interest rate swap agreements qualify for settlement
accounting. Accordingly, net settlement amounts are reported as adjustments to
interest expense on an accrual basis over the lives of the agreements. Cash
flows are reported net as operating activities.
Interest rate floor agreements require the seller to pay the purchaser, at
specified dates, the amount, if any, by which the market interest rate falls
below the agreed-upon floor, applied to a notional principal amount. Such
positions are designed to protect the value of the mortgage servicing rights
from the effects of increased prepayment activity that generally result from
declining interest rates. Realized gains and losses on positions used as hedges
of capitalized mortgage servicing rights are deferred and amortized to expense
over the remaining life of the original agreement while unrealized gains and
losses are considered in the impairment analysis of the fair value of such
mortgage servicing rights. Premiums are amortized to expense on a straight-line
basis over the life of the agreement. Unamortized premiums paid are included in
other assets. Cash payments received from these agreements are recognized upon
receipt as a reduction to amortization expense.
INCOME TAXES
The Corporation files a consolidated federal income tax return and separate
state income tax returns. The Corporation and its subsidiaries entered into a
tax-sharing agreement that provides for the allocation and payment of federal
and state income taxes. The provision for income taxes of each corporation is
computed on a separate company basis, subject to certain adjustments. The
Corporation calculates income taxes on the liability method, under which the net
deferred tax asset or liability is determined based on the tax effects of the
differences between the book and tax bases of the various assets and liabilities
of the Corporation giving current recognition to changes in tax rates and laws.
STOCK SPLITS
On November 17, 1997, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders. The stock dividend totaled 10,865,530 shares of common stock.
Also, on November 18, 1996, the Board of Directors declared a three-for-two
stock split effected in the form of a 50 percent stock dividend to stockholders.
This stock dividend totaled 10,745,214 shares of common stock. All references to
the number of shares, per share amounts and stock prices for all periods
presented have been adjusted on a retroactive basis to reflect the effect of
these stock splits.
EARNINGS PER COMMON SHARE
The Corporation follows the provisions of Statement of Financial Accounting
Standards No. 128 entitled "Earnings Per Share." Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
COMPREHENSIVE INCOME
Effective July 1, 1998, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 130 entitled "Reporting Comprehensive Income"
(SFAS No. 130). This statement requires disclosures of the components of
comprehensive income and the accumulated balance of other comprehensive income
within consolidated total stockholders' equity. The adoption of the provisions
of SFAS No. 130, disclosed in the Consolidated Statement of Comprehensive
Income, did not effect the Corporation's consolidated financial position,
results of operations or liquidity.
SEGMENT REPORTING
Effective July 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 131 entitled
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COMMERCIAL FEDERAL CORPORATION
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"Disclosures About Segments of an Enterprise and Related Information" (SFAS No.
131). This statement supersedes SFAS No. 14, "Financial Reporting for Segments
of a Business Enterprise," and utilizes the "management approach" for segment
reporting. The management approach is based on the way that the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on any manner
in which management disaggregates its company such as by products and services,
geography, legal structure and management structure. This statement also
requires descriptive information about the way the operating segments were
determined, the products/services provided by the operating segments, the
differences between the measurements used in reporting segment information and
those used in the general purpose financial statements, and the changes in the
measurement of segment amounts from period to period. As a community banking
institution, substantially all of the Corporation's operations involve
commercial and consumer banking and mortgage banking. Management makes operating
decisions and assesses performance based on a continuous review of these two
primary operations, which constitute the Corportion's operating segments under
the provisions of SFAS No. 131.
NOTE 2. ACQUISITIONS
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FISCAL YEAR 1999 ACQUISITIONS
On July 31, 1998, the Corporation consummated its acquisition of AmerUs, a
wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a
taxable acquisition all of the outstanding shares of the common stock of AmerUs
for total consideration of $178,269,000. Such consideration consisted of (i)
certain assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title
One single-family residential mortgage loans and a receivable for income tax
benefits) totaling approximately $85,027,000, (ii) cash (as adjusted per the
agreement) totaling $53,242,000, and (iii) promissory notes due July 31, 1999,
for $40,000,000 bearing interest, adjusted monthly, at 150 basis points over the
one-year Treasury bill rate. These promissory notes were paid in full on July
30, 1999.
AmerUs was a federally chartered savings bank headquartered in Des Moines, Iowa
and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4),
Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase accounting
adjustments, AmerUs had total assets of approximately $1,266,800,000, deposits
of approximately $949,700,000 and stockholder's equity of approximately
$84,800,000. This acquisition was accounted for as a purchase with resulting
core value of deposits totaling $16,264,000 amortized on an accelerated basis
over 10 years, and estimated goodwill totaling $110,176,000 amortized on a
straight-line basis over 25 years. Fair value adjustments and other purchase
accounting adjustments will be finalized pursuant to generally accepted
accounting principles.
The accounts and consolidated results of operations for fiscal year 1999 include
the results of AmerUs beginning July 31, 1998. The following table summarizes
results on an unaudited consolidated pro forma basis for the last two fiscal
years as though this purchase had occurred at the beginning of fiscal year 1998:
Fiscal Year Ended
June 30,
-------------------------
1999 1998
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Total interest income and other income ............ $921,607 $871,127
Net income ........................................ 69,345 69,481
Diluted earnings per common share ................. 1.15 1.67
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COMMERCIAL FEDERAL CORPORATION
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On August 14, 1998, the Corporation consummated its acquisition of First
Colorado. The Corporation acquired in a tax-free reorganization all 18,564,766
outstanding shares of First Colorado's common stock in exchange for 18,278,789
shares of its common stock. Based on the Corporation's closing stock price of
$26.375 at August 14, 1998, the total consideration for this acquisition,
including cash paid for fractional shares, approximated $482,154,000. This
acquisition was accounted for as a pooling of interests.
First Colorado, headquartered in Lakewood, Colorado, was a unitary savings and
loan holding company and the parent company of First Federal Bank of Colorado, a
federally chartered stock savings bank that operated 27 branches located in
Colorado, with 23 branches located in the Denver metropolitan area and four in
Colorado's western slope region. At July 31, 1998, First Colorado had assets of
approximately $1,572,200,000, deposits of approximately $1,192,700,000 and
stockholders' equity of approximately $254,700,000.
The following table reconciles total interest income and other income, total
interest expense and net income previously reported by the Corporation and First
Colorado to give effect to this merger for fiscal years 1998 and 1997 as if this
acquisition had occurred at the beginning of the respective fiscal years:
<TABLE>
<CAPTION>
First
Corporation Colorado Combined
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Fiscal year 1998:
<S> <C> <C> <C>
Total interest income and other income ........... $735,883 $119,326 $855,209
Total interest expense ........................... 417,188 60,201 477,389
Net income ....................................... 67,333 20,080 87,413
Earnings per diluted common share ................ 1.62 1.26 1.52
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Fiscal year 1997:
Total interest income and other income ........... $688,737 $110,123 $798,860
Total interest expense ........................... 396,775 57,194 453,969
Extraordinary items, net of tax benefit .......... (583) - (583)
Net income ....................................... 54,884 13,372 68,256
Earnings per diluted common share -
Income before extraordinary items .............. 1.35 .74 1.17
Extraordinary items, net of tax benefit ........ (.01) - (.01)
Net income ..................................... 1.34 .74 1.16
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</TABLE>
Net income and diluted earnings per share presented above do not include any
expected cost savings and benefits of related synergies, or any nonrecurring
merger transaction costs, as a result of the merger of First Colorado.
Prior to its merger into the Corporation, results of operations for First
Colorado were reported on a calendar year basis. In restating prior periods, the
accounts and results of operations of First Colorado were conformed to the
Corporation's fiscal year ended June 30, 1998. Accordingly, in changing to the
Corporation's fiscal year, First Colorado's accounts and results of operations
for the six months ended June 30, 1997, including total interest income and
other income of $55,737,000, total interest expense of $29,399,000 and net
income of $8,840,000 were excluded from reported results of operations for the
restated combined companies. Such amounts, net of a cash dividend of $3,477,000,
are included in the Corporation's consolidated retained earnings in the
Consolidated Statement of Stockholders' Equity.
On March 1, 1999, the Corporation consummated its acquisition of Midland First
Financial Corporation (Midland), parent company of Midland Bank. The Corporation
acquired in a taxable acquisition all of the outstanding shares of Midland's
common stock. The total purchase consideration of this acquisition was
$83,000,000 in cash, including cash to pay off existing Midland debt totaling
$5,550,000, the retirement of preferred stock of both Midland and Midland Bank
totaling $11,562,000 and $810,000 for advisor fees.
Midland Bank was a privately held commercial bank headquartered in Lee's Summit,
Missouri that operated eight branches in the greater Kansas City area. At
February 28, 1999,
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Midland had total assets of approximately $399,231,000, deposits of
approximately $353,090,000 and stockholders' equity of approximately
$24,236,000. This acquisition was accounted for as a purchase with the fair
value adjustments and other purchase accounting adjustments to be finalized
pursuant to generally accepted accounting principles. The effect of the Midland
acquisition on the Corporation's consolidated financial statements as if this
acquisition had occurred at the beginning of fiscal year 1999 is not material.
FISCAL YEAR 1998 ACQUISITIONS
On January 30, 1998, the Corporation consummated its acquisition of First
National Bank Shares, LTD (First National). The Corporation acquired all of the
outstanding shares of First National's common stock for 992,842 shares of the
Corporation's common stock resulting in a total aggregate value approximating
$32,267,000. At January 30, 1998, before purchase accounting adjustments, First
National had assets of approximately $147,800,000, deposits of approximately
$131,300,000 and stockholders' equity of approximately $12,000,000. First
National operated seven branches located in Kansas. This acquisition was
accounted for as a purchase with resulting core value of deposits totaling
$6,045,000 amortized on an accelerated basis over 10 years, and goodwill
totaling $19,162,000 amortized on a straight-line basis over 25 years. The
effect of the First National acquisition on the Corporation's consolidated
financial statements as if this acquisition had occurred at the beginning of
fiscal year 1998 is not material.
On February 13, 1998, the Corporation consummated its acquisition of Liberty
Financial Corporation (Liberty), a privately held commercial bank and thrift
holding company. The Corporation acquired all of the outstanding shares of
Liberty's common stock for 4,015,555 shares of the Corporation's common stock
for an aggregate value of approximately $135,349,000. Liberty operated 38
branches in Iowa and seven in the metropolitan area of Tucson, Arizona and at
January 31, 1998, had assets of approximately $658,100,000, deposits of
approximately $569,800,000 and stockholders' equity of approximately
$50,100,000. This acquisition was accounted for as a pooling of interests.
On February 27, 1998, the Corporation consummated its acquisition of Mid
Continent Bancshares, Inc. (Mid Continent). The Corporation acquired all of the
outstanding shares of Mid Continent's common stock for 2,641,945 shares of the
Corporation's common stock for an aggregate value of approximately $86,961,000.
Mid Continent operated ten branches located in Kansas and at February 27, 1998,
had total assets of approximately $405,700,000, deposits of approximately
$258,600,000 and stockholders' equity of approximately $41,200,000. This
acquisition was accounted for as a pooling of interests.
On May 29, 1998, the Corporation consummated its acquisition of Perpetual
Midwest Financial, Inc. (Perpetual). The Corporation acquired in a tax-free
reorganization all of the outstanding shares of Perpetual's common stock in
exchange for 1,717,721 shares of the Corporation's common stock for an aggregate
value of approximately $57,222,000. At May 29, 1998, Perpetual had total assets
of approximately $412,200,000, deposits of approximately $323,400,000, and
stockholders' equity of approximately $36,000,000. Perpetual operated five
branches located in Iowa. This acquisition was accounted for as a pooling of
interests.
The Corporation's historical consolidated financial statements were restated for
all periods prior to the acquisitions of Liberty, Mid Continent and Perpetual to
include the accounts and results of operations of these financial institutions.
Prior to merger into the Corporation, results of operations for Liberty were
reported on a calendar year basis and Mid Continent on a September 30 fiscal
year basis. In restating prior periods, the accounts and results of operations
of Liberty and Mid Continent were conformed to the Corporation's fiscal year
ended June 30, 1997 and 1998, respectively. Accordingly, in changing fiscal
years, Liberty's accounts and results of operations for the six months ended
June 30, 1996, including total interest income and other income of $24,952,000,
total interest expense of $9,916,000 and net income of $2,850,000 were excluded
from reported results of operations for the restated combined companies. Such
amounts, net of cash dividend of $479,000, are included in the Corporation's
Consolidated Statement of Stockholders' Equity. Mid Continent's accounts and
results of operations for the three months ended September 30, 1998, including
total interest income and other income of $9,507,000, total interest expense of
$4,558,000 and net income of $977,000 were included in results of operations for
the restated combined companies for both fiscal years 1998 and 1997. Such
amounts, net of a cash dividend of $180,000, are included in the Corporation's
Consolidated Statement of Stockholders' Equity only for the fiscal year ended
June 30, 1998.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-51-
- --------------------------------------------------------------------------------
FISCAL YEAR 1997 ACQUISITIONS
On October 1, 1996, the Corporation consummated its acquisition of Heritage
Financial, Ltd. (Heritage). The Corporation acquired all of the outstanding
shares of Heritage's common stock in exchange for cash and 1,016,173 shares of
the Corporation's common stock for an aggregate value of approximately
$22,806,000. At October 1, 1996, before purchase accounting adjustments,
Heritage had assets of $182,934,000, deposits of $158,168,000 and stockholders'
equity of $10,308,000. Heritage operated six branches located in west-central
Iowa. This acquisition was accounted for as a purchase with resulting core value
of deposits totaling $7,633,000 amortized on an accelerated basis over 10 years
and goodwill totaling $8,617,000 amortized on a straight-line basis over 25
years.
On May 1, 1997, the Corporation consummated its acquisition of Investors Federal
Savings (Investors). The Corporation acquired all of the outstanding shares of
Investors' common stock for $5,347,000 in cash. At April 30, 1997, before
purchase accounting adjustments, Investors had assets of $30,723,000, deposits
of $26,117,000 and stockholders' equity of $4,431,000. Investors operated three
branches in southwest Kansas with one branch closed as part of the acquisition
consolidation process. This acquisition was accounted for as a purchase with
resulting goodwill totaling $925,000.
The effect of the Heritage and Investors acquisitions on the Corporation's
consolidated financial statements as if these acquisitions had occurred at the
beginning of fiscal year 1997 is not material.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -52-
- --------------------------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1999 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and other Government agency obligations .. $ 80,185 $ 6 $ (1,429) $ 78,762
States and political subdivisions ...................... 4,652 2 (61) 4,593
Other securities ....................................... 459 - (3) 456
- ------------------------------------------------------------------------------------------------------------------
$ 85,296 $ 8 $ (1,493) $ 83,811
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ......................... 6.45%
- ------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations .. $755,195 $ 79 $(15,720) $739,554
States and political subdivisions ...................... 49,857 145 (459) 49,543
Other securities ....................................... 57,708 - - 57,708
- ------------------------------------------------------------------------------------------------------------------
$862,760 $ 224 $(16,179) $846,805
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ......................... 6.53%
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
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 .. $124,314 $ 719 $ (30) $125,003
States and political subdivisions ...................... 7,168 79 (127) 7,120
Other securities ....................................... 8,978 20 (5) 8,993
- ------------------------------------------------------------------------------------------------------------------
$140,460 $ 818 $ (162) $141,116
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ......................... 6.86%
- ------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations .. $465,359 $ 876 $ (170) $466,065
States and political subdivisions ...................... 48,571 333 (276) 48,628
Other securities ....................................... 18,258 130 (3) 18,385
- ------------------------------------------------------------------------------------------------------------------
$532,188 $1,339 $ (449) $533,078
- ------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ......................... 6.40%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-53-
- --------------------------------------------------------------------------------
As of June 30, 1999, the Corporation recorded an unrealized loss on securities
available for sale as a decrease to stockholders' equity totaling $1,485,000 net
of a deferred tax benefit of approximately $555,000; and as of June 30, 1998,
recorded an unrealized gain on securities available for sale as an increase to
stockholders' equity totaling $656,000, net of deferred income taxes of
$239,000.
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 1999, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<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 ............................... $ 8,948 $ 8,948 $ 32,088 $ 32,079
Due after one year through five years ................. 20,256 20,035 24,798 24,859
Due after five years through ten years ................ 22,152 21,668 91,756 90,563
Due after ten years ................................... 33,940 33,160 714,118 699,304
- -------------------------------------------------------------------------------------------------------------------
$85,296 $ 83,811 $862,760 $846,805
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Activity from the sales of investment 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>
1999 .................................................. $30,153 $ 491 $ - $ 491
1998 .................................................. 20,189 1,287 (4) 1,283
1997 .................................................. 54,366 91 (57) 34
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999 and 1998, investment securities totaling $101,130,000 and
$179,270,000, respectively, were pledged primarily to secure public funds and
securities sold under agreements to repurchase.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -54-
- --------------------------------------------------------------------------------
NOTE 4. MORTGAGE-BACKED SECURITIES
- --------------------------------------------------------------------------------
Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1999 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation ................ $ 85,380 $ 24 $ (3,128) $ 82,276
Government National Mortgage Association .............. 44,319 88 (544) 43,863
Federal National Mortgage Association ................. 260,267 44 (10,731) 249,580
Collateralized Mortgage Obligations ................... 37,968 537 (121) 38,384
Other ................................................. 5,548 70 (14) 5,604
- -------------------------------------------------------------------------------------------------------------------
$433,482 $ 763 $(14,538) $419,707
- -------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ........................ 6.67%
- -------------------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation ................ $239,873 $ 837 $(13,065) $227,645
Government National Mortgage Association .............. 358,975 2,437 (2,734) 358,678
Federal National Mortgage Association ................. 83,888 845 (1,579) 83,154
Collateralized Mortgage Obligations ................... 169,539 55 (468) 169,126
Privately Issued Mortgage Pool Securities ............. 10,563 413 (91) 10,885
- -------------------------------------------------------------------------------------------------------------------
$862,838 $4,587 $(17,937) $849,488
- -------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ........................ 6.10%
- -------------------------------------------------------------------------------------------------------------------
<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 ................ $ 40,123 $ 557 $ (44) $ 40,636
Government National Mortgage Association .............. 75,218 116 (686) 74,648
Federal National Mortgage Association ................. 29,515 131 (914) 28,732
Collateralized Mortgage Obligations ................... 24,428 168 (26) 24,570
Other ................................................. 2,817 11 (21) 2,807
- -------------------------------------------------------------------------------------------------------------------
$172,101 $ 983 $ (1,691) $171,393
- -------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ........................ 6.55%
- -------------------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation ................ $175,707 $1,952 $ (1,632) $176,027
Government National Mortgage Association .............. 480,607 4,000 (2,091) 482,516
Federal National Mortgage Association ................. 82,921 1,664 (449) 84,136
Collateralized Mortgage Obligations ................... 166,448 122 (2,379) 164,191
Privately Issued Mortgage Pool Securities ............. 14,773 559 (160) 15,172
- -------------------------------------------------------------------------------------------------------------------
$ 920,456 $8,297 $ (6,711) $922,042
- -------------------------------------------------------------------------------------------------------------------
Weighted average interest rate ........................ 6.76%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERICIAL FEDERAL CORPORATION
<PAGE>
-55-
- --------------------------------------------------------------------------------
Mortgage-backed securities held to maturity at June 30 are classified by type of
interest payment and contractual maturity term as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ----------------------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate ................... $369,922 $362,589 5.77% $543,059 $544,083 6.80%
Fixed rate, 5-year term ........... 17,820 17,816 6.31 34,584 34,716 6.44
Fixed rate, 7-year term ........... 17,860 17,812 5.64 29,683 29,625 5.99
Fixed rate, 15-year term .......... 195,746 189,411 6.00 44,668 44,978 6.50
Fixed rate, 30-year term .......... 91,951 92,734 7.32 102,014 104,449 7.61
- ------------------------------------------------------------------------------------------------------------------------
693,299 680,362 6.05 754,008 757,851 6.84
Collateralized mortgage obligations 169,539 169,126 6.30 166,448 164,191 6.40
- ------------------------------------------------------------------------------------------------------------------------
$862,838 $849,488 6.10% $920,456 $922,042 6.76%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1999 and 1998, the Corporation recorded unrealized losses on
securities available for sale as decreases to stockholders' equity totaling
$13,775,000 and $568,000, respectively, net of deferred income tax benefits of
approximately $5,143,000 and $221,000, respectively.
Activity from the sales of mortgage-backed securities available for sale for the
years ended June 30 is summarized as follows:
Gross Gross
Realized Realized Net
Fiscal Year Ended Proceeds Gains Losses Gain
- --------------------------------------------------------------------------------
1999 ....................... $209,789 $3,885 $ - $3,885
1998 ....................... 121,187 2,511 (29) 2,482
1997 ....................... 99,273 999 (523) 476
- --------------------------------------------------------------------------------
At June 30, 1999 and 1998, mortgage-backed securities totaling $370,735,000 and
$394,802,000, respectively, were pledged as collateral primarily for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase and interest rate swap agreements.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -56-
- --------------------------------------------------------------------------------
NOTE 5. LOANS AND LEASES HELD FOR SALE
- --------------------------------------------------------------------------------
Loans and leases held for sale at June 30, 1999 and 1998, totaled $104,347,000
and $290,380,000, respectively, with weighted average rates of 6.76% and 7.21%,
respectively. Loans held for sale are secured by single-family residential
properties totaling $103,174,000 at June 30, 1999, consisting entirely of fixed
rate mortgage loans with a weighted average rate of 6.72%. Leases held for sale
totaled $1,173,000 at June 30, 1999, consisting of fixed rate leases with a
weighted average rate of 9.73%. Loans held for sale at June 30, 1998, consisted
of fixed and adjustable rate mortgage loans totaling $289,954,000 and $426,000,
respectively.
NOTE 6. LOANS AND LEASES RECEIVABLE
- --------------------------------------------------------------------------------
Loans and leases receivable at June 30 are summarized as follows:
1999 1998
- --------------------------------------------------------------------------------
Conventional mortgage loans .................... $6,509,981 $5,490,799
FHA and VA loans ............................... 406,171 358,941
Commercial real estate loans ................... 756,412 494,325
Construction loans ............................. 346,349 325,698
Consumer, other loans and leases ............... 1,442,654 1,060,631
- --------------------------------------------------------------------------------
9,461,567 7,730,394
Unamortized premiums, net ...................... 4,846 5,681
Unearned income ................................ (22,445) (13,253)
Deferred loan costs, net ....................... 11,546 21,515
Loans-in-process ............................... (153,124) (112,781)
Allowance for loan and lease losses ............ (80,344) (64,660)
- --------------------------------------------------------------------------------
$9,222,046 $7,566,896
- --------------------------------------------------------------------------------
Weighted average interest rate ................. 7.70% 7.95%
- --------------------------------------------------------------------------------
At June 30, 1999, conventional, FHA and VA loans, including loans held for sale,
totaling $7,287,850,000 are secured by residential properties located as
follows: 20% in Colorado, 13% in Nebraska, 10% in Kansas, and the remaining 57%
in 47 other states. At June 30, 1998, conventional, FHA and VA loans, including
loans held for sale, totaling $6,422,772,000 were secured by residential
properties located as follows: 24% in Colorado, 15% in Nebraska, 10% in Kansas
and the remaining 51% in 47 other states. The commercial real estate portfolio
at June 30, 1999, was secured by properties located as follows: 29% in Colorado,
15% in Kansas, 14% in Iowa and the remaining 42% in 22 other states. The
commercial real estate portfolio at June 30, 1998, was secured by properties
located as follows: 34% in Colorado, 29% in Iowa, 9% in Nebraska and the
remaining 28% in 13 other states. The lease portfolio totaling $103,985,000 and
$64,855,000 at June 30, 1999 and 1998, respectively, includes contracts to
lessees throughout the United States and involved in various industries. The
commercial operating loan portfolio, including agricultural loans, is well
diversified with no industry constituting a concentration.
Nonperforming loans and leases at June 30, 1999 and 1998, aggregated $70,015,000
and $49,366,000, respectively. Of the nonperforming loans and leases at June 30,
1999, approximately 22% were secured by properties located in Kansas, 9% in
Iowa, 6% each in California and Florida and the remaining 57% located in 46
other states. Of the nonperforming loans and leases at June 30, 1998,
approximately 12% were secured by properties located in Kansas, 8% each in
Colorado and Iowa, 7% in California, 6% in Oklahoma and the remaining 59%
located in 45 other states.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-57-
- --------------------------------------------------------------------------------
Also included in loans and leases receivable at June 30, 1999 and 1998, are
loans with carrying values of $9,729,000 and $4,302,000, respectively, the terms
of which have been modified in troubled debt restructurings. During the fiscal
years ended June 30, 1999, 1998 and 1997, the Corporation recognized interest
income on these loans aggregating $470,000, $380,000 and $852,000, respectively,
whereas under their original terms the Corporation would have recognized
interest income of $475,000, $499,000 and $1,087,000, respectively. At June 30,
1999, the Corporation had no material commitments to lend additional funds to
borrowers whose loans were subject to troubled debt restructurings. Impaired
loans, a portion of which are included in the balances for troubled debt
restructurings at June 30, 1999 and 1998, and the resulting interest income as
originally contracted and as recognized, are not material for either fiscal year
1999 or 1998.
At June 30, 1999 and 1998, the Corporation pledged real estate loans totaling
$3,365,770,000 and $3,045,978,000, respectively, as collateral for Federal Home
Loan Bank advances and other borrowings. The amount of collateral at June 30,
1998, excludes qualifying loans from First Colorado, which had a blanket pledge
with the Federal Home Loan Bank.
NOTE 7. REAL ESTATE
- --------------------------------------------------------------------------------
Real estate at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned and in judgment, net of allowance for losses of $4,894 and $1,055 ........... $22,026 $13,258
Real estate held for investment, which includes equity in unconsolidated joint ventures and
investments in real estate partnerships, net of allowance for losses of $734 and $777 ...... 9,487 8,937
- ---------------------------------------------------------------------------------------------------------------------------
$31,513 $22,195
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999 and 1998, real estate is comprised primarily of commercial real
estate (54% and 58%, respectively) and residential real estate (46% and 40%,
respectively). Real estate located by states at June 30, 1999, was as follows:
30% in Nebraska, 15% in Missouri and the remaining 55% in 37 other states. Real
estate located by states at June 30, 1998, was as follows: 39% in Nebraska, 18%
in Colorado and the remaining 43% in 23 other states.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -58-
- --------------------------------------------------------------------------------
NOTE 8. ALLOWANCES FOR LOSSES ON LOANS AND LEASES AND REAL ESTATE
- --------------------------------------------------------------------------------
An analysis of the allowances for losses on loans and leases and real estate is
summarized as follows:
<TABLE>
<CAPTION>
Loans and Real
Leases Estate Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1996 (1) .............................................. $ 59,577 $ 5,389 $ 64,966
Provision charged to operations ......................................... 13,427 480 13,907
Charges ................................................................. (15,432) (2,097) (17,529)
Recoveries .............................................................. 2,872 43 2,915
Allowances acquired in acquisitions ..................................... 1,966 31 1,997
Liberty activity for the six months ended June 30, 1996, net ............ 475 - 475
Change in estimate of allowance for bulk purchased loans ................ (1,878) - (1,878)
Charge-offs to allowance for bulk purchased loans ....................... (78) - (78)
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 (1) .............................................. 60,929 3,846 64,775
Provision charged to operations ......................................... 13,853 49 13,902
Charges ................................................................. (14,157) (2,136) (16,293)
Recoveries .............................................................. 4,816 61 4,877
Allowances acquired in acquisitions ..................................... 1,273 52 1,325
First Colorado activity for the six months ended June 30, 1997, net ..... 428 (52) 376
Mid Continent activity for the three months ended September 30, 1997, net (38) 12 (26)
Change in estimate of allowance for bulk purchased loans ................ (2,324) - (2,324)
Charge-offs to allowance for bulk purchased loans ....................... (23) - (23)
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 (1) .............................................. 64,757 1,832 66,589
Provision charged to operations ......................................... 12,400 1,574 13,974
Charges ................................................................. (15,760) (1,408) (17,168)
Recoveries .............................................................. 3,674 18 3,692
Allowances acquired in acquisitions ..................................... 17,307 3,612 20,919
Change in estimate of allowance for bulk purchased loans ................ (1,959) - (1,959)
Charge-offs to allowance for bulk purchased loans ....................... - - -
- -------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 (1) .............................................. $ 80,419 $ 5,628 $ 86,047
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $75,000, $97,000, $77,000 and $78,000 at June 30, 1999, 1998, 1997
and 1996 in general allowance for losses established primarily to cover
risks associated with borrowers' delinquencies and defaults on loans and
leases held for sale.
================================================================================
Bulk loan purchases acquired at a discount between January 1991 and June 30,
1992, are allocated an estimated allowance for bulk purchased loans that is
available for potential losses in the future on a particular loan package. At
June 30, 1999, 1998 and 1997, $6,503,000, $8,462,000 and $10,809,000,
respectively, are included in the total amount of allowance for losses on loans
and leases.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-59-
- --------------------------------------------------------------------------------
NOTE 9. LOAN SERVICING
- --------------------------------------------------------------------------------
The Corporation's mortgage banking subsidiary services real estate loans for
investors which are not included in the accompanying consolidated financial
statements. The mortgage banking subsidiary also services a substantial portion
of the Corporation's real estate loan portfolio. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding advance payments by borrowers for taxes and insurance, making
inspections as required of the mortgage premises, collecting amounts due from
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults and generally administering the loans for the investors to whom they
have been sold. The amount of loans serviced for others at June 30, 1999, 1998
and 1997, was $7,448,814,000, $7,239,726,000 and $7,506,688,000, respectively.
Custodial escrow balances maintained in connection with loan servicing totaled
approximately $120,246,000, $119,014,000 and $130,727,000 at June 30, 1999, 1998
and 1997, respectively.
The mortgage servicing portfolio is covered by servicing agreements pursuant to
the mortgage-backed securities programs of the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance, VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. The amount of funds advanced by the Corporation pursuant to
servicing agreements was not material.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "Prepaid expenses and other assets." The
activity of mortgage servicing rights at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance .......................................................... $ 67,836 $61,976 $57,688
Purchases of mortgage servicing rights ..................................... 21,959 14,483 10,194
Mortgage servicing rights from purchase acquisitions ....................... - - 271
Mortgage servicing rights capitalized through loan originations ............ 6,702 3,183 3,149
Amortization expense ....................................................... (12,021) (10,177) (9,534)
Conforming accounting practices of combining companies ..................... - (1,100) -
First Colorado activity for the six months ended June 30, 1997, net ........ - 72 -
Mid Continent activity for the three months ended September 30, 1997, net .. - (382) -
Other items, net ........................................................... 276 (219) 208
- -------------------------------------------------------------------------------------------------------------------
Ending balance ............................................................. $84,752 $67,836 $61,976
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, 1998 and 1997 the fair value of the Corporation's mortgage
servicing rights totaled approximately $106,906,000, $87,409,000 and
$90,143,000, respectively. No valuation allowances were necessary to be
established during fiscal years 1999, 1998 or 1997. At June 30, 1999, 1998 and
1997, the Corporation utilized interest rate floor agreements with notional
amounts totaling $375,000,000, $215,000,000 and $165,000,000, respectively,
designed to hedge impairment losses due to potential decreasing interest rates.
See Note 16 "Derivative Financial Instruments" for additional information.
At June 30, 1999 and 1998, there were no commitments to purchase mortgage loan
servicing rights or to sell any bulk packages of mortgage servicing rights.
Outstanding commitments to purchase mortgage loan servicing rights totaled
$1,284,000 at June 30, 1997.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -60-
- --------------------------------------------------------------------------------
NOTE 10. PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Premises and equipment at June 30 are summarized as follows:
1999 1998
- --------------------------------------------------------------------------------
Land ................................................. $ 27,878 $ 28,010
Buildings and improvements ........................... 117,127 102,748
Leasehold improvements ............................... 6,621 3,919
Furniture, fixtures and equipment .................... 138,962 96,570
- --------------------------------------------------------------------------------
290,588 231,247
Less accumulated depreciation and amortization ....... 105,286 96,296
- --------------------------------------------------------------------------------
$185,302 $134,951
- --------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment, included in occupancy
and equipment expenses, totaled $18,172,000, $13,135,000 and $11,880,000 for
fiscal years ended June 30, 1999, 1998 and 1997, respectively.
The Bank has operating lease commitments on certain premises and equipment. Rent
expense totaled $4,489,000, $3,571,000 and $2,628,000 for fiscal years ended
June 30, 1999, 1998 and 1997, respectively. Annual minimum operating lease
commitments as of June 30, 1999, are as follows: 2000 - $3,975,000; 2001 -
$3,705,000; 2002 - $2,899,000; 2003 - $2,141,000; 2004 - $1,474,000; 2005 and
thereafter - $7,859,000.
NOTE 11. INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
An analysis of intangible assets is summarized as follows:
Core Value
Goodwill of Deposits Total
- --------------------------------------------------------------------------------
Balance, June 30, 1996 ................ $ 8,473 $35,980 $ 44,453
Additions relating to acquisitions .... 17,314 7,634 24,948
Amortization expense .................. (1,855) (9,380) (11,235)
- --------------------------------------------------------------------------------
Balance, June 30, 1997 ................ 23,932 34,234 58,166
Additions relating to acquisitions .... 20,290 6,544 26,834
Amortization expense .................. (1,860) (5,954) (7,814)
- --------------------------------------------------------------------------------
Balance, June 30, 1998 ................ 42,362 34,824 77,186
Additions relating to acquisitions .... 155,928 35,265 191,193
Amortization expense .................. (6,718) (8,984) (15,702)
- --------------------------------------------------------------------------------
Balance, June 30, 1999 ................ $191,572 $61,105 $252,677
- --------------------------------------------------------------------------------
No impairment adjustment was necessary to intangible assets during fiscal years
1999, 1998 or 1997.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-61-
- --------------------------------------------------------------------------------
NOTE 12. DEPOSITS
- --------------------------------------------------------------------------------
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- --------------------------
Description and interest rates Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passbook accounts (average of 3.70% and 3.93%) ......... $1,137,282 14.9% $ 990,996 15.1%
NOW accounts (average of 1.20% and 1.23%) .............. 1,036,921 13.5 880,001 13.4
Market rate savings (average of 3.62% and 3.51%) ....... 909,233 11.9 640,487 9.8
- -----------------------------------------------------------------------------------------------------------------
Total savings (no stated maturities) ................... 3,083,436 40.3 2,511,484 38.3
- -----------------------------------------------------------------------------------------------------------------
Certificates of deposits:
Less than 3.00% ..................................... 6,555 .1 4,894 .1
3.00% - 3.99% ..................................... 73,342 1.0 7,858 .1
4.00% - 4.99% ..................................... 1,816,539 23.7 371,298 5.7
5.00% - 5.99% ..................................... 2,310,800 30.2 2,983,982 45.5
6.00% - 6.99% ..................................... 307,487 4.0 622,235 9.5
7.00% - 7.99% ..................................... 53,311 .7 51,282 .8
8.00% - 8.99% ..................................... 3,488 - 4,273 -
9.00% and over .................................... 457 - 901 -
- -----------------------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 5.38% and 5.81%) ......................... 4,571,979 59.7 4,046,723 61.7
- -----------------------------------------------------------------------------------------------------------------
$7,655,415 100.0% $6,558,207 100.0%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposit accounts for the years ended June 30 is summarized
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts ...................................................... $ 41,616 $ 39,788 $ 33,965
NOW accounts ........................................................... 12,223 10,092 10,241
Market rate savings .................................................... 26,993 18,324 17,169
Certificates of deposit ................................................ 242,026 245,548 254,228
- -----------------------------------------------------------------------------------------------------------------
$322,858 $313,752 $315,603
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year Ending June 30,
------------------------------------------------------------------------------------
Rate 2000 2001 2002 2003 2004 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.00% ........ $ 6,449 $ 15 $ 14 $ 1 $ 76 $ - $ 6,555
3.00% - 3.99% ....... 73,165 - 14 17 146 - 73,342
4.00% - 4.99% ....... 1,543,511 214,024 35,279 4,893 13,790 5,042 1,816,539
5.00% - 5.99% ....... 1,806,668 319,135 94,526 49,516 27,288 13,667 2,310,800
6.00% - 6.99% ....... 164,921 55,659 67,670 17,340 621 1,276 307,487
7.00% - 7.99% ....... 46,388 1,553 4,739 - 100 531 53,311
8.00% - 8.99% ....... 2,177 337 747 19 13 195 3,488
9.00% and over ...... 53 79 8 9 4 304 457
- ---------------------------------------------------------------------------------------------------------------
$3,643,332 $590,802 $202,997 $71,795 $42,038 $21,015 $4,571,979
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -62-
- --------------------------------------------------------------------------------
Certificates of deposit in amounts of $100,000 or more totaled $792,343,000 and
$437,711,000, respectively, at June 30, 1999 and 1998. There were no brokered
certificates of deposit at June 30, 1999 or 1998.
At both June 30, 1999 and 1998, the Corporation utilized interest rate swap
agreements with notional amounts totaling $215,000,000 to artificially lengthen
the maturity of certain deposits. Under these requirements, the Corporation pays
fixed rates of interest and receives variable rates of interest that are based
on the same rates that the Corporation pays on the hedged deposits. See Note 16
"Derivative Financial Instruments" for additional information.
At June 30, 1999 and 1998, deposits of certain state and municipal agencies and
other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $224,733,000 and $109,235,000, respectively,
and investment securities with carrying values of $84,762,000 and $85,308,000,
respectively. In accordance with regulatory requirements, at June 30, 1999 and
1998, the Corporation maintained $72,285,000 and $34,038,000, respectively, in
cash on hand and deposits at the Federal Reserve Bank in noninterest earning
reserves against certain transaction checking accounts and nonpersonal
certificates of deposit.
NOTE 13. ADVANCES FROM THE FEDERAL HOME LOAN BANK
- --------------------------------------------------------------------------------
The Corporation was indebted to the Federal Home Loan Bank at June 30 as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- --------------------------
Weighted Weighted
Interest Rate Average Average
Scheduled Maturities Due: Range Rate Amount Rate Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Within 1 year ........................... 6.05% - 8.21% 6.33% $ 295,606 5.87% $ 795,207
Over 1 year to 2 years .................. 5.06 - 8.31 6.21 194,595 6.38 252,000
Over 2 years to 3 years ................. 5.38 - 6.86 6.18 328,640 6.30 170,000
Over 3 years to 4 years ................. 5.70 - 7.20 6.47 29,825 6.17 320,000
Over 4 years to 5 years ................. -- - -- -- -- 5.97 16,350
Over 5 years ............................ 3.86 - 6.55 4.70 2,783,575 5.10 825,625
- ---------------------------------------------------------------------------------------------------------------
3.86% - 8.31% 5.05% $3,632,241 5.69% $2,379,182
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Fixed-rate advances totaling $3,046,000,000 and $1,013,000,000 at June 30, 1999
and 1998, respectively, are convertible into adjustable-rate advances at the
option of the Federal Home Loan Bank. At June 30, 1999, these convertible
advances had call dates ranging from July 1999 to March 2003 consisting
primarily of $316,000,000 within the category of scheduled maturities due over
two years to three years and $2,708,000,000 within the category due over five
years.
At June 30, 1999 and 1998, outstanding advances were collateralized by real
estate loans totaling $3,365,770,000 and $3,045,978,000, respectively, and, in
addition, at June 30, 1998, were collateralized by investment and
mortgage-backed securities totaling $9,940,000 and $3,805,000, respectively. The
amount of collateral at June 30, 1998, excludes qualifying loans from First
Colorado, which had a blanket pledge with the Federal Home Loan Bank. The
Corporation is also required to hold shares of Federal Home Loan Bank stock in
an amount at least equal to the greater of 1.0% of certain of its residential
mortgage loans or 5.0% of its outstanding advances. The Corporation was in
compliance with this requirement at June 30, 1999 and 1998, holding Federal Home
Loan Bank stock totaling $194,129,000 and $131,132,000, respectively. At June
30, 1999 and 1998, there were no commitments for advances from the Federal Home
Loan Bank.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-63-
- --------------------------------------------------------------------------------
NOTE 14. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- --------------------------------------------------------------------------------
At June 30, 1999 and 1998, securities sold under agreements to repurchase
identical securities totaled $128,514,000 and $334,294,000, respectively. An
analysis of securities sold under agreements to repurchase identical securities
for the years ended June 30 is summarized as follows:
1999 1998
- --------------------------------------------------------------------------------
Maximum month-end balance ............................. $334,294 $639,294
- --------------------------------------------------------------------------------
Average balance ....................................... $209,111 $501,979
- --------------------------------------------------------------------------------
Weighted average interest rate during the period ...... 5.94% 6.08%
Weighted average interest rate at end of period ....... 5.72% 5.96%
- --------------------------------------------------------------------------------
At June 30, 1999, securities sold under agreements to repurchase totaling
$3,514,000 matured overnight with the remaining balance of $125,000,000 having
maturities ranging from November 1999 to September 2000 with a weighted average
maturity of 213 days. At June 30, 1999, mortgage-backed securities and
investment securities with carrying values totaling $123,628,000 and
$16,369,000, respectively, and fair values totaling $122,374,000 and
$16,095,000, respectively, were pledged as collateral. At June 30, 1998,
mortgage-backed securities and investment securities with carrying values
totaling $262,531,000 and $79,217,000, respectively, and fair values totaling
$230,501,000 and $79,449,000, respectively, were pledged as collateral.
It is the Corporation's policy to enter into repurchase agreements only with
major brokerage firms that are primary dealers in government securities. At June
30, 1999, there were no repurchase agreements with any broker with balances at
risk in excess of 10.0% of stockholders' equity.
NOTE 15. OTHER BORROWINGS
- --------------------------------------------------------------------------------
Other borrowings at June 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------
<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
Purchase notes, adjustable interest, due July 31, 1999 ..................... 40,000 -
Term note, adjustable interest, due July 31, 2003 .......................... 32,500 -
Term note, adjustable interest, due September 30, 1998 ..................... - 1,000
Collateralized mortgage obligations ........................................ 3,483 6,773
Other borrowings ........................................................... 54,400 7,901
- ----------------------------------------------------------------------------------------------------------
$225,383 $110,674
- ----------------------------------------------------------------------------------------------------------
</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.
Effective May 14, 1997, CFC Preferred Trust (the Issuer), a special-purpose
wholly-owned Delaware trust subsidiary of the Corporation completed an offering
of 1,800,000 shares (issue price of $25.00 per share) totaling $45,000,000
consisting of fixed-rate 9.375% cumulative trust preferred
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -64-
- --------------------------------------------------------------------------------
securities (Capital Securities) due May 15, 2027. Also, effective May 14, 1997,
the Corporation purchased all of the common securities (Common Securities) of
the Issuer for $1,391,775. The Issuer invested the total proceeds of $46,391,775
it received in 9.375% junior subordinated deferrable interest debentures
(Debentures) issued by the Corporation. Interest paid on the Debentures will be
distributed to the holders of Capital Securities and to the Corporation as
holder of the Common Securities. As a result, under current tax law,
distributions to the holders of the Capital Securities are tax deductible for
the Corporation. These Debentures are unsecured and rank junior and are
subordinate in right of payment of all senior debt of the Corporation. The
obligations of the Corporation under the Debentures, the indenture, the relevant
trust agreement and the guarantees, in the aggregate, constitute a full and
unconditional guarantee by the Corporation of the obligations of the trust under
the trust preferred securities and rank subordinate and junior in right of
payment to all liabilities of the Corporation. The distribution rate payable on
the Capital Securities is cumulative and is payable quarterly in arrears. The
Corporation has the right, subject to events of default, at any time, to defer
payments of interest on the Debentures by extending the interest payment period
thereon for a period not exceeding 20 consecutive quarters with respect to each
deferral period, provided that no extension period may extend beyond the
redemption or maturity date of the Debentures. The Debentures mature on May 15,
2027, which may be shortened to not earlier than May 15, 2002, if certain
conditions are met. The Capital Securities would qualify as Tier 1 capital of
the Corporation should the Corporation become subject to the Federal Reserve
capital requirements for bank holding companies.
On July 31, 1998, the Corporation partially financed the acquisition of AmerUs
with $40,000,000 of one-year purchase notes from the seller due July 31, 1999.
The terms of the purchase notes require the payment of principal and interest on
the maturity date. The interest rate is adjusted monthly at 150 basis points
over the one-year Treasury bill rate. These notes were paid in full on July 30,
1999.
On July 30, 1998, the Corporation borrowed $45,000,000 in the form of a
five-year term note due July 31, 2003. Proceeds were used, in part, to finance
the acquisition of AmerUs on July 31, 1998. Terms of the note require quarterly
principal payments of $1,250,000 and quarterly interest payable at a monthly
adjustable interest rate priced at 100 basis points below the lender's national
base rate, or 6.75% at June 30, 1999. This term note, which is unsecured but
subject to certain covenants, was partially paid down on November 13, 1998, by
an additional $8,750,000, resulting in a balance of $32,500,000 at June 30,
1999. This note was refinanced on July 1, 1999, from the same lender with a
$32,500,000 term note due June 30, 2004, and bearing interest adjusted monthly
at 100 basis points below the lender's national base rate.
On December 31, 1996, the Corporation borrowed $28,000,000 in the form of a
five-year term note originally due December 31, 2001. Proceeds were used to
refinance a short-term promissory note obtained in the financing of the
repurchase of 2,812,725 shares of the Corporation's common stock. This unsecured
term note carried a monthly adjustable interest rate which was 7.50% at June 30,
1998. This term note was paid in full on July 29, 1998.
At June 30, 1999, notes issued in conjunction with collateralized mortgage
obligations bear interest from 7.89% to 8.75% and are due in varying amounts
contractually through 2019. The notes are secured by FNMA and FHLMC
mortgage-backed securities with book values of approximately $9,345,000 and
$13,600,000, respectively, at June 30, 1999 and 1998. As the principal balance
on the collateral on these notes repay, the notes are correspondingly repaid.
Other borrowings at June 30, 1999, consisted of Federal funds purchased totaling
$54,400,000 bearing an interest rate of 6.06% and due July 1, 1999. Other
borrowings at June 30, 1998, were collateralized by certain mortgage-backed
securities and by lease-backed notes that were secured by lease financing
receivables with a book value totaling $3,121,000 and restricted cash totaling
$500,000.
Contractual principal maturities of other borrowings as of June 30, 1999, for
the next five fiscal years are as follows: 2000 - $101,116,000; 2001 -
$6,556,000; 2002 - $5,211,000; 2003 - $5,000,000; 2004 - $12,500,000; 2005 and
thereafter - $95,000,000.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-65-
- --------------------------------------------------------------------------------
NOTE 16. DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following summarizes the Corporation's interest rate swap agreements, by
maturity date, at June 30:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- ---------------------------------------------
Notional Interest Rate Notional Interest Rate
Scheduled Maturities Due: Amount Paying Receiving Amount Paying Receiving
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 ......................... $ 75,000 6.24% 4.43% $ 75,000 6.24% 5.80%
2001 ......................... 140,000 6.00 4.77 140,000 6.00 5.29
- ---------------------------------------------------------------------------------------------------------------------------
$ 215,000 6.08% 4.65% $215,000 6.08% 5.47%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation began utilizing interest rate swaps to artificially lengthen the
maturity of certain deposit liabilities. during fiscal year 1997. As of June 30,
1999 and 1998, the Corporation had notional amounts outstanding totaling
$215,000,000 for such purposes. Under these agreements, the Corporation pays
fixed rates of interest and receives variable rates of interest that are based
on the same rates that the Corporation pays on the hedged deposit liabilities.
Such variable rates are based on the 13-week average yield of the three-month
U.S. Treasury bill. Net interest settlement is quarterly. Net interest expense
on the swap agreements totaled $2,849,000, $1,926,000 and $916,000,
respectively, for fiscal years 1999, 1998 and 1997. The fair value of the
interest rate swaps at June 30, 1999, resulted in a loss position of
approximately $2,301,000 which represents the amount that would be paid to
terminate the swap agreements.
The interest rate swap agreements were collateralized at June 30, 1999, by
mortgage-backed securities with carrying values of $7,941,000 and at June 30,
1998, by mortgage-backed securities and investment securities with carrying
values of $4,665,000 and $998,000, respectively. Entering into interest rate
swap agreements involves the credit risk of dealing with intermediary and
primary counterparties and their ability to meet the terms of the respective
contracts. The Corporation is exposed to credit loss in the event of
nonperformance by the counterparties to the interest rate swaps if the
Corporation is in a net interest receivable position at the time of potential
default by the counterparties. However, at June 30, 1999 and 1998, the
Corporation was in a net interest payable position. The Corporation does not
anticipate nonperformance by the counterparties.
At June 30, 1999 and 1998, the Corporation had interest rate floor agreements
with notional amounts totaling $375,000,000 and $215,000,000, respectively.
These interest rate floor agreements with strike rates ranging from 3.84% to
5.75%, are designed to hedge impairment losses on mortgage loan servicing rights
due to decreasing interest rates. By purchasing floor agreements, the
Corporation would be paid cash based on the differential between a short-term
rate and the strike rate, applied to the notional principal amount, should the
current short-term rate fall below the strike rate level of the agreement. These
interest rate floor agreements mature between September 1999 and June 2002.
Premiums paid to enter into such agreements are deferred and totaled $541,000,
$138,000 and $399,000, respectively, for fiscal years 1999, 1998 and 1997.
During fiscal years 1999, 1998 and 1997, amortization expense on these premiums
totaled $188,000, $122,000 and $67,000, respectively. In addition, during fiscal
years 1999, 1998 and 1997, agreements were sold resulting in deferred gains of
$135,000, $41,000 and $39,000, respectively. These deferred gains are amortized
as a credit to expense and during fiscal years 1999, 1998 and 1997 totaled
$109,000, $27,000 and $10,000, respectively. The deferred premiums are amortized
over the lives of the respective agreements and the deferred gains are amortized
over the remaining lives of the agreements sold. The fair value of the interest
rate floor agreements at June 30, 1999, resulted in a gain position of
approximately $249,000 which represents the amount that would be received to
terminate the floor agreements.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -66-
- --------------------------------------------------------------------------------
NOTE 17. INCOME TAXES
- --------------------------------------------------------------------------------
The following is a comparative analysis of the provision for federal and state
taxes on income:
Year Ended June 30,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal ............................ $42,937 $46,154 $34,508
State .............................. 3,230 3,698 3,034
- --------------------------------------------------------------------------------
46,167 49,852 37,542
- --------------------------------------------------------------------------------
Deferred:
Federal ............................ 16,789 2,188 713
State .............................. 304 316 (275)
- --------------------------------------------------------------------------------
17,093 2,504 438
- --------------------------------------------------------------------------------
Total provision for income taxes ...... $63,260 $52,356 $37,980
- --------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax rate to
the consolidated effective tax rate:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate .............................................. 35.0% 35.0% 35.0%
Nondeductible merger-related expenses and other nonrecurring charges ........... 4.9 1.8 -
Amortization of discounts, premiums and intangible assets from acquisitions .... 1.4 .4 -
Tax exempt interest ............................................................ (.8) (1.0) (.9)
Income tax credits ............................................................. (.4) (.5) (.6)
State income taxes, net of federal income tax benefit .......................... 1.5 2.0 1.8
Other items, net ............................................................... (1.0) (.2) .3
- ----------------------------------------------------------------------------------------------------------------------
Effective tax rate ............................................................. 40.6% 37.5% 35.6%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-67-
- --------------------------------------------------------------------------------
The components of deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
<S> <C> <C>
Federal Home Loan Bank stock ..................................................... $19,060 $14,332
Core value of acquired deposits .................................................. 11,108 6,630
Real estate investment trust deferred income ..................................... 8,803 -
Deferred loan fees ............................................................... 7,632 9,703
Mortgage servicing rights ........................................................ 6,699 4,054
Differences between book and tax basis of premises and equipment ................. 6,645 6,076
Basis differences between tax and financial reporting arising from acquisitions .. 1,847 2,486
Other items ...................................................................... 6,932 5,657
- ------------------------------------------------------------------------------------------------------------------
68,726 48,938
- ------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible ........... 29,945 19,192
Basis differences between tax and financial reporting arising from acquisitions .. 10,718 4,760
State operating loss carryforwards ............................................... 5,085 3,494
Employee benefits ................................................................ 2,919 3,780
Collateralized mortgage obligations .............................................. 2,584 2,738
Accretion of discounts on purchased items ........................................ 1,786 1,713
Other items ...................................................................... 5,436 6,201
- ------------------------------------------------------------------------------------------------------------------
58,473 41,878
Valuation allowance ................................................................. (5,089) (3,582)
- ------------------------------------------------------------------------------------------------------------------
53,384 38,296
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax liability .......................................................... $15,342 $10,642
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance, primarily attributable to state operating loss
carryforwards, was $5,089,000 at June 30, 1999, increasing from $3,582,000 at
June 30, 1998, primarily due to increases in such state net operating losses
available for income tax purposes.
In August 1996, changes in the federal tax law repealed the reserve method of
accounting for tax bad debt deductions and, effective July 1, 1996, required the
Corporation to calculate the tax bad debt deduction based on actual charge-offs.
These tax law changes resulted in a charge of $191,000 to income tax expense in
fiscal year 1997.
In accordance with provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," a deferred tax liability has not been
recognized for the bad debt reserves of the Bank created in the tax years which
began prior to December 31, 1987 (the base year). At June 30, 1999, the amount
of these reserves totaled approximately $105,266,000 with an unrecognized
deferred tax liability approximating $38,527,000. Such unrecognized deferred tax
liability could be recognized in the future, in whole or in part, if (i) there
is a change in federal tax law, (ii) the Bank fails to meet certain definitional
tests and other conditions in the federal tax law, (iii) certain distributions
are made with respect to the stock of the Bank or (iv) the bad debt reserves are
used for any purpose other than absorbing bad debt losses.
During fiscal year 1998, the Internal Revenue Service completed its examination
of the Corporation's consolidated federal income tax returns through June 30,
1995. Such examination had no effect on the Corporation's results of operations
for fiscal year 1998.
NOTE 18. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS
- --------------------------------------------------------------------------------
Effective July 3, 1998, stockholders approved an amendment to the Corporation's
Articles of Incorporation to increase the number of authorized shares of common
stock to 120,000,000 shares.
On December 19, 1988, the Board of Directors of the Corporation adopted a
Shareholder Rights Plan and declared a dividend of stock purchase rights
consisting of one primary
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -68-
- --------------------------------------------------------------------------------
right and one secondary right for each outstanding share of common stock payable
on December 30, 1988, and with respect to each share of common stock issued by
the Corporation at any time after such date and prior to the earlier of the
occurrence of certain events or expiration of such rights. These rights are
attached to and trade only together with the common stock shares. The provisions
of the Shareholder Rights Plan are designed to protect the interests of the
stockholders of record in the event of an unsolicited or hostile attempt to
acquire the Corporation at a price or on terms that are not fair to all
shareholders. Unless rights are exercised, holders have no rights as a
stockholder of the Corporation (other than rights resulting from such holder's
ownership of common shares), including, without limitation, the right to vote or
to receive dividends. Effective December 18, 1998, the Corporation's Shareholder
Rights Plan was amended primarily to extend the expiration date of such rights
to December 19, 2008, unless earlier redeemed by the Corporation. At June 30,
1999, no such rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of such shares and the qualifications, limitations and restrictions
thereof. The preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights.
Effective April 1, 1999, the Office of Thrift Supervision (OTS) issued a final
rule revising its capital distribution regulation. This revised regulation
reflects the OTS's implementation of the system of prompt corrective action
established under the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) and conforms the OTS's capital distribution requirements more
closely to those of the other banking agencies. Under the terms of this
regulation, the Bank is permitted to pay capital distributions during a calendar
year up to 100.0% of its retained net income (net income determined in
accordance with generally accepted accounting principles less total capital
distributions declared) for the current calendar year combined with the Bank's
retained net income for the preceding two calendar years without prior approval
of the OTS. At June 30, 1999, the Bank is permitted to pay an aggregate amount
approximating $113,783,000 in dividends under this regulation. Should the Bank's
regulatory capital fall below certain levels, applicable law and certain other
federal regulations would require prior approval of such proposed dividends and,
in some cases, would prohibit the payment of dividends.
On August 21, 1996, the Corporation consummated the repurchase of 2,812,725
shares of its common stock, $.01 par value, from CAI Corporation, a Dallas-based
investment company, for an aggregate purchase price totaling $48,910,000
excluding $414,000 in transaction costs. The repurchased shares represented 8.3%
of the outstanding shares of the Corporation's common stock prior to the
repurchase. Pursuant to Nebraska corporate law, the 2,812,725 shares of
repurchased common stock were canceled. The Corporation also reimbursed CAI
Corporation a total of $2,262,500 for costs and expenses incurred in connection
with the 1995 proxy contest and the pro rata portion of the dividend CAI
Corporation otherwise would have received for the quarter ended September 30,
1996. These nonrecurring expenses paid to CAI Corporation are included in other
operating expenses in fiscal year 1997.
On November 17, 1997, the Board of Directors declared a three-for-two stock
split effected in the form of a 50 percent stock dividend to stockholders of
record on November 28, 1997. The stock dividend was distributed on December 15,
1997, and totaled 10,865,530 shares of common stock with $109,000 transferred
from additional paid-in capital to common stock to record this distribution.
Fractional shares resulting from the stock split were paid in cash. Also, on
November 18, 1996, the Board of Directors declared a three-for-two stock split
effected in the form of a 50 percent stock dividend to stockholders of record on
December 31, 1996. This stock dividend, which was distributed on January 14,
1997, totaled 10,745,214 shares of common stock with $72,000 transferred from
additional paid-in capital to common stock. Fractional shares resulting from the
stock split were paid in cash.
Effective April 28, 1999, the Board of Directors authorized the repurchase of up
to five percent, or approximately 3,000,000 shares, of the Corporation's
outstanding common stock during the next 18 months. As of June 30, 1999, the
Corporation repurchased and cancelled 1,500,000 shares of its common stock at a
cost of $36,218,000.
NOTE 19. REGULATORY CAPITAL
- --------------------------------------------------------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators, that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-69-
- --------------------------------------------------------------------------------
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
corrective action provisions pursuant to FDICIA require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for prompt corrective action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios as set forth in the following table. At June 30, 1999
and 1998, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements:
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------------------------------------
Actual Capital Required Capital
----------------------- --------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital ...................................... $880,400 6.97% $189,412 1.50%
Core capital .......................................... 890,967 7.05 379,142 3.00
Risk-based capital .................................... 957,676 13.70 559,279 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital ............................... 890,967 7.05 631,903 5.00
Tier 1 risk-based capital ............................. 890,967 12.74 419,459 6.00
Total risk-based capital .............................. 957,676 13.70 699,099 10.00
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As of June 30, 1998
-----------------------------------------------------------
Actual Capital Required Capital
------------------------ ---------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital ...................................... $813,961 7.88% $154,993 1.50%
Core capital .......................................... 826,686 7.99 310,278 3.00
Risk-based capital .................................... 878,363 15.49 453,593 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital ............................... 826,686 7.99 517,130 5.00
Tier 1 risk-based capital ............................. 826,686 14.58 340,195 6.00
Total risk-based capital .............................. 878,363 15.49 566,992 10.00
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of June 30, 1999, the most recent notification from the OTS categorized the
Bank as "well-capitalized" under the regulatory framework for prompt corrective
action provisions under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's classification.
NOTE 20. COMMITMENTS
AND CONTINGENCIES
- --------------------------------------------------------------------------------
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, standby
letters of credit, financial guarantees on certain loans sold with recourse and
on other contingent obligations. These instruments involve elements of credit
and interest rate risk in excess of the amount recognized in the Consolidated
Statement of Financial Condition. The contractual amounts of these instruments
represent the maximum credit risk to the Corporation. The Corporation uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
At June 30, 1999, the Corporation issued commitments, excluding undisbursed
portions of loans in process, of
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -70-
- --------------------------------------------------------------------------------
approximately $771,842,000 as follows: $296,879,000 to originate loans,
$106,000,000 to purchase loans, $81,500,000 to purchase investment securities,
$9,953,000 to purchase mortgage-backed securities and $277,510,000 to provide
unused lines of credit for commercial and consumer use. At June 30, 1998, the
Corporation had issued commitments, excluding undisbursed portions of loans in
process, of approximately $618,694,000 as follows: $303,823,000 to originate
loans, $144,150,000 to purchase loans and $170,721,000 to provide unused lines
of credit for commercial and consumer use. There were no commitments to purchase
mortgage loan servicing rights at June 30, 1999 or 1998.
Loan commitments, which are funded subject to certain limitations, extend over
various periods of time. Generally, unused loan commitments are canceled upon
expiration of the commitment term as outlined in each individual contract. These
outstanding loan commitments to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn upon. The Corporation evaluates each customer's credit worthiness on a
separate basis and requires collateral based on this evaluation. Collateral
consists mainly of residential family units and personal property.
At June 30, 1999 and 1998, the Corporation had approximately $77,686,000 and
$392,760,000, respectively, in mandatory forward delivery commitments to sell
residential mortgage loans. At June 30, 1999 and 1998, loans sold subject to
recourse provisions totaled approximately $16,601,000 and $29,471,000,
respectively, which represents the total potential credit risk associated with
these particular loans. Such credit risk would, however, be offset by the value
of the single-family residential properties that collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 12, 1994, the Bank and the Corporation commenced litigation against
the United States in the United States Court of Federal Claims seeking to
recover monetary relief for the government's refusal to honor certain contracts
that it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States. The Corporation and the Bank are pursuing
alternative damage claims of up to approximately $230,000,000. The Bank also
assumed a lawsuit in the merger with Mid Continent against the United States
also relating to a supervisory goodwill claim filed by the former Mid Continent.
The litigation status and process of these legal actions, as well as that of
numerous actions brought by others alleging similar claims with respect to
supervisory goodwill and regulatory capital credits, make the value of the
claims asserted by the Bank (including the Mid Continent claim) uncertain as to
their ultimate outcome, and contingent on a number of factors and future events
which are beyond the control of the Bank, both as to substance, timing and the
dollar amount of damages that may be awarded to the Bank and the Corporation if
they finally prevail in this litigation.
NOTE 21. EMPLOYEE BENEFIT AND INCENTIVE PLANS
- --------------------------------------------------------------------------------
RETIREMENT SAVINGS PLAN
The Corporation maintains a contributory deferred savings 401(k) plan covering
substantially all employees. The Corporation's matching contributions are equal
to 100% of the first 8% of participant contributions. Participants vest
immediately in their own contributions. For contributions of the Corporation,
participants vest over a five-year period and, thereafter, vest 100% on an
annual basis if employed on the last day of each calendar year. Contribution
expense was $3,737,000, $2,312,000 and $1,998,000 for fiscal years ended June
30, 1999, 1998 and 1997, respectively.
STOCK OPTION AND INCENTIVE PLANS
The Corporation maintains the 1996 Stock Option and Incentive Plan (the 1996
Plan), the 1984 Stock Option and Incentive Plan, as amended (the 1984 Plan), and
various stock option and incentive plans assumed in certain mergers since 1995.
These plans permit the granting of stock options, restricted stock awards and
stock appreciation rights. Stock options are generally 100% exercisable on the
date of grant over a period not to exceed 10 years from the date of grant with
the option price equal to market value on the date of grant. However, stock
options granted to executives vest over various periods not exceeding three
years. Recipients of restricted stock have the usual rights of a shareholder,
including the rights to receive dividends and to vote the shares; however, the
common stock will not be vested until certain restrictions are satisfied. The
term of the 1984 Plan extends to July 31, 2002, and the term of the 1996 Plan to
September 11, 2006.
Effective July 3, 1998, shareholders approved an amendment to the 1996 Plan to
increase the number of shares available for grant by 2,400,000 shares. Such
shares were registered
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-71-
- --------------------------------------------------------------------------------
on July 7, 1998. The following table presents the activity of all stock option
plans for each of the three fiscal years ended June 30, 1999, and the stock
options outstanding at the end of the respective fiscal years:
<TABLE>
<CAPTION>
Weighted
Stock Option Average Price Aggregate
Shares Per Share Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at June 30, 1996 ................................ 1,595,158 $ 7.69 $12,266
Granted .................................................. 1,652,891 15.49 25,599
Exercised ................................................ (244,655) 4.93 (1,205)
Canceled ................................................. (32,559) 13.15 (428)
- -------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1997 ................................ 2,970,835 12.20 36,232
Granted .................................................. 744,972 33.91 25,261
Exercised ................................................ (831,300) 7.77 (6,463)
Canceled ................................................. (20,251) 15.16 (307)
- -------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1998 ................................ 2,864,256 19.11 54,723
Granted .................................................. 766,825 24.19 18,549
Exercised ................................................ (1,000,491) 12.78 (12,785)
Canceled ................................................. (41,483) 32.32 (1,357)
- -------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1999 ................................ 2,589,107 $22.84 $59,130
- -------------------------------------------------------------------------------------------------------------
Exercisable at June 30, 1999 ................................ 2,299,394 $22.49 $51,722
- -------------------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1999:
1984 Plan ................................................ 8,600
1996 Plan ................................................ 2,546,500
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the Corporation's stock options
outstanding at June 30, 1999:
<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 - $ 2.67 73,767 1.83 $ 2.31 73,767 $ 2.31
5.36 - 6.26 11,894 4.69 6.21 11,894 6.21
9.01 - 13.77 586,883 6.57 12.63 586,883 12.63
17.22 - 22.17 441,829 7.51 20.21 441,829 20.21
24.19 - 25.26 787,874 9.84 24.22 538,231 24.23
34.16 686,860 8.88 34.16 646,790 34.16
- ---------------------------------------------------------------------------------------------------------------------------
$ 1.11 - $34.16 2,589,107 8.19 $ 22.84 2,299,394 $ 22.49
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During fiscal years 1999 and 1998, non-incentive stock options for 50,000 and
55,000 shares, respectively, of the Corporation's common stock were granted
under the 1996 Plan to directors of the Corporation and the Bank. Stock options
under the 1984 Plan and the 1996 Plan were also granted to executives and
employees during fiscal years 1999 and 1998 for 766,825 (1996 Plan) and 668,920
shares (1984 Plan - 144,239 shares and 1996 Plan - 524,681 shares),
respectively. Such grants were in accordance with a management incentive plan
providing for these awards pursuant to the attainment of certain operating goals
of the Corporation for the respective fiscal years.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -72-
- --------------------------------------------------------------------------------
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option and incentive plans. Accordingly, no
compensation cost has been recognized for stock options granted. Had
compensation cost been determined based on the fair value at the grant dates for
stock options awarded pursuant to the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Corporation's net income and earnings per share would have been reduced to the
pro forma amounts indicated in the following table.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported ..................... $92,392 $87,413 $68,256
Pro forma ....................... 84,101 79,615 66,333
- --------------------------------------------------------------------------------
Earnings per share:
Basic -
As reported ................... $ 1.55 $ 1.55 $ 1.17
Pro forma ..................... 1.41 1.41 1.14
Diluted -
As reported ................... $ 1.54 $ 1.52 $ 1.16
Pro forma ..................... 1.42 1.40 1.12
- --------------------------------------------------------------------------------
</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 in fiscal years 1999, 1998 and 1997, respectively: dividend
yield of 1.07%, .64% and .84%; expected volatility of 26%, 24% and 25%;
risk-free interest rates of 5.50%, 5.72% and 6.62%; and expected lives of six
years for the plans for each year.
Restricted stock is also granted for awards earned each fiscal year under
management incentive plans. On the grant dates of June 30, 1999, 1998 and 1997,
the Corporation issued restricted stock for 39,072 shares, 39,494 shares and
37,761 shares, respectively, with an aggregate market value of $906,000,
$1,249,000, and $935,000, respectively. The awards of restricted stock vest 20%
on each anniversary of the grant date, provided that the employee has completed
the specified service requirement, or earlier if the employee dies or is
permanently and totally disabled or upon a change in control. Total deferred
compensation on the unvested restricted stock totaled $1,887,000, $1,944,000,
and $1,435,000, at June 30, 1999, 1998 and 1997, respectively, and is recorded
as a reduction of stockholders' equity. The value of the restricted shares is
amortized to compensation expense over the five-year vesting period.
Compensation expense applicable to the restricted stock totaled $960,000,
$731,000 and $531,000 for fiscal years 1999, 1998 and 1997, respectively.
First Colorado, Liberty, Mid Continent and Perpetual had certain deferred
compensation, retirement and incentive plans that were effectively terminated
after acquisition by the Corporation. During fiscal years 1999 and 1998 these
plans were in the process of final distribution of plan assets to participants
with all appropriate unearned compensation and employer contributions recognized
as charges to operations in the respective fiscal years.
POSTRETIREMENT BENEFITS
The Corporation recognizes the cost of providing postretirement benefits other
than pensions over the employee's period of service. The determination of the
accrual liability requires a calculation of the accumulated postretirement
benefit obligation (APBO) which represents the actuarial present value of
postretirement benefits to be paid out in the future (primarily health care
benefits to be paid to retirees) that have been earned as of the end of the
year. The Corporation's postretirement benefit plan is unfunded. The table on
the following page reconciles the status of the plan with the amounts recognized
in the Consolidated Statement of Financial Condition at June 30, 1999 and 1998.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-73-
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
APBO at the beginning of the year ............................. $ 906 $1,110
Service cost - benefits earned during the fiscal year ......... 47 63
Interest cost on benefit obligation ........................... 57 81
Actuarial (gain) loss ......................................... 269 (317)
Retiree contributions ......................................... 111 92
Benefits paid ................................................. (280) (123)
- -----------------------------------------------------------------------------------------------
APBO at the end of the year ................................... $ 1,110 $ 906
- -----------------------------------------------------------------------------------------------
Change in the fair value of plan assets:
Fair value of plan assets at the beginning of the year ........ $ - $ -
Retiree contributions ......................................... 111 92
Employer contributions ........................................ 169 31
Benefits paid ................................................. (280) (123)
- -----------------------------------------------------------------------------------------------
Fair value of plan assets at the end of the year .............. $ - $ -
- -----------------------------------------------------------------------------------------------
Funded status of the plan:
Funded status at the beginning of the year .................... $(1,110) $ (906)
Unrecognized prior service cost ............................... (259) (288)
Unrecognized net loss ......................................... 533 276
- -----------------------------------------------------------------------------------------------
Accrued postretirement benefit cost at the end
of the year included in other liabilities ................... $ (836) $ (918)
- -----------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the components of the net periodic postretirement
benefit cost for the fiscal years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the fiscal year ................. $ 47 $ 63 $105
Interest cost on accumulated postretirement benefit obligation ........ 57 81 99
Amortization (accretion) of net loss (gain) ........................... (17) 4 40
- --------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense ........................... $ 87 $148 $244
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used to determine the APBO was 7.0%, 7.0% and
7.75%, respectively, for fiscal years ended June 30, 1999, 1998 and 1997. The
assumed health care cost trend rate used in measuring the APBO as of July 1,
1998, was 8.0% decreasing gradually until it reaches 5.0% in 2008, when it
remains constant. Assumed health care cost trend rates have a significant effect
on the amounts reported for the Corporation's health benefit plan. A
one-percentage point change in assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
One-Percentage Point
Increase Decrease
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Total service and interest cost components for fiscal year 1999 ......... $15 $(12)
APBO as of June 30, 1999 ................................................ $71 $(66)
- -------------------------------------------------------------------------------------------------
</TABLE>
The Corporation maintains an unfunded postretirement survivor income plan for
certain key executives that provides benefits to beneficiaries based upon the
death of such executives and their employment status at the time of death (i.e.,
normal retirement, termination or death prior to retirement). At June 30, 1999,
1998 and 1997, the accrued postretirement benefit cost included in other
liabilities totaled $337,000, $220,000 and $125,000, respectively, and the net
postretirement benefit cost charged to operations totaled $117,000, $95,000 and
$92,000 for the respective fiscal years. The weighted average discount rate used
to determine the accrued postretirement benefit cost was 7.0%, 7.0% and 7.75%,
respectively, for fiscal years ended June 30, 1999, 1998 and 1997, and the
assumed annual rate of increase for compensation was 3.0% for the last three
fiscal years.
- --------------------------------------------------------------------------------
COMMERCIAL CORPORATION CORPORATION
<PAGE>
- -74-
- --------------------------------------------------------------------------------
NOTE 22. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF FINANCIAL CONDITION
- ------------------------------------------
<TABLE>
<CAPTION>
June 30,
----------------------------
ASSETS 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash ............................................................................ $ 10,412 $ 40,005
Other assets .................................................................... 4,600 26,959
Intangible asset ................................................................ - 6,730
Equity in CFC Preferred Trust ................................................... 1,392 1,392
Equity in Commercial Federal Bank ............................................... 1,130,201 889,233
- ------------------------------------------------------------------------------------------------------------------
Total Assets ................................................................. $1,146,605 $964,319
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities:
Other liabilities ............................................................ $ 10,830 $ 5,732
Unsecured promissory term note ............................................... 72,500 1,000
Subordinated extendible notes ................................................ 50,000 50,000
Junior subordinated deferrable interest debentures ........................... 46,392 46,392
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities .......................................................... 179,722 103,124
- ------------------------------------------------------------------------------------------------------------------
Stockholders' Equity ............................................................ 966,883 861,195
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ................................... $1,146,605 $964,319
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
- ---------------------------------
Year Ended June 30,
---------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Dividend income from the Bank ....................................... $67,904 $47,627 $42,993
Interest income ..................................................... 2,373 3,157 4,992
Other income ........................................................ 362 1,711 1,475
Expenses:
Interest expense .................................................... (13,175) (9,329) (8,586)
Operating expenses .................................................. (8,557) (9,286) (7,566)
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary items
and equity in undistributed earnings of subsidiaries ................ 48,907 33,880 33,308
Income tax benefit ..................................................... (4,042) (3,719) (2,965)
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary items
and equity in undistributed earnings of subsidiaries ................ 52,949 37,599 36,273
Extraordinary items, net of tax benefit ................................ - - (583)
- ------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries ......... 52,949 37,599 35,690
Equity in undistributed earnings of subsidiaries ....................... 39,443 49,814 32,566
- ------------------------------------------------------------------------------------------------------------------
Net income ............................................................. $92,392 $87,413 $68,256
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-75-
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
- ---------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income ............................................................. $ 92,392 $ 87,413 $ 68,256
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary items, net of tax benefit ........................... - - 583
Equity in undistributed earnings of subsidiaries .................. (39,443) (49,814) (32,566)
Other items, net .................................................. 16,639 (31) 2,342
- ------------------------------------------------------------------------------------------------------------------
Total adjustments ............................................... (22,804) (49,845) (29,641)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ..................... 69,588 37,568 38,615
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchase of stock of and cash distributions into the Bank .............. - (426) (17,157)
Purchase of common securities of CFC Preferred Trust ................... - - (1,392)
Payments for acquisitions .............................................. (179,556) - -
Other items, net ....................................................... 2,479 11,373 30,094
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities .............. (177,077) 10,947 11,545
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from issuance of subordinated extendible notes, net ........... - - 48,500
Proceeds from issuance of notes payable ................................ 85,000 - 55,000
Payment of senior and subordinated notes ............................... - - (47,150)
Payment of notes payable ............................................... (13,500) (40,395) (24,293)
Proceeds from issuance of junior subordinated deferrable interest
debentures ............................................................ - - 46,392
Payments for debt issue costs .......................................... - - (2,218)
Repurchases of common stock ............................................ (36,218) (1,886) (86,299)
Issuance of common stock ............................................... 45,095 6,519 4,000
Proceeds from loan repayments from employee stock ownership plans ...... 11,058 - -
Payment of cash dividends on common stock .............................. (13,539) (16,147) (12,354)
Other items, net ....................................................... - 204 (2,678)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities .............. 77,896 (51,705) (21,100)
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
CASH AND CASH EQUIVALENTS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net cash position ............................... (29,593) (3,190) 29,060
Balance, beginning of year ............................................. 40,005 43,379 13,753
Adjustments to convert acquisitions to fiscal year end ................. - (184) 566
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year ................................................... $ 10,412 $ 40,005 $ 43,379
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest expense .................................................... $ 10,722 $ 9,651 $ 7,129
Income taxes, net ................................................... 54,249 51,366 23,645
Non-cash investing and financing activities:
Common stock issued in connection with the acquisitions of
businesses ......................................................... - 32,267 19,420
Common stock received in connection with employee benefit plans,
net ................................................................ (475) (4,180) (320)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -76-
- --------------------------------------------------------------------------------
NOTE 23. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Corporation has identified two distinct lines of business operations for the
purposes of management reporting: Community Banking and Mortgage Banking. These
segments were determined based on the Corporation's financial accounting and
reporting processes with insurance and securities brokerage operations
aggregated with Community Banking. Management makes operating decisions and
assesses performance based on a continuous review of these two primary
operations.
The Community Banking segment involves a variety of traditional banking and
financial services. These services include retail banking services, consumer
checking and savings accounts, and loans for consumer, commercial real estate,
residential mortgage and business purposes. Also included in this segment is
insurance and securities brokerage services. The Community Banking services are
offered through the Bank's branch network, including traditional offices,
supermarkets and convenience stores, ATMs, 24-hour telephone centers and the
Internet. Community Banking is also responsible for the Corporation's investment
and mortgage-backed securities portfolios and the corresponding management of
deposits, advances from the FHLB and certain other borrowings.
The Mortgage Banking segment involves the origination and purchase of
residential mortgage loans, the sale of such mortgage loans in the secondary
mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans. Mortgage Banking operations are
conducted through the Bank's branches, offices of a mortgage banking subsidiary
and a nationwide correspondent network of mortgage loan originators. The Bank
allocates expenses to the Mortgage Banking operation on terms that are not
necessarily indicative of those which would be negotiated between unrelated
parties. The Mortgage Banking segment also originates and sells loans to the
Bank. These sales are primarily at par such that the Mortgage Banking operation
records losses equal to the expenses it incurs net of fees collected. All of
these losses are deferred by the Bank and amortized over the estimated life of
the loans the Bank purchased.
The Parent Company includes interest income earned on intercompany cash balances
and intercompany transactions, interest expense on Parent Company debt and
operating expenses for general corporate purposes.
The contribution of the major business segments to the consolidated results for
the last three fiscal years ended June 30 is summarized in the following table:
<TABLE>
<CAPTION>
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1999:
Net interest income (loss) ............... $ 312,502 $ 11,075 $ (10,802) $ 19,558 $ 332,333
Provision for loan and lease losses ...... 11,980 420 - - 12,400
Non-interest income ...................... 95,020 52,535 107,709 (153,729) 101,535
Total other expense ...................... 224,578 33,069 8,557 (388) 265,816
Net income before income taxes ........... 170,964 30,121 88,350 (133,783) 155,652
Income tax provision (benefit) ........... 57,474 9,828 (4,042) - 63,260
Net income ............................... 113,490 20,293 92,392 (133,783) 92,392
- ------------------------------------------------------------------------------------------------------------------
Total revenue ............................ 909,055 64,228 110,082 (142,476) 940,889
Intersegment revenue ..................... 33,764 6,952 109,034
Depreciation and amortization ............ 16,382 1,760 30 - 18,172
Total assets ............................. 12,909,398 282,374 1,146,605 (1,562,915) 12,775,462
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-77-
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998:
Net interest income (loss) ............... $ 255,535 $ 13,778 $ (6,172) $ 17,158 $ 280,299
Provision for loan and lease losses ...... 13,433 420 - - 13,853
Non-interest income ...................... 93,453 48,610 99,152 (143,694) 97,521
Total other expense ...................... 187,926 29,854 9,286 (2,868) 224,198
Net income before income taxes ........... 147,629 32,114 83,694 (123,668) 139,769
Income tax provision (benefit) ........... 45,214 10,862 (3,719) (1) 52,356
Net income ............................... 102,415 21,252 87,413 (123,667) 87,413
- ------------------------------------------------------------------------------------------------------------------
Total revenue ............................ 820,667 72,439 102,309 (140,206) 855,209
Intersegment revenue ..................... 19,769 18,271 100,505
Depreciation and amortization ............ 11,628 1,497 10 - 13,135
Total assets ............................. 10,550,020 440,052 964,319 (1,555,162) 10,399,229
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1997:
Net interest income (loss) ............... $ 235,892 $ 11,060 $ (3,594) $ 20,265 $ 263,623
Provision for loan and lease losses ...... 13,007 420 - - 13,427
Non-interest income ...................... 79,834 44,831 77,034 (120,431) 81,268
Total other expense ...................... 193,176 25,080 7,566 (1,177) 224,645
Net income before income taxes
and extraordinary items ............... 109,543 30,391 65,874 (98,989) 106,819
Income tax provision (benefit) ........... 30,257 10,688 (2,965) - 37,980
Income before extraordinary items ........ 79,286 19,703 68,839 (98,989) 68,839
Extraordinary items, net of tax benefit .. - - (583) - (583)
Net income ............................... 79,286 19,703 68,256 (98,989) 68,256
- ------------------------------------------------------------------------------------------------------------------
Total revenue ............................ 764,819 61,180 82,026 (109,165) 798,860
Intersegment revenue ..................... 16,170 19,504 80,517
Depreciation and amortization ............ 10,365 1,515 - - 11,880
Total assets ............................. 9,941,503 171,312 907,923 (980,142) 10,040,596
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 24. MERGER EXPENSES AND OTHER NONRECURRING CHARGES
- --------------------------------------------------------------------------------
During fiscal years 1999 and 1998 the Corporation incurred merger expenses and
other nonrecurring charges totaling $30,043,000 and $29,729,000, respectively.
Such amounts for fiscal year 1999 are associated with the First Colorado
acquisition and the termination of three employee stock ownership plans (ESOP)
acquired in mergers during the past two fiscal years. The Corporation recorded
merger-related charges totaling $13,954,000 from the termination of the three
acquired ESOPs. These plans were terminated as soon as possible following
consummation of the mergers and receipt of determination letters from the
Internal Revenue Service to terminate such plans. During the third quarter of
fiscal year 1999 the related outstanding loans totaling $11,058,000 associated
with these plans were repaid from the respective ESOP trusts to the Corporation.
The remaining amount of unallocated shares with a market value of $13,954,000
was distributed to plan participants during the fourth quarter of fiscal year
1999.
The amounts for fiscal year 1998 are due to the Liberty, Mid Continent and
Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The Corporation finalized its plans for systems
conversions and Year 2000 compliance in fiscal year 1998 resulting in a
reduction in the estimated useful lives of such computer systems and software.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -78-
- --------------------------------------------------------------------------------
These merger expenses incurred in fiscal years 1999 and 1998 are detailed in the
following table. Other nonrecurring items not classified in the merger expenses
category of general and administrative expenses are noted parenthetically where
such items are included in the Corporation's Consolidated Statement of
Operations.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Merger expenses:
Termination of employee stock ownership plans ...................................... $13,954 $ - $ -
Transaction costs relating to the combinations ..................................... 8,015 8,992 -
Employee severance and other termination costs ..................................... 1,449 6,555 -
Costs to combine operations ........................................................ 6,499 2,487 -
- ---------------------------------------------------------------------------------------------------------------------------
29,917 18,034 -
- ---------------------------------------------------------------------------------------------------------------------------
Other nonrecurring items:
Additional loan loss reserves - (provision for loan and lease losses) .............. 1,000 3,931 -
Gain on sale of First Colorado branch - (other operating income) ................... (1,076) - -
Reserves on leasing operations - (other operating income) .......................... - 597 -
Accelerated amortization of computer systems and software - (data processing) ...... - 4,314 -
Conforming accounting practices of combining companies - (compensation and
benefits) ......................................................................... 202 489 -
Conforming accounting practices of combining companies - (other operating
expenses) ......................................................................... - 2,364 -
- ---------------------------------------------------------------------------------------------------------------------------
126 11,695 -
- ---------------------------------------------------------------------------------------------------------------------------
Total merger expenses and other nonrecurring items, before taxes ...................... 30,043 29,729 -
Income tax benefit, net ............................................................... (2,954) (8,291) -
- ---------------------------------------------------------------------------------------------------------------------------
Total merger expenses and other nonrecurring items, after-tax ......................... $27,089 $21,438 $ -
- ---------------------------------------------------------------------------------------------------------------------------
</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, at
the rate of .657%, was imposed to increase the reserve levels of the SAIF to
1.25% of insured deposits. On September 30, 1996, the Corporation recorded an
after-tax charge of $23,079,000 ($36,061,000 pre-tax) as a result of such
special assessment. The Corporation's annual deposit insurance rate in effect
prior to this recapitalization was .23% of insured deposits declining to .064%
of insured deposits effective January 1, 1997.
NOTE 26. LOSS ON EARLY RETIREMENT OF DEBT
- --------------------------------------------------------------------------------
In fiscal year 1997, the Corporation recognized extraordinary losses of $583,000
(net of income tax benefits totaling $316,000), or $.01 loss per share,
primarily as a result of the early retirement of the 10.25% subordinated debt
totaling $40,250,000 originally due December 15, 1999, and the 10.0% senior
notes totaling $6,900,000 originally due January 31, 1999. The extraordinary
losses consisted primarily of the write-off of the related premiums and costs
associated with the issuance and redemption of such debt that was retired from
the proceeds of the $50,000,000 subordinated extendible notes offering completed
December 2, 1996.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-79-
- --------------------------------------------------------------------------------
NOTE 27. QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
The following summarizes the unaudited quarterly results of operations for the
last three fiscal years ended June 30:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------
June 30 March 31 December 31 September 30
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL 1999:
Total interest income .................................. $220,706 $216,072 $203,715 $198,861
Net interest income .................................... 88,856 87,442 81,415 74,620
Provision for loan and lease losses .................... (2,800) (2,800) (3,000) (3,800)
Gain on sales of securities and loans, net ............. 30 883 3,293 3,593
Net income ............................................. 29,874 16,169 31,226 15,123
Earnings per common share:
Basic ............................................... .49 .27 .53 .26
Diluted ............................................. .49 .27 .52 .25
Dividends declared per share ........................... .065 .065 .065 .055
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1998:
Total interest income .................................. $190,317 $189,573 $189,974 $187,824
Net interest income .................................... 72,575 71,463 68,618 67,643
Provision for loan and lease losses .................... (3,389) (2,817) (5,959) (1,688)
Gain on sales of securities, loans
and loan servicing rights, net ...................... 2,717 830 2,733 957
Net income ............................................. 22,375 13,628 25,455 25,955
Earnings per common share:
Basic ............................................... .39 .24 .46 .47
Diluted ............................................. .38 .23 .45 .46
Dividends declared per share ........................... .055 .055 .055 .047
- ------------------------------------------------------------------------------------------------------------------
FISCAL 1997:
Total interest income .................................. $184,449 $178,932 $180,380 $173,831
Net interest income .................................... 67,807 66,860 66,384 62,572
Provision for loan and lease losses .................... (3,836) (3,617) (3,540) (2,434)
Gain on sales of securities and loans, net ............. 661 840 755 396
Net income ............................................. 24,690 19,868 21,184 2,514
Earnings (loss) per common share:
Basic -
Income before extraordinary items ................. .44 .34 .37 .04
Extraordinary items, net of tax benefit ........... - - (.01) -
Net income ........................................ .44 .34 .36 .04
Diluted -
Income before extraordinary items ................. .43 .34 .36 .04
Extraordinary items, net of tax benefit ........... - - (.01) -
Net income ........................................ .43 .34 .35 .04
Dividends declared per share ........................... .047 .047 .047 .045
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -80-
- --------------------------------------------------------------------------------
NOTE 28. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS No. 107), requires that the Corporation
disclose estimated fair value amounts of its financial instruments. It is
management's belief that the fair values presented below are reasonable based on
the valuation techniques and data available to the Corporation as of June 30,
1999 and 1998, as more fully described in the following discussion. It should be
noted that the operations of the Corporation are managed from a going concern
basis and not a liquidation basis. As a result, the ultimate value realized for
the financial instruments presented could be substantially different when
actually recognized over time through the normal course of operations.
Additionally, a substantial portion of the Corporation's inherent value is the
Bank's capitalization and franchise value. Neither of these components have been
given consideration in the following presentation of fair values.
The following presents the carrying value and fair value of the specified assets
and liabilities held by the Corporation at June 30, 1999 and 1998. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
<TABLE>
<CAPTION>
1999 1998
----------------------- --------------------------
Carrying Fair Carrying Fair
SELECTED ASSETS Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash (including short-term investments) .............. $ 353,275 $ 353,275 $ 217,012 $ 217,012
Investment securities ................................ 946,571 930,616 673,304 674,194
Mortgage-backed securities ........................... 1,282,545 1,269,195 1,091,849 1,093,435
Loans and leases receivable, net ..................... 9,326,393 9,533,833 7,857,276 8,238,331
Federal Home Loan Bank stock ......................... 194,129 194,129 131,132 131,132
- ------------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- ------------------------------------------------------------------------------------------------------------------
Deposits:
Passbook accounts ................................. 1,137,282 1,137,282 990,996 990,996
NOW checking accounts ............................. 1,036,921 1,036,921 880,001 880,001
Market rate savings accounts ...................... 909,233 909,233 640,487 640,487
Certificates of deposit ........................... 4,571,979 4,556,506 4,046,723 4,039,474
- ------------------------------------------------------------------------------------------------------------------
Total deposits .................................. 7,655,415 7,639,942 6,558,207 6,550,958
Advances from Federal Home Loan Bank ................. 3,632,241 3,591,178 2,379,182 2,379,991
Securities sold under agreements to repurchase ....... 128,514 128,341 334,294 334,460
Other borrowings ..................................... 225,383 225,201 110,674 114,140
- ------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------------
Derivative financial instruments ..................... 498 (2,052) 204 (3,133)
Commitments .......................................... - - - -
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The following sets forth the methods and assumptions used in determining the
fair value estimates for the Corporation's financial instruments at June 30,
1999 and 1998.
CASH AND SHORT-TERM INVESTMENTS
The book value of cash and short-term investments is assumed to approximate the
fair value of such assets.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-81-
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
Quoted market prices or dealer quotes were used to determine the fair value of
investment securities.
MORTGAGE-BACKED SECURITIES
For mortgage-backed securities available for sale and held to maturity the
Corporation utilized quotes for similar or identical securities in an actively
traded market, where such a market exists, or obtained quotes from independent
security brokers to determine the fair value of such assets.
LOANS AND LEASES RECEIVABLE, NET
The fair value of loans and leases receivable was estimated by discounting the
future cash flows using the current market rates at which similar loans and
leases would be made to borrowers with similar credit ratings and for similar
remaining maturities. When using the discounting method to determine fair value,
loans and leases were gathered by homogeneous groups with similar terms and
conditions and discounted at derived current market rates or rates at which
similar loans and leases would be made to borrowers as of June 30, 1999 and
1998. The fair value of loans held for sale was determined from quoted market
prices for such loans based on their intended final investment form, which are
generally agency mortgage-backed securities. In addition, when computing the
estimated fair value for all loans and leases, allowances for loan and lease
losses were subtracted from the calculated fair value for consideration of
credit issues.
FEDERAL HOME LOAN BANK STOCK
The fair value of such stock approximates book value since the Corporation is
able to redeem this stock with the Federal Home Loan Bank at par value.
DEPOSITS
The fair value of savings deposits were determined as follows: (i) for passbook
accounts, NOW checking accounts and market rate savings accounts fair value is
determined to approximate the carrying value (the amount payable on demand)
since such deposits are primarily withdrawable immediately; (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates as of June 30, 1999
and 1998, offered on certificates of deposit with similar maturities. In
accordance with the provisions of SFAS No. 107, no value has been assigned to
the Corporation's long-term relationships with its deposit customers (core value
of deposits intangible) since such intangible is not a financial instrument as
defined under SFAS No. 107.
ADVANCES FROM FEDERAL HOME LOAN BANK
The fair value of such advances was estimated by discounting the expected future
cash flows using current interest rates as of June 30, 1999 and 1998, for
advances with similar terms and remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The fair value of securities sold under agreements to repurchase was estimated
by discounting the expected future cash flows using derived interest rates
approximating market as of June 30, 1999 and 1998, over the contractual maturity
of such borrowings.
OTHER BORROWINGS
Included in other borrowings at June 30, 1999 and 1998, are subordinated
extendible notes and guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures with carrying values of $50,000,000
and $45,000,000, respectively, with the fair value of such borrowings based on
quoted market prices or dealer quotes. The fair value of other borrowings,
excluding the aforementioned borrowings, was estimated by discounting the
expected future cash flows using derived interest rates approximating market as
of June 30, 1999 and 1998, over the contractual maturity of such other
borrowings.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of the interest rate swap and floor agreements, obtained from
market quotes from independent security brokers, is the estimated amount that
would be paid to terminate the swap agreements and the estimated amount that
would be received to terminate the floor agreements.
COMMITMENTS
The commitments to originate and purchase loans have terms that are consistent
with current market terms. Since primarily all outstanding commitments are
short-term or adjustable rate, the fair value of the commitments is not material
for disclosure.
LIMITATIONS
It must be noted that fair value estimates are made at a specific point in time,
based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, customer relationships and the value of assets and
liabilities that are not considered financial instruments. These estimates do
not reflect any premium or discount that could result from offering the
Corporation's entire
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -82-
- --------------------------------------------------------------------------------
holdings of a particular financial instrument for sale at one time. Furthermore,
since no market exists for certain of the Corporation's financial instruments,
fair value estimates may be based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of June 30, 1999 and 1998, are not intended to represent
the underlying value of the Corporation, on either a going concern or a
liquidation basis.
NOTE 29. CURRENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 entitled "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). This statement requires the
recognition of all derivative financial instruments as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The accounting for gains and losses associated with
changes in the fair value of a derivative and the effect on the consolidated
financial statements will depend on its hedge designation and whether the hedge
is highly effective in achieving offsetting changes in the fair value or cash
flows of the asset or liability hedged. Under the provisions of SFAS No. 133,
the method that will be used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the ineffective
aspects of the hedge, must be established at the inception of the hedge. The
methods must be consistent with the entity's approach to managing risk.
SFAS No. 133 was effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. However, on July 7, 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 entitled "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS No. 137). This statement delays the effective date of
SFAS No. 133 for one year, or for all fiscal quarters of fiscal years beginning
after June 15, 2000, with initial application as of the beginning of any fiscal
quarter that begins after issuance. On that initial application date, hedging
relationships must be designated anew and documented pursuant to the provisions
of SFAS No. 133. Management of the Corporation has not determined the effect, if
any, that the adoption of this statement will have on the Corporation's
financial position, liquidity or results of operations. Management of the
Corporation has not determined when to adopt the provisions of SFAS No. 133.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134 entitled "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65" (SFAS No. 134). FASB Statement No. 65, as
amended by FASB Statements No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed security as a trading
security. SFAS No. 134 further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
The provisions of SFAS No. 134 are effective as of July 1, 1999, for the
Corporation. On the date that SFAS No. 134 is initially applied, an enterprise
may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's ability
and intent, on the date this statement is initially applied, to hold those
investments. Transfers from the trading category that result from implementing
this statement will be accounted for in accordance with the provisions of SFAS
Statement No. 115. Management of the Corporation does not believe that the
adoption of SFAS No. 134 will have a material effect on the Corporation's
financial position, liquidity or results of operations.
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
-83-
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION BOARD OF DIRECTORS
AND COMMERCIAL FEDERAL BANK BOARD OF DIRECTORS
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
Commercial Federal Corporation
TALTON K. ANDERSON
President
Baxter Chrysler Plymouth Inc.
MICHAEL P. GLINSKY
Retired Executive Vice President and CFO
US WEST, Inc.
ROBERT F. KROHN
Vice Chairman and CEO
PSI Group, Inc.
CARL G. MAMMEL
Chairman
Mammel & Associates
ROBERT S. MILLIGAN
President
MI Industries
JAMES P. O'DONNELL
Executive Vice President,
CFO and Corporate Secretary
ConAgra, Inc.
ROBERT D. TAYLOR
CEO
Executive Aircraft Corporation
ALDO J. TESI
Former Group President
First Data Resources Card Enterprise Group
COMMERCIAL FEDERAL BANK BOARD OF DIRECTORS
SHARON G. MARVIN
Real Estate Consultant
NP Dodge Company
MICHAEL T. O'NEIL, M.D.
Orthopedic Surgeon
Private Practice
EXECUTIVE OFFICERS OF THE BANK
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
JAMES A. LAPHEN
President and
Chief Operating Officer
GARY L. MATTER
Executive Vice President,
Controller and Secretary
JOY J. NARZISI
Executive Vice President and Treasurer
Lending/Asset Management
ROGER L. LEWIS
Executive Vice President
Corporate Marketing
RUSSELL G. OLSON
Executive Vice President
Community Banking
GARY D. WHITE
Executive Vice President
Corporate Services
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
- -84-
- --------------------------------------------------------------------------------
SENIOR VICE PRESIDENTS
R. HAL BAILEY
Construction Lending
GARY L. BAUGH
Special Projects
RICK A. CAMPBELL
Mortgage Operations
THOMAS J. HROMATKA
Bank Operations
LAUREN W. KINGRY
Commercial Banking
KEVIN C. PARKS
Audit/Compliance/Security
THOMAS N. PERKINS
Acquisitions and Expansion
JON W. STEPHENSON
Retail Banking
TERRY A. TAGGART
State President - Colorado
FIRST VICE PRESIDENTS
RONALD A. AALSETH
Insurance and Brokerage Services
PAMELA J. ACUFF
Human Resources
MARGARET E. ASH
Customer Service
MELISSA M. BEUMLER
Marketing
RONALD P. CHEFFER
Commercial Underwriting
MONTE M. DEERE
State President - Oklahoma
NEIL W. FELL
State President - Iowa
LARRY R. GODDARD
Investor Relations
JOHN J. GRIFFITH
Community Investment
ROBERT E. GRUWELL
Treasury
MICHAEL J. HOFFMAN
In-Store Branch Banking
JAMES C. PALMER
Mortgage Loan Servicing
DOUGLAS D. PULLIN
Consumer Lending
ROBERT W. RICHARDS
Construction Lending/
Income Property
JAMES M. ROONEY
Systems & Technology
HAROLD G. SIEMENS
Correspondent Lending
WILLIAM M. TANK, JR.
State President - Nebraska
MICHAEL J. WALTS
State President - Kansas
DENNIS R. ZIMMERMAN
Information Services
- --------------------------------------------------------------------------------
COMMERCIAL FEDERAL CORPORATION
<PAGE>
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
Commercial Federal Corporation
Commercial Federal Tower
2120 S. 72nd Street
Omaha, NE 68124
GENERAL COUNSEL
Fitzgerald, Schorr, Barmettler, Brennan
1100 Woodmen Tower
Omaha, NE 68102
CORPORATE COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W.
Suite 700
Washington, D.C. 20036
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2000 First National Center
Omaha, NE 68102
INVESTOR RELATIONS AND SHAREHOLDER SERVICES
Analysts, investors and others seeking a copy of the Form 10-K without charge or
other financial information should contact:
Investor Relations Department
Commercial Federal Corporation
2120 S. 72nd Street
Omaha, NE 68124
Telephone 402-390-6553
Shareholders desiring to change the address or ownership of stock, report lost
certificates or to consolidate accounts should contact Commercial Federal's
Transfer Agent:
Shareowner Services
P.O.Box 64854
St. Paul, MN 55164-0865
Telephone 800-468-9716
DIVIDEND REINVESTMENT PLAN
The Company maintains a Dividend Reinvestment Plan which offers shareholders a
convenient and inexpensive way to increase their holdings of common stock in
Commercial Federal Corporation. The Plan is available to all registered
shareholders of the Company. To obtain information about the Plan, contact
Shareowner Services at 800-468-9716.
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday,
November 16, 1999. The meeting will be held at the Holiday Inn Central
Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C"
Meeting Room. Further information with regard to this meeting can be found in
the proxy statement.
STOCK LISTING
Commercial Federal Corporation's common stock is traded on the New York Stock
Exchange (NYSE) using the common stock symbol "CFB." The Wall Street Journal
publishes daily trading information for the stock under the abbreviation "Comrcl
Fed" in the NYSE listings.
VISIT COMMERCIAL FEDERAL ON THE INTERNET
www.comfedbank.com
For press releases, financial information, and services available.
<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. (1) (4)
Commercial Federal Bank, Commercial Federal 100% Nebraska
a Federal Savings Bank Mortgage Corporation
Commercial Federal 100% Nebraska
Investment Services, Inc.
Commercial Federal 100% Nebraska
Insurance Corporation
Commercial Federal 100% Nebraska
Service Corporation
Empire Capital 100% Colorado
Corporation I
Tower Title & Escrow 80% Nebraska
Company
Roxborough Acquisition 100% Nebraska
Corporation
CFT Company 100% Nebraska
Liberty Leasing Company (1) 100% Iowa
AmerUs Leasing 100% Iowa
Corporation (2)
First Savings Securities 100% California
Corporation (3)
First Savings Investment 100% Colorado
Corporation (3)
</TABLE>
<PAGE>
EXHIBIT 21. SUBSIDIARIES OF THE CORPORATION
- -------------------------------------------
<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 Savings Insurance, 100% Colorado
Inc. (3) (4)
Commercial Federal Investment AmerUs 100% Iowa
Services, Inc. Investments, Inc. (2)
Liberty Leasing Company Liberty Leasing Funding 100% Iowa
Corporation I (1) (4)
Liberty Leasing Funding 100% Iowa
Corporation II (1)
Liberty Leasing Funding 100% Iowa
Corporation III (1)
</TABLE>
- --------------------------------------------------------------------------------
(1) Acquired in the acquisition of Liberty Financial Corporation.
(2) Acquired in the acquisition of AmerUs Bank.
(3) Acquired in the acquisition of First Colorado Bancorp, Inc.
(4) In process of dissolution.
Note: All of the material accounts of the above listed companies are
consolidated in the Corporation's consolidated financial statements. All
significant intercompany balances and transactions are eliminated in
consolidation.
Subsidiaries Dissolved During Fiscal Year 1999:
- -----------------------------------------------
K101
First United Insurance Co.
Greatland Financial Services, Inc.
Laredo Investments, Inc.
Liberty Insurance, Inc.
Liberty Loan Store, Inc.
Liberty Marketing, Inc.
Liberty Services, Inc.
- --------------------------------------------------------------------------------
<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. 333-58607,333-49967,333-45613,333-42817,333-20739,33-63629,33-63221, 33-
60448,33-39762,33-36708, 33-31685,33-21068,33-05616 and Post-Effective Amendment
No. 1 to Registration Statement Nos.33-01333 and 33-10396 of Commercial Federal
Corporation on Form S-8 of our report dated August 12, 1999, incorporated by
reference in the Annual Report on Form 10-K of Commercial Federal Corporation
for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
September 24, 1999
<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, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 313,690
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 503,518
<INVESTMENTS-CARRYING> 1,725,598
<INVESTMENTS-MARKET> 1,696,293
<LOANS> 9,326,393
<ALLOWANCE> 80,419
<TOTAL-ASSETS> 12,775,462
<DEPOSITS> 7,655,415
<SHORT-TERM> 500,236
<LIABILITIES-OTHER> 167,026
<LONG-TERM> 3,485,902
596
0
<COMMON> 0
<OTHER-SE> 966,287
<TOTAL-LIABILITIES-AND-EQUITY> 12,775,462
<INTEREST-LOAN> 700,911
<INTEREST-INVEST> 138,443
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 839,354
<INTEREST-DEPOSIT> 322,858
<INTEREST-EXPENSE> 507,021
<INTEREST-INCOME-NET> 332,333
<LOAN-LOSSES> 12,400
<SECURITIES-GAINS> 4,376
<EXPENSE-OTHER> 265,816
<INCOME-PRETAX> 155,652
<INCOME-PRE-EXTRAORDINARY> 155,652
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,392
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 2.99
<LOANS-NON> 70,015
<LOANS-PAST> 0
<LOANS-TROUBLED> 9,729
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 64,757
<CHARGE-OFFS> 15,760
<RECOVERIES> 3,674
<ALLOWANCE-CLOSE> 80,419
<ALLOWANCE-DOMESTIC> 6,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 73,916
</TABLE>
