SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1997
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- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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SEC File Number: 0-23620
MID CONTINENT BANCSHARES, INC.
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(Exact name of Registrant as specified in its Charter)
Kansas 48-1146797
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
124 W. Central, El Dorado, Kansas 67042
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(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (316) 321-2700
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), 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 last sale price of such stock on
December 17, 1997 was $73.5 million.
As of December 17, 1997, the Registrant had 1,997,332 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of the Registrant's 1997 Annual Report to Stockholders.
2. Part III -- Portions of the Registrant's Proxy Statement for Annual Meeting
of Stockholders to be held in February - March 1998.
<PAGE>
PART I
Item 1. Business
(Dollars in Thousands)
General
Mid Continent Bancshares, Inc. ("Registrant" or "Company") is a unitary
savings and loan holding company that was incorporated in January 1994 under the
laws of the State of Kansas for the purpose of acquiring all of the issued and
outstanding common stock of Mid-Continent Federal Savings Bank ("Mid-Continent
Federal" or "Savings Bank"). This acquisition occurred in June 1994 at the time
Mid-Continent Federal changed its name from Mid-Continent Federal Savings and
Loan Association of El Dorado, simultaneously converted from a mutual to stock
institution, and sold all of its outstanding capital stock to the Company and
the Company made its initial public offering of common stock. As of September
30, 1997, the Company had total assets of $405,262, total deposits of $236,333
and stockholders' equity of $39,982 or 9.87% of total assets under generally
accepted accounting principles ("GAAP"). The only subsidiary of the Company is
the Savings Bank. The Savings Bank has one subsidiary, Laredo Investment, Inc.
Mid-Continent Federal is a federally chartered capital stock savings
bank located in El Dorado, Kansas. The Savings Bank was founded in 1925 as a
Kansas chartered savings and loan association under the name Mid-Continent
Savings and Loan Association. In 1935, the Savings Bank adopted a federal
charter and changed its name to Mid-Continent Federal Savings and Loan
Association of El Dorado (the "Association"). In June 1994, the Association
converted from a federally chartered mutual savings and loan association to its
current form, a federally chartered capital stock savings bank subsidiary of a
savings and loan holding company. The Savings Bank's deposits are federally
insured by the Federal Deposit Insurance Corporation ("FDIC").
The Company directs and plans the activities of the Savings Bank, the
Company's primary asset. The Company's business activities to date have been
limited to its investment in the Savings Bank, loans made to the Savings Bank
for use in the normal course of the Savings Bank's business and to the
Mid-Continent Federal Savings Bank Employee Stock Ownership Plan (the "ESOP") to
enable the ESOP to purchase shares of the Company's common stock in the initial
public offering and the repurchase of a portion of the Company's stock, as
permitted by the Office of Thrift Supervision. References to the Company include
the Savings Bank, unless the context otherwise indicates.
The Company is primarily engaged in attracting deposits from the
general public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. The Company also purchases one-to-four
family residential loans. The Company has offices in El Dorado, Newton,
Winfield, Augusta, Derby and Wichita, Kansas, which are located in its primary
market area of Butler, Cowley, Sedgwick and Harvey Counties in the State of
Kansas. The Company opened two full service branches in 1997. In addition, the
Company invests in mortgage-related
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<PAGE>
securities and investment securities. The Company offers its customers
fixed-rate, and adjustable-rate mortgage loans ("ARM"), as well as FHA/VA loans
and consumer loans, including home equity and savings account loans.
Adjustable-rate mortgage loans and short-term fixed-rate mortgage loans
generally are originated for retention in the Company's portfolio while
long-term fixed-rate mortgage loans are generally sold into the secondary
market. All consumer loans are retained in the Company's portfolio.
The principal sources of funds for the Company's lending activities are
deposits and the amortization, repayment and maturity of loans, mortgage-related
securities, and investment securities and borrowings from the Federal Home Loan
Bank. Principal sources of income are interest and fees on loans,
mortgage-related securities, investment securities, and deposits held in other
financial institutions. The Company's principal expense is interest paid on
deposits.
The Company is actively engaged in the purchase and sale of mortgage
loans through a correspondent network. These purchased loans and loans
originated by the Company are then sold, generally without recourse, into the
secondary market with the Company generally retaining the servicing rights. The
Company is contingently liable on certain loans sold with recourse. The
principal balance of loans sold with recourse totaled approximately $207 at
September 30, 1997.
The Company has striven to increase its other income by increasing its
portfolio of loans serviced for others. The Company expects to continue to
increase the size of its portfolio of loans serviced for others. This portfolio
totaled approximately $1,291,331 as of September 30, 1997. Income from loan
servicing fees, net of amortization and before operating expenses, has provided
a substantial portion of net income in recent years and totaled $3,099, before
income tax, for the fiscal year ended September 30, 1997.
The counties of Butler, Cowley, Sedgwick and Harvey, Kansas are the
Company's primary market area for deposits and are located in south central
Kansas. This area was founded on agriculture and the oil and gas industry, which
continue to play a major role in the economy. This area has also attracted a
variety of industries including aircraft, recreational and camping equipment,
balloon plant, meat processing, refineries, state and private universities,
junior colleges, electronics manufacturing, and heating and air conditioning
equipment manufacturing. This area also includes the health care, financial
service, and other service related industries, including the wholesale/retail
trade industries. Also, within Butler County are located two state prisons. The
largest employment sectors in the Company's market area are aircraft, industrial
manufacturing, and retail.
Lending Activities
General. The Company's loan portfolio consists of fixed-rate mortgage
loans and adjustable-rate mortgage loans ("ARMs") secured by one-to-four family
residences and, to a much lesser extent, commercial real estate, mobile home
loans, and real estate construction loans. As of September 30, 1997, the
Company's total portfolio of loans (the "loan portfolio") was $233,311 (net of
loans in process, deferred fees and costs and allowance for loan losses), of
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<PAGE>
which $237,197 or 101.67%, was secured by one-to-four family residential real
estate, $607, or 0.26%, was secured by commercial real estate, and $128, or
0.05%, was secured by mobile homes. The following table sets forth information
about the company's loan portfolio at September 30, of each year presented.
<TABLE>
<CAPTION>
(Dollars in Thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
$ % $ % $ % $ % $ %
- - - - - - - - - -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOANS:
Real Estate Loans
Residential $53,727 94.89% $ 96,631 94.52% $117,216 93.93% $159,672 93.29% 219,819 94.22%
Construction 569 1.00% 6,976 6.82% 10,351 8.29% 17,367 10.15% 17,534 7.52%
Commercial 1,809 3.19% 1,210 1.18% 1,212 0.97% 964 0.56% 813 0.35%
Land 67 0.12% 73 0.07% 599 0.48% 49 0.03% 44 0.02%
Consumer Loans
Mobile home loans 931 1.60% 716 0.70% 499 0.40% 305 0.18% 128 0.05%
Savings account loans 479 0.85% 699 0.68% 688 0.55% 769 0.45% 795 0.34%
Home improvement loans 1,031 1.82% 873 0.85% 414 0.33% 1,012 0.59% 962 0.41%
Automobile loans 31 0.05% 682 0.67% 1,050 0.84% 1,115 0.65% 1,292 0.55%
Other 182 0.32% 225 0.22% 507 0.41% 890 0.52% 1,454 0.62%
------- ------ -------- ------ ------- ------ -------- ------ -------- ------
Total 58,826 103.89% 108,085 105.71% 132,536 106.20% 182,143 106.42% 242,841 104.08%
Less:
Loans in process (1,036) (1.83%) (4,581) (4.49%) (6,624) (5.30%) (10,407) (6.08%) (9,547) (4.09%)
Deferred loan fees
and costs (821) (1.53%) (987) (0.97%) (693) (0.56%) (157) (0.09%) 482 0.21%
Allowance for loan
losses (346) (0.61%) (274) 0.27% (423) (0.34%) (421) (0.25%) (465) (0.20%)
------- ------ -------- ------- -------- ------ -------- ------ -------- ------
Total loans, net $56,623 100.00% $102,243 100.00% $124,796 100.00% $171,158 100.00% 233,311 100.00%
======= ====== ======== ======= ======== ====== ======== ====== ======== ======
Total mortgage-related
securities, net $42,856 100.00% $ 45,030 100.00% $ 40,004 100.00% $ 34,383 100.00% $ 28,124 100.00%
======= ====== ======== ====== ======== ====== ======== ====== ======== ======
TYPE OF SECURITY:
Residential real estate
1 to 4 family 53,900 95.19% 103,607 101.34% 127,567 102.22% 176,843 103.33% 237,197 101.67%
Other dwelling units 396 0.70% 275 0.27% 254 0.20% 231 0.13% 362 0.16%
Commercial real estate 1,809 3.19% 935 0.91% 958 0.77% 929 0.54% 607 0.26%
Land 67 0.12% 73 0.07% 599 0.48% 49 0.03% 44 0.02%
Consumer loans
Mobile homes 931 1.64% 716 0.70% 499 0.40% 305 0.18% 128 0.05%
Savings accounts 479 0.85% 699 0.68% 688 0.55% 769 0.45% 795 0.34%
Home improvement 1,031 1.82% 873 0.85% 414 0.33% 1,012 0.59% 962 0.41%
Automobiles 31 0.05% 682 0.67% 1,050 0.84% 1,115 0.65% 1,292 0.55%
Other 182 0.32% 225 0.22% 507 0.41% 890 0.52% 1,454 0.62%
------- ------ --------- ------ ------- ------ -------- ------ -------- ------
Total 58,826 103.89% 108,085 105.71% 132,536 106.20% 182,143 106.42% 242,841 104.08%
Less:
Loans in process (1,036) (1.83%) (4,581) (4.49%) (6,624) (5.30%) (10,407) (6.08%) (9,547) (4.09%)
Deferred loan fees
and costs (821) (1.53%) (987) (0.97%) (693) (0.56%) (157) (0.09%) 482 0.21%
Allowance for loan losses (346) (0.61%) (274) (0.27%) (423) (0.34%) (421) (0.25%) (465) (0.20%)
------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Total loans, net $56,623 100.00% $ 102,243 100.00% $124,796 100.00% $171,158 100.00% $233,311 100.00%
======= ====== ========= ====== ======== ====== ======== ====== ======== ======
Total mortgage-related
securities, net $42,856 100.00% $ 45,030 100.00% $ 40,004 100.00% $ 34,383 100.00% $ 28,124 100.00%
======= ====== ========= ====== ======== ====== ======== ====== ======== ======
</TABLE>
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<PAGE>
Loan Maturity. The following table sets forth the maturity of the Company's loan
portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled $30,688, $44,858, and $58,362, for the three years ended
September 30, 1995, 1996 and 1997, respectively. Adjustable-rate mortgage loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Multi-
1-4 Family Family and
Real Estate Commercial
Mortgage Real Estate Construction Consumer Total
-------- ----------- ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year $ 25 $ 38 $ 17,534 $ 759 $ 18,356
--------- --------- --------- --------- ---------
After 1 year
1 to 5 years 2,801 169 2,339 5,309
Over 5 years 216,993 650 1,533 219,176
--------- --------- --------- --------- ---------
Total due after one year 219,794 819 3,872 224,485
--------- --------- --------- --------- ---------
Total $ 219,819 $ 857 $ 17,534 4,631 242,841
========= ========= ========= =========
Less:
Allowance for loan loss (465)
Loans in process (9,547)
Deferred loan origination
fees and cost 482
---------
Loans receivable, net $ 233,311
=========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Adjustable
Rate Rates Total
---- ----- -----
(In Thousands)
One-to-four family $ 75,499 $144,295 $219,794
Multi-family and Commercial real estate 512 307 819
Construction 0 0 0
Consumer 3,592 280 3,872
-------- -------- --------
Total $ 79,603 $144,882 $224,485
======== ======== ========
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<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities portfolio as of September 30, 1997.
<TABLE>
<CAPTION>
2001 to 2003 to 2008 and
1998 1999 2000 2002 2007 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
$12 $1,197 $ - 0 - $3,931 $ - 0 - $22,984 $28,124
</TABLE>
Residential Loans. The Company's primary lending activity consists of
the origination of one-to-four family, owner-occupied, residential mortgage
loans secured by property located in the Company's primary market area of the
state of Kansas. At September 30, 1997, the Company had $237,353, or 101.74%, of
its net loan portfolio invested in these loans. Management believes that this
policy of focusing on one-to-four family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.
The Company offers ARMs that adjust every one to three years and have
terms from 10 to 30 years, as well as ARMs that adjust annually, but only after
the third year. One year ARMs have adjustments that are limited to 2% per year
and 6% over the life of the loan, and ARMs that are fixed for the first three
years and adjust annually thereafter have adjustments that are limited to 2% per
year and 5% over the life of the loan. The Company also offers conventional
fixed-rate mortgage loans with terms from 10 to 30 years. Generally, the
interest rates on ARMs are based on treasury bill indices. The Company considers
the market factors and competitive rates on loans as well as its own cost of
funds when determining the rates on the loans that it offers. The Company also
has a network of correspondents from whom the Company may be referred both
fixed- and adjustable-rate real estate mortgage loans. The Company expects to
expand its purchases and sales of mortgage loans, subject to market conditions.
Since 1989, the Company has sold most of its originated fixed-rate mortgage
loans into the secondary market. The Company does, however, service most of the
loans sold since 1991.
Generally, during periods of rising interest rates, the risk of default
on an ARM is considered to be greater than the risk of default on a fixed-rate
loan due to the upward adjustment of interest costs to the borrower. To help
reduce such risk, the Company qualifies the loan at the fully indexed interest
rate, as opposed to the original interest rate. ARM loans may be made at up to
95% loan to value ratio. The Company does not originate ARMs with negative
amortization.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Company's lending policies, however,
generally limit the maximum loan-to-value ratio to 80% of the appraised value of
the property, based on an independent or staff appraisal. When the Company makes
a loan in excess of 80% of the appraised value or purchase price, private
mortgage insurance is required for at least the
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amount of the loan in excess of 80% of the appraised value. The Company
generally does not make conventional mortgage loans in excess of 95% of the
appraised value.
The loan-to-value ratio, maturity, and other provisions of the
residential real estate loans made by the Company reflect the policy of making
loans generally below the maximum limits permitted under applicable regulations.
The Company requires an independent appraisal, title insurance, flood hazard
insurance (if applicable), and fire and casualty insurance on all properties
securing real estate loans made by the Company. The Company reserves the right
to approve the selection of which title insurance companies' policies are
acceptable to insure the real estate in the loan transactions.
While one-to-four family residential real estate loans are normally
originated with 10-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all of the fixed-interest rate
loans in the Company's loan portfolio contain due-on-sale clauses providing that
the Company may declare the unpaid amount due and payable upon the sale of the
property securing the loan. The Company enforces these due-on-sale clauses to
the extent permitted by law. Thus, average loan maturity is a function of, among
other factors, the level of purchase and sale activity in the real estate
market, the prevailing interest rates, and the interest rates payable on
outstanding loan.
Multi-Family Loans. The Company does not presently originate
multi-family loans. The existing portfolio, $362 at September 30, 1997,
consisted of permanent loans secured by apartments. Multi-family loans are
generally considered to have more credit risk than traditional single family
mortgage loans.
Construction Loans. As of September 30, 1997, the Company had $17,534
of construction loans or 7.52% of the Company's total loan portfolio. The
Company originates construction loans within its market area for custom homes
built for specific borrowers. The Company also originates construction loans for
homes being built by professional builders for which a final retail purchaser
has not yet been identified. Construction financing is generally 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 or development and the estimated cost (including interest) of
construction. 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 Company may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan, with a project having a sales value which is insufficient
to assure full repayment. Construction loans originated for homes built by
professional builders for which the ultimate purchaser has not been identified
have the increased risk that the builder may be unable to locate a purchaser and
may be unable to continue funding the monthly interest and principal expense.
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<PAGE>
Consumer Loans. Mid-Continent views consumer lending as an important
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, the Company believes that offering consumer loans helps to
expand and create stronger ties to its customer base. Consequently, the Company
intends to increase its consumer lending by marketing consumer loans to existing
and potential customers. All branches are now able to originate consumer loans.
Regulations permit federally chartered savings associations to make secured and
unsecured consumer loans up to 35% of the Company's assets. In addition, the
Company has lending authority above the 35% limit for certain consumer loans,
such as home improvement loans and loans secured by savings accounts.
Consumer loans consist of personal, unsecured loans, home improvement
loans, automobile loans, mobile home loans, and savings account loans, at fixed
rates. Of these consumer loans, as of September 30, 1997, approximately $128, or
0.05% of the Company's total loan portfolio consisted of mobile home loans.
These mobile home loans were obtained in 1986. The Company does not originate
mobile home loans and expects that the size of the mobile home loan portfolio
will continue to decline as outstanding loans are repaid. As of September 30,
1997, total consumer loans aggregated $4,631, or 1.97% of the Company's total
loan portfolio.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of liability to meet existing obligation and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security in relation to the
proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision to its consumer loan loss
allowance, based on general economic conditions, prior loss experience and
management's periodic evaluation.
Commercial Real Estate Loans. The Company does not presently originate
commercial real estate loans. The existing portfolio, $607, or 0.26% of the loan
portfolio as of September 30, 1997, consisted of permanent loans secured by
small office buildings, churches and other non-residential buildings. Commercial
real estate secured loans were, in the past, originated in amounts up to 80% of
the appraised value of the property. Such appraised value was determined by an
independent appraiser previously approved by the Company.
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<PAGE>
Loans secured by commercial real estate generally involve a greater
degree of risk than residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. As of September 30, 1997, the largest commercial
real estate loan had a balance of $162 and was performing in accordance with its
terms.
Loan Solicitation and Processing for Portfolio Loans. The Company's
source of mortgage loan applications is referrals from existing or past
customers, real estate brokers, call-in and walk-in customers, and also as the
result of advertising. The Company has, in the past, added to its portfolio some
of the adjustable-rate loans and shorter term fixed-rate loans and, to a lesser
extent, some of the short term balloon loans obtained from the correspondent
network that the Company uses for its mortgage banking operations.
All loans are underwritten and approved, or denied, by the loan
committee, including loans obtained through the correspondent network. All
single-family loans approved by the loan committee are ratified by the Board of
Directors.
The Company uses independent fee appraisers on all real estate related
transactions that are originated in the branches of the Company and for each
purchased loan. Each fee appraiser used must be licensed and approved by
Mid-Continent's Board of Directors. Each purchased loan is reviewed and
underwritten as if Mid-Continent were originating the loan. It is the Company's
policy to obtain title and fire and casualty insurance for all mortgage loans.
If appropriate, flood insurance is also required.
Loan Solicitation and Processing for Mortgage Banking Operations. The
Company solicits fixed- and adjustable-rate mortgage loans through a network of
approximately 125 correspondents located primarily in Kansas and Oklahoma for
sale in the secondary mortgage market.
The Company regularly advises its correspondents of the rates it will
pay to purchase mortgage loans. All loans are underwritten and approved, or
denied, by the loan committee. All single family loans are reviewed and approved
by both the loan committee and the Board of Directors. The Company issues a
commitment letter by which the Company will extend the offer of a particular
rate and terms for a period of up to 60 days. The Company's correspondents,
typically other financial institutions, close the loan in the name of the
correspondent and sell the loan to the Company based on the terms previously
established for the loan.
The Company generally retains the servicing rights to the loans it
sells. The Company also sells mortgage loans originated through referrals from
existing or past customers, real estate brokers, call-in and walk-in customers,
and also as the result of advertising.
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<PAGE>
Origination, Purchase and Sale of Loans
During the fiscal year ended September 30, 1997, the Registrant
originated $115,236 in loans, purchased $219,374 in loans (all secured by
one-to-four family residences), and sold $215,076 in loans (including $85,067 of
loans securitized primarily through GNMA).
Loan Sales. The Company currently sells most of its fixed-rate mortgage
loan originations to FNMA, GNMA, FHLMC and private secondary market purchasers.
The Company does not have separate underwriting policies for loans to be sold
and loans to be retained. Loans originated for sale are underwritten with the
same standards used to originate loans to be retained in the Company's loan
portfolio. The Company pools its FHA and VA loans into GNMA pools that are then
sold. Mortgage loans are typically sold with retention of servicing rights by
the Company but generally without recourse.
Loan Commitments. The Company issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitment requires
acceptance within 60 days of the date of issuance. As of September 30, 1997, the
Company had $87,584 of commitments to originate mortgage loans. The Company has
commitments to sell, with servicing rights retained, $34,191 of these loans and
the intent to add $17,486 of loans to its investment in loans receivable to be
held to maturity.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Company recognized fees and service charges which consist primarily
of fees on loans serviced for others. The Company recognized net loan servicing
fees of $3,102, $3,128 and $3,099, before operating expenses, for the years
ended September 30, 1995, 1996, and 1997, respectively. As of September 30,
1997, loans serviced for others totaled approximately $1,291,331. The Company
has a strategy in place to expand the amount of loans serviced for others. This
strategy requires the increase in both loans originated by the Company and sold
into the secondary market with servicing retained as well as the purchase of
loans originated out of Kansas for the purpose of resale with retention of the
servicing rights.
Loans to One Borrower. Regulations limit loans to one borrower in an
amount equal to (i) 15% of unimpaired capital and retained earnings on an
unsecured basis and an additional amount equal to 10% of unimpaired capital and
retained earnings if the loan is secured by readily marketable collateral
(generally, financial instruments, not real estate) or (ii) $500, whichever is
higher. The Company's maximum loan-to-one borrower limit was approximately
$5,427 as of September 30, 1997.
As of September 30, 1997, the Company's largest aggregation of loans to
one borrower was two loans secured by 62 one-to-four family residence,
originated prior to August 1989 in the amount of $3,039 having a balance of
$3,710 as of September 30, 1997. These loans are secured by non-owner occupied
one-to-four family units located in Wichita, Kansas and were performing in
accordance with their terms as of September 30, 1997. They were restructured
during October 1994. No provision for loss was considered necessary, based on
the restructured terms and the cash flows expected to be generated by the
underlying collateral.
10
<PAGE>
Loan Delinquencies. The Company's collection procedures provide that
when a mortgage loan is 16 days past due, a computer printed delinquency notice
is sent and borrowers are contacted by telephone to discuss the delinquency. If
the loan continues in a delinquent status for 90 days or more, the Board of
Directors of the Company generally approves the initiation of foreclosure
proceedings unless other repayment arrangements are made. Collection procedures
for non-mortgage loans generally begin after is loan is ten days delinquent.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or, in the
opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent payments, if any, are recorded as
interest income.
Real estate acquired by the Company as a result of foreclosure or by a
deed in lieu of foreclosure is classified as foreclosed real estate until such
time as it is sold. When foreclosure real estate is acquired, it is recorded at
fair value as of the date of foreclosure or transfer less estimated disposal
costs. It is subsequently carried at the lower of the new basis (fair value at
foreclosure or transfer) or fair value. As of September 30, 1997, the Company
had no loans that were considered troubled debt restructurings within the
meaning of SFAS No. 15.
Non-Performing Assets
<TABLE>
<CAPTION>
At September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by one-to-four
family dwelling units $ 45 $125 $368 $445 $898
All other mortgage loans 0 0 0 0 0
Non-mortgage loans:
Consumer 0 22 24 39 34
---- ---- ---- ---- ----
Total $ 45 $147 $392 $484 $932
==== ==== ==== ==== ====
Accruing loans which are contractually past
due 90 days or more $ 0 $ 0 $ 0 $ 0 $ 0
Total non-accrual and accrual loans 45 147 392 484 932
REO 837 46 187 28 41
---- ---- ---- ---- ----
Total non-performing assets $882 $193 $579 $512 $973
==== ==== ==== ==== ====
Total non-accrual loans to net loans 0.08% 0.12% 0.31% 0.28% 0.39%
Total non-accrual loans to total assets 0.03% 0.06% 0.14% 0.14% 0.23%
Total non-performing assets to total assets 0.52% 0.08% 0.21% 0.15% 0.24%
</TABLE>
Accrued interest on non-performing loans for the years ended September
30, 1996 and 1997 totaled approximately $45 and $79.
11
<PAGE>
During 1995, the Savings Bank restructured loans with a carrying value
of approximately $3,039. No provision for loss was considered necessary based on
the restructured terms and the cash flows expected to be generated by the
underlying collateral. The Savings Bank did not engage in any troubled debt
restructurings during the years ended September 30, 1995, 1996 and 1997. No
loans were considered impaired under SFAS No. 114 during the years ended
September 30, 1995, 1996 and 1997.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions that covers all problem assets. Under
this classification system, problem assets of insured institutions are
classified as "substandard", "doubtful", or "loss". An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard", with the added characteristic that
the weaknesses present make "collection or liquidation in full", on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable". Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Company's internal
watchlist because of potential weakness but which do not currently warrant
classification in one of the aforementioned categories.
When an insured institution classified problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowance which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss", it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. At September 30, 1997 the Company had a general loss
allowance for loans and REO of $484.
12
<PAGE>
At September 30,
1997
---------------------
(In Thousands)
Special Mention $4,559
Substandard 116
Doubtful assets 0
Loss assets 1
General loss allowance 484
Specific loss allowance 0
Charge-offs, net 124
REO. Real estate owned or acquired by the Company as a result of
foreclosure, judgment or by a deed in lieu of foreclosure is classified as real
estate owed until it is sold. When property is acquired it is recorded at fair
value as of the date of foreclosure or transfer less estimated disposal costs.
It is subsequently carried at the lower of the new basis (fair value at
foreclosure or transfer) or fair value.
The Company held REO with a net balance of $41 as of September 30, 1997
consisting of two one-to-four family dwellings with a carrying value totaling
$34. An allowance for loss of $19 is carried on real estate owned. See Note 10
to the Notes to Consolidated Financial Statements.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Company's loan portfolio. Such evaluation, which includes a review of all loans
of which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated net realizable value of
the underlying collateral. During the years ended September 30, 1995, 1996, and
1997, the Company charged $224, $75, and $143, respectively, to the provision
for loan losses and $81, $18, and $10, respectively, to the provision for losses
on REO or in judgment and other repossessed assets.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
The distribution of the Company's allowance for losses on loans is
shown below at the dates indicated:
13
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
At September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real $307 92.13% $224 95.98% $365 96.49% $351 97.06% $381 97.75%
estate
Commercial real 18 3.19% 10 0.90% 10 0.98% 10 0.55% 7 0.28%
estate
Consumer 21 4.68% 41 3.12% 48 2.53% 60 2.39% 77 1.97%
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total $346 100.00% $275 100.00% $423 100.00% $421 100.00% $465 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
Analysis of the Allowance for Loan Losses.
The following table sets forth information with respect to the
Company's allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net $ 56,623 $ 102,243 $ 124,796 $ 171,158 $ 233,311
========= ========= ========= ========= =========
Average loans outstanding 65,959 63,751 119,247 134,013 193,512
========= ========= ========= ========= =========
Allowance balances (at beginning
of period) 283 346 275 423 421
Provision for loan losses 154 6 224 75 143
Charge-offs:
Residential (65) (67) (60) (64) (88)
Consumer (30) (13) (21) (26) (28)
Recoveries
Residential 3 2 4 6 11
Consumer 1 1 1 7 6
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 346 $ 275 $ 423 $ 421 465
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding 0.61% 0.27% 0.34% 0.25% 0.20%
Net loans charged off as a percent of
average loans outstanding 0.14% 0.12% 0.06% 0.06% 0.05%
</TABLE>
Analysis of the Allowance for REO
<TABLE>
<CAPTION>
At September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total REO, net $ 837 $ 46 $ 187 $ 28 $ 41
===== ===== ===== ===== =====
Allowance balance (at beginning
of period) 36 25 16 51 34
Provision for loss 29 59 81 18 10
Charge-offs (40) (76) (47) (35) (25)
Recoveries -- 8 1 -- --
----- ----- ----- ----- -----
Allowance balance (at end of period) 25 16 51 34 19
===== ===== ===== ===== =====
Allowance for loss on REO to net REO 2.99% 34.78% 27.27% 121.43% 46.34%
===== ===== ===== ===== =====
</TABLE>
14
<PAGE>
Loan Servicing
General. The Company's loan servicing portfolio represents a
substantial asset which, in the opinion of management, is expected to generate
a significant source of fee income. As of September 30, 1997, the Company was
servicing approximately $1,291,331 of loans for others. The portfolio of
mortgage loans serviced for others at September 30, 1997 consisted of
approximately 22,750 loans with an average balance of approximately $57 and a
weighted average service fee of approximately 0.42% per annum. Since 1988, the
loan servicing portfolio has been increasing and the Company expects that it
will continue to increase. In management's view, the loan servicing portfolio
also acts to some degree as a hedge for the lending and mortgage banking
components of the Company's business.
The Company receives fees from a variety of institutional mortgage
owners in return for performing the traditional services of collecting
individual payments and managing the loan portfolio. Loan servicing includes
processing payments, accounting for loan funds and collecting and paying real
estate taxes, hazard insurance and other loan-related items such as private
mortgage insurance. When the Company receives the gross mortgage payment from
individual borrowers, it remits to the investor in the mortgage a predetermined
net amount based on the yield on that mortgage. The difference between the
coupon on the underlying mortgage and the predetermined net amount paid to the
investor is the gross loan servicing fee. In addition, the Company retains
certain amounts in escrow for the benefit of the lender for which the Company
incurs no interest expense but is able to lend. As of September 30, 1997, the
Company held $19,870 in borrower escrow and principal and interest payments
related to loans serviced for others. These amounts are categorized as deposits
for financial reporting purposes.
Loan Servicing Portfolio. The loan servicing portfolio as of September
30, 1997 was composed primarily of GNMA mortgage loan (66.17%), FNMA mortgage
loans (7.80%), and FHLMC mortgage loans (25.57%). The balance of the loan
servicing portfolio as of September 30, 1997 consisted of loans serviced for a
variety of private investors. The loans serviced for others are predominantly
secured by property located in Kansas. As of September 30, 1997, the portfolio
also included loans secured by property located primarily in Kansas, Oklahoma,
Louisiana, Michigan and Illinois.
As a result of the increase in the size of the portfolio of loans
serviced for others, gross loan servicing fees have increased from $1,261 for
the year ended September 30, 1991 to $4,841 for the year ended September 30,
1997.
As part of its responsibilities for various investors in VA-guaranteed
or FHA-insured mortgage loans, the Company is required to advance interest and
certain other costs on those loans when the mortgagor is delinquent. This
requirement continues until the Company pays the remaining principal amount of
the loan to the investor and forecloses upon the loan. The Company subsequently
files with either the VA or FHA a claim for the amount of loan principal,
advanced interest and other costs incurred.
15
<PAGE>
When a claim is filed with the VA, the VA either (i) pays the claim in
full and takes title to the foreclosed property (in which case the Company does
not suffer a loss) or (ii) exercises its option to pay to the company only the
mortgage guarantee amount up to a maximum of 50% of the loan amount (in which
case the Company must rely upon the sale of the foreclosed property to recover
the balance of its claim). The VA typically exercises this latter option when
the value of the property plus the guarantee is less than the carrying amount of
the loan. To the extent that the guarantee, insurance, and the amounts generated
from foreclosure proceedings are insufficient to retire the indebtedness on such
loans, a loss will be incurred.
When a claim is filed with the FHA, the Company is reimbursed for its
advances of interest on the loan at the debenture interest rate in effect on the
date that the loan was originated; in addition, the interest starts to accrue on
the 61st day after the date of default at the debenture interest rate.
Furthermore, if an originated loan does not conform to the loan underwriting
standards of the acquiror, the acquiror has a right to require the Company to
repurchase such loans.
Included in other assets as of September 30, 1997, were $1,741 in
claims receivable from the FHA or VA for insured or guaranteed mortgage loans.
These receivables are carried at the lower of cost or net realizable value.
Mortgage Servicing Rights ("MSRs"). The Savings Bank adopted Statement
of Financial Accounting Standards ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, effective for
the year ended September 30, 1997. For each servicing contract in existence
before January 1, 1997, previously recognized originated and purchased servicing
rights and "excess servicing" receivables are combined, net of any previously
recognized servicing obligations under that contract, as a servicing asset or
liability. The Statement provides that servicing assets and other retained
interests in transferred assets be measured by allocating the previous carrying
amount between the assets sold, if any, and retained interest, if any, based on
their relative fair values at the date of the transfer, and servicing assets and
liabilities be subsequently measured by (1) amortization in proportion to and
over the period of estimated net servicing income or loss, and (2) assessment
for asset impairment or increased obligation based on their fair values. The
implementation of this Statement did not have a material impact on the
consolidated financial statements.
Originated mortgage servicing rights are recorded at cost based upon
the relative fair values of the loans and the servicing rights. Servicing
release fees paid on comparable loans and discounted cash flows are used to
determine estimates of fair values. Purchased mortgage servicing rights are
acquired from independent third-party originators and are recorded at the lower
of cost or fair value. These rights are amortized in proportion to and over the
period of expected net servicing income.
Impairment Evaluation. The Savings Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring impairment of
capitalized servicing rights, in accordance with SFAS No. 125, the Savings Bank
stratifies the rights based on their predominant risk characteristics.
16
<PAGE>
The significant risk characteristics considered by the Savings Bank are
loan type, period of origination and stated interest rate. If the fair value
estimated, using a discounted cash flow methodology, is less than the carrying
amount of the portfolio, the portfolio is written down to the amount of the
discounted expected cash flows utilizing a valuation allowance. The Savings Bank
utilizes consensus market prepayment assumptions and discount rates to evaluate
its capitalized servicing rights which considers the risk characteristics of the
underlying servicing rights. For the years ended 1995 and 1996, there were no
write downs or valuation allowances established for capitalized servicing. A
write down and valuation allowance of $10 was established at September 30, 1997.
Sale of Mortgage Servicing Rights. The Savings Bank recognizes gains on
sales of mortgage servicing rights when a legal closing of the sale occurs with
title passing to the buyer, all significant risks and rewards of ownership have
transferred to the buyer, including risks related to default prepayment
(including no uncapped risks related to defaults or prepayments) and there are
no significant unresolved contingencies. The Savings Bank defers the gain on
sale of servicing until these conditions are met.
The following table sets forth the loan servicing fees of the Company
as well as such fees as a percentage of net interest income of the Company
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loan servicing fees, net of MSR amortization $1,125 $1,789 $3,102 $3,128 $3,099
Net interest income $5,509 $5,605 $7,221 $7,905 $9,213
Loan servicing fees as a percentage of net interest
income 20.4% 31.9% 43.0% 39.6% 33.6%
</TABLE>
The following tables sets forth the composition of the portfolio of
loans serviced for others as of September 30, 1997.
Unpaid principal balance
------------------------
(In Thousands)
GNMA $ 854,467
FNMA 100,778
FHLMC 330,225
Other (1) 5,861
----------
$1,291,331
==========
- ---------------------------
(1) Includes private investors, other financial institutions and
municipalities.
17
<PAGE>
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1997, the Company held $15,940 in interest-bearing deposits
in other financial institutions, principally with the FHLB of Topeka. The
Company maintains these accounts in order to maintain liquidity and improve the
interest-rate sensitivity of its assets.
Investment Activities
Mid-Continent is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The Company has generally maintained a
liquidity portfolio well in excess of regulatory requirements. Liquidity levels
may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short-term
demand for funds to be used in the Company's loan origination and other
activities. As of September 30, 1997, the Company had an investment portfolio of
approximately $86,065, consisting primarily of U.S. Government agency
obligations, U.S. Treasury securities, and FHLB stock as permitted by the OTS
regulations. The Company has found its level of investment securities has
increased in recent years as a result of increased interest rates. Mid-Continent
has invested in mortgage-related securities to offset any excess liquidity;
principally in FNMA ARMs and FHLMC ARMs. The Company anticipates having the
ability to fund all of its investing activities from funds held on deposit at
FHLB of Topeka. Mid-Continent will continue to seek high quality investments
with short to intermediate maturities and duration from one to five years.
Investment Portfolio
The following table sets forth the carrying value of the Company's
investment securities portfolio, short-term investments, FHLB stock, at the
dates indicated. As of September 30, 1997, the market value of the Company's
total investment securities portfolio was $85,895.
<TABLE>
<CAPTION>
At September 30,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities
U.S. Government Securities $ 1,126 $ 1,222 $ 1,326 $ 1,438 $ 1,560
U.S. Agency Securities 11,812 20,946 52,917 84,797 77,830
FHLB Stock 2,206 2,206 2,206 4,327 6,675
------- ------- ------- ------- -------
Total Investment Securities $15,144 $24,374 $56,449 $90,562 $86,065
======= ======= ======= ======= =======
</TABLE>
On June 1, 1989, the OTS issued a rule to clarify the application of
GAAP to securities held for investment, sale and/or trading by insured savings
associations. The rule requires an insured savings association's board of
directors to document and monitor its investment policy and strategies,
discusses the appropriate documentation of investment decisions of the insured
savings association's board of directors, summarizes GAAP applicable to
securities held for investment, sale and/or trading, and offers guidance on the
application of GAAP by insured
18
<PAGE>
savings associations in determining whether a security should be accounted for
as a security held as an investment, as a security held for sale or as a
security held for trading.
19
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Company's investment
securities portfolio as of September 30, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
Securities:
U.S. Government
Obligations $1,455 14.00% $ 105 8.02% $ 1,560 13.60% $ 1,579
U.S. Agency
Obligations 7,000 4.88% $4,996 5.04% $27,500 7.22% $38,334 7.35% 77,830 6.93% 77,641
FHLB Stock 6,675 7.25% 6,675 7.25% 6,675
------ ---- ------ ---- ------- ---- ------ ---- ------- ---- -------
Total $8,455 6.45% $4,996 5.04% $27,605 7.23% $45,009 7.33% $86,065 7.08% $85,895
====== ==== ====== ==== ======= ==== ====== ==== ======= ==== =======
</TABLE>
20
<PAGE>
Mortgage-Related Securities
The Company has a substantial investment in residential
mortgage-related securities. Although such securities are held for investment,
they can serve as collateral for borrowings and, through repayments, as a source
of liquidity. As of September 30, 1997, the carrying value of mortgage-related
securities totaled $28,124, or 6.94% of total assets. The market value of such
securities totaled approximately $28,556 as of September 30, 1997. As of
September 30, 1997, $12,873 in mortgage-related securities were pledged as
collateral for public funds.
The mortgage-related securities portfolio as of September 30, 1997
consisted of fixed and adjustable rate pass through certificates issued by GNMA
($9,871). Fixed and adjustable pass through certificates issued by FHLMC
($13,607), and fixed and adjustable pass through certificates issued by FNMA
($2,697). To a less extent, the mortgage-related securities portfolio also
contains pass through certificates issued by the Mortgage Guarantee Insurance
Corporation ("MGIC").
Mortgage-related securities represent a participation interest in a
pool of single-family or multi-family mortgages, the principal and interest
payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Company. Such quasi-governmental agencies, which guarantee the payment of
principal and interest to investors, primarily include FHLMC, FNMA and GNMA.
FHLMC is a corporation chartered by the United States Government that
issues participation certificates backed principally by conventional mortgage
loans. FHLMC guarantees the timely payment of interest and the ultimate return
or principal. FHLMC securities are indirect obligations of the United States
Government. FNMA is a private corporation chartered by Congress with a mandate
to establish a secondary market for conventional mortgage loans. FNMA guarantees
the timely payment of principal and interest, and FNMA securities are indirect
obligations of the United States Government. GNMA is a government agency with
HUD which is intended to help finance government assisted housing programs. GNMA
guarantees the timely payment of principal and interest, and GNMA securities are
backed by the full faith and credit of the United States Government. Since
FHLMC, FNMA and GNMA were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. To accommodate larger-sized loans, and loans that,
for other reasons, do not conform to the agency programs, a number of private
institutions have established their own home-loan origination and securitization
programs.
Mortgage-related securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
ARMs. Mortgage-related securities are generally referred to as mortgage
participation certificates or pass-through certificates. As a result, the
interest rate risk characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-related pass-
21
<PAGE>
through security is equal to the life of the underlying mortgages.
Mortgage-related securities issued by FHLMC, FNMA, and GNMA make up the majority
of the pass-through market.
In a declining interest rate environment, the Company may experience
significant prepayments on both fixed- and adjustable-rate mortgage-related
securities. In such an environment or in an environment where interest rates are
perceived to be low, the Company may not be able to reinvest the cash flow from
these securities into comparable yielding investments.
The following table sets forth the carrying value of the Company's
mortgage-related securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1994 1995 1996 1997
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Held for Investment:
FNMA-ARMs $ 3,391 $ 2,990 $ 2,616 $ 2,352
FHLMC-ARMs 8,293 6,786 6,219 5,865
GNMA-ARMs 6,020 5,729 5,043 4,302
FHLMC-fixed rate 15,256 13,835 11,853 7,742
FNMA-fixed rate 585 459 365 345
GNMA-fixed rate 8,086 7,293 6,151 5,569
MGIC 3,399 2,912 2,136 1,949
------- ------- ------- -------
Total mortgage-related securities $45,030 $40,004 $34,383 $28,124
======= ======= ======= =======
</TABLE>
To supplement lending activities in period of deposit growth and/or
declining loan demand, Mid-Continent has increased its investments in
residential mortgage-related securities during recent years. Although such
securities are held for investment, they can serve as collateral for borrowings
and through repayments, as a source of liquidity. As of September 30, 1997,
$50,849 in investment and mortgage-related securities were pledged as collateral
for public funds.
Subsidiary Activities
Mid-Continent is permitted to invest up to 2% of its assets in the
capital stock of, or secured or unsecured loans to, subsidiary corporations,
with an additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. As of September 30, 1997,
the net book value of the Company's total investment in its service corporation
was $131.
The Bank has one subsidiary, Laredo Investment, Inc. which was
incorporated in the State of Kansas and is engaged in the sale of tax deferred
annuities through Mid-Continent's branch offices. Insurance commissions from the
sale of tax deferred annuities amount to $3 and $2 for the years ended September
30, 1996 and 1997, respectively.
Source of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. Mid-Continent derives funds from
amortization and prepayment of loans and mortgage-related securities, maturities
of investment securities and operations. Scheduled loan principal repayments are
a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. Mid-Continent utilizes FHLB advances. The Company does not use
brokered deposits.
22
<PAGE>
Deposits. Consumer deposits are attracted principally from within the
Company's primary market area through the offering of a broad selection of
deposit instruments including checking, statement savings, money market deposit
and term certificate accounts (including negotiated jumbo certificates in
denominations of $100,000 or more) and retirement account funds. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate, among other factors.
The Company intends to continue to aggressively seek new checking
accounts and other related products and services by utilizing automated teller
machines, direct mail, gifts, and in-branch promotions in an effort to increase
fee income. In April 1993, the Company introduced a totally-free checking
account program which has been successful in attracting new checking accounts.
NOW account, money market accounts, regular savings accounts and
custodial accounts constituted $67,301, or 28.48% of the Company's deposit
portfolio as of September 30, 1997. Certificates of deposit constituted
$116,585, or 49.33% of the deposit portfolio, excluding Jumbo accounts, with
principal amounts of $100 or more, which constituted $52,447, or 22.19% of the
deposit portfolio, as of September 30, 1997.
Deposit Accounts of $100 or More
The following table indicates the amount of the Company's deposits of
$100 or more by time remaining until maturity as of September 30, 1997.
Maturity Period
- ---------------
(Dollars in Thousands)
Within three months $27,793
Over three through six months 2,848
Over six through twelve months 9,813
Over twelve months 11,993
-------
Total $52,447
=======
Borrowings
Deposits are the primary source of funds of the Company's lending and
investment activities and for its general business purposes. The Company has
obtained advances from the FHLB of Topeka to supplement its supply of lendable
funds. Advances from the FHLB of Topeka have typically been secured by a pledge
of the Company's stock in the FHLB of Topeka
23
<PAGE>
and a portion of the Company's first mortgage loans and certain other assets.
The Company, if the need arises, may also access the Federal Reserve Bank
discount window to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. As of September 30, 1997, Mid-Continent had $121,800 in
advances outstanding from the FHLB of Topeka. The Savings Bank has entered into
a line-of-credit agreement with the FHLB of Topeka wherein the Savings Bank can
borrow up to $68,292 subject to certain limitations. As of September 30, 1997,
there was $7,300 outstanding relative to this agreement. The agreement expires
December 26, 1997.
Personnel
As of September 30, 1997, the Company had 155 full-time and 29
part-time employees. None of the Company's employees are represented by a
collective bargaining group.
Competition
The Company encounters strong competition both in the attraction of
deposits and origination of loans. Competition comes primarily from savings
institutions, commercial banks and credit unions that operate in counties where
Mid-Continent's offices are located. The Company competes for savings accounts
by offering depositors competitive interest rates and a high level of personal
service. The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors.
Regulation
Set forth below is a brief description of certain laws which relate to
the regulation of the Company. The description does not purport to be complete
and is qualified in its entirety by reference to applicable laws and
regulations. Unless otherwise indicated, this section discusses regulations that
apply to the Company indirectly through their direct application to the Savings
Bank.
General. As a federally chartered, FDIC-insured savings association,
the Savings Bank is subject to extensive regulation by the OTS and the FDIC.
Lending activities and other investments must comply with various federal
statutory and regulatory requirements. The Savings Bank is also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board").
The OTS, in conjunction with the FDIC, regularly examines the Savings
Bank and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that they find in the Savings Bank's operations.
The Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal law, especially in such matters as the
ownership of savings accounts and the form and content of the Savings Bank's
mortgage documents.
24
<PAGE>
The Savings Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the FDIC and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company and its operations.
The Company is also required to file certain reports with, and otherwise comply
with the rules and regulations of the OTS and the Securities and Exchange
Commission ("SEC").
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three
capital standards: (1) tangible capital equal to 1.5% of total adjusted assets,
(2) a leverage ratio (core capital) equal to 3% of total adjusted assets and (3)
risk-based capital equal to 8.0% of total risk-weighted assets.
The following table sets forth the Savings Bank's capital position at
September 30, 1997, as compared to the minimum regulatory capital requirements
imposed by the OTS at that date.
Percent
of Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
Tangible Capital:
Regulatory capital $36,179 8.9%
Regulatory requirement 6,079 1.5%
------- ----
Excess $30,100 7.4%
======= ====
Core Capital:
Regulatory capital $36,179 8.9%
Regulatory requirement 12,158 3.0%
------- ----
Excess $24,021 5.9%
======= ====
Risk-Based Capital:
Regulatory capital $36,633 22.6%
Regulatory requirement 12,954 8.0%
------- ----
Excess $23,679 14.6%
======= =====
Prompt Corrective Action
Banking regulators are required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS rules, an institution
shall be deemed to (i) "well capitalized" if it has total risk-based capital of
10.0% or more, has a Tier I risk-based capital ratio (core or
25
<PAGE>
leverage capital to risk-weighted assets) of 6.0% or more, has a leverage
capital ratio of 5.0% or more and is not subject to any order or final capital
directive to meet and maintain a specific capital level for any capital measure,
(ii) "adequately capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier I risked-based ratio of 4.0% or more and a leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized", (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a leverage capital ratio that is less than 4.0%
(3.0% in certain circumstances), (iv) "significantly undercapitalized" if it has
a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a leverage capital ratio that is less
than 3.0% and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. In addition, under
certain circumstances, a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
Immediately upon becoming undercapitalized, an institution becomes
subject to restrictive provisions. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible long
term cost to the deposit insurance fund, subject in certain cases to specified
procedures.
The Company is currently a well capitalized institution.
Dividend and Other Capital Distribution Limitations
OTS regulations require the Savings Bank to give the OTS 30 days
advance notice of any proposed declaration of dividends and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends. In
addition, the Savings Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Savings Bank below the amount required for the liquidation account established
pursuant to the Savings Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter
26
<PAGE>
period. Any additional capital distributions require prior regulatory approval.
As of September 30, 1997, the Savings Bank was a Tier 1 institution. In the
event the Company's capital fell below its fully phased-in requirement or the
OTS notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirement).
Qualified Thrift Lender Test
The Home Owners Loan Act ("HOLA"), as amended, requires savings
institutions to meet a qualified thrift lender ("QTL") test. If the Savings Bank
maintains at least 65% of its portfolio assets (defined as all assets minus
intangible assets, property used by the institution in conducting its business
and liquid assets equal to 20% of total assets) in Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-backed securities ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Topeka. Certain
assets are subject to a percentage limitation of 20% of portfolio assets. In
addition, savings associations may include shares of stock of the Federal Home
Loan Banks, FNMA and FHLMC as qualifying QTIs. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of September 30,
1997, the Savings Bank was in compliance with its QTL requirement with 88.5% of
its total assets invested in Qualified Thrift Investments.
Federal Home Loan Bank System
The Savings Bank is a member of the FHLB of Topeka, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of Topeka in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. As of September 30, 1997, the Savings
Bank had $6,675 in FHLB stock, which was in compliance with this requirement.
27
<PAGE>
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts)
and non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the OTS.
Savings association have authority to borrow from the Federal Reserve
Bank "discount window", but Federal Reserve policy generally requires savings
association to exhaust all OTS sources before borrowing from the Federal Reserve
System. The Savings Bank had no discount window borrowings as of September 30,
1997.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Company and not for stockholders of the
Company.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions, provided the Company satisfied the QTL
test. If the Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Company or any other FDIC-insured savings association) would become
subject to such restrictions unless such other associations each qualify as a
QTL and were acquired in a supervisory acquisition.
Executive Officers of the Registrant
The following individuals were executive officers of the Registrant as
of September 30, 1997:
Name Age (1) Positions Held With the Registrant
- ---- ------- ----------------------------------
Richard T. Pottorff 63 Chairman, President, and Chief
Executive Officer
Larry R. Goddard 51 Executive Vice President, Chief Operating
Officer, and Chief Financial Officer
Harold G. Siemens 48 Senior Vice President - Lending
28
<PAGE>
David L. Walter 49 Vice President
- ----------------------------------
(1) At September 30, 1997
The following is a description of the principal employment and
occupation during at least the past five years of the executive officers of the
Registrant as of September 30, 1997.
Richard T. Pottorff has served as a Director and Officer of the Savings
Bank since 1978 and of the Company since its incorporation in January 1994. Mr.
Pottorff has served as a Director of the FHLB of Topeka and has served as a
member of the El Dorado Chamber of Commerce, the Wichita Association of Real
Estate Brokers and the Wichita Homebuilders Association. In addition, Mr.
Pottorff is the Chairman of the Federal and State Legislative Committee of the
Heartland Community Bankers. Mr. Pottorff is also a past Chairman of the
Heartland Community Bankers.
Larry R. Goddard has been with the Savings Bank since 1978 and has
served as a Director of the Savings Bank and the Company since 1994. Mr. Goddard
is a past President of the Mid-West Savings Conference and has served as
Chairman of the Real Estate Mortgage Committee of the Heartland Community
Bankers. He is also a member of the Lions Club, a member of the Partners in
Education, a director of El Dorado, Inc., and a member of the Community Action
for Retail & Revitalization Board.
Harold G. Siemens has been with the Company since 1983. He is a
founding Director and past President of the Kansas Mortgage Banking Association
and a Director of the Mid-West Savings Conference. Mr. Siemens is also a member
of the Real Estate Mortgage Committee of the Heartland Community Bankers, the
Wichita Area Association of Realtors and the Wichita Area Builders Association.
David L. Walter has been with the Savings Bank since 1988 and has
served as a Vice President of the Company since January 1995. With respect to
the Savings Bank, Mr. Walter became the Treasurer and the Controller in 1988 and
a Vice President in 1989. Mr. Walter is a member of the Financial Managers
Society and the Treasurer of the El Dorado Kiwanis Club.
Item 2. Properties
The Company operates from its corporate office located at 124 W.
Central, El Dorado, Kansas. The Company owns this office facility which was
opened in 1965.
Full service offices owned and leased by the Company are set forth
below.
29
<PAGE>
Location
100 W. Twelfth 405 N. Main 2123 N. Maize Road
Newton, Kansas 67114 El Dorado, Kansas 67042 Wichita, Kansas 67212
1113 S. Main 255 N. Main 3055 N. Rock Road
Winfield, Kansas 67156 Wichita, Kansas 67201 Wichita, Kansas 67226
2310 S. Main 1420 N. Ohio 762 N. West Street
Winfield, Kansas 67156 Augusta, Kansas 67010 Wichita, Kansas 67203
300 N. Rock Road
Derby, Kansas 67037
The Company owns all of its facilities except 405 N. Main in El Dorado,
which is leased. This lease expires June 30, 1998.
The Company also owns certain other properties that it leases to
others. The location of these properties is set forth below.
409 N. Main 100 W. Twelfth 402 N. Rose Hill Road
El Dorado, Kansas 67042 Newton, Kansas 67114 Rose Hill, Kansas 67213
Item 3. Legal Proceedings
There are various claims and lawsuits in which the Company is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Company's business. In the opinion of management, no material loss is expected
from any of such pending claims or lawsuits.
Supreme Court Ruling on Breach of Contract Regarding Supervisory
Goodwill: Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid
Continent Bancshares, Inc., is pursuing its claim against the federal government
to recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
lawsuit that the federal government breached its contract with the Bank when
FIRREA was enacted because FIRREA prevented the Bank from counting such assets
toward minimum capital requirements. As a result of FIRREA,
30
<PAGE>
the Bank was forced to write off approximately $7,500,000 in supervisory
goodwill. This write off reduced the Bank's regulatory capital.
On July 1, 1996, the United States Supreme Court affirmed decisions by
a federal appellate court that the government had breached express contracts
with three thrifts (U.S. v. Winstar Corp. et al.) and therefore was liable for
damages. Those lawsuits stemmed from circumstances that are similar to those of
the Bank; in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp. et al.,
serves to support the Bank's legal claims in its pending lawsuit against the
federal government, it is not possible at this time to predict what effect the
Supreme Court's ruling, and subsequent rulings of a lower court concerning
damages, will have on the outcome of the Bank's lawsuit. Notwithstanding the
Supreme Court's ruling, there can be no assurance that the Bank will be able to
recover any funds arising out of its claim and, if any recovery is made, the
amount of such recovery.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
31
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information contained under the section captioned "Market and
Dividend Information" in the Company's Annual Report to Stockholders for the
fiscal year ended September 30, 1997 (the "Annual Report"), is incorporated
herein by reference.
Item 6. Selected Financial Data
The information contained in the table captioned "Selected Consolidated
Financial Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitiative and Qualitative Disclosures about Market Risks
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Market Risk" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Registrant's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no change of independent auditor for the Company, or its
subsidiaries, during the two year period ended September 30, 1997.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained under the section captioned "Proposal 4
Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance of Mid Continent" in the Registrant's definitive proxy statement for
the Registrant's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference. The Proxy Statement is included in Part I of a
Registration Statement on Form S-4 of Commercial Federal Corporation ("CFC")
filed with the SEC on or about December 19, 1997. This Form S-4 relates to the
merger of the Company with CFC.
Additional information concerning executive officers is included under
"Part I - Executive Officers of the Registrant".
32
<PAGE>
Item 11. Executive Compensation
The information contained under the sections captioned "Proposal 4
Election of Directors - Executive Compensation", and "Compensation Committee
Interlocks and Insider Participation" in the Proxy Statement are incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal Holders
Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "Proposal I - Election of
Directors" in the Proxy Statement.
(c) Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the operation of which
may at a subsequent date result in a change in control of the Registrant.
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 - Certain
Relationships and Related Transactions" in the Proxy Statement.
33
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants of the Registrant included in the Registrant's 1997
Annual Report to Stockholders are incorporated herein by reference and also in
Item 8 hereof.
Consolidated Balance Sheets as of September 30, 1996 and 1997.
Consolidated Statements of Income for the Years Ended September 30,
1995, 1996 and 1997.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995, 1996 and 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules, except for Exhibit 11, for
which provision is made in the applicable accounting regulations of the SEC are
not required under the related instructions or are inapplicable and therefore
have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
2 Merger Agreement with CFC*
3(i) Certificate of Incorporation of Mid Continent
Bancshares, Inc. **
3(ii) Bylaws of Mid Continent Bancshares, Inc. ***
10.1 Outside Director Consultation and Retirement Plan **
10.2 Employment Agreement with Richard T. Pottorff
10.3 Employment Agreement with Larry R. Goddard
10.4 1994 Stock Option Plan ***
10.5 Management Stock Bonus Plan and Trust Agreement ***
34
<PAGE>
10.6 Severance Agreement with Harold Siemens
11 Statement Regarding Computation of Earnings Per
Share
13 Annual Report to Stockholders for the fiscal year
ended September 30, 1997
21 Subsidiaries of the Registrant ***
23 Consent from Deloitte & Touche, LLP
- -------------------------
* Incorporated by reference to Exhibit 99.2 of the Form 8-K (File No.
0-23620) dated September 2, 1997.
** Incorporated by reference to the registration statement on Form S-1 (File
No. 33-76010) declared effective by the SEC on May 3, 1994.
*** Incorporated by reference to the Form 10-K (File No. 0-23620) for the
fiscal year ended September 30, 1996.
(b) Reports on Form 8-K:
A Form 8-K, dated September 2, 1997 (Items 5 and 7), was filed
during the quarter.
Copies of above exhibits not contained herein are available, at a fee of $0.15
per page, to any security holder upon written request to the Secretary, Mid
Continent Bancshares, Inc., 124 West Central, El Dorado, Kansas 67042.
35
<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, on December 23, 1997, by the undersigned, thereunto duly authorized.
Mid Continent Bancshares, Inc.
By: /s/ Richard T. Pottorff
------------------------------------
Richard T. Pottorff
President, Chairman and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement 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 indicated as of December 23, 1997.
/s/ Larry R. Goddard /s/ Richard T. Pottorff
- ------------------------------------- ------------------------------------
Larry R. Goddard Richard T. Pottorff
Executive Vice President, Chief President, Chairman, Chief Executive
Operating Officer, Chief Financial Officer, and Director
Officer and Director (Principal Executive Officer)
(Principal Financial and Accounting
Officer)
/s/ Donald Adlesperger /s/ Thomas C. Hand
- ------------------------------------- ------------------------------------
Donald Adlesperger Thomas C. Hand
Director Director
/s/ Kenneth B. Dellett /s/ Ron J. McGraw
- ------------------------------------- ------------------------------------
Kenneth B. Dellett Ron J. McGraw
Director Director
EMPLOYMENT AGREEMENT
--------------------
as restated and amended
THIS AGREEMENT entered into this 27 day of February, 1997 ("Effective
Date"), by and between Mid-Continent Federal Savings Bank (the "Bank") and
Richard T. Pottorff (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the President
and Chief Executive Officer of the Bank. The Employee shall render such
administrative and management services to the Bank and Mid Continent Bancshares,
Inc. ("Parent") as are currently rendered and as are customarily performed by
persons situated in a similar executive capacity. The Employee shall promote to
the extent permitted by law the business of the Bank and Parent. The Employee's
other duties shall be such as the Board of Directors for the Bank (the "Board of
Directors" or "Board") may from time to time reasonably direct, including normal
duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $_______ per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. Discretionary Bonus. The Employee shall be entitled to participate in
an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may
<PAGE>
become applicable to the Bank's senior management employees, including by
example, participation in any stock option or incentive plans adopted by the
Board of Directors of Bank or Parent, club memberships, a reasonable expense
account, and any other benefits which are commensurate with the responsibilities
and functions to be performed by the Employee under this Agreement. The Bank
shall reimburse Employee for all reasonable out-of-pocket expenses which
Employee shall incur in connection with his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending thirty-six (36)
months thereafter.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
2
<PAGE>
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee'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 the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term of this Agreement and the cost of Employee obtaining all
health, life and disability benefits which the Employee would be eligible to
participate in for a period equal to the remaining term of the Agreement, but in
no event for as period of less than one year from the date of termination of
employment, based upon the
3
<PAGE>
benefit levels substantially equal to those being provided Employee at the date
of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations 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) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS 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.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee 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 FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the 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 shall, (i) pay the Employee
all or part of the compensation withheld while its
4
<PAGE>
contract obligations were suspended and (ii) reinstate any of its obligations
which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Paragraph 2 of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
12. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twelve (12) months after, any
change in control of the Bank or Parent, Employee shall be paid an amount equal
to the product of 2.99 times the Employee's "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder. Said sum shall be paid, at the option of
Employee, either in one (1) lump sum within thirty (30) days of such termination
or in periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Employee and any dependents of the Employee shall, nevertheless,
remain eligible to participate in the medical and life insurance programs
sponsored by the Bank, Parent or successor entity for a period of three years
from the date of termination of employment on the same basis as other employees
of the Bank who shall remain employed by the Bank, Parent or successor entity.
Notwithstanding the forgoing, all sums payable hereunder shall be reduced in
such manner and to such extent so that no such payments made hereunder when
aggregated with all other payments to be made to the Employee by the Bank or the
5
<PAGE>
Parent shall be deemed an "excess parachute payment" in accordance with Section
280G of the Code and be subject to the excise tax provided at Section 4999(a) of
the Code. The term "control" shall refer to the ownership, holding or power to
vote more than 25% of the Parent's or Bank's voting stock, the control of the
election of a majority of the Parent's or Bank's directors, or the exercise of a
controlling influence over the management or policies of the Parent or Bank by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twelve (12) months following a change in control of the Bank or Parent and
Employee shall thereupon be entitled to receive the payment described in Section
12(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the Board
of the Bank or Parent; (iii) if the Bank or Parent should fail to maintain
existing employee benefits plans, including material fringe benefit, stock
option and retirement plans; (iv) if Employee would be assigned duties and
responsibilities other than those normally associated with his position as
referenced at Section 1, herein; (v) if Employee would not be elected or
reelected to the Board of Directors of the Bank; or (vi) if Employee's
responsibilities or authority have in any way been materially diminished or
reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative expenses assessed by the AAA. The Bank shall reimburse Employee
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, following the
6
<PAGE>
delivery of the decision of the arbitrator or upon delivery of other legal
judgment or settlement of the matter; provided that the arbitrator rendors a
determination in favor of the Employee or the parties agree to a settlement of
such issue prior to delivery of an arbitrator's determination. Such
reimbursement shall be paid within ten (10) days of Employee furnishing to the
Bank or Parent evidence, which may be in the form, among other things, of a
canceled check or receipt, of any costs or expenses incurred by Employee.
13. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
7
EMPLOYMENT AGREEMENT
--------------------
as restated and amended
THIS AGREEMENT entered into this 27 day of February, 1997 ("Effective
Date"), by and between Mid-Continent Federal Savings Bank (the "Bank") and Larry
R. Goddard (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Executive Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Executive
Vice President of the Bank. The Employee shall render such administrative and
management services to the Bank and Mid Continent Bancshares, Inc. ("Parent") as
are currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall promote to the extent permitted
by law the business of the Bank and Parent. The Employee's other duties shall be
such as the Board of Directors for the Bank (the "Board of Directors" or
"Board") may from time to time reasonably direct, including normal duties as an
officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the term
of this Agreement a salary at the rate of $_______ per annum, payable in cash
not less frequently than monthly; provided, that the rate of such salary shall
be reviewed by the Board of Directors not less often than annually, and Employee
shall be entitled to receive annually an increase at such percentage or in such
an amount as the Board of Directors in its sole discretion may decide at such
time.
3. Discretionary Bonus. The Employee shall be entitled to participate in
an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The Employee shall
be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
<PAGE>
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall be
for the period commencing on the Effective Date and ending thirty-six (36)
months thereafter.
6. Loyalty; Noncompetition.
-----------------------
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this Agreement
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in accordance
with the policies as are periodically established by the Board of Directors for
senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except
2
<PAGE>
in either case to the extent authorized by the Board of Directors for senior
management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
-------------------------------
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in which
event the Employee's estate shall be entitled to receive the compensation due
the Employee through the last day of the third calendar month in which
Employee's death shall have occurred.
(b) The Board of Directors may terminate the Employee's employment at any
time, but any termination by the Board of Directors other than termination for
Just Cause, shall not prejudice the Employee's right to compensation or other
benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee'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 the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term of this Agreement and the cost of Employee obtaining all
health, life and disability benefits which the Employee would be
3
<PAGE>
eligible to participate in for a period equal to the remaining term of the
Agreement, but in no event for as period of less than one year from the date of
termination of employment, based upon the benefit levels substantially equal to
those being provided Employee at the date of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA) all
obligations under this Agreement shall terminate as of the date of default, but
this paragraph shall not affect any vested rights of the contracting parties.
(f) All obligations 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) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS 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.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee 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 FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date
4
<PAGE>
of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Bank shall, (i) pay the Employee all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate any of its obligations which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated to
the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then his compensation (as
set forth in Paragraph 2 of this Agreement) shall be reduced in proportion to
the time spent in said employment, or as shall otherwise be agreed to by the
parties.
12. Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twelve (12) months after, any
change in control of the Bank or Parent, Employee shall be paid an amount equal
to the product of 2.99 times the Employee's "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code") and
regulations promulgated thereunder. Said sum shall be paid, at the option of
Employee, either in one (1) lump sum within thirty (30) days of such termination
or in periodic payments over the next 36 months or the remaining term of this
Agreement whichever is less, as if Employee's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Employee and any dependents of the Employee shall, nevertheless,
remain eligible to participate in the medical and life insurance programs
sponsored by the Bank, Parent or successor entity for a period of three years
from the date of termination of employment on the same basis as other employees
of the Bank who shall remain employed by the Bank, Parent or successor entity.
Notwithstanding the forgoing, all sums
5
<PAGE>
payable hereunder shall be reduced in such manner and to such extent so that no
such payments made hereunder when aggregated with all other payments to be made
to the Employee by the Bank or the Parent shall be deemed an "excess parachute
payment" in accordance with Section 280G of the Code and be subject to the
excise tax provided at Section 4999(a) of the Code. The term "control" shall
refer to the ownership, holding or power to vote more than 25% of the Parent's
or Bank's voting stock, the control of the election of a majority of the
Parent's or Bank's directors, or the exercise of a controlling influence over
the management or policies of the Parent or Bank by any person or by persons
acting as a group within the meaning of Section 13(d) of the Securities Exchange
Act of 1934. The term "person" means an individual other than the Employee, or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary,
Employee may voluntary terminate his employment under this Agreement within
twelve (12) months following a change in control of the Bank or Parent and
Employee shall thereupon be entitled to receive the payment described in Section
12(a) of this Agreement, upon the occurrence, or within ninety (90) days
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President or the Board of the Bank or Parent; (iii) if the Bank or Parent should
fail to maintain existing employee benefits plans, including material fringe
benefit, stock option and retirement plans; (iv) if Employee would be assigned
duties and responsibilities other than those normally associated with his
position as referenced at Section 1, herein; (v) if Employee would not be
elected or reelected to the Board of Directors of the Bank; or (vi) if
Employee's responsibilities or authority have in any way been materially
diminished or reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative
6
<PAGE>
expenses assessed by the AAA. The Bank shall reimburse Employee for all costs
and expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, following the delivery of the decision of the arbitrator
or upon delivery of other legal judgment or settlement of the matter; provided
that the arbitrator rendors a determination in favor of the Employee or the
parties agree to a settlement of such issue prior to delivery of an arbitrator's
determination. Such reimbursement shall be paid within ten (10) days of Employee
furnishing to the Bank or Parent evidence, which may be in the form, among other
things, of a canceled check or receipt, of any costs or expenses incurred by
Employee.
13. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank or Parent which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
7
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") entered into this
26th day of June, 1997 ("Effective Date"), by and between Mid-Continent Federal
Savings Bank (the "Savings Bank") and Harold Siemens (the "Employee").
WHEREAS, the Employee is currently employed by the Savings Bank as Senior
Vice President and is experienced in certain phases of the business of the
Savings Bank; and
WHEREAS, the parties desire by this writing to set forth the rights and
responsibilities of the Savings Bank and Employee if the Savings Bank should
undergo a change in control (as defined hereinafter in the Agreement) after the
Effective Date.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Senior Vice
President of the Savings Bank. The Employee shall render such administrative and
management services to the Savings Bank and Mid Continent Bancshares, Inc.
("Parent") as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee's other duties shall be
such as the Board of Directors for the Savings Bank (the "Board of Directors" or
"Board") may from time to time reasonably direct, including normal duties as an
officer of the Savings Bank and the Parent.
2. Term of Agreement. The term of this Agreement shall be for the period
commencing on the Effective Date and ending twenty-four (24) months thereafter
("Term"). Additionally, on, or before, each annual anniversary date from the
Effective Date, the Term of this Agreement may be extended for an additional
period beyond the then effective expiration date upon a determination and
resolution of the Board of Directors that the performance of the Employee has
met the requirements and standards of the Board, and that the Term of such
Agreement shall be extended.
3. Termination of Employment in Connection with or Subsequent to a
--------------------------------------------------------------------
Change in Control.
-----------------
(a) Notwithstanding any provision herein to the contrary, in the event of
the involuntary termination of Employee's employment under this Agreement,
absent Just Cause, in connection with, or within twenty-four (24) months after,
any Change in Control of the Savings Bank or Parent, Employee shall be paid an
amount equal to twenty-four months times the monthly base salary in effect as of
the date of such Change in Control or the base salary in effect as of the date
of such termination of employment, if greater, to be paid to the Employee by the
Savings Bank and the costs associated with maintaining coverage under the
Savings Bank's medical and dental insurance reimbursement plans similar to that
in effect on the date of termination of employment for a period of one year
thereafter. Said sum shall be paid, at the option of Employee, either in one (1)
lump sum within thirty (30) days of such termination or in periodic payments
over the next 24 months, and such payments shall be in lieu of any other
<PAGE>
future payments which the Employee would be otherwise entitled to receive.
Notwithstanding the forgoing, all sums payable hereunder shall be reduced in
such manner and to such extent so that no such payments made hereunder when
aggregated with all other payments to be made to the Employee by the Savings
Bank or the Parent shall be deemed an "excess parachute payment" in accordance
with Section 280G of the Internal Revenue Codes of 1986, as amended (the "Code")
and be subject to the excise tax provided at Section 4999(a) of the Code. The
term "Change in Control" shall mean: (i) the execution of an agreement for the
sale of all, or a material portion, of the assets of the Savings Bank or the
Parent; (ii) the execution of an agreement for a merger or recapitalization of
the Savings Bank or the Parent or any merger or recapitalization whereby the
Savings Bank or the Parent is not the surviving entity; (iii) a change in
control of the Savings Bank or the Parent, as otherwise defined or determined by
the Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Savings Bank
or the Parent by any person, trust, entity or group. The term "person" means an
individual other than the Employee, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the contrary
except as provided at Sections 4 and 5, Employee may voluntarily terminate his
employment under this Agreement within twenty-four months following a Change in
Control of the Savings Bank or Parent, and Employee shall thereupon be entitled
to receive the payment and benefits described in Section 3(a) of this Agreement,
upon the occurrence, or within ninety (90) days thereafter, of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than fifty (50) miles from the
Employee's primary office as of the signing of this Agreement; (ii) if in the
organizational structure of the Savings Bank or Parent, Employee would be
required to report to a person or persons other than the Board of the Savings
Bank or Parent, the President or the Executive Vice President and Chief
Operating Officer; (iii) if the Savings Bank or Parent should fail to maintain
the Employee's base compensation in effect as of the date of the Change in
Control and existing employee benefits plans, including material fringe benefit,
stock option and retirement plans, except to the extent that such reduction in
benefit programs is part of an overall adjustment in benefits for all employees
of the Savings Bank or Parent and does not disproportionately adversely impact
the Employee; (iv) if Employee would be assigned duties and responsibilities
other than those normally associated with his position as referenced at Section
1, herein; or (v) if Employee's responsibilities or authority have in any way
been materially diminished or reduced.
4. Other Changes in Employment Status.
----------------------------------
Except as provided for at Section 3, herein, the Board of Directors may
terminate the Employee's employment at any time with or without Just Cause
within its sole discretion. This
-2-
<PAGE>
Agreement shall not be deemed to give Employee any right to be retained in the
employment or service of the Bank, or to interfere with the right of the Bank to
terminate the employment of the Employee at any time. The Employee shall have no
right to receive compensation or other benefits for any period after termination
for Just Cause. Termination for "Just Cause" shall include termination because
of the Employee'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 the Agreement.
5. Regulatory Exclusions.
---------------------
(a) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(b) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(c) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his or her designee, at the time that
the Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his
or her designee, at the time that the Director of the OTS, or his or her
designee approves a supervisory merger to resolve problems related to operation
of the Savings Bank or when the Savings Bank is determined by the Director of
the OTS 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.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)),
the Savings Bank's obligations under the Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Savings Bank may within its discretion (i) pay the
Employee all or part of the compensation withheld while its contract obligations
were suspended and (ii) reinstate any of its obligations which were suspended.
(e) Notwithstanding anything herein to the contrary, any payments made to
the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
-3-
<PAGE>
6. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Savings Bank.
(b) The Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Savings Bank.
7. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
8. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
9. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
10. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extend that the parties may otherwise reach
a mutual settlement of such issue. The Savings Bank shall reimburse Employee for
all reasonable costs and expenses, including reasonable attorneys' fees, arising
from such dispute, proceedings or actions, following the delivery of the
decision of the arbitrator finding in favor of the Employee. Further, the
settlement of the dispute to be approved by the Board of the Savings Bank or the
Parent may include a provision for the reimbursement by the Savings Bank or
Parent to the Employee for all reasonable costs and expenses, including
reasonable attorneys' fees, arising from such dispute, proceedings or actions,
or the Board of the Savings Bank or the Parent may authorize such reimbursement
of such reasonable costs and expenses by separate action upon a written action
and determination of the Board following settlement of the dispute.
11. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
-4-
Exhibit 11
MID CONTINENT BANCSHARES, INC.
Statement Regarding Computation of Earnings Per Share
Three Months and Year Ended September 30, 1996 and 1997
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30, September 30,
------------- -------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings per share
Common shares outstanding,
beginning of period 1,937,803 1,925,227 2,045,235 1,930,712
Exercise of stock options ---- 725 ---- 183
Effect of dilutive stock options 768 13,080 5,942 29,628
Allocated ESOP shares 1,700 1,700 6,975 7,332
Amortized MSBP shares 1,871 10,021 7,524 9,635
Treasury share purchase (6,848) ----- (102,827) (38,725)
--------- --------- --------- ---------
Weighted average common and common equivalent
shares outstanding 1,935,294 1,950,753 1,962,849 1,938,765
Net earnings $460 $977 $3,126 $4,170
Per share amount $0.24 $0.50 $1.59 $2.15
Fully Diluted Earnings per share
Common shares outstanding,
beginning of period 1,938,696 1,931,446 2,053,855 1,933,603
Exercise of stock options 725 183
Effect of dilutive stock options 2,766 14,824 (478) 31,913
Allocated ESOP shares 1,700 1,700 6,975 7,332
Amortized MSBP shares 1,871 10,021 7,524 9,635
Treasury share purchases (6,848) ----- (102,827) (38,725)
--------- --------- --------- ---------
Weighted average common and common equivalent
shares outstanding 1,938,185 1,958,716 1,965,049 1,943,941
Net earnings $460 $977 $3,126 $4,170
Per share amount $0.24 $0.50 $1.59 $2.15
</TABLE>
Primary earnings per share have been computed on the treasury stock method using
the average market price for the common stock equivalents (options). Fully
diluted earnings per share have been computed on the treasury stock method using
the closing market price for the common stock equivalents (options).
The Company accounts for the 136,000 shares acquired by the Employee Stock
Ownership Plan ("ESOP") in accordance with Statement of Position 93-6 and the
74,833 shares acquired for the Management Stock Bonus Plan ("MSBP") in a manner
similar to the ESOP shares; shares controlled by the ESOP and MSBP are not
considered in the weighted average shares outstanding until the shares are
committed for allocation.
Mid Continent Bancshares, Inc.
================================================================================
CONTENTS
A Letter to Our Shareholders 1
Business of the Bancorp and Savings Bank 2-3
Selected Consolidated Financial Highlights 4-5
Market and Dividend Information 6
Management's Discussion and Analysis 7-27
Consolidated Financial Statements 28-68
Directors and Officers and Other Information 69-70
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
A letter to Our Shareholders
- ----------------------------
Dear Stockholder:
During the fiscal year of 1997 there were numerous and exciting changes with Mid
Continent Bancshares, Inc. and Mid-Continent Federal Savings Bank.
In retrospect, the year and the financial changes for the Bank was outstanding.
The Bank's assets increased 19.1%, to $405 million.
During the year the loan portfolio increased from $171 million to $233 million.
The increase was in adjustable rate and short-term fixed-rate mortgages held for
investment. The Bank's loan servicing portfolio increased to $1.291 billion.
The Bank's deposits accounts balances increased by $22 million. The Bank's High
Performance checking accounts has continued to increase at a rapid rate with the
total number of accounts being approximately 19,000.
The stockholders' equity increased from $36.8 million to $40.0 million, or 8.6%.
Looking to the future, Mid Continent Bancshares on September 2, 1997 executed a
definitive agreement with Commercial Federal of Omaha, Nebraska to merge. The
Board of Directors, after a long deliberation, concluded that this was in the
best interest of the stockholders, the future of the Bank, its employees, and
the communities it serves.
Commercial Federal is an outstanding company and has the same business and
community responsibilities as Mid-Continent. The Board of Directors encourage
you to vote in the affirmative for the merger of these two companies.
We thank you, the stockholders of Mid Continent Bancshares, for your confidence
you have shown in the Bank, the Board of Directors, management and our
employees.
Very truly yours,
MID CONTINENT BANCSHARES, INC.
/s/Richard T. Pottorff
Richard T. Pottorff
Chairman of the Board and President
1
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
BUSINESS OF THE BANCORP
- -----------------------
Mid Continent Bancshares, Inc. ("Bancorp") is a Kansas corporation organized in
January, 1994. On June 27, 1994, the Bancorp acquired all the capital stock of
Mid-Continent Federal Savings Bank ("Savings Bank") in the conversion of the
Savings Bank from a federal mutual savings and loan association to a federal
stock savings bank. Bancorp, as a unitary savings and loan holding company,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Savings Bank retains a
specified amount of its assets in housing-related investments.
The Bancorp's business activities to date have been limited to its investment in
the Savings Bank, loans made to the Savings Bank for use in the normal course of
its business and to the Mid-Continent Federal Savings Bank Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Bancorp's
common stock in the initial public offering and the repurchase of limited
amounts of Bancorp stock. The loans bear interest rates and have terms and
conditions which prevailed in the market place at the time they were originated.
As of September 30, 1997 the Bancorp has reacquired 290,000 shares of its common
stock in the open market.
BUSINESS OF THE SAVINGS BANK
- ----------------------------
Mid-Continent Federal Savings Bank is a federally chartered stock savings bank
located in El Dorado, Kansas in Butler County, Kansas. The Savings Bank was
founded in 1925 with a charter from Kansas under the name Mid-Continent Savings
and Loan Association. In 1935, the Savings Bank adopted a federal charter and
changed its name to Mid-Continent Federal Savings and Loan Association of El
Dorado. Its present name, Mid-Continent Federal Savings Bank, was obtained in
1994 at the time it obtained a charter as a savings bank. The Savings Bank
completed its conversion from mutual to stock form in June, 1994 at which time
all of its stock was acquired by Mid Continent Bancshares, Inc. The Savings Bank
has been a member of the Federal Home Loan Bank of Topeka since 1937 and its
deposits are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
Mid-Continent is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. The Savings Bank purchases one-to-four
family residential loans through approximately 125 correspondents located in
Kansas, Oklahoma, and in Missouri. The Savings Bank also invests in
mortgage-related securities, U.S. government and agency obligations. These
activities are funded with deposits from the general public and borrowings from
the Federal Home Loan Bank and Mid Continent Bancshares, Inc. The Savings Bank
has offices in El Dorado, Newton, Winfield, Augusta, Derby and Wichita, Kansas,
which are located in its primary market area of Butler, Cowley, Sedgwick and
Harvey Counties in the State of Kansas. The Savings Bank opened one full service
branch in Wichita, Kansas and another in Derby, Kansas in fiscal 1997. The
Savings Bank offers its customers fixed-rate and adjustable-rate mortgage loans,
as well as FHA/VA loans and consumer loans, including home equity and savings
account loans. Adjustable-rate mortgage loans
2
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
generally are originated for retention in the Savings Bank's portfolio while
fixed-rate mortgage loans are generally sold into the secondary market. All
consumer loans are retained in the Savings Bank's portfolio.
The Savings Bank is actively engaged in the purchase and sale of certain
mortgage loans through a correspondent network. These purchased loans and loans
originated by the Savings Bank are sold, generally without recourse, into the
secondary market with the Savings Bank generally retaining the servicing rights.
The sale of loans in the secondary market is the source of a significant amount
of income in the form of gain on the sale of loans and fees generated from
servicing the loans.
The principal sources of funds for the Savings Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, mortgage-related
securities and investment securities, and borrowings from the Federal Home Loan
Bank of Topeka and the Bancorp. Principal sources of income are interest and
fees on loans, mortgage-related securities and investment securities. The
Savings Bank's principal expense is interest paid on deposits.
3
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Selected Consolidated Financial Highlights
- ------------------------------------------
The following table sets forth certain information at the dates and the periods
indicated. Average data presented herein is primarily calculated on the basis of
daily balances. All dollar amounts are in thousands except per share data and
selected ratios.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ -------------- -------------- --------------- ---------------
Dollars in Thousands
<S> <C> <C> <C> <C> <C>
Total Amount of:
Assets $170,012 $202,628 $270,923 $340,186 $405,262
Loans receivable 56,623 102,243 124,796 171,158 233,311
Mortgage-related securities 42,856 45,030 40,004 34,383 28,124
Loans held for sale 27,734 5,527 22,108 13,718 13,894
Investments and FHLB Stock 15,144 24,374 56,449 90,562 86,065
Mortgage servicing rights 3,243 6,312 11,625 12,496 13,615
Excess of cost over fair value of
assets acquired (Goodwill) 252 161 83 22 --
Cash and cash equivalents 17,701 10,823 5,677 5,618 17,327
Savings deposits 145,838 154,764 195,716 214,493 236,333
Other borrowings 7,500 9,000 33,000 81,700 121,800
Stockholders' equity 12,792 35,208 36,735 36,807 39,982
Number of:
Real estate loans outstanding 2,124 1,985 2,568 2,864 3,628
Deposit accounts 17,557 21,743 27,192 29,609 35,226
Full service offices 6 6 7 8 10
Employees 100 112 119 150 166
Principal balance of loans serviced
for others $580,768 $908,112 $1,189,892 $1,229,153 $1,291,331
</TABLE>
4
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
Dollars in Thousands
1993 1994 1995 1996 1997
------------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income $12,885 $11,549 $16,225 $20,173 $26,047
Interest Expense 7,376 5,944 9,004 12,268 16,834
------------- ------------ ------------- ------------- ------------
Net interest income 5,509 5,605 7,221 7,905 9,213
Provision for loan losses 154 6 224 75 143
------------- ------------ ------------- ------------- ------------
Net interest income after provision for 5,355 5,599 6,997 7,830 9,070
loan losses
------------- ------------ ------------- ------------- ------------
Non-interest income:
Loan servicing fees 1,804 2,689 4,407 4,779 4,841
Amortization of mortgage servicing rights (679) (899) (1,305) (1,651) (1,742)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 618 1,032 1,846 2,539 3,067
Gain on sale of loans held for sale, net 2,596 896 706 1,367 1,194
Other income 358 83 139 138 159
------------- ------------ ------------- ------------- ------------
Total non-interest income 4,697 3,801 7,754 7,172 7,519
------------- ------------ ------------- ------------- ------------
Total non-interest expense (1) 5,632 6,340 8,202 9,983 9,742
------------- ------------ ------------- ------------- ------------
Income before income tax expense and cumulative
effect of change in accounting principle 4,420 3,060 6,549 5,019 6,847
Income tax expense 1,616 1,195 2,443 1,893 2,677
------------- ------------ ------------- ------------- ------------
Income before cumulative effect of change in
accounting principle 2,804 1,865 4,106 3,126 4,170
Cumulative effect of change in accounting 136
principle (2)
------------- ------------ ------------- ------------- ------------
Net income $2,804 $2,001 $4,106 $3,126 $4,170
============= ============ ============= ============= ============
Earnings per share (3) $0.30 $1.97 $1.59 $2.15
===== ===== ===== =====
Cash dividends per share $0.40 $0.40 $0.40
===== ===== =====
</TABLE>
Selected Financial Ratios
<TABLE>
<CAPTION>
Year Ended September 30,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Return on average assets 1.61% 1.14% 1.75% 1.07% 1.11%
Return on average equity 24.12% 10.54% 11.86% 8.54% 10.95%
Dividend payout ratio -- -- 20.30% 25.16% 18.60%
Average total equity to average assets 6.67% 10.81% 14.74% 12.56% 10.14%
Net interest rate spread 3.23% 3.15% 2.90% 2.58% 2.38%
</TABLE>
- --------------------------------------------------------------------------------
(1) For 1996, includes a $1,053 one time assessment to recapitalize the SAIF
insurance fund.
(2) The cumulative effect of accounting change reflects the adoption of SFAS
No. 109 for fiscal year 1994.
(3) Earnings per share is based on net income subsequent to the Conversion on
June 27, 1994.
5
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
MARKET AND DIVIDEND INFORMATION
- -------------------------------
Mid Continent Bancshares, Inc.'s common stock trades on the Nasdaq National
Market system under the symbol "MCBS".
The following table sets forth the quarterly high and low sale prices for the
common stock throughout the fiscal years ended September 30, 1996 and 1997:
Quarter Ended High Low
September 30, 1995 19 1/8 15 1/2
December 31, 1995 18 1/2 17
March 31, 1996 18 1/2 17 3/8
June 30, 1996 19 1/4 17 7/8
September 30, 1996 19 3/8 17 1/2
December 31, 1996 25 1/2 18 3/4
March 31, 1997 27 1/8 23 3/8
June 30, 1997 29 1/4 25 1/8
September 30, 1997 38 7/8 28 3/4
During the years ended September 30, 1996 and 1997, the Bancorp declared and
paid cash dividends to shareholders as follows:
Declaration Date Shareholder Record Date Payment Date Amount Per Share
- ---------------- ----------------------- ------------ ----------------
December 21, 1995 January 4, 1996 January 18, 1996 $0.10
March 28, 1996 April 11, 1996 April 25, 1996 0.10
June 27, 1996 July 11, 1996 July 25, 1996 0.10
September 26, 1996 October 10, 1996 October 24, 1996 0.10
December 1996 January 2, 1997 January 16, 1997 0.10
March 27, 1997 April 10, 1997 April 24, 1997 0.10
June 26, 1997 July 10, 1997 July 24, 1997 0.10
September 25, 1997 October 9, 1997 October 23, 1997 0.10
The Bancorp has approximately 925 stockholders. This number includes persons or
entities who hold their stock in nominee or "street" name through various
brokerage firms.
The Bancorp's ability to pay dividends to stockholders is substantially
dependent upon the dividends it receives from the Savings Bank. Under current
regulations, the Savings Bank is not permitted to pay dividends if its
regulatory capital would thereby be reduced below (1) the amount then required
for the liquidation account established in connection with the Savings Bank's
conversion from mutual to stock form, or (2) the regulatory capital requirements
imposed by the Office of Thrift Supervision. Capital distributions are also
subject to certain limitations based on the Savings Bank's net income. See Note
1 of notes to consolidated financial statements. The Savings Bank's total
capital at September 30, 1997, exceeded the amounts of its liquidation account
and regulatory capital requirements.
6
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------
(Dollars in thousands)
GENERAL
- -------
Mid Continent Bancshares, Inc. was formed to purchase all of the common stock of
Mid-Continent Federal Savings Bank in connection with the Saving Bank's
conversion from the mutual to the stock form of ownership in 1994. In addition,
the Bancorp made loans to the Savings Bank and to the Savings Bank's employee
stock ownership plan, from which it receives interest income. The loans bear
interest rates and have terms and conditions which prevailed in the market place
at the time they were originated.
The Bancorp's consolidated results of operations are primarily dependent on the
Savings Bank's net interest income, or the difference between the interest
income earned on its loan, mortgage-related securities and investment securities
portfolios, and the interest expense paid on its deposits and other borrowings.
Net interest income is affected not only by the difference between the yields
earned on interest-earning assets and the costs incurred on interest-bearing
liabilities, but also by the relative amounts of such interest-earning assets
and interest-bearing liabilities.
Mid-Continent Federal Savings Bank is a federally chartered stock savings bank
located in El Dorado, Kansas in Butler County, Kansas. Mid-Continent Federal
Savings Bank is primarily engaged in attracting deposits from the general public
and using those funds to originate and sell real estate loans on one-to-four
family residences and, to a less extent, to originate consumer and construction
loans for its portfolio. The Savings Bank purchases one-to-four family
residential loans through correspondents located in Kansas, Oklahoma, and in
Missouri. The Savings Bank also invests in mortgage-related securities, U.S.
government and agency obligations. These activities are funded with deposits
from the general public and borrowings from the Federal Home Loan Bank and Mid
Continent Bancshares, Inc. The Savings Bank offers its customers fixed-rate and
adjustable-rate mortgage loans, as well as FHA/VA loans and consumer loans,
including home equity and savings account loans. Adjustable-rate mortgage loans
generally are originated for retention in the Savings Bank's portfolio while
fixed-rate mortgage loans are generally sold into the secondary market. All
consumer loans are retained in the Savings Bank's portfolio.
The Savings Bank is actively engaged in the purchase and sale of certain
mortgage loans through a correspondent network. These purchased loans and loans
originated by the Savings Bank are sold, generally without recourse, into the
secondary market with the Savings Bank generally retaining the servicing rights.
The sale of loans in the secondary market is the source of a significant amount
of income in the form of gain on the sale of loans and fees generated from
servicing the loans.
Earnings of the Savings Bank are significantly affected by economic and
competitive conditions, particularly changes in interest rates, government
policies and regulations of regulatory authorities.
7
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
On September 2, 1997, the Bancorp entered into a Reorganization and Merger
Agreement ("the agreement") to be acquired by Commercial Federal Corporation
("Commercial Federal"). Under the terms of the agreement, Commercial Federal
will acquire through a tax-free reorganization all of the outstanding shares of
the Bancorp's common stock in exchange for Commercial Federal's common stock.
The exchange ratio will be determined based upon the average closing price of
Commercial Federal's common stock during a twenty consecutive trading day period
prior to closing. Based on Commercial Federal's closing price on September 2,
1997, Mid Continent shareholders would receive .8693 shares of Commercial
Federal common stock for each share of Mid Continent Bancshares, Inc.
outstanding common stock. The acquisition is subject to regulatory approvals,
the Bancorp's shareholders' approval and other conditions and is expected to
close in the second fiscal quarter of 1998. Regardless of whether the proposed
acquisition is consummated, the following discussion addresses the financial
condition, results of operation, liquidity and capital resources and ongoing
strategy of the Bancorp and Savings Bank.
MANAGEMENT STRATEGY
- -------------------
The Savings Bank's lending strategy has focused historically on the origination
of mortgage loans on one-to-four family residences pursuant to underwriting
standards. The Savings Bank generally retains ownership of the adjustable-rate
and short-term fixed-rate loans it originates and sells long-term fixed-rate
loans in the secondary market; accordingly, its lending strategy is designed to
reduce the risk of losses on its loan portfolio. However, the high concentration
of residential mortgage loans in its portfolio subjects the Savings Bank to
risks associated with potential declines in real estate values in its lending
area. This risk has been mitigated to some extent, however, through
diversification in its investment and mortgage-related securities portfolios.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Savings Bank has instituted certain
asset and liability management measures. This strategy includes the following
primary elements: (i) originating and purchasing long-term fixed-rate loans
primarily for sale in the secondary mortgage market, (ii) maintaining a high
percentage of total assets in short-term securities and other liquid assets,
(iii) increasing sources of other income, such as gain on sale of loans and loan
servicing fees, (iv) increasing its adjustable rate mortgage and short-term
fixed-rate loan portfolio and (v) building a loan servicing portfolio whose
market value floats inversely to the movement of interest rates. A loan
servicing portfolio becomes more valuable as the "turnover" in the mortgage
loans slows. Loan portfolios traditionally become more seasoned and experience
less turnover after interest rates rise. Therefore, after interest rates rise,
the value of a loan servicing portfolio generally increases (assuming credit
quality is maintained), causing the opposite effect to the value of the Savings
Bank's loans and investments.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1996
- ------------------------------------------------------
TO SEPTEMBER 30, 1997
- ---------------------
Total assets increased $65,076, or 19.1% from $340,186 at September 30, 1996 to
$405,262 at September 30, 1997. The increase is attributable to increases of
$11,709 in cash, $62,153 in
8
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
loans receivable, and $1,119 in mortgage servicing rights. Mortgage-related
securities decreased $6,259 and investments and Federal Home Loan Bank stock
decreased $4,497. Investment securities and FHLB stock decreased from $90,562 at
September 30, 1996 to $86,065 at September 30, 1997. At September 30, 1997 there
are callable securities with a carrying value of approximately $70,830 bearing
interest at various rates ranging from 4.98% to 7.87% with stated maturity dates
ranging from 1998 to 2011. The Savings Bank intends to hold these securities to
maturity, but the securities are subject to call at the option of the issuer.
Loans receivable increased from $171,158 at September 30, 1996 to $233,311 at
September 30, 1997. This increase is due primarily to increases in
adjustable-rate mortgages and short-term fixed-rate mortgage loans being held
for investment and to a lesser extent to increases in the construction and
consumer lending portfolio. First mortgage loans increased $59,669 and consumer
loans increased $1,029. The Bank expects to increase its residential
(one-to-four unit), first mortgage loans in fiscal 1998, but not to the extent
that these loans were increased in fiscal 1997.
Mortgage servicing rights increased $1,119 during fiscal 1997. During the fiscal
year the Savings Bank increased its servicing portfolio for others from
$1,229,153 to $1,291,331.
Deposit accounts increased $21,840. Savings certificate accounts increased
$12,401 and Demand and NOW deposit accounts increased $6,678. Demand and NOW
accounts which totaled $43,463 at September 30, 1997 provide a significant
amount of low interest-rate funds and a source of service fee income to the
Savings Bank.
Advances from the Federal Home Loan Bank increased $40,100 from $81,700 at
September 30, 1996 to $121,800 at September 30, 1997. The Savings Bank utilizes
advances from the Federal Home Loan Bank to meet its cash needs as they arise.
The Savings Bank has a $68,292 line of credit with the Federal Home Loan Bank,
subject to certain limitations, for the purpose of providing short-term
financing. At September 30, 1997, $7,300 was outstanding relative to this line
of credit.
Stockholders' equity increased $3,175, or 8.6%, from $36,807 to $39,982. Net
income for the year was $4,170.
Other significant transactions during the year included the acquisition of
58,500 shares of the Bancorp's common stock for treasury at a cost of $1,481 and
cash dividends paid or payable to common stockholders of $743. See the
accompanying Consolidated Statements of Stockholders' Equity for more detail.
9
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
COMPARISON OF OPERATING RESULTS FOR YEARS
- -----------------------------------------
ENDED SEPTEMBER 30, 1995 AND 1996
- ---------------------------------
GENERAL
- -------
Net income decreased by $980, or 23.9%, from $4,106 for the year ended September
30, 1995 to $3,126 for the year ended September 30, 1996.
TOTAL INTEREST INCOME
- ---------------------
Total interest income increased $3,948, or 24.3%, to $20,173 during the year
ended September 30, 1996 from $16,225 for the year ended September 30, 1995.
Interest income on loans receivable and on investment securities increased
$1,413 and $2,669, respectively. The average yield on loans declined from 7.95%
in 1995 to 7.76% in 1996, but increases in the loan portfolio resulted in an
increase in loan interest in 1996 over 1995. The average yield of investment
securities increased from 6.92% in 1995 to 7.15% in 1996. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased $84
as mortgage-related securities were allowed to repay in the amount of $6,746.
The average yield on mortgage-related securities increased from 6.92% in 1995 to
7.36% in 1996, but as rates increased, increased repayments took place in
amounts sufficient to result in an overall decrease in interest from
mortgage-related securities. Other interest income decreased $50 due to reduced
average cash balances. The average rate of interest earned on interest-bearing
cash accounts decreased from 1995 to 1996, plus the demand for cash to fund
loans and investment securities, which paid higher yields, reduced the overall
interest yield from cash accounts.
NET INTEREST INCOME
- -------------------
Net interest income increased $684, or 9.5%, from $7,221 for the year ended
September 30, 1995 to $7,905 for the year ended September 30, 1996. Total
average interest-earnings assets increased $52,867 from 1995 to 1996. Components
of the interest-earning assets are discussed above. Overall the average yield
remained unchanged, at 7.49% in 1995 and 1996. The major increase in interest
income was due to the increase in interest-earning assets with a lesser benefit
from individual rate increases, primarily on mortgage-related securities and
investment securities.
Average interest-bearing liabilities increased $53,614 from 1995 to 1996. Both
deposit accounts and borrowed money increased in 1996. Average rates on deposits
increased from 4.35% in 1995 to 4.63% in 1996. The average interest rate on
borrowed money, however, declined from 6.33% in 1995 to 6.21% in 1996. Overall
rates on interest-bearing liabilities increased from 4.59% in 1995 to 4.91% in
1996.
The ratio of average interest-bearing assets to interest-bearing liabilities
decreased from 110.4% at September 30, 1995 to 107.9% at September 30, 1996.
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans,
10
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
estimated value of the underlying collateral and current and expected market
conditions. The allowance for loan losses was $423 and $421 at September 30,
1995 and 1996, respectively. The provision for losses on loans decreased $149
for the year ended September 30, 1996. The decrease in the provision resulted
from management's evaluation of the adequacy of the allowance for loan losses.
While the Savings Bank maintains its allowance for losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
OTHER INCOME
- ------------
Other income decreased $582, or 7.5%, during the year ended September 30, 1996,
as compared to the year ended September 30, 1995. During the year ended
September 30, 1995, the Bank realized gain on sale of servicing rights of
$1,961. There was no sales of servicing rights in the year ended September 30,
1996. All other significant sources of other income increased in 1996 compared
to 1995.
Loan servicing fees (net of amortization) increased by $26, or 0.8%, from $3,102
to $3,128 during the years ended September 30, 1995 and 1996, respectively. Loan
servicing fees increased $372, from $4,407 in 1995 to $4,779 in 1996.
Amortization of mortgage servicing rights increased $346, from $1,305 in 1995 to
$1,651 in 1996. The growth in gross servicing fees was 8.44%. Servicing fees
result primarily from service fees paid by investors and correlate closely with
the size of the loan servicing portfolio. The change in servicing fees during
the year ended September 30, 1996 is reflective of the increase in the amount of
loans serviced by Mid-Continent for others from $1,189,892 at September 30, 1995
to $1,229,153 at September 30, 1996. Amortization of mortgage servicing rights
are influenced by changes in the servicing portfolio, scheduled loan
amortization, anticipated and actual prepayments and changes in market interest
rates.
Service fees and other charges to customers increased by $693, or 37.5%, from
$1,846 to $2,539 during the years ended September 30, 1995 and 1996,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
program. The Bank also receives late charges related to loans serviced for the
Bank, as well as loans serviced for others.
Net gains on sale of loans increased by $661, or 93.6%, from $706 to $1,367
during the years ended September 30, 1995 and 1996, respectively. The gains on
the sale of loans are attributable to the Savings Bank's secondary market
activities and result from a combination of interest rates and management
strategies. Gains from the sale of loans are dependent on market and economic
conditions and, accordingly, there can be no assurance that the gains reported
in current periods can be achieved in the future or that there will not be
significant variations in the results from such activities.
11
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
OTHER EXPENSE
- -------------
Other expense increased by $1,781, or 21.7%, from $8,202 to $9,983 during the
years ended September 30, 1995 and 1996, respectively. This increase is
primarily attributable to increases in salaries and related expenses, office
supplies and related expense, advertising, federal insurance premiums and
promotion.
Compensation and employee benefits increased $291, or 6.9%, in 1996 over 1995.
The increase is due to normal annual salary adjustments and employment of
personnel necessary to carry out the business activities of the Savings Bank.
Occupancy decreased $22 and office supplies expense increased $114, in 1996 over
1995. During 1996 the Savings Bank opened one new full service branch in
Wichita, Kansas.
Data processing costs increased $135 in support of additional branch operations
and in response to mortgage banking (including servicing) demands.
Advertising increased $34 in the fiscal year 1996 over fiscal 1995. Advertising
was increased primarily to promote the Savings Bank's checking account programs.
Federal insurance premiums increased from $351 for the year ended September 30,
1995 to $1,504 for the year ended September 30, 1996. On September 30, 1996 the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed into
law. The Act imposed a special assessment on Savings Association Insurance Fund
(SAIF) members to recapitalize the SAIF. The Bank's assessment was $1,053 which
was charged to expense immediately. The rate of deposit insurance assessment is
expected to materially decline in future periods.
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $227 in 1995 to $298 in 1996. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense increased $149 in 1996 over 1995. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. See footnote 19 to the consolidated
financial statements, Segment Information, for more information relative to the
operation of the mortgage banking segment (which includes loan servicing for
others) of the Savings Bank.
Operating expenses have increased in recent years due to the Savings Bank's
increased mortgage banking operations. For the year ended September 30, 1996,
operating expenses totaled 3.4% of average assets, a decrease from the 3.5% of
average assets recorded for the year ended September 30, 1995. The operating
expense ratios are attributable to loan production and loan servicing activities
(which incur operating expenses), and general inflationary pressures on the
Savings Bank's operations.
12
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
INCOME TAX EXPENSE
- ------------------
Income tax expense decreased $550, from $2,443 for the year ended September 30,
1995 to $1,893 for the year ended September 30, 1996. The primary reason for the
decrease was a $1,530 decrease in pre-tax income. The effective rate for the
year ended September 30, 1995 was 37.3% as compared to 37.7% for 1996.
13
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
COMPARISON OF OPERATING RESULTS FOR YEARS
- -----------------------------------------
ENDED SEPTEMBER 30, 1996 AND 1997
- ------------------------ --------
GENERAL
- -------
Net income increased by $1,044, or 33.40% from $3,126 for the year ended
September 30, 1996 to $4,170 for the year ended September 30, 1997.
TOTAL INTEREST INCOME
- ---------------------
Total interest income increased $5,874, or 29.12%, to $26,047 during the year
ended September 30, 1997 from $20,173 for the year ended September 30, 1996.
Interest income on loans receivable and on investment securities increased
$4,268 and $2,048, respectively. The average yield on loans declined from 7.76%
in 1996 to 7.68% in 1997, but increases in the loan portfolio resulted in an
increase in loan interest in 1997 over 1996. The average yield of investment
securities increased from 7.15% in 1996 to 7.18% in 1997. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased
$384 as mortgage-related securities repaid in the amount of $6,228. The average
yield on mortgage-related securities increased from 7.36% in 1996 to 7.42% in
1997, but as rates increased, increased repayments took place in amounts
sufficient to result in an overall decrease in interest from mortgage-related
securities. Other interest income decreased $58 due to reduced average cash
balances. The average rate of interest earned on interest-bearing cash accounts
increased from 1996 to 1997, but the demand for cash to fund loans and
investment securities, which paid higher yields, reduced the overall interest
income from cash accounts.
NET INTEREST INCOME
- -------------------
Net interest income increased $1,308, or 16.55%, from $7,905 during the year
ended September 30, 1996 to $9,213 for the year ended September 30, 1997. Total
average interest-earning assets increased $79,435 from 1996 to 1997. Components
of the interest-earning assets are discussed above. Overall the average yield
remained substantially unchanged for 1996 and 1997, at 7.49% and 7.47%,
respectively. The major increase in interest income was due to the increase in
interest-earning assets.
Average interest-bearing liabilities increased $81,076 from 1996 to 1997. Both
deposit accounts and borrowed money increased in 1997. Average rates on deposits
increased from 4.63% in 1996 to 4.71% in 1997. The average interest rate on
borrowed money, however, declined from 6.21% in 1996 to 5.98% in 1997. Overall
rates on interest-bearing liabilities increased from 4.91% in 1996 to 5.09% in
1997.
The ratio of average interest-bearing assets to interest-bearing liabilities
decreased from 107.9% at September 30, 1996 to 105.5% at September 30, 1997.
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans,
14
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
estimated value of the underlying collateral and current and expected market
conditions. The allowance for loan losses was $421 and $465 at September 30,
1996 and 1997, respectively. The provision for losses on loans increased $68 for
the year ended September 30, 1997. The increase in the provision resulted from
management's evaluation of the adequacy of the allowance for loan losses. While
the Savings Bank maintains its allowance for losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
OTHER INCOME
- ------------
Other income increased $347, or 4.84%, during the year ended September 30, 1997,
as compared to the year ended September 30, 1996.
Loan servicing fees (net of amortization) decreased by $29, or 0.93%, from
$3,128 to $3,099 during the years ended September 30, 1996 and 1997,
respectively. Loan servicing fees increased $62, from $4,779 in 1996 to $4,841
in 1997. Amortization of mortgage servicing rights increased $91, from $1,651 in
1996 to $1,742 in 1997. The growth in gross servicing fees was 1.30%. Servicing
fees result primarily from service fees paid by investors and correlate closely
with the size of the loan servicing portfolio. The change in servicing fees
during the year ended September 30, 1997, is reflective of the increase in the
amount of loans serviced by Mid-Continent for others from $1,229,153 at
September 30, 1996 to $1,291,331 at September 30, 1997. Amortization of mortgage
servicing rights are influenced by changes in the servicing portfolio, scheduled
loan amortization, anticipated and actual prepayments and changes in market
interest rates.
Service fees and other charges to customers increased by $528, or 20.8%, from
$2,539 to $3,067 during the years ended September 30, 1996 and 1997,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
program. The Bank also receives late charges related to loans serviced for the
Bank, as well as serviced for others.
Net gains on sale of loans decreased by $173, or 12.66%, from $1,367 to $1,194
during the years ended September 30, 1996 and 1997, respectively. The gains on
the sale of loans are attributable to the Savings Bank's secondary market
activities and result from a combination of interest rates and management
strategies. Gains from the sale of loans are dependent on market and economic
conditions and, accordingly, there can be no assurance that the gains reported
in current periods can be achieved in the future or that there will not be
significant variations in the results from such activities.
OTHER EXPENSE
- -------------
Other expense decreased by $241, or 2.41%, from $9,983 to $9,742 during the
years ended September 30, 1996 and 1997, respectively. A decrease in federal
insurance premiums for the 1997 year more than offset increases in salaries and
related expenses, office supplies and related
15
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
expense, advertising, data processing and promotion. Additionally, $187 of
expense has been incurred in the 1997 year related to the proposed merger with
Commercial Federal.
Compensation and employee benefits increased $533, or 11.75%, in 1997 over 1996.
In addition to increases due to normal annual salary adjustments and employment
of personnel necessary to carry out the business activities of the Savings Bank,
the Bank charged off the total remaining cost of its Management Stock Bonus
Plan, an additional expense of $348, which became 100% vested to plan
participants upon the signing of the proposed merger agreement with Commercial
Federal.
Occupancy increased $321 and office supplies expense increased $36, in 1997 over
1996. The Savings Bank opened two new full service branches in 1997.
Data processing costs increased $14 in support of additional branch operations
and in response to mortgage banking (including servicing) demands.
Advertising increased $52 in the fiscal year 1997 over fiscal 1996. Advertising
was increased primarily to promote the Savings Bank's checking account programs
and two branch openings.
Federal insurance premiums decreased from $1,504 for the year ended September
30, 1996 to $204 for the year ended September 30, 1997. On September 30, 1996
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed
into law. The Act imposed a special assessment on SAIF members to recapitalize
the SAIF. The Bank's assessment was $1,053 which was immediately charged to
expense in 1996. The normal rate of deposit insurance premium assessment
materially declined in 1997 ($204 for 1997 compared to $451 for 1996).
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $298 in 1996 to $340 in 1997. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense decreased $101 in 1997 over 1996. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. The decrease in this expense in 1997
is attributed to a decrease in the rate of prepayments of loans serviced for
others. See footnote 19 to the consolidated financial statements, Segment
Information, for more information relative to the operation of the mortgage
banking segment (which includes loan servicing for others) of the Savings Bank.
For the year ended September 30, 1997, operating expenses totaled 2.59% of
average assets, a decrease from the 3.4% of average assets recorded for the year
ended September 30, 1996. The operating expense ratios are attributable to loan
production and loan servicing activities (which incur operating expenses), and
general inflationary pressures on the Savings Bank's operations.
16
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
INCOME TAX EXPENSE
- ------------------
Income tax expense increased $784 from $1,893 for the year ended September 30,
1996 to $2,677 for the year ended September 30, 1997. The primary reason for the
increase was a $1,828 increase in pre-tax income. The effective rate for the
year ended September 30, 1996 was 37.7% as compared to 39.1% for 1997.
Asset and Liability Management
Although the Savings Bank's dependence upon net interest income has been greatly
reduced during the past years as a result of the increase in sources of other
income obtained through its mortgage banking operation and purchases of mortgage
servicing rights ("MSR"), the income from retail operations and assets held in
portfolio still depends primarily upon it's net interest income. The ability to
maximize net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap", provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates over a period of time. A gap is considered positive
when the amount of interest-rate sensitive assets maturing or repricing over a
specified period of time exceeds the amount of interest-rate sensitive
liabilities maturing or repricing within that period and is considered negative
when the amount of interest-rate sensitive liabilities maturing or repricing
over a specified period of time exceeds the amount of interest-rate sensitive
assets maturing or repricing within that period. Generally, during a period of
rising interest rates, a negative gap within a given period of time would
adversely affect net interest income, while a positive gap within a given period
of time would result in an increase in net interest income; during a period of
falling interest rates, a negative gap within a given period of time would
result in an increase in net interest income while a positive gap within a given
period of time would have the opposite effect. At September 30, 1997, the
Savings Bank's one year and three year cumulative interest sensitivity gap as a
percentage of total assets was a negative 12.4% and a negative 7.0%,
respectively.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Savings Bank has instituted certain
asset and liability management measures. This strategy includes the following
primary elements: (i) originating and purchasing long-term fixed-rate loans only
for sale in the secondary mortgage market, (ii) maintaining a high percentage of
total assets in short-term securities and other liquid assets, (iii) increasing
sources of other income, such as gain on sale of loans and loan servicing fees,
(iv) increasing its ARM and short-term fixed rate loan portfolio and (v)
building a loan servicing portfolio whose market value floats inversely to the
movement of interest rates. A loan servicing portfolio becomes more valuable as
the "turnover" in the mortgage loans slows. Mortgage loans traditionally become
more seasoned and turnover less as interest rates rise. Therefore, after
interest rates rise, the value of a loan servicing portfolio generally increases
(assuming credit quality is maintained), causing the opposite effect to the
value of the Savings Bank's loans and investments.
17
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Certain risks are inherent in the business of mortgage banking. There is a risk
that the Savings Bank will not be able to sell all the loans that it originates
or purchases or, conversely, that the Savings Bank will be unable to fulfill its
contractual commitment to deliver loans. In addition, in periods of rising
interest rates, loans originated or purchased by the Savings Bank may decline in
value. Exposure to interest rate risk is significant during the period between
the time the interest rate on a customer's mortgage loan application is
established and the time the mortgage loan closes, and also during the period
between the time the interest rate is established and the time the Savings Bank
commits to sell the loan. If interest rates change in an unanticipated fashion,
the actual percentage of loans that close may differ from projected percentages.
The resultant mismatching of commitments to close loans and commitments to
deliver sold loans may have an adverse effect on the profitability of loan
originations in any such period. A sudden increase in interest rates can cause a
higher percentage of loans to close than projected. To the degree that this was
not anticipated, the Savings Bank will not have made commitments to sell these
additional loans and may incur significant mark to market losses, adversely
affecting results of operations. In order to minimize these risks, it is the
policy of the Savings Bank to cover approximately 75%-85% of the loans that it
has originated or purchased with sales contracts with third parties. A mortgage
banker that is unable to fulfill its commitments to deliver mortgage loans to
third parties will be subject to the payment of fees and monetary penalties as
well as the loss of business reputation. The risk associated with failing to
meet delivery commitments cannot be eliminated due to the variables created by
changes in market conditions and other factors. Commitments to sell loans are
considered when assessing the lower of cost or market valuation of the Savings
Bank's loans held for sale portfolio.
Gap Table
The following table sets forth the amount of the Savings Bank's interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1997 on an
unconsolidated basis, which are expected to reprice or mature in each of the
future time periods shown. The amount of assets or liabilities shown which
reprice or mature during a particular period were determined by the contractual
terms of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-related securities, and
assumes that adjustable rate mortgage loans will reprice at contractual
repricing intervals. No consideration has been provided for the impact of future
commitments and loans in process.
18
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
<TABLE>
<CAPTION>
Within Over 1-3 Over 3-5 Over
One Year Years Years 5 Years Total
Amount Amount Amount Amount Amount
------ ------ -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans and MRS (1) $106,606 $106,269 $17,401 $37,766 $268,042
Other loans 2.588 2,554 967 1,189 7,298
Investment securities (2) 46,606 3,000 52,399 102,005
------ ----- ----- ------ -------
Total interest-earning assets 155,800 111,823 18,368 91,354 377,345
------- ------- ------ ------ -------
Interest-bearing liabilities:
Non-interest-bearing deposits 9,692 9,994 3,989 2,651 26,326
Demand and NOW accounts 9,826 2,781 1,837 2,993 17,437
Savings accounts 6,396 759 548 1,430 9,133
Money market deposit accounts 9,216 3,364 1,312 840 14,732
Certificates of deposit 97,076 63,201 7,687 1,068 169,032
FHLB advances 70,800 10,000 41,000 121,800
Other borrowings 3,059 3,059
----- ----- ----- ----- -----
Total interest-bearing liabilities 206,065 90,099 56,373 8,982 361,519
------- ------ ------ ----- -------
Interest sensitivity gap (50,265) 21,724 (38,005) 82,372 15,826
======== ====== ======== ====== ======
Cumulative interest sensitivity gap (50,265) (28,541) (66,546) 15,826 15,826
======== ======== ======== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 75.6% 124.1% 32.6% 1,017.1% 104.4%
===== ====== ===== ======== ======
Ratio of cumulative gap to total assets (12.4%) (7.0%) (16.4%) 3.9% 3.9%
======= ====== ======= ==== ====
</TABLE>
(1) Includes loans held for sale. Mortgage-related securities are identified as
"MRS".
(2) Includes investment securities, FHLB stock and interest-earning deposits in
banks.
Certain shortcomings are inherent in the method of analysis presented in the
table above. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment levels and decay rates on core deposits would likely deviate
significantly from those assumed in calculating the table.
The Savings Bank's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the repricing characteristics of deposits. The
Savings Bank has made the following assumptions in calculating the value on the
above-referenced table: adjustable-rate mortgage loans have prepayment rates
ranging from 10 to 31%; fixed-rate mortgage loans have a prepayment rate that is
constant through time but varies from 5% for lower contractual interest rate
loans to 44% for higher
19
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
contractual interest rate loans; consumer loans have prepayment rates ranging
from 4 to 17%; core savings deposits have a decreasing decay rate through time
ranging from 100% almost immediately to 15% after one year; NOW checking
deposits have a decreasing decay rate through time ranging from 100% almost
immediately to 19% after one year; and money market deposits have a decreasing
decay rate through time ranging from 91% almost immediately to 38% after one
year. The interest-rate sensitivity of the Savings Bank's assets and liabilities
illustrated in the table could vary substantially if different assumptions were
used or if actual experience differs from the assumptions used.
As discussed above and as shown in the preceding gap table and the average
balance sheet and rate/volume analysis contained in the annual report, the
Bank's net interest rate risk consists of risks from the numerous time periods
for maturity or repricing of particular assets or liabilities and from the
numerous interest rates that vary over time and because of the maturity or
repricing of the underlying assets or liabilities. These risks necessarily
impact net interest income. One impact on net interest income results from the
interest rate margin (net yield on interest bearing assets).
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
- -------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amounts
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on the average interest bearing
liabilities, expressed both in dollars and rates. Average balances are derived
from daily balances. The following table includes nonaccruing loans averaging
$278, $359 and $597, respectively, for the years ended September 30, 1995, 1996
and 1997 as interest-earning assets at a yield of zero percent. Interest income
for the years ended September 30, 1995, 1996 and 1997 includes loan fee
amortization of $371, $168 and $72, respectively.
20
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996 1997
-------------------------------- ------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans receivable $129,687 $10,310 7.95% $151,078 $11,723 7.76% $208,205 $15,991 7.68%
Mortgage-related securities 43,430 3,006 6.92% 39,711 2,922 7.36% 34,194 2,538 7.42%
Investment securities 37,322 2,581 6.92% 73,431 5,250 7.15% 101,690 7,298 7.18%
Other interest-earning assets 6,042 328 5.43% 5,128 278 5.42% 4,694 220 4.69%
-------- ------- ------ -------- ------- ----- -------- ------- ------
Total interest-earning
assets 216,481 $16,225 7.49% 269,348 $20,173 7.49% $348,783 $26,047 7.47%
======= ====== ======= ===== ======= ======
Non-interest-earning assets 18,392 22,110 26,698
-------- -------- --------
Total assets $234,873 $291,458 $375,481
======== ======== ========
Interest-bearing liabilities:
Passbook savings deposits $8,710 $239 2.74% $8,634 $238 2.76% $8,783 $241 2.74%
NOW accounts and money
market demand deposits 40,131 565 1.41% 47,285 756 1.60% 52,936 1,015 1.92%
Certificates of deposit 123,444 6,697 5.43% 148,922 8,491 5.70% 170,056 9,662 5.68%
Other interest-bearing
liabilities 23,751 1,503 6.33% 44,809 2,783 6.21% 98,951 5,916 5.98%
-------- ------ ------ -------- ----- ------ ------ ----- ------
Total interest-bearing
liabilities 196,036 $9,004 4.59% 249,650 $12,268 4.91% 330,726 $16,834 5.09%
====== ====== ======= ====== ======= ======
Non-interest-bearing liabilities 4,216 5,201 6,677
-------- -------- --------
Total liabilities 200,252 254,851 337,403
Stockholders' equity 34,621 36,607 38,078
-------- -------- --------
Total liabilities and
stockholders' equity $234,873 $291,458 $375,481
======== ======== ========
Net interest income $7,221 $7,905 $9,213
====== ====== ======
Interest rate spread 2.90% 2.58% 2.38%
====== ====== =======
Net yield on interest-
bearing assets 3.34% 2.93% 2.64%
====== ====== =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.43% 107.89% 105.46%
====== ====== =======
</TABLE>
21
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
The following schedule presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities. For each category of interest earning assets and
interest-bearing liabilities, information is provided on changes attributed to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
<TABLE>
<CAPTION>
1995 vs. 1996 1996 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,701 $ (247) $ (41) $ 1,413 $ 4,433 $ (119) $ (46) $ 4,268
Mortgage-related securities (258) 190 (16) (84) (406) 26 (4) (384)
Investment securities 2,497 87 85 2,669 2,020 20 8 2,048
Other interest-earning assets (50) 0 0 (50) (24) (38) 4 (58)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 3,890 $ 30 $ 28 $ 3,948 $ 6,023 $ (111) $ (38) $ 5,874
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Passbook savings deposits $ (2) $ 1 $ 0 ($ 1) $ 4 $ (1) $ 0 $ 3
NOW accounts and money market
demand deposits 100 77 14 191 90 151 18 259
Certificates of deposit 1,383 341 70 1,794 1,205 (30) (4) 1,171
Other interest-bearing liabilities 1,333 (28) (25) 1,280 3,363 (104) (126) 3,133
------- ------- ------- ------- ------- ------- ------- -------
Total interst-bearing liabilities $ 2,814 $ 391 $ 59 $ 3,264 $ 4,662 $ 16 $ (112) $ 4,566
======= ======= ======= ======= ======= ======= ======= =======
Net change in net interest income $ 1,076 $ (361) $ (31) $ 684 $ 1,361 $ (127) $ 74 $ 1,308
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
MARKET RISK
- -----------
When used or incorporated by reference in disclosure documents, the words
"anticipate," "estimate," "expect," "project," "target," "goal" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including those set forth below. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. These forward-looking statements speak only as of the date of the
document. The Bancorp expressly disclaims any obligation or undertaking to
publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Bancorp's expectation with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
The Savings Bank's Assets Liability Management Committee ("ALCO"), which
includes senior management representatives, monitors and considers methods of
managing the rate and sensitivity repricing characteristics of the balance sheet
components consistent with maintaining acceptable levels of changes in net
portfolio value ("NPV") and net interest income. A primary purpose of the
Savings Bank's asset and liability management is to manage interest rate risk to
effectively invest the Savings Bank's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Savings 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
Savings Bank's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Savings Bank
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base. Management has sought to decrease the average
maturity of its assets by emphasizing the origination of adjustable-rate
residential mortgage loans, consumer loans and adjustable-rate mortgage loans
for the acquisition, development, and construction of residential real estate,
all of which are retained by the Bank for its portfolio. In addition, long-term,
fixed-rate single-family residential mortgage loans are underwritten according
to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Housing Administration ("FHA"), Veterans Administration ("VA"), Guaranteed Rural
Housing Loans ("GRHL") and the Federal National Mortgage Association ("FNMA"),
and are either swapped with the FHLMC, FNMA, and GNMA ("Government National
Mortgage Association") in exchange for mortgage-related securities secured by
such loans which are then sold directly for cash in the secondary market.
23
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained one hundred to four hundred basis points
increase or decrease in the market interest rates. The Savings Bank's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the NPV of 15%, 25%, 35% and 45% in the event of a sudden and
sustained one hundred to four hundred basis points increase or decrease in
market interest rates. The following table presents the Savings Bank's projected
change in NPV for the various rate shock levels of September 30, 1997. All
market risk sensitive instruments presented in this table are held to maturity
or available for sale. The Savings Bank has no trading securities.
Percent Change
Change in Market Value of Actual Board
Interest Rates Portfolio Equity Change Actual Limit
---------------- ------ ------ -----
(Dollars in Thousands)
----------------------
400 basis point rise $ 38,443 $ (25,503) (40) % (45) %
300 basis point rise 45,921 (18,025) (28) (35)
200 basis point rise 52,605 (11,341) (18) (25)
100 basis point rise 58,953 (4,993) (8) (15)
Base Scenario 63,946 -- -- --
100 basis point decline 65,307 1,361 2 15
200 basis point decline 63,243 (703) (1) 25
300 basis point decline 63,977 31 0 35
400 basis point decline 66,333 2,387 4 45
The preceding table indicates that at September 30, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, the Savings
Bank's NPV would normally decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Savings Bank's NPV
would normally increase. At September 30, 1997, the Savings Bank's estimated
changes in NPV were within the targets established by the Board of Directors.
NPV is calculated by the Savings Bank pursuant to guidelines established by the
OTS. The calculation is based on the net present value of estimated discounted
cash flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of
September 30, 1997, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
24
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Savings Bank's primary loan products, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable-rate loans in the Savings Bank's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate mortgage loans may decrease in
the event of interest rate increases.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Savings Bank is required to maintain minimum levels of "liquid assets", as
defined by the Office of Thrift Supervision ("OTS") regulations. This
requirement, which may be varied from time to time depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required minimum ratio is currently 4 percent. The
Savings Bank's average liquidity ratio was 9.06% percent during September, 1997.
The Savings Bank manages its liquidity ratio to meet its funding needs,
including; deposit outflows; disbursement of payments collected from borrowers
for taxes and insurance; repayment of Federal Home Loan Bank advances and other
borrowings; and loan principal disbursements. The Savings Bank also monitors its
liquidity position in accordance with its asset/liability management objectives.
In addition to funds provided from operations, the Savings Bank's primary
sources of funds are: savings deposits; principal repayments on loans and
mortgage-related; and matured or called investment securities. The Savings Bank
also borrows funds from time to time from the Federal Home Loan Bank of Topeka
(the "FHLB").
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-related securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
The Savings Bank usually maintains a portion of its cash on hand in
interest-bearing demand deposits with the FHLB to meet immediate loan commitment
and savings withdrawal funding requirements. When applicable, cash in excess of
immediate funding needs is invested into longer-term investment and
mortgage-related securities, some of which may also qualify as liquid
investments under current OTS regulations.
The Savings bank has a $68,292 line of credit with the FHLB which may be used to
provide funds necessary to cover cash shortages on a daily basis, and the
ability to obtain various other FHLB advances up to a total borrowing limit of
approximately $220,000, the amount of the
25
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Banks residential housing finance assets. At September 30, 1997, the Savings
Bank had total FHLB borrowings of $121,800.
Management believes the Savings Bank has sufficient resources available to meet
its foreseeable funding requirements. At September 30, 1997, the Savings Bank
had outstanding loan commitments of $87,584, and certificates of deposit
scheduled to mature within one year of $97,076.
As required by the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the Savings Bank must meet or exceed three separate
standards of capital adequacy. OTS regulations require financial institutions to
have minimum tangible capital equal to 1.50 percent of total adjusted assets;
minimum core capital equal to 3.00 percent of total adjusted assets; and
risk-based capital equal to 8.00 percent of total risk-weighted assets.
The Savings Bank's capital requirements and actual capital under the OTS
regulations were as follows at September 30, 1997:
Percent of
Amount Adjusted
(Thousands) Assets
------------- ------------
Tangible capital
Actual amount $36,179 8.9%
Required amount 6,079 1.5%
----- ----
Excess $30,100 7.4%
======= ====
Core capital:
Actual amount $36,179 8.9%
Required amount 12,158 3.0%
------ ----
Excess $24,021 5.9%
======= ====
Risk-based capital:
Actual amount $36,633 22.6%
Required amount 12,954 8.0%
------ ----
Excess $23,679 14.6%
======= =====
OTHER MATTERS
- -------------
LEGAL PROCEEDINGS
- -----------------
Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid Continent
Bancshares, Inc., is pursuing its claim against the federal government to
recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
lawsuit that the federal government
26
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
breached its contract with the Bank when FIRREA was enacted because FIRREA
prevented the Bank from counting such assets toward minimum capital
requirements. As a result of FIRREA, the Bank was forced to write off
approximately $7,500,000 in supervisory goodwill. This write off reduced the
Bank's regulatory capital.
On July 1, 1996, the United States Supreme Court affirmed decisions by a federal
appellate court that the government had breached express contracts with three
thrifts (U.S. v. Winstar Corp, et al.) and therefore was liable for damages.
Those lawsuits stemmed from circumstances that are similar to those of the Bank;
in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp, et al., serves to
support the Bank's legal claims in its pending lawsuit against the federal
government, it is not possible at this time to predict what effect the Supreme
Court's ruling, and subsequent rulings of a lower court concerning damages, will
have on the outcome of the Bank's lawsuit. Notwithstanding the Supreme Court's
ruling, there can be no assurance that the Bank will be able to recover any
funds arising out of its claim and, if any recovery is made, the amount of such
recovery.
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Savings Bank.
Data processing is also essential to most other financial institutions and many
other companies.
All of the material computer programs of the Savings Bank that could be affected
by this problem are provided by third party vendors. The third party vendors of
the Savings Bank have advised the Savings Bank that they expect to resolve this
potential problem before the year 2000. However, if the third party vendors are
unable to resolve this potential problem in time, the Savings Bank would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Savings Bank.
27
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 29
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and 1997 30-31
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997 32
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1995, 1996 and 1997 33
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997 34-35
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1995, 1996 and 1997 36-68
28
<PAGE>
[Deloitte & Touche LLP Letterhead, Kansas City, Missouri]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid Continent Bancshares, Inc.
El Dorado, Kansas
We have audited the accompanying consolidated balance sheets of Mid Continent
Bancshares, Inc. and subsidiary (the "Company") as of September 30, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1996 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, on September 2,
1997, the Company entered into a reorganization and merger agreement to be
acquired by another financial institution.
/s/ Deloitte & Touche LLP
November 14, 1997
29
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS 1996 1997
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 1,694 $ 1,387
Interest bearing deposits in other banks 3,924 15,940
-------- --------
Total cash and cash equivalents 5,618 17,327
INVESTMENT SECURITIES, At cost (Market value of $83,827
and $79,220) 86,235 79,390
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, At cost 4,327 6,675
MORTGAGE-RELATED SECURITIES, At cost (Market value of
$34,366 and $28,556) 34,383 28,124
LOANS HELD FOR SALE (Market value of $13,816 and $14,078) 13,718 13,894
LOANS RECEIVABLE, Net (Less allowance for loan losses
of $421 and $465) 171,158 233,311
PREMISES AND EQUIPMENT, Net 6,271 7,222
REAL ESTATE OWNED (Less allowance for losses of
$34 and $19) 28 41
ACCRUED INTEREST RECEIVABLE:
Loans receivable 1,285 1,594
Mortgage-related securities 262 224
Investment securities 1,197 1,053
-------- --------
Total accrued interest receivable 2,744 2,871
MORTGAGE SERVICING RIGHTS, Net 12,496 13,615
OTHER ASSETS 3,208 2,792
-------- --------
TOTAL ASSETS $340,186 $405,262
======== ========
(Continued)
30
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
DEPOSITS $ 214,493 $ 236,333
ADVANCE PAYMENTS BY BORROWERS FOR TAXES
AND INSURANCE 1,805 2,066
DEFERRED INCOME TAXES 698 1,042
ACCRUED AND OTHER LIABILITIES 4,683 4,039
ADVANCES FROM FEDERAL HOME LOAN BANK 81,700 121,800
--------- ---------
Total liabilities 303,379 365,280
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000 shares authorized,
no shares issued or outstanding
Common stock, $.10 par value, 20,000,000 shares authorized,
2,248,250 and 2,251,953 shares issued 225 225
Additional paid-in capital 21,663 22,209
Unearned compensation - Employee Stock Ownership Plan (1,054) (918)
Unearned compensation - Management Stock Bonus Plan (547)
Retained earnings, substantially restricted 20,424 23,851
--------- ---------
40,711 45,367
Treasury stock, 231,500 and 290,000 shares, at cost (3,904) (5,385)
--------- ---------
Total stockholders' equity 36,807 39,982
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,186 $ 405,262
========= =========
</TABLE>
See notes to consolidated financial statements. (Concluded)
31
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 10,310 $ 11,723 $ 15,991
Mortgage-related securities 3,006 2,922 2,538
Investment securities 2,581 5,250 7,298
Other interest - cash and cash equivalents 328 278 220
-------- -------- --------
Total interest income 16,225 20,173 26,047
-------- -------- --------
INTEREST EXPENSE:
Deposits 7,501 9,485 10,918
Advances from Federal Home Loan Bank 1,503 2,783 5,916
-------- -------- --------
Total interest expense 9,004 12,268 16,834
-------- -------- --------
NET INTEREST INCOME 7,221 7,905 9,213
PROVISION FOR LOAN LOSSES 224 75 143
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,997 7,830 9,070
-------- -------- --------
OTHER INCOME:
Loan servicing fees 4,407 4,779 4,841
Amortization of mortgage servicing rights (1,305) (1,651) (1,742)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 1,846 2,539 3,067
Gain on sale of loans held for sale, net 706 1,367 1,194
Insurance commissions 100 54 73
Other 39 84 86
-------- -------- --------
Total other income 7,754 7,172 7,519
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 4,245 4,536 5,069
Occupancy of premises 866 844 1,165
Office supplies and related expenses 529 643 679
Data processing 455 590 604
Advertising and promotions 414 448 500
Federal insurance premiums 351 1,504 204
Professional services 313 272 244
Provision for losses on real estate owned 81 18 10
Amortization of excess cost over fair value of assets acquired 78 60 22
Deposit accounts 227 298 340
Loan servicing 193 342 241
Other 450 428 664
-------- -------- --------
Total other expenses 8,202 9,983 9,742
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 6,549 5,019 6,847
INCOME TAX EXPENSE 2,443 1,893 2,677
-------- -------- --------
NET INCOME $ 4,106 $ 3,126 $ 4,170
======== ======== ========
EARNINGS PER SHARE $ 1.97 $ 1.59 $ 2.15
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unearned Unearned
Compensation - Compensation -
Employee Management Retained
Additional Stock Stock Earnings, Total
Common Stock Paid-In Ownership Bonus Substantially Treasury Stock Stockholders'
Shares Amount Capital Plan Plan Restricted Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 2,248,250 $ 225 $ 21,504 $ (1,312) $ 14,792 $35,209
Acquisition of common
stock for Management
Stock Bonus Plan $ (995) (995)
Acquisition of Treasury
Stock 80,000 $ (1,174) (1,174)
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 122 122
Increase in fair market
value of Employee Stock
Ownership Plan shares
committed to be released
for allocation 49 49
Amortization of unearned
compensation - Management
Stock Bonus Plan 249 249
Dividends on common
stock to stockholders (831) (831)
Net income 4,106 4,106
--------- ----- -------- -------- ------ -------- ------- -------- ------
BALANCE, September 30, 1995 2,248,250 225 21,553 (1,190) (746) 18,067 80,000 (1,174) 36,735
Acquisition of Treasury
Stock 151,500 (2,730) (2,730)
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 136 136
Increase in fair market
value of Employee
Stock Ownership Plan
shares committed to be
released for allocation 110 110
Amortization of unearned
compensation -
Management Stock
Bonus Plan 199 199
Dividends on common
stock to stockholders (769) (769)
Net income 3,126 3,126
--------- ----- -------- -------- ------ -------- ------- -------- ------
BALANCE, September 30, 1996 2,248,250 225 21,663 (1,054) (547) 20,424 231,500 (3,904) 36,807
Acquisition of Treasury
Stock 58,500 (1,481) (1,481)
Exercise of stock
options 3,703 43 43
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 136 136
Increase in fair market
value of Employee Stock
Ownership Plan shares
committed to be released
for allocation 225 225
Amortization of unearned
compensation - Management
Stock Bonus Plan 547 547
Income tax benefit upon
vesting of Management
Stock Bonus Plan 278 278
Dividends on common stock to
stockholders (743) (743)
Net income 4,170 4,170
--------- ----- -------- -------- ------ -------- ------- -------- -------
BALANCE, September 30, 1997 2,251,953 $ 225 $ 22,209 $ (918) $ $ 23,851 290,000 (5,385) $39,982
========= ===== ======== ====== ====== ======== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,106 $ 3,126 $ 4,170
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Common stock committed to be released for allocation -
Employee Stock Ownership Plan 122 136 136
Increase in fair market value of Employee Stock Ownership
Plan shares committed to be released for allocation 49 110 225
Amortization of unearned compensation - Management
Stock Bonus Plan 249 199 547
Stock dividend on capital stock of Federal Home Loan Bank (172) (365)
Accretion of premiums and discounts on mortgage-
related securities and investment securities, net (134) (155) (147)
Provision for loan losses 224 75 143
Provision for losses on real estate owned 81 18 10
Net loan origination fees capitalized 380 1,602 899
Amortization of net deferred loan origination fees (371) (168) (72)
Amortization of mortgage servicing rights 1,305 1,651 1,742
Impairment of mortgage servicing rights 10
Amortization of excess of cost over fair value of assets acquired 78 60 22
Gain on sale of real estate owned, net (7) (34) (34)
Depreciation and amortization on premises and equipment 393 344 516
Gain on sale of premises and equipment (12)
Gain on sale of loans held for sale, net (706) (1,367) (1,194)
Origination/purchase of loans held for sale (107,341) (195,873) (214,177)
Proceeds from sale of loans held for sale 91,466 205,630 215,195
Gain on sale of mortgage servicing rights (1,961)
Provision (benefit) for deferred income taxes (225) 530 344
Changes in:
Accrued interest receivable (935) (525) (127)
Other assets (27) (698) 394
Income taxes payable 607 (77)
Accrued and other liabilities 1,091 2,028 (638)
--------- --------- ---------
Net cash provided by (used in) operating activities (11,568) 16,440 7,599
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or call of investment securities 10,100 29,000 48,860
Purchases of investment securities (42,000) (62,753) (43,820)
Principal collected on mortgage-related securities 4,985 6,746 6,228
Purchases of mortgage-related securities (1,158)
Loan originations net of principal collected on loans receivable (23,171) (48,069) (63,420)
Proceeds from sales of premises and equipment 117
Acquisitions of mortgage servicing rights, net (8,423) (2,522) (2,871)
Proceeds from sales of mortgage servicing rights 3,766
Purchases of premises and equipment (1,416) (1,858) (1,468)
Proceeds from sales of real estate owned 170 374 308
--------- --------- ---------
Net cash used in investing activities (55,872) (80,240) (56,183)
--------- --------- ---------
</TABLE>
(Continued)
34
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for deposits, net $ 40,952 $ 18,779 $ 21,839
Increase (decrease) in advance payments
by borrowers for taxes and insurance, net 126 (225) 261
Proceeds from advances from Federal Home Loan Bank 96,600 199,500 325,680
Repayments on advances from Federal Home Loan Bank (72,600) (150,800) (285,580)
Acquisition of common stock for Management Stock Bonus Plan (995)
Acquisition of treasury stock (1,174) (2,730) (1,481)
Cash dividends on common stock to stockholders (615) (783) (747)
Issuance of common stock for exercise of stock options 43
Income tax benefit upon vesting of Management Stock Bonus Plan 278
--------- --------- ---------
Net cash provided by financing activities 62,294 63,741 60,293
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,146) (59) 11,709
CASH AND CASH EQUIVALENTS:
Beginning of year 10,823 5,677 5,618
--------- --------- ---------
End of year $ 5,677 $ 5,618 $ 17,327
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income tax payments, net of refunds $ 1,708 $ 2,424 $ 2,029
========= ========= =========
Interest payments, including interest credited to deposits
of approximately $7,218, $9,434 and $9,969 $ 8,758 $ 12,287 $ 16,443
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to real estate owned $ 386 $ 238 $ 296
========= ========= =========
Loans made upon the sale of real estate owned $ 40
=========
Accrued dividends on common stock $ 204 $ 190 $ 186
========= ========= =========
</TABLE>
See notes to consolidated financial statements. (Concluded)
35
<PAGE>
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
1. STOCK CONVERSION
On November 23, 1993, the Board of Directors of Mid-Continent Federal
Savings and Loan Association of El Dorado unanimously adopted a Plan of
Conversion to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank to be known as
Mid-Continent Federal Savings Bank (the "Savings Bank") and to form Mid
Continent Bancshares, Inc., (the "Company"), a Kansas corporation, to
act as the holding company of the Savings Bank. At the date of
conversion, June 27, 1994, the Company completed the sale of 2,248,250
shares of common stock, $.10 par value, through concurrent Subscription
and Community Offerings at $10.00 per share. Included in the total
shares sold are 136,000 shares which were purchased by the Employees
Stock Ownership Plan ("ESOP") at $10.00 per share. Net proceeds from the
conversion, after recognizing conversion expenses and underwriting costs
of $754 were $21,729. From the net proceeds, the Company used $11,241 to
purchase all of the capital stock of the Savings Bank and $1,360 to fund
the purchase of 136,000 shares of the Company stock by the ESOP. The
Company owns 100% of the Savings Bank's common stock.
At the time of conversion, the Savings Bank segregated and restricted
$13,434 of retained earnings, which was the amount of its regulatory
capital as of December 31, 1993, in a liquidation account for the
benefit of eligible account holders who continue to maintain their
deposit accounts in the Savings Bank after conversion. In the event of a
complete liquidation of the Savings Bank (and only in such an event),
eligible depositors who continue to maintain accounts shall be entitled
to received a distribution from the liquidation account in an amount
proportionate to the current adjusted balances of all qualifying
deposits then held. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits.
The Company or the Savings Bank may not declare or pay a cash dividend
on any of its shares of common stock if the effect would reduce
stockholders' equity below either the amount required for the
liquidation account discussed above or the applicable regulatory capital
requirements or if such declaration and payment would otherwise violate
regulatory requirements. At September 30, 1997 approximately $8,949,000
of the equity of the Savings Bank was available for distribution as
dividends to the parent company without reducing regulatory capital
below required levels.
2. REORGANIZATION AND MERGER AGREEMENT
On September 2, 1997, the Company entered into a Reorganization and
Merger Agreement ("the agreement") to be acquired by Commercial Federal
Corporation ("Commercial Federal"). Under the terms of the agreement,
Commercial Federal will acquire through a tax-free reorganization all of
the outstanding shares of the Company's common stock in exchange for
Commercial Federal's common stock. The exchange ratio will be determined
based upon the average closing price of Commercial
36
<PAGE>
Federal's common stock during a twenty consecutive trading day period
prior to closing. Based on Commercial Federal's closing price on
September 2, 1997, the Company's shareholders would receive 1.30395
shares of Commercial Federal's common stock for each share of the
Company's outstanding common stock. The acquisition is subject to
regulatory approvals, the Company's shareholders' approval and other
conditions and is expected to close in the second fiscal quarter of
1998. The accompanying financial statements do not include any
adjustments giving effect to the agreement.
3. ACCOUNTING POLICIES AND PROCEDURES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, and its wholly owned subsidiary,
Mid-Continent Federal Savings Bank. The Savings Bank grants mortgage and
consumer loans primarily to customers within the state of Kansas. The
Savings Bank has a wholly owned subsidiary, Laredo Investment, Inc.,
that is engaged in promoting the sale of tax deferred annuities and
receives related commissions. Significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from depository institutions, treasury bills and
interest bearing deposits in other banks purchased with an original
maturity of three months or less.
The Savings Bank is required by regulation to maintain liquid assets in
the form of cash and securities approved by federal regulations, at a
monthly average of not less than 5% of customer deposits and short-term
borrowings.
Investment Securities - Investment securities include securities of the
United States Government and its agencies and are recorded at amortized
cost. Related premiums and discounts are accreted or amortized into
income over the lives of the securities using the level-yield method.
Securities are not adjusted to market value because management has both
the ability and intent to hold these securities to maturity.
Capital Stock of Federal Home Loan Bank - Capital stock of Federal Home
Loan Bank is carried at cost. Dividends received on such stock are
reflected as interest income on investment securities in the
consolidated statements of income.
Mortgage-Related Securities - Mortgage-related securities are recorded
at amortized cost. The related premiums and discounts are accreted or
amortized over the estimated lives of the underlying securities using
the level-yield method. These securities are not adjusted to market
value because management has both the ability and intent to hold these
securities to maturity.
Loans Held for Sale - The Savings Bank's management designates certain
loans receivable at the date of origination or purchase as held for sale
as management does not intend to hold such loans to maturity.
Accordingly, such loans are carried at the lower of cost (outstanding
principal adjusted for net unearned fees and costs) or market value
(determined on an aggregate basis with consideration given to forward
delivery commitments). Such loans are originated or purchased and
intended for sale in the secondary market and are generally sold with
servicing retained by the Savings Bank. Gains or losses on such sales
are recognized utilizing the specific identification method for
financial reporting and income tax purposes at the time of sale. Loan
fees, net discounts, premiums and other related costs are
37
<PAGE>
recognized at the time the related loans are sold to third-party
investors. Interest on these loans is included in interest income on
loans receivable.
Loans Receivable - Loans are stated at the amount of unpaid principal
less an allowance for loan losses, undisbursed loan funds and unearned
discounts and loan fees, net of certain direct loan origination costs.
Interest on loans is credited to income as earned and accrued only if
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or
interest is in doubt. As a general rule, the accrual of interest is
discontinued when principal or interest payments become 90 days past due
or earlier if conditions warrant. When a loan is placed on nonaccrual
status, previously accrued but unpaid interest is reversed against
current income. Subsequent collections of cash may be applied as
reductions to the principal balance, interest in arrears or recorded as
income, depending on management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to accrual
status when principal and interest become current and full payment of
principal and interest is expected.
Net loan origination and commitment fees are amortized as a yield
adjustment to interest income using the level-yield method over the
contractual lives of the related loans.
Provision for Loan Losses - SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan," requires the Savings Bank to measure impaired
loans based on the present value of the estimated future cash flows
discounted at the loan's effective rate or based on the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. One to four family residential loans and
consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units and loans on
business properties are evaluated for impairment on a loan by loan
basis. The provision for loan losses also includes an amount which,
based on management's estimate, is necessary to establish a general
valuation allowance sufficient to absorb possible credit losses within
the Savings Bank's loan portfolio. These provisions are made based on
the results of continuing reviews by management of the loan portfolio,
which includes analysis of borrower's financial data and assessment of a
borrower's ability to continue to meet its obligations. These estimates
are susceptible to changes that could result in a material adjustment to
operations. Recovery of the carrying value of such loans is dependent to
a great extent upon economic, operating and other conditions that may be
beyond the Savings Bank's control.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed primarily on the straight-line method over the estimated
useful lives of the related assets. The following represents a summary
of estimated useful lives:
Years
Building and improvements 40
Furniture, fixtures and equipment 5-10
Automobiles 3
38
<PAGE>
Real Estate Owned - Real estate owned represents foreclosed assets held
for sale and is recorded at fair value as of the date of foreclosure or
transfer less estimated disposal costs (the new basis) and is
subsequently carried at the lower of the new basis or fair value less
selling costs on the current measurement date. Subsequently, properties
are evaluated and any additional declines which reduce the fair value to
less than carrying value are provided for as a provision for losses on
real estate owned. Costs and expenses related to major additions and
improvements are capitalized while maintenance and repairs which do not
improve or extend the lives of the assets are expensed currently. Gains
on the sale of real estate owned for which the Savings Bank grants a
loan are recognized upon disposition of the property to the extent
allowable considering certain down payments and other requirements.
Other Assets - Included in other assets is the excess of cost over fair
value of assets acquired, which is amortized using a straight line
method over the estimated remaining life of the long-term
interest-bearing assets acquired. The excess of cost over fair value of
assets acquired is $22 as of September 30, 1996 and has been fully
amortized as of September 30, 1997.
Mortgage Servicing Rights - The Savings Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, effective for the year ended September 30, 1997. For each
servicing contract in existence before January 1, 1997, previously
recognized originated and purchased servicing rights and "excess
servicing" receivables are combined, net of any previously recognized
servicing obligations under that contract, as a servicing asset or
liability. The Statement provides that servicing assets and other
retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values at the date of the
transfer, and servicing assets and liabilities be subsequently measured
by (1) amortization in proportion to and over the period of estimated
net servicing income or loss, and (2) assessment for asset impairment or
increased obligation based on their fair values. The implementation of
this Statement did not have a material impact on the consolidated
financial statements.
Originated mortgage servicing rights are recorded at cost based upon the
relative fair values of the loans and the servicing rights. Servicing
release fees paid on comparable loans and discounted cash flows are used
to determine estimates of fair values. Purchased mortgage servicing
rights are acquired from independent third-party originators and are
recorded at the lower of cost or fair value. These rights are amortized
in proportion to and over the period of expected net servicing income.
Impairment Evaluation - The Savings Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring
impairment of capitalized servicing rights, in accordance with SFAS No
125, the Savings Bank stratifies the rights based on their predominant
risk characteristics. The significant risk characteristics considered by
the Savings Bank are loan type, period of origination and stated
interest rate. If the fair value estimated, using a discounted cash flow
methodology, is less than the carrying amount of the portfolio, the
portfolio is written down to the amount of the discounted expected cash
flows utilizing a valuation allowance. The Savings Bank utilizes
consensus market prepayment assumptions and discount rates to evaluate
its capitalized servicing rights which considers the risk
characteristics of the underlying servicing rights. For the years ended
1995 and 1996, there were no write downs or valuation allowances
established for capitalized servicing. A write down and valuation
allowance of $10 was established at September 30, 1997.
39
<PAGE>
Sale of Mortgage Servicing Rights - The Savings Bank recognizes gains on
sales of mortgage servicing rights when a legal closing of the sale
occurs with title passing to the buyer, all significant risks and
rewards of ownership have transferred to the buyer, including risks
related to default prepayment (including no uncapped risks related to
defaults or prepayments) and there are no significant unresolved
contingencies. The Savings Bank defers the gain on sale of servicing
until these conditions are met.
Income Taxes - The Company, the Savings Bank and its subsidiary file a
consolidated Federal income tax return. State income tax returns are
individually filed for each of the entities.
In years prior to September 30, 1997, thrift institutions were permitted
under the Internal Revenue Code to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. This addition differs from the bad debt experience used for
financial accounting purposes. Bad debt deductions for income tax
purposes are included in taxable income of later years only if the bad
debt reserve is used subsequently for purposes other than to absorb bad
debt losses. Under SFAS No. 109, a deferred tax liability is provided
only to the extent the tax bad debt reserve exceeds the base year
reserve. The base year reserve is the tax bad debt reserve as of
September 30, 1988. Retained earnings as of September 30, 1997 includes
approximately $2,071 representing such bad debt reserve as of the base
year for which no deferred income taxes have been provided.
The Small Business Job Protection Act of 1996 (the "Act") repeals the
special bad debt reserve method for thrift institutions. The Act
requires thrifts to recapture any reserves accumulated after 1987 but
forgives taxes owed on reserves accumulated prior to 1988. Thrift
institutions will be given six years to account for the recaptured
excess reserves. The Savings Bank must recapture excess reserves
beginning with the year ended September 30, 1997. Thrift institutions
will be permitted to delay the timing of this recapture for up to two
years depending upon whether they meet certain residential loan tests. A
deferred tax liability has been provided on the amount of bad debt
reserve that exceeds the base year reserve.
Revenue Recognition - Servicing fees, interest income, late fees, and
other ancillary income related to the Savings Bank's servicing and
lending activities are accrued as earned.
Earnings Per Share - Common equivalent shares include shares issuable
upon exercise of dilutive options outstanding determined under the
treasury stock method. The Company accounts for the shares acquired by
its ESOP in accordance with the American Institute of Certified Public
Accountants' (AICPA) Statement of Position 93-6 and the shares acquired
for its Management Stock Bonus Plan (MSBP) in a manner similar to the
ESOP shares; shares acquired by the ESOP and MSBP are not considered in
the weighted average shares outstanding until the shares are committed
for allocation or vested to an employee's individual account. The
weighted average number of common and common equivalent shares
outstanding are 2,087,668; 1,962,849 and 1,938,765 as of September 30,
1995, 1996 and 1997.
Regulatory Compliance - The Savings 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 Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Savings
Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The
40
<PAGE>
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Savings Bank to maintain minimum capital
amounts and ratios (set forth in the table below). The Savings Bank's
primary regulatory agency, the OTS, requires that the Savings Bank
maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based capital (as defined) of 8%. The Savings Bank is also subject
to prompt corrective action capital requirement regulations set forth by
the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires
the Savings Bank to maintain a minimum of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of September 30, 1997, that the Savings Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1997 and 1996, the most recent notification from the
OTS categorized the Savings Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Savings Bank must maintain minimum total
risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Categorized as
"Well Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ----------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Tangible capital
(to total assets) $36,179 8.9 % $ 6,079 1.5 % N/A N/A
Core capital
(to total assets) 36,179 8.9 % 12,158 3.0 % N/A N/A
Total risk-based capital
(to risk weighted assets) 36,633 22.6 % 12,954 8.0 % 22,480 10.0 %
Tier I risk-based capital
(to risk weighted assets) 36,179 16.1 % N/A N/A 13,488 6.0 %
Tier I leverage capital
(to average assets) 36,179 9.6 % N/A N/A 18,774 5.0 %
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
To Be Categorized as
"Well Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996:
Tangible capital
(to total assets) $31,827 9.3 % $ 5,122 1.5 % N/A N/A
Core capital
(to total assets) 31,827 9.3 % 10,244 3.0 % N/A N/A
Total risk-based capital
(to risk weighted assets) 32,281 24.5 % 10,551 8.0 % 17,703 10.0 %
Tier I risk-based capital
(to risk weighted assets) 31,827 24.1 % N/A N/A 10,622 6.0 %
Tier I leverage capital
(to average assets) 31,827 10.9 % N/A N/A 14,573 5.0 %
</TABLE>
A reconciliation of the Savings Bank's stockholders' equity under
generally accepted accounting principles to regulatory capital amounts
as of September 30, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity, core and tangible capital - as reported by the Savings Bank $36,179
General loan loss reserves 454
-------
Risk-based capital $36,633
=======
</TABLE>
Estimates - The preparation of these 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 as of September 30, 1995, 1996 and 1997 and the reported
amounts of revenues and expenses during the years then ended.
Significant estimates include loan loss and real estate owned reserves,
valuation of mortgage servicing rights and fair value of financial
instruments. Actual results could differ from those estimates.
New Statements of Financial Accounting Standards - In February 1997, the
FASB issued SFAS No. 128, Earnings per Share. The Statement establishes
standards for computing and presenting earnings per share ("EPS"). It
replaces the presentation of primary EPS with a presentation of basic
EPS. The Statement is effective for the Company's financial statements
as of September 30, 1998. The Company's earnings per share under the new
standard are not materially different from that reported.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure. The Statement establishes standards
for disclosing information about an entity's capital structure. The
Statement is effective for the Company's financial statements as of
September 30, 1998. The Company does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income.
The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires
42
<PAGE>
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that the Company (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. The Statement is effective for the Company's financial
statements as of September 30, 1999. The Company does not anticipate
that the implementation of this Statement will have a material impact on
the consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective for
the Company's financial statements as of September 30, 1999. The Company
anticipates that the implementation of this Statement may require
additional disclosures.
Reclassifications - Certain reclassifications have been made to the 1995
and 1996 consolidated financial statements in order to conform with the
1997 presentation.
4. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury and other U.S.
Government agencies:
Securities maturing within one year $ 2,000 $ 25 $ 1,975
Securities maturing after one year
through five years 13,332 606 12,726
Securities maturing after five years
through ten years 17,500 $ 16 441 17,075
Securities maturing after ten years 53,403 111 1,463 52,051
------- ------- ------- -------
$86,235 $ 127 $ 2,535 $83,827
======= ======= ======= =======
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
United States Treasury and other U.S.
Government agencies:
Securities maturing within one year $ 8,455 $ 5 $ 161 $ 8,299
Securities maturing after one year
through five years 4,996 87 4,909
Securities maturing after five years
through ten years 27,605 173 83 27,695
Securities maturing after ten years 38,334 30 47 38,317
------- ------- ------- -------
$79,390 $ 208 $ 378 $79,220
======= ======= ======= =======
</TABLE>
As of September 30, 1996 and 1997, the Savings Bank held callable
securities with aggregate carrying values of $76,801 and $70,830,
respectively. The securities bear interest at rates ranging from 4.98%
to 8.5% with stated maturity dates ranging from 1997 to 2011.
Certain investment securities have been pledged as collateral for
deposits and advances from the Federal Home Loan Bank (See Notes 12 and
14).
5. MORTGAGE-RELATED SECURITIES
<TABLE>
<CAPTION>
September 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Pass-through certificates - fixed rate:
Government National Mortgage Association $ 6,151 $ 224 $ 6,375
Federal National Mortgage Association 365 12 377
Federal Home Loan Mortgage Corporation 11,853 138 $ 176 11,815
Mortgage Guarantee Insurance Corporation 59 3 62
Pass-through certificates - adjustable rate:
Government National Mortgage Association 5,043 24 5,019
Federal National Mortgage Association 2,616 70 2,546
Federal Home Loan Mortgage Corporation 6,219 119 6,100
Mortgage Guarantee Insurance Corporation 2,077 5 2,072
-------- ------ ------- -------
$ 34,383 $ 377 $ 394 $34,366
======== ====== ======= =======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Pass-through certificates - fixed rate:
Government National Mortgage Association $ 5,569 $ 303 $ 5,872
Federal National Mortgage Association 345 18 $ 1 362
Federal Home Loan Mortgage Corporation 7,742 172 18 7,896
Mortgage Guarantee Insurance Corporation 12 1 13
Pass-through certificates - adjustable rate:
Government National Mortgage Association 4,302 77 4,379
Federal National Mortgage Association 2,352 54 2,298
Federal Home Loan Mortgage Corporation 5,865 62 5,803
Mortgage Guarantee Insurance Corporation 1,937 4 1,933
------- ------- ------- -------
$28,124 $ 571 $ 139 $28,556
======= ======= ======= =======
</TABLE>
Certain mortgage-related securities have been pledged as collateral for
deposits and advances from the Federal Home Loan Bank (See Notes 12 and
14).
6. LOANS RECEIVABLE
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
First mortgage loans:
Residential - one-to-four units $ 157,494 $ 217,152
Secured by other properties 1,013 857
Construction loans 17,367 17,534
--------- ---------
Total first mortgage loans 175,874 235,543
--------- ---------
Other installment loans:
Property improvements, auto and other 5,195 6,375
Mobile home 305 128
Deposits 769 795
--------- ---------
Total installment loans 6,269 7,298
--------- ---------
Total loans 182,143 242,841
Less:
Unearned loan fees and deferred costs 511 255
Unamortized premiums on loans purchased (354) (737)
Undisbursed loan funds 10,407 9,547
Allowance for loan losses 421 465
--------- ---------
$ 171,158 $ 233,311
========= =========
</TABLE>
45
<PAGE>
There were no commercial real estate or business loans purchased or
originated during 1995, 1996 or 1997. The Savings Bank has lending
activities primarily in the State of Kansas.
The Savings Bank originates and purchases both adjustable and fixed rate
loans. The approximate composition of these loans is as follows:
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
----------------------------------------- ---------------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
<S> <C> <C> <C> <C>
1 mo. - 1 yr. $ 18,246 1 mo. - 1 yr. $ 50,379
1 yr. - 3 yrs. 2,009 1 yr. - 3 yrs. 48,341
3 yrs. - 5 yrs. 2,219 3 yrs. - 5 yrs. 9,419
5 yrs. - 10 yrs. 5,422 5 yrs - 10 yrs. 1,170
10 yrs. - 20 yrs. 28,615
Over 20 years 16,323
-------- ---------
$ 72,834 $ 109,309
======== =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
----------------------------------------------- ------------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
<S> <C> <C> <C> <C>
1 mo. - 1 yr. $ 18,296 1 mo. - 1 yr. $ 55,765
1 yr. - 3 yrs. 2,119 1 yr. - 3 yrs. 66,989
3 yrs. - 5 yrs. 2,994 3 yrs. - 5 yrs. 21,098
5 yrs. - 10 yrs. 5,843 5 yrs - 10 yrs. 1,091
10 yrs. - 20 yrs. 49,450
Over 20 years 19,196
-------- ---------
$ 97,898 $ 144,943
======== =========
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to the weekly average yield on United States
Treasury securities adjusted to a constant maturity of 1 year.
The Savings Bank is subject to numerous lending-related regulations.
Under FIRREA, the Savings Bank may not make real estate loans to one
borrower in excess of the greater of 15% of its unimpaired capital and
surplus or $500, whichever is greater. As of September 30, 1997, the
Savings Bank is in compliance with this limitation.
46
<PAGE>
A summary of the activity in the allowance for loan losses is as
follows:
1995 1996 1997
Balance, beginning of year $ 275 $ 423 $ 421
Provision charged to expense 224 75 143
Losses charged against the allowance (80) (90) (117)
Recoveries 4 13 18
----- ----- -----
Balance, end of year $ 423 $ 421 $ 465
===== ===== =====
During 1995, the Savings Bank restructured loans with a carrying value
of approximately $3,039. No provision for loss was considered necessary
based on the restructured terms and the cash flows expected to be
generated by the underlying collateral. The Savings Bank did not engage
in any troubled debt restructurings during the years ended September 30,
1995, 1996 and 1997. No loans were considered impaired under SFAS No.
114 during the years ended September 30, 1995, 1996 and 1997.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did
not exceed 5% of stockholders' equity as of September 30, 1996 and 1997.
Management believes such loans were made under terms and conditions
substantially the same as loans made to parties not affiliated with the
Savings Bank.
As of September 30, 1996 and 1997, loans totaling approximately $484 and
$932, respectively, were on nonaccrual status. Gross interest income
would have increased by $45 and $79 for the year ended September 30,
1996 and 1997, respectively, for nonaccrual status loans
7. MORTGAGE LOANS SERVICED
The Savings Bank services primarily single family residential loans for
others which are not included in the accompanying consolidated balance
sheets. The approximate unpaid principal balances of these loans are
summarized as follows:
1995 1996 1997
Government National
Mortgage Association $ 902,977 $ 875,381 $ 854,467
Federal National
Mortgage Association 132,209 115,492 100,778
Federal Home
Loan Mortgage Corporation 146,624 231,515 330,225
Other investors 8,082 6,765 5,861
---------- ---------- ----------
$1,189,892 $1,229,153 $1,291,331
========== ========== ==========
47
<PAGE>
The Savings Bank services loans in 16 states. The five largest state
concentrations, based on unpaid principal balances, are as follows:
Kansas (53.0%), Oklahoma (23.1%), Louisiana (8.0%), Michigan (8.3%), and
Illinois (3.5%), aggregating approximately 95.9% of the portfolio. The
risk inherent in such concentrations is dependent not only upon regional
and general economic stability which affects property values, but also
the financial well-being and creditworthiness of the borrower.
Mortgage loans and their related servicing rights are sold under
agreements that define certain criteria for the mortgage loan. If the
criteria is not met, the Savings Bank may be required to repurchase the
mortgage loan. Conforming conventional loans serviced by the Savings
Bank are securitized through FNMA or FHLMC programs on a non-recourse
basis, whereby foreclosure losses are generally the responsibility of
FNMA or FHLMC and not the Savings Bank. Similarly, the government loans
serviced by the Savings Bank are securitized through GNMA programs,
whereby the Savings Bank is insured against loss by the Federal Housing
Administration ("FHA") or partially guaranteed against loss by the
Veterans Administration ("VA"). With respect to sales of loans, under
certain circumstances, the Savings Bank may become liable for the unpaid
principal and interest on defaulted loans or other loans if there has
been a breach of representations or warranties. In the opinion of
management, adequate reserves have been established for losses that may
be incurred as a result of obligations to repurchase mortgage loans.
The servicing of loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. The Savings Bank held borrowers'
escrow balances and principal and interest payments related to loans
serviced for others of $19,169, $16,917 and $19,870 as of September 30,
1995, 1996 and 1997, respectively. These balances are segregated in
special bank accounts which are included in deposits in the accompanying
consolidated balance sheets.
In connection with its fiduciary responsibilities, the Savings Bank
advances funds relative to the foreclosure of serviced loans, which are
repaid from sale proceeds by way of reimbursement from investors or
through claims submitted to private mortgage insurance companies, the
FHA and/or the VA. These advances totaled $1,995 and $1,741 as of
September 30, 1996 and 1997, respectively, and are included in other
assets in the accompanying consolidated balance sheets.
8. LOANS HELD FOR SALE
A summary of gross realized gains (losses) on sales of loans held for
sale is as follows:
1996 1997
Loans held for sale $ 13,787 $ 13,964
Deferred net discounts, premiums and
other related costs (69) (70)
-------- --------
Loans held for sale, net $ 13,718 $ 13,894
======== ========
48
<PAGE>
A summary of gross unrealized gains (losses) on sales of loans held for
sale is as follows:
1995 1996 1997
Gross realized gains $ 794 $ 1,651 $ 1,232
Gross realized losses (88) (284) (38)
------- ------- -------
Gains on sale of loans, net $ 706 $ 1,367 $ 1,194
======= ======= =======
9. PREMISES AND EQUIPMENT
1996 1997
Land $ 2,099 $ 2,099
Building and improvements 4,555 5,622
Furniture, fixtures and equipment 2,980 3,219
Automobiles 38 38
------- -------
9,672 10,978
Less accumulated depreciation (3,401) (3,756)
------- -------
$ 6,271 $ 7,222
======= =======
10. REAL ESTATE OWNED
1996 1997
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) $ 62 $ 60
Less allowance for losses (34) (19)
---- ----
$ 28 $ 41
==== ====
A summary of the activity in the allowance for losses on real estate
owned is as follows:
1995 1996 1997
Balance, beginning of year $ 16 $ 51 $ 34
Provision charged to expense 81 18 10
Losses charged against the allowance (47) (35) (25)
Recoveries 1
---- ---- ----
Balance, end of year $ 51 $ 34 $ 19
==== ==== ====
49
<PAGE>
11. MORTGAGE SERVICING RIGHTS
The following is an analysis of the changes in mortgage servicing
rights:
1995 1996 1997
Balance, beginning of year $ 6,312 $11,625 $12,496
Additions:
Purchased mortgage servicing rights 8,107 1,970 2,235
Originated mortgage servicing rights 322 589 661
------- ------- -------
8,429 2,559 2,896
Reductions:
Amortization 1,305 1,651 1,742
Bulk sales 1,805
Servicing released sales 6 37 25
Impairment loss 10
------- ------- -------
3,116 1,688 1,777
------- ------- -------
Balance, end of year $11,625 $12,496 $13,615
======= ======= =======
During 1995, the Savings Bank sold (in bulk) the mortgage servicing
rights to loans with a principal balance of approximately $304,000
resulting in a gain of $1,961. No such sales occurred in 1996 or 1997.
50
<PAGE>
12. DEPOSITS
<TABLE>
<CAPTION>
1996 1997
------------------------- -----------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Passbook and checking accounts:
Demand and NOW accounts, including
noninterest bearing deposits of
approximately $22,384 and
$26,326 as of September 30,
1996 and 1997 (rate, excluding
noninterest bearing deposits, of 2.6%
as of September 30, 1996 and 1997) $ 36,785 17.1% $ 43,463 18.4%
Money market accounts (rate of 2.65%
as of September 30, 1996 and 1997) 12,387 5.8 14,732 6.2
Passbook savings accounts (rate of 2.75%
as of September 30, 1996 and 1997) 8,690 4.1 9,106 3.9
--------- ---- -------- ----
Total passbook and checking accounts 57,862 27.0 67,301 28.5
--------- ---- -------- ----
Certificate accounts:
2.00% to 3.00% 12 4
3.01% to 4.00%
4.01% to 5.00% 6,134 2.9 2,278 1.0
5.01% to 6.00% 106,577 49.7 142,341 60.2
6.01% to 7.00% 43,526 20.3 24,144 10.2
7.01% to 8.00% 275 0.1 265 0.1
8.01% to 9.00% 107
--------- ---- -------- ----
Total certificate accounts 156,631 73.0 169,032 71.5
--------- ---- -------- ----
$ 214,493 100% $236,333 100%
========= ==== ======== ====
Weighted average interest rate on deposits
during year 4.63% 4.75%
==== ====
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100 as of September 30, 1996 and 1997 was $57,151 and
$52,447, respectively.
Certain savings deposits of public institutions were collateralized by
investment and mortgage-related securities with aggregate amortized cost
of $41,371 and aggregate market value of $40,281 as of September 30,
1996, and aggregate amortized cost of $50,849 and aggregate market value
of $51,168 as of September 30, 1997.
51
<PAGE>
At September 30, 1997, certificate accounts mature as follows:
1998 $ 97,076
1999 55,006
2000 8,195
2001 2,113
2002 5,574
Thereafter 1,068
--------
$169,032
========
A summary of interest expense by deposit type is as follows:
1995 1996 1997
Passbook savings deposits $ 239 $ 238 $ 241
NOW accounts and money market
demand deposits 565 756 1,015
Certificate accounts 6,697 8,491 9,662
------ ------ --------
$7,501 $9,485 $ 10,918
====== ====== ========
13. INCOME TAXES
1995 1996 1997
Current $ 2,668 $ 1,363 $ 2,333
Deferred (225) 530 344
------- ------- -------
$ 2,443 $ 1,893 $ 2,677
======= ======= =======
Income tax expense has been provided at effective rates of 37.3%, 37.7%
and 39.1% for the years ended September 30, 1995, 1996 and 1997,
respectively. The differences between such effective rates and the
statutory Federal income tax rate computed on income before income tax
expense result from the following:
1995 1996 1997
Amount % Amount % Amount %
Federal income tax expense
computed at statutory
rate $ 2,227 34.0 $ 1,706 34.0 $ 2,328 34.0
Increases (decreases) in
taxes resulting from:
State income taxes 304 4.6 181 3.6 303 4.4
Merger related costs 63 0.9
Amortization of cost over
fair value of assets
acquired 26 0.4 21 0.4 8 0.1
Other (114) (1.7) (15)(0.3) (25) (0.3)
------- ---- ------- ---- ------- ----
$ 2,443 37.3 $ 1,893 37.7 $ 2,677 39.1
======= ==== ======= ==== ======= ====
52
<PAGE>
Deferred tax expense results from timing differences in the recognition
of revenue and expense for tax and financial statement purposes. The
sources of these differences and the tax effect of each were as follows:
1995 1996 1997
Market adjustment on loans held for sale $(134) $(125) $ 67
Bad debt reserves 2 164 (10)
Depreciation (7) 49 (4)
Deferred loan fees and costs 12 402 113
Excess amortization of mortgage
servicing rights (72) (28) (38)
Outside Directors' Retirement Plan accrual (52) (1) (1)
Management Stock Bonus Plan accrual (19) 19
Federal Home Loan Bank stock dividends 66 138
Other 45 3 60
----- ----- -----
$(225) $ 530 $ 344
===== ===== =====
The components of net deferred tax liabilities as of September 30, 1996
and 1997 are as follows:
1996 1997
Deferred tax assets:
Allowance for loan losses $ 173 $ 183
Excess amortization of mortgage servicing rights 100 138
Outside Directors' Retirement Plan accrual 53 54
Management Stock Bonus Plan accrual 19
Market adjustment on loans held for sale 94 27
Other 72 7
------ ------
511 409
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 396 534
Bad debt reserves 402 402
Prepaid expenses 90 98
Fixed assets - depreciation 70 66
Deferred loan fees 238 351
Other 13
------ ------
1,209 1,451
------ ------
Net deferred tax liabilities $ 698 $1,042
====== ======
53
<PAGE>
14. ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
1996 1997
----------------------------------------- --------------------------------------------
Weighted Weighted
Fiscal Average Fiscal Average
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
<S> <C> <C> <C> <C> <C>
1997 $ 63,200 5.98 % 1998 $ 80,800 6.03 %
1998 18,500 6.43 2001 10,000 5.85
2002 31,000 5.72
---------
$ 81,700 6.08 % $ 121,800 5.94 %
======== =========
</TABLE>
The advances are collateralized as of September 30, 1997 by a blanket
pledge agreement, including all Capital Stock of Federal Home Loan Bank,
qualifying first mortgage loans, certain mortgage-related securities and
other investment securities.
The Savings Bank has entered into a line-of-credit agreement with the
Federal Home Loan Bank wherein the Savings Bank can borrow up to
approximately $68,292, subject to certain limitations. As of September
30, 1997, there was $7,300 outstanding relative to this agreement. The
agreement expires December 26, 1997.
15. EMPLOYEE BENEFIT PLANS
Pension Plan - The Savings Bank has a noncontributory defined-benefit
pension plan covering substantially all employees completing one year of
employment and 1,000 hours of service. Plan benefits are based upon
years of service and compensation. The Savings Bank funding policy is,
acting under the advice of the actuary for the plan, that the Savings
Bank intends to make contributions to the trust in such amounts and at
such times as they are required to maintain the plan and trust for its
employees in compliance with ERISA and Section 412 of the Internal
Revenue Code.
54
<PAGE>
The following table sets forth the funded status of the plan:
<TABLE>
<CAPTION>
September 30,
1996 1997
<S> <C> <C>
Projected benefit obligation:
Vested benefits $ 1,111 $ 1,276
Nonvested benefits 49 66
------- -------
Accumulated benefit obligation 1,160 1,342
Effect of projected future compensation levels 453 581
------- -------
Projected benefit obligation 1,613 1,923
Fair value of plan assets 1,162 1,314
------- -------
Projected benefit obligation in excess of fair value of plan assets 451 609
Unrecognized net obligation existing at initial
application of SFAS No. 87 (141) (131)
Unrecognized net loss (52) (144)
------- -------
Accrued pension cost $ 258 $ 334
======= =======
</TABLE>
The assets of the plan consist primarily of certificates of deposit
which are included in the Savings Bank's deposits.
Net periodic pension cost includes the following:
<TABLE>
<CAPTION>
September 30,
1995 1996 1997
<S> <C> <C> <C>
Service cost $ 172 $ 181 $ 214
Interest cost 83 101 110
Actual return on assets (63) (87) (104)
Net amortization and deferral 7 19 20
----- -------- -------
Net periodic pension cost $ 199 $ 214 $ 240
===== ======== =======
</TABLE>
For each of the plan years ending September 30, 1995, 1996 and 1997, the
weighted average discount rate used in determining the actuarial present
value of the projected obligation was 7.0%, the expected rate of
increase in future salary levels for plan beneficiaries was 4.0% and the
expected long-term rate of return on plan assets was 7.5%.
Upon execution of the Reorganization and Merger Agreement (Note 2), the
pension plan will be merged with Commercial Federal's existing plan.
Employee Stock Ownership Plan - The Company has an ESOP for the benefit
of Savings Bank employees who meet the eligibility requirement which
includes having completed 1,000 hours of service within a 12 month
period with the Company. The ESOP Trust acquired 136,000 shares of
55
<PAGE>
common stock in the Company's initial public offering with proceeds from
a loan from the Company. The Savings Bank makes cash contributions to
the ESOP on a quarterly basis sufficient to enable the ESOP to make the
required loan payments to the Company.
The note payable referred to above bears interest at prime rate
adjustable quarterly with interest payable quarterly and future
principal payable in nine installments of $136 beginning December 31,
1995 and annually thereafter and one installment of $68 payable on June
26, 2004. The loan is secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid in
the year. The Company accounts for its ESOP in accordance with AICPA
Statement of Position 93-6. Accordingly, the shares pledged as
collateral are reported as a reduction of stockholders' equity in the
consolidated balance sheet. As shares are released from collateral, the
Company reports compensation expense equal to the current market price
of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings.
Compensation expense related to the ESOP was $172, $246 and $361 for the
years ended September 30, 1995, 1996 and 1997, respectively. Following
is a summary of shares held in the ESOP Trust as of September 30, 1997:
Allocated shares 32,910
Shares released for allocation or committed to be released 10,200
Unreleased shares 90,719
--------
Total ESOP shares 133,829
========
Fair value of unreleased shares at September 30, 1997 $ 3,470
========
The ESOP will terminate, as of the date of acquisition by Commercial
Federal Corporation (Note 2) and the ESOP will allocate and distribute
Plan assets to Plan participants and beneficiaries in accordance with
the terms of the Plan.
Management Stock Bonus Plan - The Savings Bank adopted a Management
Stock Bonus Plan ("MSBP"), the objective of which is to enable the
Savings Bank to retain personnel of experience and ability in key
positions of responsibility. Employees of the Savings Bank are eligible
to receive benefits under the MSBP at the sole discretion of a committee
appointed by the Board of Directors of the Savings Bank.
The MSBP is managed by trustees who are non-employee directors of the
Savings Bank. The MSBP purchased 74,833 shares of the Company's stock
for $995 during 1995. These shares were granted in the form of
restricted stock payable 20% upon date of award (June 27, 1995) and the
remaining equally over a four year period beginning June 27, 1996.
Compensation expense in the amount of the fair market value of the
common stock at the date of the grant to the employee will be recognized
over the period during which the shares are payable. A recipient of such
restricted stock will be entitled to all voting and other stockholder
rights (including the right to receive dividends on vested and nonvested
shares), except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in escrow.
If a holder of such restricted stock terminates
56
<PAGE>
employment for reasons other than death, disability or retirement, the
employee forfeits all rights to the allocated shares under restriction.
If the participant's service terminates as a result of death,
disability, retirement or a change in control of the Savings Bank, all
restrictions expire and all shares allocated become unrestricted.
Upon entering into the Reorganization and Merger Agreement (Note 2) all
plan shares subject to restrictions were immediately 100% earned and
non-forfeitable and subject to distribution to Plan participants. As a
result, the Company recognized the remaining unearned compensation of
$547 related to the Plan as of September 30, 1997.
Stock Option Plan - In connection with the stock conversion, the
Company's Board of Directors adopted the 1994 Stock Option Plan (the
"Option Plan"). Pursuant to the Option Plan, 224,825 shares of common
stock are reserved for issuance by the Company upon exercise of stock
options granted to officers, directors and employees of the Company from
time to time under the Option Plan. The purpose of the Option Plan is to
provide additional incentive to certain officers, directors and key
employees by facilitating their purchase of a stock interest in the
Company.
The Option Plan provides for a term of ten years, after which no awards
may be made, unless earlier terminated by the Board of Directors
pursuant to the Option Plan. The Option Plan is administered by a
committee of at least three non-employee directors designated by the
Board of Directors (the "Option Committee"). The Option Committee
selects the employees to whom options are to be granted and the number
of shares to be granted. The option price may not be less than 100% of
the fair market value of the shares on the date of the grant, and no
option shall be exercisable after the expiration of ten years from the
grant date. In the case of any employee who owns more than 10% of the
outstanding common stock at the time the option is granted, the option
price may not be less than 110% of the fair market value of the shares
on the date of the grant, and the option shall not be exercisable after
the expiration of five years from the grant date. The exercise price may
be paid in cash, shares of the common stock, or a combination of both.
On January 27, 1995 the Option Committee granted options for 165,476
shares of common stock, at an exercise price of $11.75 (market value at
date of grant) per share. All such options are exercisable immediately
(for nonemployee directors) or otherwise generally at the rate of
one-third following one year after the date of the grant and one-third
annually thereafter. Options on 161,773 shares are exercisable and
outstanding at September 30, 1997. Options on 3,703 shares were
exercised during the year ended September 30, 1997.
The stock option plan is accounted for under Accounting Principles Board
("APB") Opinion No. 25. The disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, are not required as all of the
stock options were granted prior to the date of disclosure requirements
of SFAS No. 123.
Upon entering into the Reorganization and Merger Agreement (Note 2), all
outstanding stock option awards became immediately exercisable. If the
merger is treated as a pooling of interests for accounting purposes,
each outstanding option to purchase Company Common Stock will be
converted to an economically equivalent number of Commercial Federal
Corporation Common Stock shares. However, if the merger is not treated
as a pooling of interests for accounting purposes, then the Option Plan
will be terminated and each holder of options will receive a cash
payment in the amount of the per share
57
<PAGE>
value of the optioned shares, less the exercise price of such options,
net of any cash which must be withheld under federal and state income
tax requirements.
16. OUTSIDE DIRECTORS' RETIREMENT PLAN
The Savings Bank has a consultation and retirement plan for outside
directors which became effective January 1, 1995. The plan provides
retirement benefits for outside directors after they have completed ten
years of service to the Savings Bank and reached age 65. The benefits
include $300 per month payment for 120 months beginning at age 75. In
the event of death, disability or retirement of a director on or after
age 65 or in the event of a change in control of the Company or the
Savings Bank, such payments will commence to the director or their
beneficiary as if age 75 was attained. Management estimates
approximately $114 relate to severance benefits payable upon
consummation of the Reorganization and Merger (Note 2). Expense related
to the retirement plan is amortized ratably over the service period
which is also the vesting period. Total expense related to this plan was
$141, $10 and $10 for the years ended September 30, 1995, 1996 and 1997,
respectively. The plan is unfunded.
17. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1996, the Savings Bank had commitments to originate
loans approximating $63,743 of which approximately $39,491 were
fixed-rate (interest rates ranging from 6.00% to 9.00%) and $24,252 were
floating rate commitments. As of September 30, 1997, the Savings Bank
had commitments to originate loans approximating $87,584 of which
approximately $49,481 were fixed-rate (interest rates ranging from 4.75%
to 8.5%) and $38,103 were floating rate commitments. These commitments
are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. Certain of the commitments are expected to expire
without being fully drawn upon; the total commitments amount disclosed
above does not necessarily represent future cash requirements due to
normal fallout experience. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained if considered necessary by the Savings Bank upon extension of
credit is based on management's credit evaluation of the borrower.
As of September 30, 1996 and 1997, the Savings Bank has approximately
$28,345 and $34,191 of commitments to sell loans to third parties, which
includes $28,345 and $32,246 of forward commitments to sell
mortgage-related securities, respectively. These instruments contain an
element of risk in the event the counterparties may be unable to meet
the terms of such agreements. In the event the parties to delivery
commitments were unable to fulfill their obligations, the Savings Bank
would be required to sell its product to other parties and would be
exposed to market fluctuations. The Savings Bank minimizes its risk
exposure by limiting the counterparties to those that meet established
credit and capital guidelines. Management does not expect any
counterparty to default on its obligations and, therefore, does not
expect to incur any cost due to counterparty default. The Savings Bank
does not require nor place collateral for any delivery commitments. Any
unrealized gain or loss on these commitment obligations are considered
in conjunction with the Savings Bank's lower of cost or market valuation
of its loans held for sale.
The Savings Bank is contingently liable on loans sold with recourse. The
principal balance of these loans is $207 as of September 30, 1997.
58
<PAGE>
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of
the amount the Company could realize in a current market exchange. The
use of different market assumptions and estimation methodologies may
have a material effect on the estimated fair value amounts.
The estimated fair value of the Company's financial instruments as of
September 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 5,618 $ 5,618 $ 17,327 $ 17,327
Investment securities 86,235 83,827 79,390 79,220
Capital stock of Federal Home
Loan Bank 4,327 4,327 6,675 6,675
Mortgage-related securities 34,383 34,366 28,124 28,556
Loans held for sale 13,718 13,816 13,894 14,078
Loans receivable 171,158 173,295 233,311 236,697
Mortgage servicing rights 12,496 18,326 13,615 19,508
Liabilities:
Deposits 214,493 215,016 236,333 237,311
Advances from Federal Home
Loan Bank 81,700 81,857 121,800 121,549
Accrued and other liabilities 4,683 4,683 4,039 4,039
</TABLE>
<TABLE>
<CAPTION>
1996 1997
-------------------- --------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
<S> <C> <C> <C> <C>
Off-balance sheet financial instruments:
Lending commitments - fixed rate, net $ 39,491 $ 117 $ 49,481 $ 235
Lending commitments - floating rate 24,252 38,103
Commitments to sell loans 28,345 (64) 34,191 150
</TABLE>
The following methods and assumptions were used to estimate the fair
value of the financial instruments.
Cash and Cash Equivalents and Accrued and Other Liabilities - The
carrying amounts of cash and cash equivalents and accrued and other
liabilities are a reasonable estimate of their fair value.
59
<PAGE>
Investment Securities, Mortgage-Related Securities and Loans Held for
Sale - Estimated fair values of investment securities, mortgage-related
securities and loans held for sale are based on quoted market prices
where available. If quoted market prices are not available, fair values
are estimated using quoted market prices for similar instruments.
Capital Stock of Federal Home Loan Bank - The carrying value of capital
stock of Federal Home Loan Bank approximates its fair value.
Mortgage Servicing Rights - Fair values are determined by discounting
the estimated future net cash flows using consensus market prepayment
assumptions and discount rates which consider the risk characteristics
of the underlying servicing rights. The significant risk characteristics
considered by the Company are loan type, period of origination and
interest rate.
Loans Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as single
family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and variable interest rate categories. Future cash
flows of these loans are discounted using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits - The estimated fair value of demand deposits and savings
accounts is the amount payable on demand at the reporting date. The
estimated fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank - The estimated fair value of
advances from Federal Home Loan Bank is determined by discounting the
future cash flows of existing advances using rates currently available
on advances from Federal Home Loan Bank having similar characteristics.
Lending Commitments - Fixed Rate - The estimated fair value of
commitments to originate fixed-rate loans is determined based on the
difference between current levels of interest rates and the committed
rates. The notional amount of lending commitments - fixed rate
represents the amount which the Savings Bank expects to fund. The
Savings Bank's estimate of unrealized gains and losses, based on
experience, is that 25% of its lending commitments - fixed rate will not
close.
Lending Commitments - Floating Rate - There is no estimated unrealized
gain (loss) attributable to floating rate lending commitments due to
their floating interest rate nature.
Commitments to Sell Loans - The estimated unrealized gain (loss)
associated with commitments to sell loans is based on current market
prices that the buyer will pay or demand for assuming such commitments.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1996 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
60
<PAGE>
19. SEGMENT INFORMATION
The Savings Bank's operations include two reportable segments: savings
and loan and mortgage banking. The savings and loan segment is composed
of those operations involved in originating mortgage loans held for
investment, primarily on single family residences; investing in
mortgage-related securities, United States Treasury and other U.S.
Government agencies' securities and receiving deposits from customers.
The mortgage banking segment is composed of those operations involved in
originating and purchasing residential mortgage loans for resale in the
secondary mortgage market and in servicing loans for others.
Intersegment interest income and expense represent interest on loans and
advances from the savings and loan segment to the mortgage banking
segment computed at the prime rate of interest.
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 14,499 $ 1,726 $ 16,225
Intersegment 1,937 $ (1,937)
--------- --------- --------- ---------
Total interest income 16,436 1,726 (1,937) 16,225
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 9,004 9,004
Intersegment 1,937 (1,937)
--------- --------- --------- ---------
Total interest expense 9,004 1,937 (1,937) 9,004
--------- --------- --------- ---------
Net interest income (expense) 7,432 (211) $ 7,221
=========
Provision for loan losses (224) (224)
Other income 1,580 6,174 7,754
Other expense (5,431) (2,771) (8,202)
--------- --------- ---------
Income before income taxes $ 3,357 $ 3,192 $ 6,549
========= ========= =========
Identifiable assets $ 214,649 $ 56,274 $ 270,923
========= ========= =========
Depreciation and amortization expense $ 338 $ 55 $ 393
========= ========= =========
Capital expenditures $ 1,014 $ 403 $ 1,417
========= ========= =========
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 17,859 $ 2,314 $ 20,173
Intersegment 2,723 $ (2,723)
--------- --------- -------- ---------
Total interest income 20,582 2,314 (2,723) 20,173
--------- --------- -------- ---------
Interest expense:
Unaffiliated customers 12,268 12,268
Intersegment 2,723 (2,723)
--------- --------- -------- ---------
Total interest expense 12,268 2,723 (2,723) 12,268
--------- --------- -------- ---------
Net interest income (expense) 8,314 (409) $ 7,905
=========
Provision for loan losses (75) (75)
Other income 2,121 5,051 7,172
Other expense (6,962) (3,021) (9,983)
--------- --------- ---------
Income before income taxes $ 3,398 $ 1,621 $ 5,019
========= ========= =========
Identifiable assets $ 293,415 $ 46,771 $ 340,186
========= ========= =========
Depreciation expense $ 257 $ 87 $ 344
========= ========= =========
Capital expenditures $ 1,489 $ 369 $ 1,858
========= ========= =========
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
<S> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 23,994 $ 2,053 $ 26,047
Intersegment 2,624 $ (2,624)
--------- --------- --------- ---------
Total interest income 26,618 2,053 (2,624) 26,047
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 16,834 16,834
Intersegment 2,624 (2,624)
--------- --------- --------- ---------
Total interest expense 16,834 2,624 (2,624) 16,834
--------- --------- --------- ---------
Net interest income (expense) 9,784 (571) $ 9,213
=========
Provision for loan losses (143) (143)
Other income 2,575 4,944 7,519
Other expense (7,200) (2,542) (9,742)
--------- --------- ---------
Income before income taxes 5,016 1,831 $ 6,847
========= ========= =========
Identifiable assets $ 354,504 $ 50,758 $ 405,262
========= ========= =========
Depreciation expense $ 425 $ 91 $ 516
========= ========= =========
Capital expenditures $ 1,319 $ 149 $ 1,468
========= ========= =========
</TABLE>
63
<PAGE>
20. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Mid Continent Bancshares, Inc. was organized to serve as the holding
company for Mid-Continent Federal Savings Bank and began operations on
June 27, 1994 in conjunction with the Savings Bank's mutual-to-stock
conversion and the Company's initial public offering of common stock.
The Company's (Parent company only) balance sheets as of September 30,
1996 and 1997 and related statements of income and cash flows for the
periods then ended are as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- ---------------------------------------------------------------------------------------
ASSETS 1996 1997
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 287 $ 192
NOTES RECEIVABLE FROM MID-CONTINENT
FEDERAL SAVINGS BANK 4,951 3,059
INVESTMENT IN AND ADVANCES TO
MID-CONTINENT FEDERAL SAVINGS BANK 31,827 36,179
OTHER ASSETS 76 764
-------- --------
TOTAL ASSETS $ 37,141 $ 40,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES -
Income taxes payable $ 112
Accrued and other liabilities 222 $ 212
-------- --------
Total liabilities 334 212
-------- --------
STOCKHOLDERS' EQUITY
Common stock $.10 par value, 20,000,000
authorized, 2,248,250 and 2,251,953 shares issued 225 225
Additional paid-in capital 21,663 22,209
Unearned compensation - Employee Stock Ownership Plan (1,054) (918)
Unearned compensation - Management Stock Bonus Plan (547)
Retained earnings, substantially restricted 20,424 23,851
-------- --------
40,711 45,367
Treasury stock, 231,500 and 290,000 shares, at cost (3,904) (5,385)
-------- --------
Total stockholders' equity 36,807 39,982
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,141 $ 40,194
======== ========
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands)
- ------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
INTEREST INCOME $ 575 $ 361 $ 243
OTHER EXPENSES:
Professional fees 82 44 40
Merger and acquisition expenses 187
Other 105 94 91
------- ------- -------
Total other expense 187 138 318
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 388 223 (75)
INCOME TAX EXPENSE (BENEFIT) 140 85 (29)
------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 248 138 (46)
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 3,858 2,988 4,216
------- ------- -------
NET INCOME $ 4,106 $ 3,126 $ 4,170
======= ======= =======
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,106 $ 3,126 $ 4,170
Adjustment to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,858) (2,988) (4,216)
Changes in:
Other assets (39) 6 (330)
Accrued and other liabilities 24 100 219
Income taxes payable 94 (14) 156
------- ------- -------
Net cash flows provided by (used in)
operating activities 327 230 (1)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from
Mid-Continent Federal Savings Bank 2,968 2,342 1,892
------- ------- -------
Net cash flows provided by investing activities 2,968 2,342 1,892
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for exercise of stock options (995) 43
Receipt of funds for Management Stock Bonus Plan stock 199 199 199
Acquisition of treasury stock (1,174) (2,730) (1,481)
Cash dividends on common stock to stockholders (615) (783) (747)
------- ------- -------
Net cash flows used in financing activities (2,585) (3,314) (1,986)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 710 (742) (95)
CASH AND CASH EQUIVALENTS:
Beginning of year 319 1,029 287
------- ------- -------
End of year $ 1,029 $ 287 $ 192
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Accrued dividends on common stock $ 205 $ 190 $ 186
======= ======= =======
</TABLE>
These statements should be read in conjunction with the other notes
related to the consolidated financial statements.
66
<PAGE>
21. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except earnings per share)
------------------------------------------------------
December 31, March 31, June 30, September 30,
1995 1996 1996 1996
<S> <C> <C> <C> <C>
Interest income $4,726 $4,707 $5,089 $5,651
Interest expense 2,806 2,913 3,051 3,498
Net interest income 1,920 1,794 2,038 2,153
Net income 951 820 896 459 (l)
Earnings per share -
Net income 0.48 0.42 0.46 0.23
</TABLE>
(1) Reflects a fourth quarter charge for the one-time assessment of
federal insurance premiums (See Note 23).
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except earnings per share)
--------------------------------------------------------
December 31, March 31, June 30, September 30,
1996 1997 1997 1997
<S> <C> <C> <C> <C>
Interest income $6,122 $6,164 $6,672 $7,089
Interest expense 3,907 4,076 4,294 4,557
Net interest income 2,215 2,088 2,378 2,532
Net income 1,098 968 1,127 977 (2)
Earnings per share -
Net income 0.56 0.50 0.59 0.50
</TABLE>
(2) Reflects a fourth quarter charge for merger expenses of $187 and the
immediate vesting of all remaining Management Stock Bonus Plan
shares (See Note 15).
22. INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals. For the year ending September 30, 1997, the Company had
average interest earnings assets of approximately $348,783 having a
weighted average effective yield of 7.47% and average interest bearing
liabilities of approximately $330,726 having a weighted average
effective interest rate of 5.09%. The average maturity or repricing of
interest earning assets is generally longer than that of the
liabilities. The shorter duration of interest sensitive liabilities
indicates that the Company is exposed to interest rate risk because, in
a rising rate environment, liabilities will be repricing upwards more
rapidly than the Company's interest sensitive assets, thereby reducing
net interest income.
67
<PAGE>
23. FEDERAL LEGISLATION
In September 1996, legislation was enacted which included a
comprehensive reform of the banking and thrift industries. The
legislation imposed a one-time assessment on qualifying thrift deposits
to recapitalize the Savings Association Insurance Fund ("SAIF"), the
fund which insures thrift deposits, and ultimately merged the Bank
Insurance Fund ("BIF") and the SAIF, at which time banks and thrifts now
pay the same deposit insurance premiums. The amount of the one-time
assessment was .657% on qualifying thrift deposits as of March 31, 1995.
This one-time assessment of $1,053 is included in federal insurance
premiums for the year ended September 30, 1996. For GNMA report only
******
68
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
Directors of Directors of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
Richard T. Pottorff - Chairman Richard T. Pottorff - Chairman
Officer - Mid-Continent Federal Savings Bank Dr. Ken Dellett
Dr. Ken Dellett - Vice Chairman Thomas C. Hand
Retired - Physician Ron McGraw
Thomas C. Hand Don Adlesperger
President - Hand Realty Co. Larry R. Goddard
Ron McGraw Robert Lasater *
President - Sunflower Roofing, Inc. Clem Silvers *
Don Adlesperger * Advisory Directors
President - Triple A Builders Supply
Larry R. Goddard
Officer - Mid-Continent Federal Savings Bank
Officers of Officers of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
Richard T. Pottorff Richard T. Pottorff
Chairman, President & CEO Chairman, President & CEO
Larry R. Goddard Larry R. Goddard
Executive Vice President, CFO & COO Executive Vice President, CFO & COO
Harold Siemens Harold Siemens
Senior Vice President Senior Vice President
Cheryl A. Wilkerson Cheryl A. Wilkerson
Vice President/Secretary Vice President/Secretary
David L. Walter David L. Walter
Vice President Vice President/Treasurer
Richard O. Nelson Craig Yaryan
Vice President Vice President
William Cole
Vice President
Diane Griffin
Vice President
Larry Haury
Vice President
Jill Norman
Vice President
Tim Wooding
Vice President
Richard O. Nelson
Vice President
69
<PAGE>
Mid Continent Bancshares, Inc.
================================================================================
LEGAL COUNSEL
General Counsel Special Counsel
Adams, Jones, Robinson and Malone Malizia, Spidi, Sloane & Fisch, P.C.
155 N. Market One Franklin Square
Wichita, KS 67202 1301 K Street, NW - Suite 700 East
Washington, DC 20005
AUDITORS TRANSFER AGENT
Deloitte & Touche LLP American Securities Transfer & Trust, Inc.
Suite 400 938 Quail St. Suite 101
1010 Grand Avenue Lakewood, CO 80215
Kansas City, MO 64106 Phone: (303) 234-5300
OFFICE LOCATIONS
Executive and Administrative Office
124 W. Central
El Dorado, Kansas 67042
(316) 321-2700
El Dorado Wichita
405 N. Main 255 N. Main
El Dorado, KS 67042 Wichita, KS 67202
(316) 321-2700 (316) 264-4133
Augusta
1420 N. Ohio 762 N. West St.
Augusta, KS 67010 Wichita, KS 67203
(316) 775-2208 (316) 946-0202
Winfield
1113 S. Main 2123 N. Maize Road
Winfield, KS 67156 Wichita, KS 67212
(316) 221-3830 (316) 729-7999
2310 S. Main 3055 N. Rock Road
Winfield, KS 67156 Wichita, KS 67226
(316) 221-0158 (316) 634-3800
Newton Derby
100 W. 12th 300 N. Rock Road
Newton, KS 67114 Derby, KS 67037
(316) 283-7310 (316) 788-9800
70
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-92224 of Mid Continent Bancshares, Inc. on Form S-8 of our report dated
November 14, 1997, (which contains an emphasis paragraph indicating that the
Company entered into an agreement to be acquired by another financial
institution), appearing in and incorporated by reference in this Annual Report
on Form 10-K of Mid Continent Bancshares, Inc. for the year ended September 30,
1997.
Kansas City, Missouri
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,387
<INT-BEARING-DEPOSITS> 15,940
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 114,189
<INVESTMENTS-MARKET> 114,451
<LOANS> 247,670
<ALLOWANCE> 465
<TOTAL-ASSETS> 405,262
<DEPOSITS> 236,333
<SHORT-TERM> 80,800
<LIABILITIES-OTHER> 4,147
<LONG-TERM> 41,000
0
0
<COMMON> 225
<OTHER-SE> 39,757
<TOTAL-LIABILITIES-AND-EQUITY> 405,262
<INTEREST-LOAN> 15,991
<INTEREST-INVEST> 9,836
<INTEREST-OTHER> 220
<INTEREST-TOTAL> 26,047
<INTEREST-DEPOSIT> 10,918
<INTEREST-EXPENSE> 5,916
<INTEREST-INCOME-NET> 9,213
<LOAN-LOSSES> 143
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,742
<INCOME-PRETAX> 6,847
<INCOME-PRE-EXTRAORDINARY> 6,847
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,170
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.15
<YIELD-ACTUAL> 2.64
<LOANS-NON> 932
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 421
<CHARGE-OFFS> 117
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 465
<ALLOWANCE-DOMESTIC> 465
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
