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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2000, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number: 1-11515
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COMMERCIAL FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2120 South 72nd Street, Omaha, Nebraska 68124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $.01 Per Share New York Stock Exchange
(Title of Each Class) (Name of Each Exchange on Which
Registered)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 20, 2000, was
$879,388,086. As of September 20, 2000, there were issued and outstanding
54,983,365 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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COMMERCIAL FEDERAL CORPORATION
FORM 10-K INDEX
Page
No.
----
PART I Item 1. Business............................................. 3
Item 2. Properties........................................... 43
Item 3. Legal Proceedings.................................... 43
Item 4. Submission of Matters to a Vote of Security Holders.. 43
PART II Item 5. Market for Commercial Federal Corporation's Common
Equity and Related Stockholder Matters............... 44
Item 6. Selected Financial Data.............................. 45
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 47
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................. 68
Item 8. Financial Statements and Supplementary Data.......... 68
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 121
PART III Item 10. Directors and Executive Officers of Commercial
Federal Corporation.................................. 121
Item 11. Executive Compensation............................... 123
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 132
Item 13. Certain Relationships and Related Transactions....... 133
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 133
SIGNATURES.............................................................. 134
PART I
ITEM 1. BUSINESS
Forward Looking Statements
This document contains certain statements that are not historical fact but
are forward-looking statements that involve inherent risks and uncertainties.
Management cautions readers that a number of important factors could cause
actual results to differ materially from those in the forward looking
statements. Factors that might cause a difference include, but are not limited
to: fluctuations in interest rates, inflation, the effect of regulatory or
government legislative changes, expected cost savings and revenue growth not
fully realized, the progress of strategic initiatives and whether realized
within expected time frames, general economic conditions, adequacy of allowance
for credit losses, costs or difficulties associated with restructuring
initiatives, technology changes and competitive pressures in the geographic and
business areas where the company conducts its operations. These forward-looking
statements are based on management's current expectations. Actual results in
future periods may differ materially from those currently expected because of
various risks and uncertainties.
General
Commercial Federal Corporation (the "Corporation") was incorporated in the
state of Nebraska on August 18, 1983, as a unitary non-diversified savings and
loan holding company. The primary purpose of the Corporation was to acquire all
of the capital stock of Commercial Federal Bank, a Federal Savings Bank (the
"Bank") in connection with the Bank's 1984 conversion from mutual to stock
ownership. A secondary purpose was to provide the structure to expand and
diversify the Corporation's financial services to activities allowed by
regulation to a unitary savings and loan holding company. The general offices
of the Corporation are located at 2120 South 72nd Street, Omaha, Nebraska
68124.
The primary subsidiary of the Corporation is the Bank. The Bank was
originally chartered in 1887 and converted to a federally chartered mutual
savings and loan association in 1972. On December 31, 1984, the Bank completed
its conversion from mutual to stock ownership and became a wholly-owned
subsidiary of the Corporation. Effective August 27, 1990, the Bank's federal
charter was amended from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially
consist of 100% of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. During the fiscal
year ended June 30, 2000, the Corporation incurred interest expense on $50.0
million of subordinated extendible notes, $46.4 million of junior subordinated
deferrable interest debentures, $65.3 million on an unsecured term note and
$10.0 million on an unsecured revolving line of credit. Interest is payable
monthly on the subordinated extendible notes and quarterly on the junior
subordinated deferrable interest debentures, the term note and the line of
credit. For additional information on the debt of the Corporation see Note 15
to the Consolidated Financial Statements that are under Item 8 of this Form 10-
K Annual Report for the fiscal year ended June 30, 2000 (the "Report").
The Corporation has been repurchasing its common stock since April 1999. For
fiscal year 2000, the Corporation purchased and cancelled 3,773,500 shares of
its common stock at a cost of $63.9 million. From April 1999 through June 30,
2000, the Corporation purchased and canceled 5,273,500 shares of its common
stock at a cost of $100.1 million. The Corporation also pays operating expenses
primarily for shareholder and stock related expenditures such as the annual
report, proxy, corporate filing fees and assessments and certain costs directly
attributable to the holding company. In addition, common stock cash dividends
totaling $15.8 million, or $.275 per common share, were declared during fiscal
year 2000.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt, to fund the common stock repurchases and for the common stock cash
dividends paid to the Corporation's shareholders. During fiscal year 2000 the
Corporation received cash dividends totaling $117.8 million from the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A")--Liquidity and Capital Resources" under Item 7 of this
Report.
3
The Bank operates as a federally chartered savings institution with deposits
insured primarily by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
a community banking institution offering commercial and consumer banking,
mortgage banking and investment services. Acquisitions in fiscal years 1999 and
1998 allowed the Bank to further expand its commercial and consumer banking
services, commercial and agricultural loans and business checking. These
acquisitions created new customer franchises in Missouri and Minnesota and
expanded the Bank's franchises in Iowa, Colorado, Nebraska and Kansas. The Bank
has branches not only in traditional locations but also in supermarkets and
convenience stores, more ATM outlets and expanded services in telephone bill
paying and Internet banking. All loan origination activities are conducted
through the Bank's branch office network, through the loan offices of
Commercial Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage
banking subsidiary, and through a nationwide correspondent network of mortgage
loan originators. The Bank also provides insurance and securities brokerage and
other retail financial services.
The Corporation has identified two distinct lines of business operations for
the purposes of management reporting: Community Banking and Mortgage Banking.
The Community Banking segment involves a variety of traditional banking and
financial services. The Mortgage Banking segment involves the origination and
purchase of residential mortgage loans, the sale of these mortgage loans in the
secondary mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans.
At June 30, 2000, the Corporation had assets of $13.8 billion and
stockholders' equity of $988.0 million, and operated 255 branches located in
Iowa (74), Colorado (44), Nebraska (44), Kansas (40), Oklahoma (22), Missouri
(20), Arizona (7) and Minnesota (4). The Bank is one of the largest retail
financial institutions in the Midwest, and, based upon total assets at June 30,
2000, the Corporation was the 10th largest publicly-held thrift institution
holding company in the United States. In addition, CFMC serviced a loan
portfolio totaling $14.0 billion at June 30, 2000, with approximately $7.3
billion in loans serviced for third parties and $6.7 billion in loans serviced
for the Bank. See "MD&A--General" under Item 7 of this Report.
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System and
the FDIC. Deposit flows and costs of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are affected by the demand for mortgage and commercial financing, consumer
loans and other types of loans, which, in turn, are affected by the interest
rates at which such financings may be offered, the availability of funds, and
other factors, such as the supply of housing for mortgage loans and regional
economic situations.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which
is one of the 12 regional banks comprising the FHLB System. The Bank is further
subject to regulations of the Federal Reserve Board, which governs reserves
required to be maintained against deposits and certain other matters. As a
federally chartered savings bank, the Bank is subject to numerous restrictions
on operations and investments imposed by applicable statutes and regulations.
See "Regulation."
Recent Developments
Key Strategic Initiatives
On August 14, 2000 the Board of Directors approved and management announced
a series of strategic initiatives aimed at increasing the overall operations of
the Corporation. Key initiatives include:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans resulting in a pre-tax charge to earnings in the range of
approximately $105 million to $125 million. The proceeds from this
disposition are expected to be used to reduce high-cost borrowings by up
to $1.0 billion, to repurchase additional shares of the Corporation's
common stock with the remainder reinvested in lower risk securities with
a predictable income stream.
4
. A thorough assessment of the Bank's delivery and servicing systems to
ensure the proper channels to achieve the growth potential and to
maintain a high level of customer service.
. The sale of the leasing company acquired as part of the February 1998
acquisition of Liberty is anticipated to result in a pre-tax charge to
earnings of approximately $7.0 million.
. Acceleration of the disposition of other real estate owned anticipated to
result in a pre-tax charge to earnings of approximately $6.0 million.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in
loans experienced over the past year, while maintaining credit quality.
. A change in the Corporation's year end from June 30 to December 31.
. An expansion of the Corporation's common stock repurchase program by up
to 10% of its outstanding shares, or approximately 5.5 million shares.
Management anticipates to sell the approximate $2.0 billion in investments
and mortgage loans, as well as the leasing portfolio, by December 31, 2000. The
estimated pretax charges disclosed above reflect management's expectations
given the current information available. The formal plan to achieve these
strategic initiatives is in process. Management is currently identifying all
significant actions to be taken and finalizing the expected timetable for
completion. The total estimated exit costs and termination benefits have not
been determined.
Change In Year End
On August 14, 2000, the Board of Directors approved a change in the
Corporation's year end from June 30 to December 31. This change is effective
for calendar year 2000. A December 31 year end allows the Corporation to be
aligned with the financial industry from a reporting perspective and will
facilitate comparisons with industry norms. The By-laws were amended to reflect
this change in fiscal year. As a result, the Corporation's next annual meeting
of shareholders is scheduled for May 8, 2001.
Common Stock Repurchases
Effective April 28, 1999, the Corporation's Board of Directors authorized
the repurchase of up to five percent, or approximately 3,000,000 shares of the
Corporation's outstanding common stock. This repurchase was completed on
December 29, 1999. Effective December 27, 1999, the Corporation's Board of
Directors authorized a second repurchase of up to 3,000,000 shares of the
Corporation's outstanding stock over the next 18 months. During the year ended
June 30, 2000, the Corporation purchased and cancelled 3,773,500 shares of its
common stock at a cost of $63.9 million. Since the first repurchase was
announced in April 1999, the Corporation purchased and cancelled a total of
5,273,500 shares through June 30, 2000, at a cost of approximately $100.1
million.
From July 1, 2000, through August 25, 2000, the Corporation repurchased and
cancelled an additional 726,500 shares of its common stock at a cost of
approximately $12.3 million. This completes the second repurchase. On August
14, 2000, the Corporation's Board of Directors authorized the repurchase of up
to 10% of its outstanding shares, or approximately 5,500,000 shares. This
repurchase is anticipated to be completed no later than February 2002.
5
Year 2000
The year 2000 posed important business issues regarding how existing
application software programs and operating systems, both internal and
external, could accommodate this date value. The Corporation did not experience
any data processing delays, mistakes or failures as a result of Year 2000
issues. For further information, see "MD&A--Year 2000" under Item 7 of this
Report.
Supervisory Goodwill Lawsuit
On September 12, 1994, the Bank and the Corporation commenced litigation
relating to supervisory goodwill against the United States in the United States
Court of Federal Claims seeking to recover monetary relief for the government's
refusal to honor certain contracts that it had entered into with the Bank. The
suit alleges that such governmental action constitutes a breach of contract and
an unlawful taking of property by the United States without just compensation
or due process in violation of the Constitution of the United States. The
Corporation and the Bank are pursuing alternative damage claims of up to
approximately $230.0 million. The Bank also assumed a lawsuit in the merger
with Mid Continent Bancshares, Inc., a fiscal year 1998 acquisition, against
the United States also relating to a supervisory goodwill claim filed by the
former company. The litigation status and process of these legal actions, as
well as that of numerous actions brought by others alleging similar claims with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank (including the Mid Continent Bancshares,
Inc. claim) uncertain as to their ultimate outcome, and contingent on a number
of factors and future events which are beyond the control of the Bank, both as
to substance, timing and the dollar amount of damages that may be awarded to
the Bank and the Corporation if they finally prevail in this litigation.
Regulatory Capital Compliance
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") require specific capital ratios
to be considered well-capitalized. At June 30, 2000, the Bank exceeded the
minimum requirements for the well-capitalized category. As of June 30, 2000,
the most recent notification from the OTS categorized the Bank as "well-
capitalized" under the regulatory framework for Prompt Corrective Action
provisions under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's classification.
See "Regulation--Regulatory Capital Requirements" and Note 19 to the
Consolidated Financial Statements under Item 8 of this Report.
Other Information
Additional information concerning the general business of the Corporation
during fiscal year 2000 is included in the following sections of this Report
and under Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Notes to the Consolidated Financial Statements"
under Item 8 of this Report. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this Report.
6
Lending Activities
General
The Corporation's lending activities focus primarily on the origination of
first mortgage loans for the purpose of financing or refinancing single-family
residential properties, single-family residential construction loans,
commercial real estate loans, consumer and home improvement loans. Consumer
loans and commercial real estate loans have been emphasized during fiscal years
2000 and 1999. The origination activity of these loans has increased
substantially over previous fiscal years. Residential construction lending has
also increased over fiscal years 1999 and 1998. Residential loan origination
activity, including activity through correspondents, was lower for fiscal year
2000 compared to fiscal years 1999 and 1998 due primarily to a larger volume of
loan refinancing activity in prior years. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 255 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's branches, loan offices of
CFMC and through its nationwide correspondent network.
At June 30, 2000, the Corporation's total loan and mortgage-backed
securities portfolio was $11.6 billion, representing over 84.3% of its $13.8
billion of total assets. The carrying value of mortgage-backed securities
totaled $1.2 billion at June 30, 2000, representing 10.5% of the Corporation's
total loan and mortgage-backed securities portfolio. The Corporation's total
loan and mortgage-backed securities portfolio was secured primarily by real
estate at June 30, 2000. Commercial real estate and land loans (collectively
referred to as "income property loans") are secured by various types of
commercial properties including office buildings, shopping centers, warehouses
and other income producing properties. Commercial real estate lending increased
in fiscal year 2000 and is expected to be a growth area for the Corporation in
the future. The Corporation's single-family residential construction lending
activity is primarily attributable to operations in Las Vegas, Nevada, Florida
and in its primary market areas. Lending operations have continued in fiscal
year 2000 in the Dallas/Fort Worth area that began in 1998 on a limited basis.
Multi-family residential loans consist of loans secured by various types of
properties, including townhomes, condominiums and apartment projects with more
than four dwelling units.
The Corporation has continued to moderately expand the agricultural business
line in the markets it serves. Agricultural lending began in fiscal year 1998
for the Corporation as a result of its 1998 acquisitions. The agricultural
lending is primarily for equipment, land and production. At June 30, 2000
agricultural business and agricultural real estate loans totaled $144.9
million. Another line of business acquired from a 1998 acquisition is lease
financing that consists of the origination, servicing and securitization of
commercial equipment leases. The type of equipment leased consisted primarily
of office equipment and commercial equipment. The lease portfolio is being
marketed for sale so no new leases were originated in fiscal year 2000. It is
anticipated that a substantial portion of the leasing portfolio will be sold no
later than December 31, 2000.
7
The Corporation's primary area of loan production continues to be in the
origination of loans secured by existing single-family residences. Adjustable-
rate single-family residential loans are originated primarily for retention in
the Corporation's loan portfolio to match more closely the repricing of the
Corporation's interest-bearing liabilities as a result of changes in interest
rates. Fixed-rate single-family residential loans are originated using
underwriting guidelines, appraisals and documentation which are acceptable to
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National
Mortgage Association("GNMA") and the Federal National Mortgage Association
("FNMA") to facilitate the sale of such loans to such agencies in the secondary
market. The Corporation also originates fixed-rate single-family residential
loans using internal lending policies in accordance with what management
believes are prudent underwriting standards but which may not strictly adhere
to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans
are originated or purchased for the Corporation's loan portfolio if such loans
have characteristics which are consistent with the Corporation's asset and
liability goals and long-term interest rate yield requirements. At June 30,
2000, fixed-rate single-family residential loans decreased $124.8 million over
last fiscal year to $4.195 billion compared to $4.320 billion at June 30, 1999.
The adjustable-rate portfolio increased to $3.069 billion at June 30, 2000
compared to $2.412 billion at June 30, 1999.
In fiscal year 1998 the Corporation initiated commercial and multi-family
real estate lending with these loans secured by properties located within the
Corporation's primary market areas. This lending activity increased in fiscal
years 1999 and 2000. These loans, which are subject to prudent credit review
and other underwriting standards and collection procedures, are expected to
constitute a greater portion of the Corporation's lending business in the
future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, agricultural loans, commercial business and saving account loans
through the Corporation's branch and loan office network and direct mail
solicitation. Management intends to continue to increase its consumer loan
origination activity with strict adherence to prudent underwriting and credit
review procedures.
Regulatory guidelines generally limit loans and extensions of credit to one
borrower. At June 30, 2000, all loans and leases were within the regulatory
limitation of $244.1 million to one borrower.
8
Composition of Loan Portfolio
The following table sets forth the composition of the Corporation's loan and
mortgage-backed securities portfolios (including loans held for sale, leases
and mortgage-backed securities available for sale) as of the dates indicated:
June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------ ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars In Thousands)
Loan Portfolio
- --------------
Conventional real
estate mortgage
loans:
Loans on existing
properties--
Single-family
residential......... $ 6,684,993 56.4% $ 6,268,958 57.8% $5,476,608 60.2% $5,142,629 57.7% $4,690,580 56.3%
Multi-family
residential......... 193,711 1.6 182,510 1.7 169,860 1.9 156,127 1.8 146,217 1.8
Land................ 30,138 .3 105,504 .9 22,582 .2 62,944 .7 52,279 .6
Commercial real
estate.............. 985,008 8.3 756,412 7.0 494,325 5.4 499,575 5.6 469,901 5.6
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total............. 7,893,850 66.6 7,313,384 67.4 6,163,375 67.7 5,861,275 65.8 5,358,977 64.3
Construction loans--
Single-family
residential......... 245,302 2.1 241,548 2.2 279,437 3.1 283,271 3.2 277,903 3.3
Multi-family
residential......... 51,845 .4 25,893 .2 2,979 -- 6,320 .1 4,448 .1
Land................ 121,396 1.0 -- -- 2,803 -- 10,445 .1 3,115 --
Commercial real
estate.............. 152,260 1.3 78,908 .8 40,479 .5 20,093 .2 21,678 .3
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total............. 570,803 4.8 346,349 3.2 325,698 3.6 320,129 3.6 307,144 3.7
FHA and VA loans..... 579,021 4.9 463,437 4.3 468,503 5.1 439,398 4.9 395,337 4.7
Mortgage-backed
securities........... 1,221,831 10.3 1,277,575 11.8 1,083,789 11.9 1,378,162 15.5 1,577,806 18.9
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total real estate
loans............. 10,265,505 86.6 9,400,745 86.7 8,041,365 88.3 7,998,964 89.8 7,639,264 91.6
Consumer, leases and
other loans--
Home improvement and
other consumer
loans............... 1,266,205 10.7 1,094,292 10.1 809,671 8.9 760,945 8.5 577,661 6.9
Savings account
loans............... 21,297 .2 19,125 .2 21,948 .2 19,516 .2 16,471 .2
Leases.............. 94,694 .8 122,704 1.1 73,395 .8 46,174 .5 33,236 .4
Commercial loans ... 206,304 1.7 206,533 1.9 155,617 1.8 79,818 1.0 74,265 .9
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer and
other loans....... 1,588,500 13.4 1,442,654 13.3 1,060,631 11.7 906,453 10.2 701,633 8.4
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans....... $11,854,005 100.0% $10,843,399 100.0% $9,101,996 100.0% $8,905,417 100.0% $8,340,897 100.0%
=========== ===== =========== ===== ========== ===== ========== ===== ========== =====
(Continued on next page)
9
Composition of Loan Portfolio (continued)
June 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------- -------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars In Thousands)
Balance forward of
total loans.......... $11,854,005 100.0% $10,843,399 100.0% $9,101,996 100.0% $8,905,417 100.0% $8,340,897 100.0%
----------- ----- ----------- ----- ---------- ----- ---------- ----- ---------- -----
Add (subtract):
Unamortized
premiums, net of
discounts........... 170 10,138 14,161 17,805 16,757
Unearned income..... (16,730) (22,543) (13,253) * *
Deferred loan costs
(fees), net......... 26,374 11,809 24,178 (3,882) (7,537)
Loans in process.... (164,313) (153,124) (112,781) (108,741) (125,096)
Allowance for loan
and lease losses.... (70,556) (80,419) (64,757) (60,929) (59,577)
Allowance for losses
on mortgage-backed
securities.......... (280) (322) (419) (678) (913)
----------- ----------- ---------- ---------- ----------
Loan portfolio....... $11,628,670 $10,608,938 $8,949,125 $8,748,992 $8,164,531
=========== =========== ========== ========== ==========
- ----
* Not restated from a fiscal year 1998 acquisition accounted for as a pooling
of interests.
For additional information regarding the Corporation's loan and lease
portfolio and mortgage-backed securities, see Notes 4, 5 and 6 to the
Consolidated Financial Statements under Item 8 of this Report.
10
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities,
consumer loans, leases, and other loans and before any reduction for
unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees, unearned income and allowance for loan and lease losses) as of the
dates indicated:
June 30,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars In Thousands)
Colorado................ $1,647,963 18.2% $1,686,667 20.8% $1,710,256 24.6% $1,660,721 25.1% $1,569,553 25.9%
Nebraska................ 1,073,664 11.9 1,014,198 12.5 985,906 14.2 937,025 14.2 929,982 15.3
Kansas.................. 954,020 10.5 860,740 10.6 678,734 9.8 557,657 8.4 510,159 8.4
Iowa.................... 818,293 9.0 737,677 9.1 676,099 9.7 618,177 9.3 500,986 8.3
Oklahoma................ 459,315 5.1 382,474 4.7 318,198 4.6 264,710 4.0 229,563 3.8
Missouri................ 380,653 4.2 329,985 4.1 185,282 2.7 175,900 2.7 181,174 3.0
Arizona................. 351,001 3.9 253,480 3.1 180,740 2.6 155,315 2.4 108,972 1.8
Georgia................. 302,929 3.3 232,128 2.9 227,971 3.3 235,665 3.6 217,957 3.6
Florida................. 268,492 3.0 242,972 3.0 123,528 1.8 116,881 1.8 111,770 1.8
Virginia................ 240,818 2.7 206,814 2.5 161,793 2.3 140,498 2.1 123,806 2.0
Maryland................ 208,833 2.3 183,460 2.2 157,180 2.3 138,886 2.1 112,160 1.9
Nevada.................. 207,364 2.3 160,643 2.0 130,159 1.9 109,475 1.7 80,696 1.3
Texas................... 205,783 2.3 184,313 2.3 158,614 2.3 187,189 2.8 204,339 3.4
California.............. 192,598 2.1 247,835 3.0 148,401 2.1 195,114 2.9 230,412 3.8
Massachusetts........... 188,500 2.1 62,233 .8 55,902 .8 68,061 1.0 44,300 .7
Ohio.................... 143,992 1.6 122,146 1.5 93,325 1.3 76,049 1.1 47,396 .8
Illinois................ 137,217 1.5 131,098 1.6 111,142 1.6 92,381 1.4 79,626 1.3
North Carolina.......... 135,085 1.5 118,207 1.4 60,634 .9 69,465 1.0 31,601 .5
Minnesota............... 125,979 1.4 92,964 1.1 62,765 .9 63,885 1.0 42,144 .7
Alabama................. 125,767 1.4 90,675 1.1 50,285 .7 37,653 .6 39,544 .7
Washington.............. 113,932 1.3 93,956 1.2 91,670 1.3 91,054 1.4 64,967 1.1
Connecticut............. 83,567 .9 71,696 .9 64,975 .9 72,154 1.1 75,946 1.3
New Jersey.............. 71,352 .8 82,068 1.0 98,061 1.4 107,022 1.6 113,824 1.9
Indiana................. 63,255 .7 66,727 .8 40,357 .6 34,689 .5 27,191 .4
Michigan................ 55,349 .6 29,505 .4 38,495 .5 46,762 .7 46,650 .8
Utah.................... 53,060 .6 39,336 .5 25,444 .4 20,729 .3 18,815 .3
Pennsylvania............ 51,811 .6 55,130 .7 59,083 .8 68,728 1.0 59,943 1.0
New York................ 31,548 .3 39,146 .5 38,382 .5 48,395 .7 38,794 .6
Other States............ 351,534 3.9 304,897 3.7 224,195 3.2 230,562 3.5 219,188 3.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
$9,043,674 100.0% $8,123,170 100.0% $6,957,576 100.0% $6,620,802 100.0% $6,061,458 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
11
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities, consumer loans, leases
and other loans and before any reduction for unamortized premiums (net of
discounts), undisbursed loan proceeds, deferred loan fees, unearned income and
allowance for loan and lease losses) by state and property type at June 30,
2000:
Conventional FHA/VA
Residential Residential Multi- Land Commercial % of
State 1-4 Units Loans Family Loans Sub Total Loans Total Total
----- ------------ ----------- -------- -------- ---------- ---------- ---------- -----
(Dollars in Thousands)
Colorado................ $1,248,541 $ 15,037 $ 81,350 $ 12,244 $1,357,172 $ 290,791 $1,647,963 18.2%
Nebraska................ 884,071 87,348 23,836 14,605 1,009,860 63,804 1,073,664 11.9
Kansas.................. 659,477 155,015 16,843 3,355 834,690 119,330 954,020 10.5
Iowa.................... 538,894 23,382 45,344 33,122 640,742 177,551 818,293 9.0
Oklahoma................ 322,380 33,703 17,380 4,566 378,029 81,286 459,315 5.1
Missouri................ 226,835 28,774 7,664 5,746 269,019 111,634 380,653 4.2
Arizona................. 223,648 12,074 4,346 21,765 261,833 89,168 351,001 3.9
Georgia................. 256,599 27,549 -- -- 284,148 18,781 302,929 3.3
Florida................. 245,990 8,461 430 -- 254,881 13,611 268,492 3.0
Virginia................ 217,979 22,839 -- -- 240,818 -- 240,818 2.7
Maryland................ 165,760 43,073 -- -- 208,833 -- 208,833 2.3
Nevada.................. 55,276 4,076 11,190 53,732 124,274 83,090 207,364 2.3
Texas................... 123,589 21,170 23,429 -- 168,188 37,595 205,783 2.3
California.............. 175,479 4,445 419 128 180,471 12,127 192,598 2.1
Massachusetts........... 188,444 56 -- -- 188,500 -- 188,500 2.1
Ohio.................... 137,008 5,989 -- -- 142,997 995 143,992 1.6
Illinois................ 122,146 7,955 -- 2,003 132,104 5,113 137,217 1.5
North Carolina.......... 131,272 1,738 947 -- 133,957 1,128 135,085 1.5
Minnesota............... 105,835 4,050 6,246 268 116,399 9,580 125,979 1.4
Alabama................. 107,973 17,794 -- -- 125,767 -- 125,767 1.4
Washington.............. 103,084 8,360 -- -- 111,444 2,488 113,932 1.3
Connecticut............. 83,460 107 -- -- 83,567 -- 83,567 .9
New Jersey.............. 69,775 1,577 -- -- 71,352 -- 71,352 .8
Indiana................. 49,541 13,581 -- -- 63,122 133 63,255 .7
Michigan................ 52,099 3,200 -- -- 55,299 50 55,349 .6
Utah.................... 44,420 7,317 1,323 -- 53,060 -- 53,060 .6
Pennsylvania............ 49,149 2,662 -- -- 51,811 -- 51,811 .6
New York................ 28,872 198 -- -- 29,070 2,478 31,548 .3
Other States............ 312,699 17,491 4,809 -- 334,999 16,535 351,534 3.9
---------- -------- -------- -------- ---------- ---------- ---------- -----
Total.................. $6,930,295 $579,021 $245,556 $151,534 $7,906,406 $1,137,268 $9,043,674 100.0%
========== ======== ======== ======== ========== ========== ========== =====
% of Total........... 76.6% 6.4% 2.7% 1.7% 87.4% 12.6% 100.0%
========== ======== ======== ======== ========== ========== ==========
12
Contractual Principal Repayments
The following table sets forth certain information at June 30, 2000,
regarding the dollar amount of all loans, leases and mortgage-backed securities
maturing in the Corporation's portfolio based on contractual terms to maturity.
This repayment information excludes scheduled payments or an estimate of
possible prepayments. Demand loans (loans having no stated schedule of
repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of
loans, leases and mortgage-backed securities, management believes that the
following table will bear little resemblance to what will be the actual
repayments of the loans, leases and mortgage-backed securities portfolios. Loan
and lease balances have not been reduced for (1) unamortized premiums (net of
discounts), undisbursed loan proceeds, deferred loan fees and allowance for
loan and lease losses or (2) nonperforming loans and leases.
Due During the Year Ended June 30,
------------------------------------------
2001 2002-2005 After 2005 Total
-------- ---------- ---------- -----------
(In Thousands)
Principal Repayments
- --------------------
Real estate loans:
Single-family residential (1)--
Fixed-rate...................... $ 44,700 $ 280,554 $3,870,095 $ 4,195,349
Adjustable-rate................. 4,705 21,482 3,042,478 3,068,665
Multi-family residential, land and
commercial real estate--
Fixed-rate...................... 31,467 235,661 236,275 503,403
Adjustable-rate................. 34,779 109,134 561,541 705,454
-------- ---------- ---------- -----------
115,651 646,831 7,710,389 8,472,871
-------- ---------- ---------- -----------
Construction loans:
Fixed-rate........................ 103,821 34,239 830 138,890
Adjustable-rate................... 414,428 13,728 3,757 431,913
-------- ---------- ---------- -----------
518,249 47,967 4,587 570,803
-------- ---------- ---------- -----------
Mortgage-backed securities:
Fixed-rate........................ 35,613 92,063 703,488 831,164
Adjustable-rate................... 7,454 35,109 348,104 390,667
-------- ---------- ---------- -----------
43,067 127,172 1,051,592 1,221,831
-------- ---------- ---------- -----------
Consumer, leases and other loans:
Fixed-rate........................ 174,703 687,411 530,084 1,392,198
Adjustable-rate................... 62,888 28,829 104,585 196,302
-------- ---------- ---------- -----------
237,591 716,240 634,669 1,588,500
-------- ---------- ---------- -----------
Principal repayments................ $914,558 $1,538,210 $9,401,237 $11,854,005
======== ========== ========== ===========
- --------
(1) Includes conventional mortgage loans, FHA and VA loans.
13
Scheduled contractual principal repayments do not reflect the actual
maturities of the assets. The average maturity of loans is substantially less
than their average contractual terms. This is due primarily to prepayments and,
in the case of conventional mortgage loans, due-on-sale clauses, which
generally give the Corporation the right to declare a loan immediately due and
payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid.
The following table sets forth the amount of all loans, leases and mortgage-
backed securities due after June 30, 2001 (July 1, 2001, and thereafter), which
have fixed interest rates and those which have adjustable interest rates. These
loans, leases and mortgage-backed securities have not been reduced for (1)
unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowance for loan and lease losses or (2) nonperforming loans
and leases.
Adjustable
Fixed-Rate Rate Total
---------- ---------- -----------
(In Thousands)
Real estate loans:
Single-family residential.................. $4,150,649 $3,063,960 $ 7,214,609
Multi-family residential, land and
commercial................................ 471,936 670,675 1,142,611
Construction loans........................... 35,069 17,485 52,554
Mortgage-backed securities................... 795,551 383,213 1,178,764
Consumer, leases and other loans............. 1,217,495 133,414 1,350,909
---------- ---------- -----------
Principal repayments due after June 30,
2001...................................... $6,670,700 $4,268,747 $10,939,447
========== ========== ===========
Loan Originations
Residential Loans
The Corporation, through its 255 branch network and CFMC's loan offices and
nationwide correspondent network, originates and purchases both fixed-rate and
adjustable-rate mortgage loans secured by single-family units. Such residential
mortgage loans are either:
. conventional mortgage loans which comply with the requirements for sale
to, or conversion into securities issued by, FNMA or FHLMC ("conventional
conforming loans"),
. mortgage loans which exceed the maximum loan amount allowed by FNMA or
FHLMC, but which otherwise generally comply with FNMA and FHLMC loan
requirements ("conventional nonconforming loans") or
. FHA/VA loans which qualify for sale in the form of securities guaranteed
by GNMA.
The Corporation originates substantially all conventional conforming loans
or conventional nonconforming loans (collectively, "conventional loans") with
loan-to-value ratios at or below 80.0% unless the borrower obtains private
mortgage insurance (through the Corporation's mortgage banking subsidiary,
which premium the borrower pays with their mortgage payment) for the
Corporation's benefit covering that portion of the loan in excess of 80.0% of
the appraised value. Occasional exceptions to the 80.0% loan-to-value ratio for
conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
Fixed-rate residential mortgage loans generally are originated with terms of
15 and 30 years and are amortized on a monthly basis with principal and
interest due each month. Adjustable-rate residential mortgage loans are also
originated with terms of 15 and 30 years. However, certain adjustable-rate
loans contain provisions which permit the borrower, at the borrower's option,
to convert at certain periodic intervals over the life of the loan to a long-
term fixed-rate loan. The adjustable-rate loans currently have interest rates
which are
14
scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh
District Federal Home Loan Bank Cost of Funds Index. The amount of any such
interest rate increase is limited to one or two percentage points annually and
four to six percentage points over the life of the loan. Certain adjustable-
rate loans are also offered which have interest rates fixed over annual periods
ranging from two through seven years, and also ten year loans, with such loans
repricing annually after the fixed interest-rate term. Adjustable-rate loans
are primarily offered at the fully indexed contractual rate. The Corporation
applies its underwriting criteria to such loans based on the amount of the loan
for which the borrower could qualify at the indexed rate. At June 30, 2000,
approximately .70%, or $48.4 million, of the Corporation's residential real
estate loan portfolio was 90 days or more delinquent.
Residential Construction Loans
During fiscal years 2000, 1999 and 1998, the Corporation originated $608.1
million, $475.1 million and $350.5 million, respectively, of residential
construction loans. The Corporation conducts its single-family residential
construction lending operations predominantly in its primary market areas, Las
Vegas, Nevada, Florida, and, on a limited basis, Dallas/Fort Worth, Texas. The
residential construction lending operations, which loans are subject to prudent
credit review and other underwriting standards and procedures, are expected to
increase from fiscal year 2000. At June 30, 2000, approximately .21%, or
$618,000, of the Corporation's residential construction loan portfolio was 90
days or more delinquent.
Construction financing is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the total
estimated cost, including interest. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Corporation may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value proves to be inaccurate, the Corporation
may be confronted, at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment.
Commercial Real Estate and Land Loans
The Corporation originated commercial real estate loans totaling $347.0
million, $280.7 million and $191.2 million, respectively, during fiscal years
2000, 1999 and 1998. Commercial real estate lending entails significant
additional risks compared with residential real estate lending. These
additional risks are due to larger loan balances which are more sensitive to
economic conditions, business cycle downturns and construction related risks.
The payment of principal and interest due on the Corporation's commercial real
estate loans is substantially dependent upon the performance of the projects
securing the loans. As an example, to the extent that the occupancy and rental
rates are not high enough to generate the income necessary to make payments,
the Corporation could experience an increased rate of delinquency and could be
required either to declare the loans in default and foreclose upon the
properties or to make concessions on the terms of the repayment of the loans.
At June 30, 2000, approximately .20%, or $2.6 million of the Corporation's
commercial real estate and land loans were 90 days or more delinquent.
The aggregate amount of loans which a federal savings institution may make
on the security of liens on nonresidential real property may not exceed 400.0%
of the institution's total risk-based capital as determined under current
regulatory capital standards. This limitation totaled approximately $3.846
billion at June 30, 2000, compared to $1.289 billion of commercial real estate
and land loans outstanding at June 30, 2000. This restriction has not and is
not expected to materially affect the Corporation's business.
Consumer Loans
Federal regulations permit federal savings institutions to make secured and
unsecured consumer loans up to 35.0% of an institution's total regulatory
assets. In addition, a federal savings institution has lending
15
authority above the 35.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. Consumer loans originated by the Corporation are primarily
second mortgage loans, loans to depositors on the security of their savings
accounts and loans secured by automobiles. The Corporation has increased its
secured consumer lending activities in order to meet its customers' financial
needs and will continue to increase such lending activities in the future in
its primary market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Corporation, and a
borrower may be able to assert against such assignee claims and defenses which
it has against the seller of the underlying collateral. At June 30, 2000,
approximately .21%, or $2.7 million, of the Corporation's consumer loans are 90
days or more delinquent.
Loan Sales
In addition to originating loans for its portfolio, the Corporation, through
its mortgage banking subsidiary, participates in secondary mortgage market
activities by selling whole and securitized loans to institutional investors or
other financial institutions with the Corporation generally retaining the right
to service such loans. Substantially all of the Corporation's secondary
mortgage market activity is with GNMA, FNMA and FHLMC. Conventional conforming
loans are either sold for cash as individual whole loans to FNMA or FHLMC, or
pooled in exchange for securities issued by FNMA or FHLMC which are then sold
to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage
banking subsidiary and, either are retained for the Corporation's real estate
loan portfolio, or are pooled to form GNMA securities which are subsequently
sold to investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 2000, 1999 and 1998, the Corporation sold an aggregate
of $762.1 million, $2.0 billion and $1.2 billion, respectively, in mortgage
loans resulting in a net loss of $110,000 in fiscal year 2000 and in net gains
of $3.4 million and $3.1 million, respectively, in fiscal years 1999 and 1998.
Of the amount of mortgage loans sold during fiscal year 2000, $742.4 million
were sold in the secondary market, of which 55.2% were converted into GNMA
securities, 43.4% were sold directly to FNMA or FHLMC for cash or were
exchanged for securities issued by FNMA or FHLMC, and the remaining were sold
to other institutional investors. At June 30, 2000, the carrying value of loans
held for sale totaled $183.4 million. The net gains recorded in fiscal years
1999 and 1998 are attributable to the relatively stable interest rate
environments over the respective periods.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to
certain limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on an annual basis. However, in connection with a 1987 acquisition
of a financial institution, the Bank assumed agreements providing for recourse
in the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 2000, the remaining balance
of such loans sold with recourse totaled $12.2 million.
16
Set forth below is a table showing the Corporation's loan, lease and
mortgage-backed securities activity for the three fiscal years ended June 30 as
indicated:
2000 1999 1998
---------- ---------- ----------
(In Thousands)
Loans Originated:
Real estate loans--
Residential loans.......................... $ 672,295 $1,287,556 $1,476,982
Construction loans......................... 608,145 475,073 350,475
Commercial real estate and land loans...... 346,979 280,723 191,167
Commercial loans and leases................ 1,289,878 996,948 795,226
---------- ---------- ----------
Loans and leases originated.............. $2,917,297 $3,040,300 $2,813,850
========== ========== ==========
Loans Purchased:
Conventional mortgage loans--
Residential loans.......................... $1,697,395 $2,323,781 $1,276,846
Bulk loan purchases........................ 207,494 613,503 232,353
Commercial loans........................... 51,267 5,311 --
Mortgage-backed securities................... 160,073 664,665 40,758
---------- ---------- ----------
Loans purchased.......................... $2,116,229 $3,607,260 $1,549,957
========== ========== ==========
Loans Securitized:
Conventional mortgage loans securitized into
mortgage-backed securities.................. $ 42,635 $ 20,773 $ 161,189
========== ========== ==========
Acquisitions:
Residential real estate loans................ $ -- $ 560,521 $ 39,469
Consumer and other loans..................... -- 616,755 73,703
Mortgage-backed securities................... -- 87,231 17,054
---------- ---------- ----------
Loans from acquisitions.................. $ -- $1,264,507 $ 130,226
========== ========== ==========
Loans Sold:
Conventional mortgage loans.................. $ 762,070 $1,955,384 $1,175,152
Mortgage-backed securities................... -- 205,904 118,705
---------- ---------- ----------
Loans sold............................... $ 762,070 $2,161,288 $1,293,857
========== ========== ==========
Loan Servicing for Other Institutions
The Corporation, through its mortgage banking subsidiary, services
substantially all of the mortgage loans that it originates and purchases
(whether retained for the Bank's portfolio or sold in the secondary market),
thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 2000, the Bank's
mortgage banking subsidiary was servicing approximately 118,000 loans and
participations for others with principal balances aggregating $7.271 billion,
compared to 122,800 loans with principal balances totaling $7.449 billion at
June 30, 1999. At June 30, 2000, adjustable-rate mortgage loans represented
11.2% of the aggregate dollar amount of loans in the servicing portfolio.
Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, holding escrow (impound funds) for payment of taxes
and insurance, making inspections as required of the mortgage premises,
collecting amounts due from delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults and generally administering the loans for the
investors to whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others,
ranging generally from .25% to .53% per annum on the declining principal
balances of the loans. The average service fee collected by the
17
Corporation was .39% and .39%, respectively, for fiscal years 2000 and 1999.
The Corporation's servicing portfolio is subject to reduction primarily by
reason of normal amortization and prepayment of outstanding mortgage loans. In
general, the value of the Corporation's loan servicing portfolio may also be
adversely affected as mortgage interest rates decline and loan prepayments
increase. It is expected that income generated from the Corporation's loan
servicing portfolio also will decline in such an environment. This negative
effect on the Corporation's income may be offset somewhat by a rise in
origination and servicing fee income attributable to new loan originations,
which historically have increased in periods of low mortgage interest rates.
The weighted average mortgage loan note rate of the Corporation's servicing
portfolio at June 30, 2000, was 7.54% compared to 7.48% at June 30, 1999.
At June 30, 1999, approximately 95.6% of the Corporation's mortgage
servicing portfolio for other institutions was covered by servicing agreements
pursuant to the mortgage-backed securities programs of GNMA, FNMA and FHLMC.
Under these agreements, the Corporation may be required to advance funds
temporarily to make scheduled payments of principal, interest, taxes or
insurance if the borrower fails to make such payments. Although the Corporation
cannot charge any interest on such advance funds, the Corporation typically
recovers the advances within a reasonable number of days upon receipt of the
borrower's payment, or in the absence of such payment, advances are recovered
through FHA insurance or VA guarantees or FNMA or FHLMC reimbursement
provisions in connection with loan foreclosures. During fiscal year 2000, the
average amount of funds advanced by the Corporation pursuant to servicing
agreements was approximately $2.2 million.
Interest Rates and Loan Fees
Interest rates charged by the Corporation on its loans are primarily
determined by secondary market yield requirements and competitive loan rates
offered in its lending areas. In addition to interest earned on loans, the
Corporation receives loan origination fees for originating certain loans. These
fees are a percentage of the principal amount of the mortgage loan and are
charged to the borrower.
Loan Commitments
At June 30, 2000, the Corporation had issued commitments of $611.2 million,
excluding undisbursed portion of loans in process, to fund and purchase loans.
These commitments are generally expected to settle within three months
following June 30, 2000. These outstanding loan commitments to extend credit do
not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "MD&A--
Liquidity and Capital Resources" under Item 7 of this Report.
Collection Procedures
If a borrower fails to make required payments on a loan, the Corporation
generally will take immediate action to satisfy its claim against the security
for the loan. If a delinquency cannot otherwise be cured, the Corporation
records a notice of default and commences foreclosure proceedings. When a
trustee sale is held, the Corporation generally acquires title to the property.
The property may then be sold for cash or with financing conforming to normal
loan requirements, or it may be sold or financed with a "loan to facilitate"
involving terms more favorable to the borrower than those permitted by
applicable regulations for new loans.
Asset Quality
Nonperforming Assets
Loans are reviewed on a regular basis and are placed on a nonaccruing status
when, in the opinion of management, the collection of additional interest is
doubtful. Loans are placed on a nonaccruing status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed
18
on nonaccruing status is charged against interest income. Subsequent payments
are applied to the outstanding principal balance until such time as the loan is
removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until such time
as it is sold. Such property is stated at the lower of cost or fair value,
minus estimated costs to sell. Valuation allowances for estimated losses on
real estate are subsequently provided when the carrying value exceeds the fair
value minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when
a delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of
ownership would still be retained by the borrower. The evaluation of borrowers
and collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring.
In these circumstances, the Corporation would strive to ensure that the
borrower's continued participation in and management of the collateral does not
put the Corporation at further risk of loss. In situations in which the
borrower is not performing under the restructured terms, foreclosure
proceedings are commenced when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession to
the debtor, such as a reduction in the loan's interest rate, a reduction in the
face amount of the debt, or an extension of the maturity date of the loan, that
the Corporation would not otherwise consider. A loan classified as a troubled
debt restructuring may be reclassified as current if such loan has returned to
a performing status at a market rate of interest for at least 8 to 12 months,
the loan-to-value ratio is 80.0% or less, the cash flows generated from the
collateralized property support the loan amount subject to minimum debt service
coverage as defined and overall applicable economic conditions are favorable.
Such loan balance decreased to $5.4 million at June 30, 2000, compared to $9.7
million at June 30, 1999 and remains low compared to prior fiscal years. The
decrease comparing June 30, 2000 to June 30, 1999 is due primarily to the
reclassification of $3.2 million and $1.1 million, respectively, of troubled
debt restructurings to nonperforming loan status and current loan status. The
increase at June 30, 1999 compared to June 30, 1998 is due primarily to the
addition of 13 loans classified commercial troubled debt restructurings.
The Corporation's nonperforming assets totaled $100.1 million at June 30,
2000, a decrease of $2.9 million, or 2.8%, compared to June 30, 1999, primarily
as a result of net decreases of $5.0 million in nonperforming loans and leases
and $4.3 million in troubled debt restructurings offset by a net increase of
$6.4 million in real estate. For a discussion of the major components of the
$2.9 million decrease in nonperforming assets during the fiscal year ended June
30, 2000, compared to June 30, 1999 see "MD&A--Provision for Loan Losses and
Real Estate Operations" under Item 7 of this Report.
19
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(Dollars in Thousands)
Loans and leases accounted for
on a nonaccrual basis:(1)
Real estate--
Residential................. $ 48,996 $ 49,061 $43,212 $37,506 $38,164
Commercial.................. 2,550 12,220 1,369 905 2,649
Consumer, other loans and
leases....................... 13,466 8,734 4,785 4,322 1,660
-------- -------- ------- ------- -------
Total..................... 65,012 70,015 49,366 42,733 42,473
-------- -------- ------- ------- -------
Accruing loans which are
contractually past due 90
days or more................. -- -- -- 894 144
-------- -------- ------- ------- -------
Total nonperforming loans and
leases......................... 65,012 70,015 49,366 43,627 42,617
-------- -------- ------- ------- -------
Real estate:
Commercial.................... 12,862 8,880 8,465 9,631 10,970
Residential................... 16,803 14,384 8,821 9,759 5,014
Other......................... -- -- 480 147 253
-------- -------- ------- ------- -------
Total..................... 29,665 23,264 17,766 19,537 16,237
-------- -------- ------- ------- -------
Troubled debt restructurings:(2)
Commercial.................... 5,259 9,534 3,524 9,489 14,533
Residential................... 172 195 778 1,126 1,052
-------- -------- ------- ------- -------
Total..................... 5,431 9,729 4,302 10,615 15,585
-------- -------- ------- ------- -------
Nonperforming assets............ $100,108 $103,008 $71,434 $73,779 $74,439
======== ======== ======= ======= =======
Nonperforming loans and leases
to total loans and leases(3)... .61% .73% .62% .58% .63%
Nonperforming assets to total
assets......................... .73% .81% .69% .73% .80%
Allowance for loan and lease
losses:
Loans and leases.............. $ 69,347 $ 73,916 $56,295 $50,120 $46,812
Bulk purchased loans(4)....... 1,209 6,503 8,462 10,809 12,765
-------- -------- ------- ------- -------
Total..................... $ 70,556 $ 80,419 $64,757 $60,929 $59,577
======== ======== ======= ======= =======
Allowance for bulk purchased
loan losses to bulk purchased
loans(4)....................... .52% 2.27% 2.18% 2.19% 2.22%
Allowance for loan and lease
losses to total loans and
leases (less bulk purchased
loans)......................... .67% .80% .74% .71% .76%
Allowance for loans and lease
losses to total loans and
leases(3)...................... .66% .84% .81% .81% .88%
Allowance for loan and lease
losses to total nonperforming
assets......................... 70.48% 78.07% 90.65% 82.58% 80.03%
Allowance for loan and lease
losses to total nonperforming
loans and leases (less
nonperforming bulk purchased
loans)(5)...................... 106.67% 128.74% 165.64% 197.89% 188.63%
(Footnotes on next page)
20
- --------
(1) During fiscal years 1997 and 1996, the Corporation recorded interest income
totaling $49,000 and $51,000, respectively, on accruing loans contractually
past due 90 days or more. During fiscal years 2000, 1999 and 1998, no
interest income was recorded. Had these nonaccruing loans been current in
accordance with their original terms and outstanding throughout this fiscal
year or since origination, the Corporation would have recorded gross
interest income on these loans totaling $3.8 million, $4.2 million, $4.3
million, $3.7 million and $3.3 million (excluding acquisitions during
fiscal years 1999 and 1998 accounted for as pooling of interests),
respectively, during fiscal years 2000, 1999, 1998, 1997 and 1996.
(2) During fiscal years 2000, 1999, 1998, 1997 and 1996, the Corporation
recognized interest income on loans classified as troubled debt
restructurings aggregating $430,000, $470,000, $380,000, $852,000, and $1.3
million, respectively, whereas under their original terms the Corporation
would have recognized interest income of $444,000, $475,000, $499,000, $1.1
million, and $1.6 million, respectively. At June 30, 2000, the Corporation
had no material commitments to lend additional funds to borrowers whose
loans were subject to troubled debt restructuring.
(3) Based on the total balance of loans and leases receivable (before any
reduction for unamortized discounts net of premiums, undisbursed loan
proceeds, deferred loan fees and allowance for loan and lease losses) at
the respective dates.
(4) At June 30, 2000, 1999, 1998, 1997 and 1996 $1.2 million, $6.5 million,
$8.5 million, $10.8 million and $12.8 million, respectively, of allowance
for loan losses for bulk purchased loans, which had been allocated from the
amount of net discounts associated with the Corporation's purchase of these
loans is included in the total allowance for loan losses to provide for the
credit risk associated with these bulk purchased loans, which had balances
of $230.6 million, $286.4 million, $388.5 million, $494.6 million and
$574.4 million, respectively, at June 30, 2000, 1999, 1998, 1997 and 1996.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(5) There were no nonperforming bulk purchased loans at June 30, 2000, but
approximated $12.6 million, $15.4 million, $18.3 million and $17.8 million,
respectively, at June 30, 1999, 1998, 1997 and 1996. The allowance for loan
losses associated with the total bulk purchased loans has been excluded
from this calculation since this allowance is not available to absorb the
losses associated with other loans in the portfolio.
21
The geographic concentration of nonperforming loans and leases at June 30
was as follows:
State 2000 1999 1998 1997 1996
----- ------- ------- ------- ------- -------
(In Thousands)
Iowa.................................... $12,890 $ 6,111 $ 4,013 $ 3,477 $ 2,052
Kansas.................................. 5,484 15,552 6,030 2,973 2,496
Maryland................................ 4,261 2,712 2,258 1,623 1,548
Florida................................. 4,244 4,356 1,502 1,389 891
Nebraska................................ 3,287 2,455 2,595 2,629 2,352
Oklahoma................................ 2,653 3,568 3,178 2,303 1,496
Georgia................................. 2,640 2,752 2,127 2,601 3,389
Colorado................................ 2,607 2,646 4,065 2,717 5,131
Virginia................................ 2,476 1,691 1,479 656 880
Ohio.................................... 2,459 1,818 722 342 348
California.............................. 2,301 3,988 3,377 3,206 4,624
Nevada.................................. 1,822 1,651 1,198 438 648
Texas................................... 1,814 1,378 2,028 3,274 3,290
Alabama................................. 1,684 863 1,307 510 517
Missouri................................ 1,455 3,241 1,944 2,402 2,018
North Carolina.......................... 1,172 907 293 392 205
Illinois................................ 1,024 1,325 1,579 1,754 1,158
New Jersey.............................. 1,010 1,414 1,277 1,060 1,069
Pennsylvania............................ 881 844 852 855 663
Michigan................................ 776 725 310 142 628
New York................................ 771 686 671 606 447
Arizona................................. 751 450 1,195 973 469
Washington.............................. 509 690 182 449 647
Minnesota............................... 355 590 1,004 610 117
Connecticut............................. 280 605 752 860 739
Other States............................ 5,406 6,997 3,428 5,386 4,795
------- ------- ------- ------- -------
Nonperforming loans and leases...... $65,012 $70,015 $49,366 $43,627 $42,617
======= ======= ======= ======= =======
Nonperforming loans and leases totaled $65.0 million at June 30, 2000, and
consisted of 1,545 loans with an average balance of $42,079. Such loans and
leases consisted of $2.6 million (15 loans) collateralized by commercial real
estate, $48.4 million (780 loans) collateralized by residential real estate,
$618,000 (6 loans) collateralized by residential construction real estate, $4.4
million (550 loans) of consumer loans, $7.1 million (167 loans) of commercial
and other operating loans and leases and $1.9 million (27 loans) of
agribusiness loans.
22
The geographic concentration of nonperforming real estate at June 30 was as
follows:
State 2000 1999 1998 1997 1996
----- ------- ------- ------- ------- -------
(In Thousands)
Missouri......................... $ 8,725 $ 4,811 $ 465 $ 522 $ 125
Kansas........................... 5,753 1,809 1,876 873 64
Illinois......................... 2,179 2,069 373 13 185
Iowa............................. 2,016 3,595 1,345 1,129 834
Oklahoma......................... 1,913 1,292 1,299 509 384
Florida.......................... 1,422 1,180 297 277 312
Colorado......................... 1,119 2,768 2,825 6,589 7,841
Nebraska......................... 796 1,196 5,417 5,565 5,356
California....................... 626 1,098 52 1,382 187
Indiana.......................... 559 395 29 -- 271
Ohio............................. 550 678 -- -- --
Maryland......................... 531 471 1,315 436 190
Texas............................ 503 85 445 220 1,608
Georgia.......................... 386 301 140 933 187
Nevada........................... 333 657 138 603 --
Arizona.......................... 171 582 -- -- 128
Minnesota........................ 163 627 456 13 --
Pennsylvania..................... 126 377 111 102 116
New Jersey....................... 102 122 317 240 270
Other states..................... 1,917 2,224 1,338 1,478 1,289
Unallocated reserves............. (225) (3,073) (472) (1,347) (3,110)
------- ------- ------- ------- -------
Nonperforming real estate...... $29,665 $23,264 $17,766 $19,537 $16,237
======= ======= ======= ======= =======
At June 30, 2000, nonperforming real estate totaling $29.7 million (464
properties) consisted of residential real estate totaling $16.8 million (442
properties) or 56.7% of the total and commercial real estate totaling $12.9
million (21 properties). The Corporation's nonperforming commercial real estate
at June 30, 2000 is located primarily in Missouri, Colorado, Kansas and Iowa.
Under the Corporation's credit policies and practices, certain real estate
loans meet the definition of impaired loans under Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" and Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures." A loan
is considered impaired when it is probable that the Corporation, based upon
current information, will not collect amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Certain loans are
exempt from the provisions of the aforementioned accounting statements,
including large groups of smaller-balance homogenous loans that are
collectively evaluated for impairment which, for the Corporation, include one-
to-four family first mortgage loans, consumer loans and leases. Loan impairment
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
observable market price of the loan or the fair value of the collateral if the
loan is collateral dependent.
Loans reviewed for impairment by the Corporation are primarily commercial
real estate loans and loans modified in a troubled debt restructuring which,
after July 1, 1994, are considered impaired. The Corporation's impaired loan
identification and measurement processes are conducted in conjunction with the
Corporation's review of classified assets and adequacy of its allowance for
possible loan losses. Specific factors utilized in the impaired loan
identification process include, but are not limited to, delinquency status,
loan-to-value ratio, debt coverage and certain other conditions pursuant to the
Corporation's classification policy. At June 30, 2000, the Corporation had
impaired loans totaling $29.1 million, net of specific reserves, of which $5.3
million were
23
classified as troubled debt restructurings and included in the Corporation's
$5.4 million balance as shown in the table for nonperforming assets. At June
30, 1999, impaired loans totaled approximately $30.5 million.
Classification of Assets
Savings institutions are required to review their assets on a regular basis
and, as warranted, classify them as "substandard," "doubtful," or "loss" as
defined by OTS regulations. Adequate valuation allowances are required to be
established for assets classified as substandard or doubtful. If an asset is
classified as a loss, the institution must either establish a specific
valuation allowance equal to the amount classified as loss or charge off such
amount. An asset which does not currently warrant classification as substandard
but which possesses credit deficiencies or potential weaknesses deserving close
attention is required to be designated as "special mention." In addition, a
savings institution is required to set aside adequate valuation allowances to
the extent that any affiliate possesses assets which pose a risk to the savings
institution. The OTS has the authority to approve, disapprove or modify any
asset classification or any amount established as an allowance pursuant to such
classification. At June 30, 2000, the Corporation had $79.5 million in assets
classified as special mention, $122.6 million in assets classified as
substandard, $2.1 million in assets classified as doubtful and no assets
classified as loss. As required, specific valuation allowances have been
established in an amount equal to 100.0% of all assets classified as loss.
Substantially all nonperforming assets at June 30, 2000, are classified as
either substandard or loss pursuant to applicable asset classification
standards. Of the Corporation's loans and leases which were not classified at
June 30, 2000, there were no loans or leases where known information about
possible credit problems of borrowers caused management to have serious doubts
as to the ability of the borrowers to comply with present loan or lease
repayment terms.
Loan and Real Estate Review Policy
Management of the Corporation has the responsibility for establishing
policies and procedures for the timely evaluation of the credit risk in the
Corporation's loan, lease and real estate portfolios. Management is also
responsible for the determination of all specific and estimated provisions for
loan and real estate losses, taking into consideration a number of factors,
including changes in the composition of the Corporation's loan and lease
portfolio and real estate balances, current economic conditions, including real
estate market conditions in the Corporation's lending areas that may affect the
borrower's ability to make payments on loans, regular examinations by the
Corporation's credit review group of the quality of the overall loan and lease
and real estate portfolios, and regular review of specific problem loans and
real estate.
Management also has the responsibility of ensuring timely charge-offs of
loan, lease and real estate balances, as appropriate, when general and economic
conditions warrant a change in the value of these loans, leases and real
estate. To ensure that credit risk is properly and timely monitored, this
responsibility has been delegated to a credit review group which consists of
key personnel of the Corporation knowledgeable in the specific areas of loan,
lease and real estate valuation.
The objectives of the credit review group are
. to define the risk of collectibility of the Corporation's loans and
leases and the likelihood of liquidation of real estate and other assets
and their book value,
. to identify problem assets at the earliest possible time,
. to assure an adequate level of allowances for possible losses to cover
identified and anticipated credit risks,
. to monitor the Corporation's compliance with established policies and
procedures, and
. to provide the Corporation's management with information obtained through
the asset review process.
This credit review group analyzes all significant loans and real estate of
the Corporation for appropriate levels of reserves on these assets based on
varying degrees of loan, lease or real estate value weakness.
24
These types of loans, leases and real estate are assigned a credit risk rating
ranging from one (excellent) to six (loss). Loans, leases and real estate with
minimal credit risk (not adversely classified or with a credit risk rating of
one to four) generally have reserves established on the basis of the
Corporation's historical loss experience and various other factors. Loans,
leases and real estate adversely classified (substandard, doubtful, loss or
with a credit risk rating of five or six) have greater levels of specific
reserves established as applicable to recognize impairment in the value of
loans, leases or real estate.
It is management's responsibility to maintain a reasonable allowance for
loan and lease losses applicable to all categories of loans and leases through
periodic charges to operations. Management employs a systematic methodology to
determine the amount of allocated specific allowances of loan and lease losses.
Specific loans and leases that are impaired, or any portion impaired, are
allocated a specific allowance equal to the amount of impairment. The estimated
allowances established on each of the Corporation's specific pools of
outstanding loan and lease portfolios is based on a minimum and maximum
percentage range of the specific portfolios as follows:
Minimum Maximum
Loan Loss Loan Loss
Type of Loan and Status Percentage Percentage
----------------------- ---------- ----------
Residential real estate loans:
Current............................................. .15% .25%
90 days delinquent (or classified substandard)...... 7.50 10.00
Residential construction loans:
Current............................................. .75 1.25
Classified special mention.......................... 2.00 5.00
90 days delinquent (or classified substandard)...... 10.00 20.00
Commercial real estate loans:
Current............................................. .75 1.25
Classified special mention.......................... 2.00 5.00
90 days delinquent (or classified substandard)...... 10.00 20.00
Commercial operating loans:
Current............................................. .90 1.25
Classified special mention.......................... 2.00 5.00
90 days delinquent (or classified substandard)...... 10.00 20.00
Agricultural loans:
Current............................................. .90 1.25
Classified special mention.......................... 2.00 5.00
90 days delinquent (or classified substandard)...... 10.00 20.00
Consumer loans:
Current--auto....................................... 1.50 2.50
Current--home equity................................ .50 1.00
Current--all others................................. .50 3.00
Classified substandard and 90 days delinquent....... 20.00 30.00
120 days delinquent (the unsecured balance of
consumer loans over 120 days delinquent is
generally written off)............................. 100.00 100.00
Leases:
Current............................................. 2.00 4.00
Classified special mention.......................... 2.00 10.00
90 days delinquent (or classified substandard)...... 30.00 50.00
Credit card/taxsaver:
Current credit card................................. 4.00 5.00
Current taxsaver.................................... .50 1.00
90 days delinquent (or classified substandard)...... 20.00 30.00
120 days delinquent................................. 100.00 100.00
25
Allowance for Losses on Loans and Leases
The allowance for loan and lease losses is based upon management's
continuous evaluation of the collectibility of outstanding loans and leases,
which takes into consideration such factors as changes in the composition of
the loan and lease portfolio, economic and business conditions that may affect
the borrower's ability to pay, credit quality and delinquency trends, regular
examinations by the Corporation's credit review group of specific problem loans
and leases and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas.
Management determines the elements of the allowance through two methods. The
first valuation process is the analysis of specific loans and leases for
individual impairment. This impairment is measured according to the provisions
of two Statements of Financial Accounting Standards: No. 114, "Accounting by
Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures." Management applies
specific monitoring policies and procedures that vary according to the relative
risk profile and other characteristics of the loans within the various loan
portfolios. Management completes periodic specific credit evaluations on
commercial real estate, commercial operating, and agricultural loans and loan
relationships with committed balances in excess of $500,000 and construction
loans and loan relationships with committed balances in excess of $1.0 million.
Management reviews these loans to assess the ability of the borrower to service
all principal and interest obligations and, as a result, may adjust the risk
grade accordingly. Loans and loan relationships in these portfolios which
possess, in management's estimation, potential or well defined weaknesses which
could affect the full collection of the Corporation's contractual principal and
interest are evaluated under more stringent reporting and oversight procedures.
These specific loans and leases are allocated a specific allowance equal to
100% of the amount of the impairment.
The estimated allowance for impairment on pools of loans is based on minimum
and maximum range percentages applied to each of the Corporation's pools of
outstanding loans and lease portfolios. The Corporation's residential,
consumer, lease and credit card portfolios are relatively homogenous.
Generally, no single loan or lease is individually significant in terms of its
size or potential loss. Therefore, management reviews these portfolios by
analyzing their performance as a specific pool against which management
estimates an allowance for impairment. Management's determination of the level
of the reserve for these homogenous pools rests upon various judgments and
assumptions used to determine the impairment related to the risk
characteristics of the specific portfolio pools. The minimum and maximum range
percentages are evaluated at least on a quarterly basis.
The Corporation's policy is to charge-off loans or leases or portions
thereof against the allowance for loan and lease losses in the period in which
loans or leases or portions thereof are determined to be uncollectible. A
majority of the Corporation's loans are collateralized by residential or
commercial real estate. Therefore, the collectibility of such loans is
susceptible to changes in prevailing real estate market conditions and other
factors which can cause the fair value of the collateral to decline below the
loan balance. When the Corporation records charge-offs on these loans, it also
begins the foreclosure process of taking possession of the real estate which
served as collateral for such loans. Recoveries of loan and lease charge-offs
generally occur only when the loan deficiencies are completely cured. Upon
foreclosure and conversion of the loan into real estate owned, the Corporation
may realize a credit to real estate operations through the disposition of such
real estate when the sale proceeds exceed the carrying value of the real
estate.
During fiscal years 2000, 1999 and 1998, consumer loan charge-offs, net of
recoveries, totaled $7.9 million, $9.7 million and $9.6 million, respectively.
Consumer loan balances increased to $1.288 billion at June 30, 2000, compared
to $1.113 billion and $831.6 million, respectively, at June 30, 1999 and 1998.
Net consumer loan charge-offs of the Corporation reflect the overall increase
in its consumer loan portfolio. Management does not anticipate increases in the
loan loss provisions or in net charge-offs for consumer loans in fiscal 2001 to
be any greater than in the last three fiscal years. In addition, management
expects the same approximate net amount of charge-offs during fiscal year 2001
compared to the actual net charge-off results for
26
fiscal year 2000. The loan and lease loss provision increased for fiscal year
2000 compared to 1999. This increase was due to additional reserves recorded to
cover the net consumer loan charge-offs of $7.9 million and the net lease
charge-offs of $4.1 million. The loan and lease loss provision decreased during
fiscal year 1999 compared to 1998 due primarily to nonrecurring loss reserves
totaling $3.9 million recorded in fiscal year 1998 to conform the reserve
positions of fiscal 1998 pooled acquisitions to the policies of the Corporation
compared to $1.0 million for fiscal year 1999.
Although management believes that the Corporation's allowance for loan and
lease losses is adequate to reflect the risk inherent in its portfolios, there
can be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans and leases on
a regular basis as an integral part of their examination process. Such agencies
may require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
The following table sets forth the activity in the Bank's allowance for loan
and lease losses for the fiscal years ended June 30 as indicated:
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(Dollars in Thousands)
Allowance for losses on loans
and leases at beginning of
year......................... $ 80,419 $ 64,757 $ 60,929 $ 59,577 $59,163
-------- -------- -------- -------- -------
Loans and leases charged-off:
Single-family residential... (1,874) (2,542) (2,838) (2,535) (1,347)
Multi-family residential and
commercial real estate..... (1,938) (71) -- (300) (214)
Consumer, leases and other.. (20,350) (13,147) (11,319) (12,597) (5,387)
-------- -------- -------- -------- -------
Loans and leases charged-
off........................ (24,162) (15,760) (14,157) (15,432) (6,948)
-------- -------- -------- -------- -------
Recoveries:
Single-family residential... 81 210 254 101 267
Multi-family residential and
commercial real estate..... 5 -- 2,822 297 56
Consumer, leases and other.. 5,747 3,464 1,740 2,474 894
-------- -------- -------- -------- -------
Recoveries.................. 5,833 3,674 4,816 2,872 1,217
-------- -------- -------- -------- -------
Net loans and leases charged-
off.......................... (18,329) (12,086) (9,341) (12,560) (5,731)
-------- -------- -------- -------- -------
Provision charged to
operations................... 13,760 12,400 13,853 13,427 6,716
-------- -------- -------- -------- -------
Activity of combining
companies to convert to June
30 fiscal year............... -- -- 390 475 --
Allowances acquired in
acquisitions................. -- 17,307 1,273 1,966 1,944
Change in estimate of
allowance for bulk purchased
loans........................ (5,294) (1,959) (2,324) (1,878) (2,273)
Charge off to allowance for
bulk purchased loans......... -- -- (23) (78) (242)
-------- -------- -------- -------- -------
Allowances for losses on loans
and leases at end of year.... $ 70,556 $ 80,419 $ 64,757 $ 60,929 $59,577
======== ======== ======== ======== =======
Ratio of net loans and leases
charged-off to average loans
and leases outstanding during
the year..................... .19% .14% .12% .18% .09%
======== ======== ======== ======== =======
27
Investment Activities
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) in each calendar quarter of at least 4.0% of its
net withdrawable deposits plus short-term borrowings or 4.0% of the average
daily balance of its net withdrawable accounts plus short-term borrowings
during the preceding quarter.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 2000,
the Corporation had total average liquid assets of $1.770 billion, which
consisted of $173.3 million in cash and $1.596 billion in agency-backed
securities. The Corporation's liquidity ratio was 15.23% as of June 30, 2000.
See "Regulation--Liquidity Requirements." The Corporation's management
objective is to maintain liquidity at a level sufficient to assure adequate
funds, taking into account anticipated cash flows and available sources of
credit, to allow future flexibility to meet withdrawal requests, to fund loan
commitments, to maximize income while protecting against credit risks and to
manage the repricing characteristics of the Corporation's assets and
liabilities. Such liquid funds are managed in an effort to produce the highest
yield consistent with maintaining safety of principal and within regulations
governing the thrift industry. The relative size and mix of investment
securities in the Corporation's portfolio are based on management's judgment
compared to the yields and maturities available on other investment securities.
The Corporation emphasizes low credit risk in selecting investment options.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
2000 1999 1998
-------- -------- --------
(In Thousands)
Investment securities held to maturity:
U.S. Treasury and other Government agency
obligations...................................... $826,043 $755,195 $465,359
Obligations of states and political subdivisions.. 49,224 49,857 48,571
Other securities.................................. 47,422 57,708 18,258
-------- -------- --------
Total investment securities held to maturity.... 922,689 862,760 532,188
Interest-earning cash on deposit (federal funds).... 1,086 39,585 62,886
-------- -------- --------
Total Investments............................... $923,775 $902,345 $595,074
======== ======== ========
28
The following table sets forth the scheduled maturities, carrying values,
market values and weighted average yields for the Corporation's investment
securities held to maturity at June 30, 2000:
Over One Within Over Five Within More Than
One Year or Less Five Years Ten Years Ten Years Total
----------------- ----------------- ----------------- ----------------- --------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------- -------
(Dollars In Thousands)
U.S. Treasury and
other Government
agency
obligations........ $11,941 5.90% $ -- -- % $151,160 7.19% $662,942 6.66% $826,043 $764,415 6.75%
States and
political
subdivisions....... 2,737 4.80 9,836 4.66 26,625 5.07 10,026 6.79 49,224 47,667 5.33
Other debt
securities......... 92 5.85 6,276 6.56 452 5.90 40,602 6.85 47,422 45,704 6.80
------- ---- ------- ---- -------- ---- -------- ---- -------- -------- ----
Total............ $14,770 5.70% $16,112 5.40% $178,237 6.87% $713,570 6.68% $922,689 $857,786 6.68%
======= ==== ======= ==== ======== ==== ======== ==== ======== ======== ====
For further information regarding the Corporation's investment securities
held to maturity, see Note 3 to the Notes to Consolidated Financial Statements
under Item 8 of this Report.
29
Sources of Funds
General
Deposits have historically been the major source of the Corporation's funds
for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, securities sold
under agreements to repurchase, prepayment and maturity of investment
securities, and other borrowings. At June 30, 2000, deposits made up 58.2% of
total interest-bearing liabilities compared to 65.8% at June 30, 1999. Deposit
levels are significantly influenced by general interest rates, economic
conditions and competition. Other borrowings, primarily FHLB advances, are
utilized to compensate for any decreases in the normal or expected inflow of
deposits.
During fiscal years 1999 and 1998 the Corporation consummated the
acquisitions of seven financial institutions. See Note 2 to the Consolidated
Financial Statements under Item 8 of this Report for additional information on
these acquisitions. These acquisitions presented the Corporation with the
opportunity to further expand its retail network in the Iowa, Nebraska, Kansas,
and Colorado markets and to enter the Missouri, Minnesota and South Dakota
markets, as well as to increase its earnings potential by increasing its
mortgage and consumer loan volumes funded primarily by deposits which generally
bear lower rates of interest than alternative sources of funds.
Deposits
The Corporation's deposit strategy is to emphasize retail branch deposits
through extensive marketing efforts and product promotion, such as by offering
a variety of checking accounts and deposit programs to satisfy customer needs.
During fiscal year 2000, NOW accounts remained stable compared to 1999. The
Corporation also experienced a product mix shift from market rate savings to
passbook accounts resulting in a net increase of $60.2 million between these
two categories. During fiscal year 1999, NOW accounts increased $156.9 million,
from $880.0 million at June 30, 1998, to $1.037 billion at June 30, 1999. At
June 30, 1999 non-interest bearing deposits totaled $541.2 million, or 7.1% of
total deposits, compared to $405.1 million, or 6.2% at June 30, 1998, an
increase of $136.1 million. As a community bank, the Corporation has increased
its non-interest bearing NOW accounts and plans to increase such non-interest
bearing accounts in the future. In addition, the Corporation intends to
continue pricing its certificates of deposit products at rates that minimize
the Corporation's total costs of funds. The competition for certificates of
deposit is very strong in a market of shrinking funds as individuals
continually seek the most attractive investment alternatives available. Rates
on deposits are priced based on investment opportunities as the Corporation
attempts to control the flow of funds in its deposit accounts according to its
business objectives and the cost of alternative sources of funds.
Fixed-term, fixed-rate retail certificates at June 30, 2000, represented
57.2% (or $4.2 billion) of total deposits compared to 59.7% at June 30, 1999
(or $4.6 billion). The Corporation offers certificate accounts with terms
ranging from one month to 120 months. Total deposits decreased $324.9 million
during fiscal year 2000 compared to $211.1 million during fiscal year 1999,
excluding deposits from acquisitions. This net decrease is primarily a result
of depositors leaving for higher interest rates for more attractive investment
alternatives.
30
The following table sets forth the balances and percentages of the various
types of deposits offered by the Corporation at the date indicated and the
change in the dollar amount of deposits between such dates:
June 30, 2000 June 30, 1999 June 30, 1998
------------------------------ ------------------------------ -------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
----------- -------- --------- ---------- -------- ---------- ---------- --------
(Dollars In Thousands)
Passbook accounts....... $ 1,575,380 21.5% $ 438,098 $1,137,282 14.9% $ 146,286 $ 990,996 15.1%
NOW accounts............ 1,028,640 14.0 (8,281) 1,036,921 13.5 156,920 880,001 13.4
Market rate savings..... 531,317 7.3 (377,916) 909,233 11.9 268,746 640,487 9.8
Certificates of
deposit................ 4,195,163 57.2 (376,816) 4,571,979 59.7 525,256 4,046,723 61.7
----------- ----- --------- ---------- ----- ---------- ---------- -----
Total Deposits......... $ 7,330,500 100.0% $(324,915) $7,655,415 100.0% $1,097,208 $6,558,207 100.0%
=========== ===== ========= ========== ===== ========== ========== =====
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated:
2000 1999 1998
--------------- --------------- ---------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ----
(Dollars In Thousands)
Passbook accounts........... $1,320,996 4.48% $1,125,632 3.70% $1,012,228 3.93%
NOW accounts................ 1,041,483 .71 1,020,345 1.20 820,819 1.23
Market rate savings......... 774,660 4.01 745,265 3.62 521,421 3.51
Certificates of deposit..... 4,295,975 5.31 4,497,729 5.38 4,223,217 5.81
---------- ---- ---------- ---- ---------- ----
Average deposit accounts.... $7,433,114 4.38% $7,388,971 4.37% $6,577,685 4.77%
========== ==== ========== ==== ========== ====
The following table sets forth the Corporation's certificates of deposit
(fixed maturities) classified by rates for the three fiscal years ended June 30
as indicated:
2000 1999 1998
Rate ---------- ---------- ----------
- ---- (In Thousands)
Less than 3.00%............................... $ 7,685 $ 6,555 $ 4,894
3.00%--3.99%.................................. 6,740 73,342 7,858
4.00%--4.99%.................................. 771,419 1,816,539 371,298
5.00%--5.99%.................................. 2,007,819 2,310,800 2,983,982
6.00%--6.99%.................................. 1,328,741 307,487 622,235
7.00%--7.99%.................................. 70,974 53,311 51,282
8.00%--8.99%.................................. 1,298 3,488 4,273
9.00% and over................................ 487 457 901
---------- ---------- ----------
Certificates of deposit....................... $4,195,163 $4,571,979 $4,046,723
========== ========== ==========
The following table presents the outstanding amount of certificates of
deposit in amounts of $100,000 or more by time remaining until maturity for the
fiscal years ended June 30 as indicated:
2000 1999 1998
Maturity Period -------- -------- --------
- --------------- (In Thousands)
Three months or less................................ $208,258 $482,996 $160,536
Over three through six months....................... 117,680 124,793 87,625
Over six through twelve months...................... 254,141 143,127 100,087
Over twelve months.................................. 113,341 41,427 89,463
-------- -------- --------
Total............................................. $693,420 $792,343 $437,711
======== ======== ========
31
Borrowings
The Corporation has also relied upon other borrowings, primarily advances
from the FHLB, as additional sources of funds. Advances from the FHLB are
typically secured by the Corporation's stock in the FHLB and a portion of first
mortgage real estate loans. The maximum amount of FHLB advances which the FHLB
will advance for purposes other than meeting deposit withdrawals fluctuates
from time to time in accordance with federal regulatory policies. The
Corporation is required to maintain an investment in FHLB stock in an amount
equal to the greater of 1.0% of the aggregate unpaid loan principal of the
Corporation's loans secured by home mortgage loans, home purchase contracts and
similar obligations, or 5.0% of advances from the FHLB to the Corporation. The
Corporation is also required to pledge such stock as collateral for FHLB
advances. In addition to this collateral requirement, the Corporation is
required to pledge additional collateral which may be unencumbered whole
residential first mortgages with an aggregate unpaid principal amount equal to
158.0% of the Corporation's total outstanding FHLB advances. Alternatively, the
Corporation can pledge 90.0% of the market value of U.S. government or U.S.
government agency guaranteed securities, including mortgage-backed securities,
as collateral for the outstanding FHLB advances. Pursuant to this requirement,
as of June 30, 2000, the Corporation had pledged $5.9 billion of its real
estate loans and held FHLB stock of $255.8 million.
At June 30, 2000, the Corporation had advances totaling approximately $5.0
billion from the FHLB at interest rates ranging from 4.18% to 8.31% and at a
weighted average rate of 5.98%. At June 30, 1999, such advances from the FHLB
totaled $3.6 billion at a weighted average rate of 5.05%. Fixed-rate advances
totaling $2.346 billion at June 30, 2000 with a weighted average rate of 5.04%
are convertible into adjustable-rate advances at the option of the FHLB with
call dates ranging from July 2000 to March 2003. Such convertible advances
consist primarily of amounts totaling $40.0 million with scheduled maturities
due over one year to two years and $2.306 billion with maturities due over five
years.
The Corporation also borrows funds under repurchase agreements. During
fiscal years 2000 and 1999 the Corporation utilized securities sold under
agreements to repurchase primarily for liquidity and asset liability management
purposes. Under a repurchase agreement, the Corporation sells securities
(generally, government agency securities and GNMA, FNMA, FHLMC and AA rated
privately issued mortgage-backed securities) and agrees to buy such securities
back at a specified price at a subsequent date. Repurchase agreements are
generally made for terms ranging from one day to four years, are subject to
renewal, and are deemed to be borrowings collateralized by the securities sold.
At June 30, 2000, the Corporation's repurchase agreements aggregated $33.4
million at an average rate of 4.99%. The Corporation's repurchase agreements
were collateralized by $32.0 million of mortgage-backed securities at June 30,
2000. At June 30, 2000, these repurchase agreements had $8.4 million that
matured overnight with the remaining balance of $25.0 million maturing
September 2000 with a weighted average maturity of 83 days.
Set forth below is certain information relating to the Corporation's
securities sold under agreements to repurchase at the dates and for the periods
indicated:
Year Ended June 30,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Balance at end of year........................... $ 33,379 $128,514 $334,294
Maximum month-end balance........................ $132,432 $334,294 $639,294
Average balance.................................. $ 69,763 $209,111 $501,979
Weighted average interest rate during the year... 5.62% 5.94% 6.08%
Weighted average interest rate at end of year.... 4.99% 5.72% 5.96%
For additional information on the Corporation's FHLB advances, securities
sold under agreements to repurchase and other borrowings, see Notes 13, 14 and
15 to the Consolidated Financial Statements under Item 8 of this Report.
32
Customer Services
Retail management aggressively markets the Bank's various checking and loan
products since these are the principal entry points for consumers seeking a
banking relationship. Management's goal is to become the new customer's primary
bank so that the opportunity is there immediately and over time to cross-sell
the Bank's numerous services to develop profitable household relationships.
Accordingly, management continues to update the data processing equipment
within the branch operations to provide a cost-effective and efficient delivery
of services to our customers. Management has also been proactive in the
implementation of new consumer-oriented technologies, including the recent
introduction of online banking and bill-paying through the Corporation's web
sight. This is in addition to computer banking interfaces already provided to
customers with Microsoft's Money and Intuit's Quicken software. Management
continues to strive to provide customers with the ability to bank when, where
and how they choose. In addition to online banking, the Bank offers the
customer the ability to bank in person at our free-standing branch offices and
supermarket locations, many of which offer extended weekday and weekend hours;
by telephone, utilizing our 24-hour AccessNow automated customer service system
tied to extended-hour operator availability; and by ATM through the Bank's
proprietary network and links to other national and international ATM services,
which give customers worldwide access to their funds. Additional information
about the Corporation and the Bank's competitive products can be obtained from
the Corporation's web site at http://www.comfedbank.com.
Subsidiaries
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to an additional 1.0% of its
consolidated regulatory assets when such additional investment is used for
community development purposes. In addition, federal savings institutions
meeting regulatory capital requirements and certain other tests may invest up
to 50.0% of their regulatory core capital in conforming first mortgage loans to
service corporations. Under such limitations, at June 30, 2000, the Bank was
authorized to invest up to $375.7 million in the stock of, or loans to, service
corporations (based upon the 3.0% limitation). As of June 30, 2000, the Bank's
investment in capital stock in its service corporations and their wholly-owned
subsidiaries was $9.8 million plus unsecured loans totaling $26,000 for a net
investment of $9.8 million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from
capital the amount of all post April 12, 1989, investments in and extensions of
credit to subsidiaries engaged in activities not permissible for national
banks. Currently, the Bank has five subsidiaries (Commercial Federal Service
Corporation, First Savings Investment Corporation, M.I.D. Properties, TC
Manufacturing and Wichita Acquisition Corporation) engaged in activities not
permissible for national banks. Investments in such subsidiaries must be 100%
deducted from capital. See "Regulation -- Regulatory Capital Requirements." At
June 30, 2000, the total investment in such subsidiaries was $14.9 million
which was deducted from capital. Capital deductions are not required for
investment in subsidiaries engaged in non-national bank activities as agent for
customers rather than as principal, subsidiaries engaged solely in mortgage
banking activities, and certain other exempted subsidiaries.
The Bank is also required to give the FDIC and the Director of OTS 30 days
prior notice before establishing or acquiring a new subsidiary, or commencing
any new activity through an existing subsidiary. Both the FDIC and the Director
of OTS have authority to order termination of subsidiary activities determined
to pose a risk to the safety or soundness of the institution.
At June 30, 2000, the Bank had sixteen wholly-owned subsidiaries, six of
which own and operate certain real estate properties of the Bank. With the
exception of the five real estate subsidiaries discussed above, these
subsidiaries are considered engaged in permissible activities and do not
require deductions from capital. CFMC was approved by the OTS in 1994 to be
classified as an "operating subsidiary" and as such, CFMC ceased to be subject
to the regulatory investment limitation in service corporation. Liberty Leasing
Company is also an operating subsidiary. The remaining wholly owned
subsidiaries, exclusive of CFMC and Liberty Leasing
33
Company, are classified as service corporations. Descriptions of the principal
active subsidiaries of the Bank follow. See Exhibit 21 "Subsidiaries of the
Corporation" herein for a complete listing of all subsidiaries of the
Corporation.
Commercial Federal Mortgage Corporation ("CFMC")
CFMC is a full-service mortgage banking company. The Corporation's real
estate lending, secondary marketing, mortgage servicing and foreclosure
activities are conducted primarily through CFMC. At June 30, 2000, CFMC
serviced 81,000 loans for the Bank and 118,000 loans for others. See "Loan
Originations--Loan Servicing for Other Institutions."
Commercial Federal Investment Services, Inc. ("CFIS")
CFIS offers customers discount brokerage services through INVEST, a service
of INVEST Financial Corporation ("IFC"), in 40 of the Corporation's branch
offices. INVEST provides investment advice and access to all major stock, bond,
mutual fund, and option markets. IFC, the registered broker-dealer, provides
all support functions either independently or through affiliates. INVEST
affects transactions only on behalf of its customers and does not buy or sell
for its own account nor does it underwrite securities. CFIS also offers these
same services through Financial Network Investment Corporation ("FNIC") in 13
branches. FNIC operations were added to CFIS as a result of the AmerUs
acquisition.
Commercial Federal Insurance Corporation ("CFIC")
CFIC was formed in November 1983 and serves as a full-service independent
insurance agency, offering a full line of homeowners, commercial (including
property and casualty), health, auto and life insurance products. Additionally,
a wholly-owned subsidiary of CFIC provides reinsurance on credit life and
disability policies written by an unaffiliated carrier for consumer loan
borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC")
CFSC was formed primarily to develop and manage real estate, principally
apartment complexes located in eastern Nebraska, directly and through a number
of limited partnerships. Subsidiaries of CFSC act as general partner and
syndicator in many of the limited partnerships. Under the capital regulations
discussed above, the Bank's investments in and loans to CFSC are fully excluded
from regulatory capital. See "Regulation--Regulatory Capital Requirements."
REIT Holding Company ("REIT")
During fiscal year 2000, a real estate investment trust was formed to hold
mortgage loan participation interests. All earnings from the REIT are derived
from loan participation interests acquired from the Bank.
Tower Title & Escrow Company ("TTE")
TTE was formed in 1996 with operations consisting of escrow closings, title
insurance and title searches. TTE services the Corporation's loan production
process and offers its services to other lending institutions. On August 30,
2000, the Bank signed a Letter of Understanding to sell a portion of TTE's
stock, reducing the Bank's ownership interest to 20%.
Employees
At June 30, 2000, the Corporation and its wholly-owned subsidiaries had
3,415 employees (3,068 full-time equivalent employees). The Corporation
provides its employees with a comprehensive benefit program,
34
including basic and major medical insurance, dental plan, a deferred
compensation 401(k) plan, life insurance, accident insurance, short and long-
term disability coverage and sick leave. The Corporation also offers discounts
on loan fees to its employees who qualify based on term of employment (except
that no preferential rates or terms are offered to executive officers and
senior management). The Corporation considers its employee relations to be
good.
Executive Officers
For certain information concerning the Registrant's directors and executive
officers, refer to Part III--Item 10 "Directors and Executive Officers of the
Registrant" of this Report.
Competition
The Corporation faces strong competition in the attraction of deposits and
in the origination of real estate, consumer and commercial loans. Its most
direct competition for savings deposits has come historically from commercial
banks and from thrift institutions located in its primary market areas. The
Corporation's primary market area for savings deposits includes Colorado, Iowa,
Nebraska, Kansas, Oklahoma, Missouri, Arizona and Minnesota and, for loan
originations, includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri,
Arizona, Minnesota, Florida and Las Vegas, Nevada (primarily residential
construction lending). Management believes that the Corporation's extensive
branch network has enabled the Corporation to compete effectively for deposits
and loans against other financial institutions. The Corporation has been able
to attract savings deposits primarily by offering depositors a wide variety of
deposit accounts, convenient branch locations, a full range of financial
services and competitive rates of interest.
The Corporation's competition for real estate, consumer and commercial loans
comes principally from other thrift institutions, mortgage banking companies,
commercial banks, insurance companies and other institutional lenders. The
Corporation competes for loans principally through the efficiency and quality
of the service provided to borrowers and the interest rates and loan fees
charged.
Regulation
General
The Bank must comply with various regulations of both the OTS and the FDIC.
The Bank's lending activities and other investments must comply with federal
statutory and regulatory requirements. The Bank must also comply with the
reserve requirements of the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of the SAIF and depositors.
Both the OTS and the FDIC have extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves. The OTS regularly examines the Bank and prepares
reports to the Board of Directors of the Bank regarding any deficiencies. The
Bank must also file reports with the OTS and the FDIC concerning its activities
and financial condition and must obtain regulatory approval before engaging in
certain transactions such as mergers and acquisitions.
As a savings and loan holding company, the Corporation is also subject to
the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to within this
"Regulation" section or appear elsewhere in this Report.
Enactment Of The Gramm-Leach-Bliley Act
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act (the "GLB Act") which, effective March 11, 2000, authorized
affiliations between banking, securities and insurance firms and authorized
bank holding companies and national banks to engage in a variety of new
financial activities.
35
Among the new activities permitted to bank holding companies are securities and
insurance brokerage, securities underwriting, insurance underwriting and
merchant banking. The GLB Act, however, prohibits future affiliations between
existing unitary savings and loan holding companies, like the Corporation, and
firms that are engaged in commercial activities and prohibits the formation of
new unitary holding companies.
The GLB Act imposes new requirements on financial institutions with respect
to customer privacy. The GLB Act generally prohibits disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions must also disclose their privacy policies to customers annually.
Financial institutions, however, must comply with state law if it is more
protective of customer privacy than the GLB Act.
The GLB Act also revised the Federal Home Loan Bank System, to make, among
other changes, membership in the FHLB voluntary for federal savings
associations. The GLB Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee.
The Corporation cannot predict the effect of the GLB Act on its operations
and competitive environment at this time. Although the GLB Act reduces the
range of companies with which the Corporation may affiliate, it may facilitate
affiliations with companies in the financial services industry.
Regulatory Capital Requirements
At June 30, 2000, the Bank exceeded all minimum regulatory capital
requirements mandated by the OTS. The following table sets forth information
relating to the Bank's regulatory capital compliance at June 30, 2000:
Actual Requirement Excess
---------- ----------- --------
(Dollars In Thousands)
Bank's stockholder's equity................. $1,119,902
Add accumulated losses on certain available
for sale securities, net................... 15,929
Less intangible assets...................... (230,850)
Less investments in non-includable
subsidiaries............................... (14,930)
----------
Tangible capital............................ $ 890,051 $203,743 $686,308
---------- -------- --------
Tangible capital to adjusted assets (1)..... 6.55% 1.50% 5.05%
---------- -------- --------
Tangible capital............................ $ 890,051
Plus certain restricted amounts of other
intangible assets.......................... 6,040
----------
Core capital (Tier 1 capital)............... $ 896,091 $407,667 $488,424
---------- -------- --------
Core capital to adjusted assets (2)......... 6.59% 3.00% 3.59%
---------- -------- --------
Core capital................................ $ 896,091
Plus general loan loss allowances........... 65,429
----------
Risk-based capital (Total capital).......... $ 961,520 $610,757 $350,763
---------- -------- --------
Risk-based capital to risk-weighted assets
(3)........................................ 12.59% 8.00% 4.59%
---------- -------- --------
- --------
(1) Based on adjusted total assets totaling $13,582,851.
(2) Based on adjusted total assets totaling $13,588,890.
(3) Based on risk-weighted assets totaling $7,634,457.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established five regulatory capital categories: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized. This Act authorized banking regulatory agencies to take
prompt corrective action with respect to institutions in the three
undercapitalized categories. These corrective actions become increasingly more
stringent as an institution's regulatory capital declines. In addition, the OTS
has a prompt
36
corrective action rule under which a savings institution that has a core
capital ratio of less than 4.0% would be deemed to be "undercapitalized" and
may be subject to certain sanctions. At June 30, 2000, the Bank exceeded the
minimum requirements for the well-capitalized category as shown in the
following table:
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk-- to Risk--
Total Assets Weighted Assets Weighted Assets
-------------- --------------- ---------------
Percentage of adjusted assets
.............................. 6.59% 11.74% 12.59%
Minimum requirements to be
classified well-capitalized... 5.00% 6.00% 10.00%
Under OTS capital regulations, the Bank must maintain "tangible" capital
equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal to
3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS can impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio
of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution is rated a Composite 1 under the regulatory CAMELS examination
rating system).
Tangible capital is defined as common shareholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged deposits, less
intangible assets and certain purchased mortgage servicing rights. Purchased
mortgage servicing rights may be included in tangible capital to the extent
they are permitted to be included within the calculation of core capital.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. The Bank may also include non-mortgage
servicing rights in the calculation of core capital. The Bank's core capital of
$896.1 million at June 30, 2000 did not include any qualifying supervisory
goodwill but did include $6.0 million of restricted amounts of certain
intangible assets (core value of deposits).
Core capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. At June 30, 2000, the Bank had
approximately $14.9 million of debt and equity invested in five subsidiaries
which are engaged in activities not permissible for national banks that was
deducted from capital. See "Business -- Subsidiaries."
Risk-based capital is comprised of core capital and supplementary capital.
Supplementary capital consists of certain preferred stock issues,
nonwithdrawable accounts and pledged deposits that do not qualify as core
capital, certain approved subordinated debt, certain other capital instruments
and a portion of the Bank's general loan and lease loss allowances. The portion
of the allowances for loan and lease losses includable in supplementary capital
is limited to 1.25% of risk-weighted assets and totaled $65.4 million at June
30, 2000.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of every on-balance-sheet asset and the credit-equivalent
amount of every off-balance-sheet item after being multiplied by an assigned
risk weight. The risk weights are determined by the OTS and range from 0% for
cash to 100% for consumer loans, non-qualifying single-family, multi-family and
residential construction loans and commercial real estate loans, repossessed
assets and assets more than 90 days past due. OTS capital regulations require
savings institutions to maintain minimum total capital, consisting of core
capital plus supplemental capital, equal to 8.0% of risk-weighted assets.
The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution
with a greater than normal interest rate risk is required to deduct from total
capital, for purposes of calculating its risk-based capital requirement, an
amount (the "interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the normal level of
interest rate risk, multiplied by the economic value of its total assets. The
Bank has determined
37
that, on the basis of current financial data, it will not be deemed to have
more than a normal level of interest rate risk under the rule and therefore
will not be required to increase its total capital as a result of the rule.
In addition to these standards, the Director of the OTS is authorized to
establish higher minimum levels of capital for a savings institution if the
Director determines that such institution is in need of more capital in light
of the particular circumstances of the institution. The Director of the OTS may
treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the Director to submit and adhere to a plan for increasing
capital. Such an order may be enforced in the same manner as an order issued by
the FDIC.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Topeka, which is one of 12 regional
FHLBs. Each FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from funds
deposited by financial institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members in
accordance with policies and procedures established by the Board of Directors
of the FHLB of Topeka.
As a member of the FHLB of Topeka, the Bank must purchase and maintain
shares of capital stock in the FHLB of Topeka in an amount at least equal to
the greater of:
. 1.0% of the Bank's aggregate unpaid principal of its residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year; or
. 5.0% of its then outstanding advances (borrowings) from the FHLB.
The Bank was in compliance with this requirement at June 30, 2000, with an
investment in FHLB stock totaling $255.8 million compared to a required amount
of $252.5 million.
Liquidity Requirements
All savings associations are required to maintain an average daily balance
of liquid assets in each calendar quarter of not less than 4.0% of its net
withdrawable deposits plus short-term borrowings at the end of the preceding
quarter or 4.0% of the average daily balance of its net withdrawable accounts
plus short term borrowings during the preceding quarter. The average liquidity
ratio of the Bank as of June 30, 2000, was 15.23%.
Qualified Thrift Lender Test
Savings institutions like the Bank are required to satisfy a qualified
thrift lender ("QTL") test. To meet the QTL test, the Bank must maintain at
least 65% of its portfolio assets (total assets less intangible assets,
property the Bank uses in conducting its business and liquid assets in an
amount not exceeding 20% of total assets) in "Qualified Thrift Investments."
Qualified Thrift Investments consist primarily of residential mortgage loans
and mortgage-backed securities and other securities related to domestic,
residential real estate or manufactured housing. The shares of stock the Bank
owns in the FHLB of Topeka also qualify as Qualified Thrift Investments as do
loans for educational purposes, loans to small businesses and loans made
through credit cards or credit card accounts. Certain other types of assets
also qualify as Qualified Thrift Investments subject to an aggregate limit of
20% of portfolio assets.
If the Bank satisfies the test, it will continue to enjoy full borrowing
privileges from the FHLB of Topeka. If it does not satisfy the test it may lose
it borrowing privileges and be subject to activities and branching restrictions
applicable to national banks. Compliance with the QTL test is measured on a
monthly basis and the Bank must meet the test in nine out of every 12 months.
As of June 30, 2000, the Bank was in compliance with
38
the QTL test with approximately 87.39% of the Bank's portfolio assets invested
in Qualified Thrift Investments.
Restrictions On Capital Distributions
The OTS limits the payment of dividends and other capital distributions
(including stock repurchases and cash mergers) by the Bank. Under these
regulations, a savings institution must submit notice to the OTS prior to
making a capital distribution if:
. it would not be well capitalized after the distribution,
. the distribution would result in the retirement of any of the
association's common or preferred stock or debt counted as its regulatory
capital, or
. the association is a subsidiary of a holding company.
A savings association must file an application to the OTS and obtain its
approval prior to paying a capital distribution if:
. the association would not be adequately capitalized following the
distribution,
. the association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or
. the distribution would otherwise violate applicable law or regulation or
an agreement with or condition imposed by the OTS.
Under these regulations, at June 30, 2000, the Bank is permitted to pay an
aggregate amount of approximately $55.3 million in capital distributions.
Despite the above authority, the OTS may prohibit any savings institution from
making a capital distribution if the OTS determined that the distribution
constituted an unsafe or unsound practice. Furthermore, under the OTS's prompt
corrective action regulations the Bank would be prohibited from making any
capital distributions if, after making the distribution, the Bank would not
satisfy its minimum capital requirements.
Deposit Insurance
The SAIF insures the Bank's deposit accounts up to applicable regulatory
limits. The Bank also has a portion (approximately 14.0%) of deposits acquired
from acquisitions that are insured by the Bank Insurance Fund ("BIF"). The FDIC
may establish an assessment rate for deposit insurance premiums which protects
the insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment is based on the capital adequacy
and supervisory rating of the institution and is assigned by the FDIC.
The FDIC's assessment schedule for SAIF deposit insurance mandates the
assessment rate for well-capitalized institutions with the highest supervisory
ratings be reduced to zero and institutions in the lower risk assessment
classification be assessed at the rate of .27% of insured deposits. Until
December 31, 1999, however, SAIF-insured institutions were also required to pay
assessments to the FDIC at the rate of .064% of insured deposits to help fund
interest payments on certain bonds issued by the Financing Corporation, an
agency of the federal government established to finance takeovers of insolvent
thrifts. During this period, the BIF members were assessed for the Financing
Corporation obligations at the rate of .013% of insured deposits. Since January
1, 2000, however, both the BIF and SAIF members are being assessed at the same
rate. The Financing Corporation assessment rate is reset quarterly. The rate
for the third quarter of 2000 is 2.06 basis points.
Transactions With Related Parties
Generally, transactions between the Bank and any of its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act. Section 23A limits
the extent to which the savings institution or its subsidiaries
39
may engage in "covered transactions" with any one affiliate to an amount equal
to 10.0% of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20.0% of such capital stock and surplus. Savings institutions are also
prohibited from making loans to any affiliate that is not engaged in activities
permissible to bank holding companies. Section 23B requires that such
transactions be on terms as substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. An
affiliate of a savings institution is any company or entity that controls, is
controlled by or is under common control with the savings institution. In a
holding company context, the parent holding company of a savings institution
(such as the Corporation) and any companies that are controlled by such parent
holding company are affiliates of the savings institution.
Loans to Executive Officers, Directors and Principal Stockholders
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions must also comply with Section 22(g) of the Federal
Reserve Act and Regulation O on loans to executive officers and the
restrictions of 12 U.S.C. Section 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Pursuant to Section 22(g) of the
Federal Reserve Act, the institution's board of directors must approve loans to
executive officers, directors and principal shareholders of the institution.
Section 1972 also prohibits a depository institution from extending credit to
or offering any other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions. Section 1972 also prohibits extensions of credit to executive
officers, directors, and greater than 10.0% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Federal Reserve System
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$44.3 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 2000, the Bank met its reserve requirements.
Savings and Loan Holding Company Regulation
The Corporation is a registered savings and loan holding company. As such,
it is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan
40
holding company, the Bank is subject to certain restrictions in its dealings
with the Corporation and any affiliates.
Activities Restrictions
Since the Corporation only owns one thrift institution, it is classified as
a unitary savings and loan holding company. There are generally no restrictions
on the activities of a unitary savings and loan holding company. However, if
the Director of the OTS determines that there is reasonable cause to believe
that the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose
restrictions to address such risk. If the Corporation were to acquire control
of another savings institution, other than through merger or other business
combination with the Bank, the Corporation would become a multiple savings and
loan holding company. In addition, if the Bank fails to meet the QTL test, then
the Corporation would also become subject to the activity restrictions
applicable to multiple holding companies. A multiple savings and loan holding
company may only engage in the following activities:
. furnishing or performing management services for a subsidiary savings
institution;
. conducting an insurance agency or escrow business;
. holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution;
. holding or managing properties used or occupied by a subsidiary savings
institution;
. acting as trustee under deeds of trust;
. those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple holding companies; or
. unless the Director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies.
The Corporation would also have to register as a bank holding company and
become subject to applicable restrictions unless the Bank requalified as a QTL
within one year thereafter. See "Regulation -- Qualified Thrift Lender Test."
Restrictions On Acquisitions
Savings and loan holding companies may not acquire, without prior approval
of the Director of OTS, control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or more than 5.0%
of the voting shares of a savings institution or holding company thereof which
is not a subsidiary. Under certain circumstances, a registered savings and loan
holding company may acquire, with the approval of the Director of the OTS, up
to 15.0% of the voting shares of an under-capitalized savings institution
pursuant to a "qualified stock issuance." In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible
capital of at least 6.5% of total assets, there must not be more than one
common director or officer between the savings and loan holding company and the
issuing savings institution, and transactions between the savings institution
and the savings and loan holding company and any of its affiliates must conform
to Sections 23A and 23B of the Federal Reserve Act. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25.0% of such company's stock, may also acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
41
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if:
. the multiple savings and loan holding company involved controls a savings
institution which operated a home or branch office in the state of the
institution to be acquired as of March 5, 1987;
. the acquired is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act; or
. the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-
chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company
that controls such state-chartered savings institutions).
Taxation
The Corporation is subject to the provisions of the Internal Revenue Code of
1986, as amended. The Corporation and its subsidiaries, including the Bank,
file a consolidated federal income tax return based on a fiscal year ending
June 30. Consolidated taxable income is determined on an accrual basis.
During fiscal year 1998, the Internal Revenue Service completed its
examination of the Corporation's consolidated federal income tax returns
through June 30, 1995. This examination had no effect on the Corporation's
results of operations.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank can not join in the filing of a consolidated
return with the Corporation (which is filed separately). The Bank is assessed
at a rate of $.47 per $1,000 of average deposits. The franchise tax is limited
to 3.81% of the Bank's income before tax (including subsidiaries) as reported
on the regular books and records. The Corporation also pays franchise or state
income taxes in a number of jurisdictions in which the Corporation or its
subsidiaries conduct business. For further information regarding federal income
taxes payable by the Corporation, see Note 17 to the Consolidated Financial
Statements under Item 8 of this Report.
42
ITEM 2. PROPERTIES
At June 30, 2000, the Corporation conducted business through 255 branch
offices in eight states: Iowa (74), Colorado (44), Nebraska (44), Kansas (40),
Oklahoma (22), Missouri (20), Arizona (7) and Minnesota (4).
At June 30, 2000, the Corporation owned the buildings for 151 of its branch
offices and leased the remaining 104 offices under leases expiring (not
assuming exercise of renewal options) between July 2000 and August 2031. The
Corporation has 265 "Cashbox" ATMs located throughout its eight-state region.
At June 30, 2000, the total net book value of land, office properties and
equipment owned by the Corporation was $181.7 million. Management believes that
the Corporation's premises are suitable for its present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Corporation, the Bank or
any subsidiary is a party or to which any of their property is subject which
are expected to have a material adverse effect on the Corporation's financial
position. For information on other legal proceedings, see Note 20 to the
Consolidated Financial Statements under Item 8 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal year 2000.
Effective August 14, 2000, the Corporation's fiscal year end was changed
from June 30 to December 31. As a result of this change, the Corporation's next
annual meeting of stockholders will be May 8, 2001.
To be eligible for inclusion in the Corporation's proxy materials for next
year's annual meeting of stockholders, any stockholder proposal to take action
at the meeting must be received at the Corporation's executive office at 2120
South 72nd Street, Omaha, Nebraska 68124, no later than December 7, 2000. Any
proposal shall be subject to the requirements of the proxy rules of the
Securities Exchange Act.
Stockholder proposals, other than those submitted under the Securities
Exchange Act, must be submitted in writing to the Corporation's principal
executive offices not less than 60 days prior to May 8, 2001.
43
PART II
ITEM 5. MARKET FOR COMMERCIAL FEDERAL CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's common stock is traded on the New York Stock Exchange
under the symbol "CFB." The following table sets forth the high, low and
closing sales prices and dividends declared for the periods indicated for the
common stock:
2000 1999
------------------------------- -------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Common stock prices:
High.................. $17.13 $16.81 $20.81 $24.69 $25.00 $24.00 $24.44 $32.38
Low................... 14.81 12.19 16.25 18.63 22.00 21.06 19.63 22.00
Close................. 15.56 16.63 17.81 19.63 23.19 23.19 23.19 23.56
------ ------ ------ ------ ------ ------ ------ ------
Dividends declared...... $ .070 $ .070 $ .070 $ .065 $ .065 $ .065 $ .065 $ .055
====== ====== ====== ====== ====== ====== ====== ======
As of June 30, 2000, there were 55,922,884 shares of common stock issued and
outstanding that were held by approximately 5,672 shareholders of record and
2,949,802 shares subject to outstanding options. The number of shareholders of
record does not reflect the persons or entities who hold their stock in nominee
or "street" name.
On November 15, 1999, the Board of Directors increased the quarterly common
stock cash dividend to $.07 per share from $.065 per share. The dividend
increase was effective for stockholders of record on December 30, 1999. On
November 16, 1998, the Board of Directors increased the quarterly common stock
cash dividend from $.055 per share to $.065 per share for stockholders of
record on December 30, 1998.
Cash dividends declared for fiscal year 2000 totaled $15.8 million, or $.275
per common share, compared to fiscal year 1999 of $15.1 million, or $.25 per
common share, and fiscal year 1998 of $7.8 million, or $.212 per common share.
The fiscal year 1998 cash dividends declared and per share amount represents
what was authorized by the Corporation's Board of Directors only and was not
restated for any of the acquisitions accounted for as pooling of interests. For
information regarding the payment of future dividends and any possible
restrictions see "MD&A--Liquidity and Capital Resources" under Item 7 of this
Report and Note 18 to the Consolidated Financial Statements under Item 8 of
this Report.
44
ITEM 6. SELECTED FINANCIAL DATA
For the Year Ended June 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands Except Per Share Data)
Interest income............ $ 927,690 $ 839,354 $ 757,688 $ 717,592 $ 673,470
Interest expense........... 585,549 507,021 477,389 453,969 437,443
----------- ----------- ----------- ----------- -----------
Net interest income........ 342,141 332,333 280,299 263,623 236,027
Provision for loan and
lease losses.............. (13,760) (12,400) (13,853) (13,427) (6,716)
Loan servicing fees, net... 25,194 22,961 24,523 25,910 21,805
Retail fees and charges.... 43,230 36,740 30,284 26,198 21,207
Real estate operations..... (88) (1,674) 1,894 1,314 1,376
Gain (loss) on sales of
loans..................... (110) 3,423 3,092 2,142 1,940
Gain (loss) on sales of
securities, net........... -- 4,376 3,765 510 (294)
Other operating income..... 33,613 24,189 23,702 15,914 13,844
General and administrative
expenses(1)............... 251,931 238,594 206,123 204,130 159,990
Amortization of intangible
assets.................... 17,236 15,702 7,814 11,235 10,479
----------- ----------- ----------- ----------- -----------
Income before income taxes,
extraordinary items and
cumulative effect of
change in accounting
principle................. 161,053 155,652 139,769 106,819 118,720
Provision for income
taxes..................... 55,269 63,260 52,356 37,980 39,887
----------- ----------- ----------- ----------- -----------
Income before extraordinary
items and cumulative
effect of change in
accounting principle...... 105,784 92,392 87,413 68,839 78,833
Extraordinary items,
net(2).................... -- -- -- (583) --
Cumulative effect of change
in accounting principle,
net(3).................... (1,776) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income................. $ 104,008 $ 92,392 $ 87,413 $ 68,256 $ 78,833
=========== =========== =========== =========== ===========
Diluted earnings per share:
Income before extraordinary
items and cumulative
effect of change in
accounting principle...... $ 1.82 $ 1.54 $ 1.52 $ 1.17 $ 1.28
Extraordinary items,
net(2).................... -- -- -- (.01) --
Cumulative effect of change
in accounting principle,
net(3).................... (.03) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income................. $ 1.79 $ 1.54 $ 1.52 $ 1.16 $ 1.28
----------- ----------- ----------- ----------- -----------
Dividends declared per
common share.............. $ .275 $ .250 $ .212 $ .185 $ .178
----------- ----------- ----------- ----------- -----------
Weighted average diluted
common shares
outstanding............... 58,242,365 60,126,846 57,685,281 59,093,615 61,409,356
----------- ----------- ----------- ----------- -----------
Other data:
Net interest rate
spread................... 2.67 % 2.85 % 2.62 % 2.58 % 2.45 %
Net yield on interest-
earning assets........... 2.78 % 2.99 % 2.88 % 2.86 % 2.72 %
Return on average
assets(4)................ .77 % .77 % .85 % .70 % .87 %
Return on average
equity(4)................ 10.85 % 9.95 % 10.96 % 9.18 % 13.34 %
Dividend payout
ratio(5)................. 15.36 % 16.23 % 13.95 % 15.95 % 13.91 %
Total number of branches
at end of period......... 255 256 195 190 175
Total assets............... $13,793,038 $12,775,462 $10,399,229 $10,040,596 $ 9,330,187
Investment securities(6)... 993,167 946,571 673,304 622,240 528,115
Mortgage-backed
securities(7)............. 1,220,138 1,282,545 1,091,849 1,388,940 1,590,907
Loans and leases
receivable, net(8)........ 10,407,692 9,326,393 7,857,276 7,360,481 6,573,624
Intangible assets.......... 230,850 252,677 77,186 58,166 44,453
Deposits................... 7,330,500 7,655,415 6,558,207 6,589,395 6,304,620
Advances from Federal Home
Loan Bank................. 5,049,582 3,632,241 2,379,182 1,719,841 1,643,160
Securities sold under
agreements to repurchase.. 33,379 128,514 334,294 639,294 380,755
Other borrowings........... 172,647 225,383 110,674 161,314 92,562
Stockholders' equity....... 987,978 966,883 861,195 764,066 756,443
Book value per common
share..................... 17.67 16.22 14.67 13.08 12.19
Tangible book value per
common share(9)........... 13.54 11.98 13.35 12.08 11.48
Regulatory capital ratios
of the Bank:
Tangible capital.......... 6.55 % 6.97 % 7.88 % 7.40 % 7.27 %
Core capital (Tier 1
capital)................. 6.59 % 7.05 % 7.99 % 7.53 % 7.46 %
Risk-based capital--
Tier 1 capital.......... 11.74 % 12.74 % 14.58 % 14.37 % 14.32 %
Total capital........... 12.59 % 13.70 % 15.49 % 15.25 % 15.19 %
(Footnotes on next page)
45
- --------
(1) Includes exit costs and termination benefits, merger-related and other
nonrecurring charges, the SAIF special assessment, and expenses associated
with the 1997 common stock repurchase and the 1995 proxy contest. These
amounts totaled $3.9 million, $30.1 million, $25.2 million, $38.3 million
and $5.5 million on a pre-tax basis for fiscal years 2000, 1999, 1998, 1997
and 1996.
(2) Represents the loss on early retirement of debt, net of income tax
benefits.
(3) Represents the cumulative effect of the change in method of accounting for
start-up and organizational costs, net of income tax benefit.
(4) Return on average assets (ROAA) and return on average stockholders' equity
(ROAE) for fiscal year 2000 are .76% and 10.77%, respectively, excluding
the after-tax effect of nonrecurring income and charges totaling $756,000.
ROAA and ROAE for fiscal year 1999 are 1.00% and 12.86% excluding the
after-tax effect of merger-related and other nonrecurring charges totaling
$27.1 million. ROAA and ROAE for fiscal year 1998 are 1.06% and 13.65%
excluding the after-tax effect of merger-related and other nonrecurring
charges totaling $21.5 million. ROAA and ROAE for fiscal year 1997 are .97%
and 12.58% excluding the after-tax effect of the nonrecurring expenses
totaling $25.1 million associated with the SAIF special assessment, the
repurchase of 2,812,725 shares of the Corporation's common stock and other
charges. ROAA and ROAE for fiscal year 1996 are .92% and 14.05% excluding
the after-tax effect of merger-related and other nonrecurring expenses
totaling $4.2 million.
(5) Represents dividends declared per share divided by net income per dilutive
share.
(6) Includes investment securities available for sale totaling $70.5 million,
$83.8 million, $141.1 million, $102.1 million and $144.4 million at June
30, 2000, 1999, 1998, 1997 and 1996.
(7) Includes mortgage-backed securities available for sale totaling $362.8
million, $419.7 million, $171.4 million, $285.3 million and $371.7 million
at June 30, 2000, 1999, 1998, 1997 and 1996.
(8) Includes loans and leases held for sale totaling $183.4 million, $104.3
million, $290.4 million, $84.4 million and $105.9 million at June 30, 2000,
1999, 1998, 1997 and 1996.
(9) Calculated by dividing stockholders' equity, reduced by the amount of
intangible assets, by the number of shares of common stock outstanding.
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Commercial Federal Corporation (the "Corporation") is a unitary non-
diversified savings and loan holding company whose primary asset is Commercial
Federal Bank, a Federal Savings Bank (the "Bank"). The Corporation is one of
the largest financial institutions in the Midwest and the 10th largest publicly
held thrift holding company in the United States. The Bank, with a thrift
charter, operates as a community banking institution, offering commercial and
consumer banking, mortgage banking, insurance and investment services. The
Corporation completed seven acquisitions in fiscal years 1999 and 1998. These
acquisitions, three of which were commercial banks, allowed the Bank to further
expand its banking services, commercial and agricultural loans, business
checking and consumer lending. In addition, these acquisitions created new
customer franchises in Missouri and Minnesota and expanded the Bank's
franchises in Iowa, Colorado, Nebraska and Kansas.
At June 30, 2000, the Corporation, headquartered in Omaha, Nebraska,
operated 255 branches with 74 located in Iowa, 44 in Colorado, 44 in Nebraska,
40 in Kansas, 22 in Oklahoma, 20 in Missouri, seven in Arizona and four in
Minnesota. Throughout its 113 year history, the Corporation has emphasized
customer service. To serve its customers, the Corporation conducts community
banking operations through its branch network, and loan origination activities
through its branches, offices of its wholly-owned mortgage banking subsidiary
and a nationwide correspondent network of mortgage loan originators. The
Corporation also provides insurance and securities brokerage and other retail
financial services.
Operations focus on offering deposits, making loans (primarily consumer,
commercial real estate, single-family residential, business lending and
agribusiness loans) and providing customers with a full array of financial
products and a high level of customer service. The Corporation's retail
strategy continues to be centered on attracting new customers and selling both
new and existing customers multiple products and services. Additionally, the
Corporation will continue to build and leverage an infrastructure designed to
increase noninterest income. The Corporation's operations are also continually
reviewed in order to gain efficiencies to increase productivity and reduce
costs.
During fiscal year 1999, the Corporation consummated the acquisitions of
three financial institutions: AmerUs Bank ("AmerUs"), First Colorado Bancorp,
Inc. ("First Colorado") and Midland First Financial Corporation ("Midland"). On
a combined basis, these institutions operated 82 branches and had assets of
$3.2 billion and deposits of $2.5 billion. These acquisitions provided the
Corporation entry into three new states, access to supermarket branches and
significant expansion of its presence in the metropolitan areas of Denver,
Colorado and Kansas City, Missouri. The accounts and results of operations of
AmerUs and Midland are reflected in the Corporation's consolidated financial
statements beginning July 31, 1998, and March 1, 1999, respectively, since
these acquisitions were accounted for as purchases. The First Colorado
acquisition was accounted for under the pooling of interests accounting method
so the Corporation's historical consolidated financial statements were restated
for all prior periods to include First Colorado's accounts and results of
operations.
In November 1999, the Corporation announced an initiative to integrate the
Corporation's most recent seven acquisitions and new data processing system to
support community-banking operations. This plan was aimed at decreasing
expenses, increasing sustainable growth in revenues, and increasing
productivity through the elimination of duplicate or inefficient functions.
Implementation of this plan resulted in exit costs and termination benefits
totaling $3.9 million ($2.9 million after-tax or $.05 per diluted share)
recorded in fiscal year 2000. See "Exit Costs and Termination Benefits" for
additional information.
47
On August 14, 2000, the Board of Directors approved a series of key
strategic initiatives aimed at improving the overall operations of the
Corporation, strengthening earnings and enhancing shareholder value. These key
initiatives include a complete balance sheet review, a thorough assessment of
the Bank's delivery and servicing systems, the sale of the underperforming
leasing company, an acceleration of the disposition of other real estate owned
and a management restructuring. The formal plan to achieve these strategic
initiatives is in process. Management is currently identifying all significant
actions to be taken and finalizing the expected timetable for completion. The
total estimated exit costs and termination benefits have not been determined.
See "Subsequent Event--Key Strategic Initiatives" for additional information.
Net income for fiscal year 2000 was $104.0 million, or $1.79 per diluted
share, compared to net income of $92.4 million, or $1.54 per diluted share for
fiscal year 1999, and $87.4 million, or $1.52 per diluted share for fiscal year
1998. Fiscal year 2000 net income includes the effect of after-tax charges of
$2.9 million relating to exit costs and termination benefits, an after-tax gain
of $5.4 million from the sale of the corporate headquarters building and a
charge totaling $1.8 million after-tax, representing the effect of the change
in accounting for certain start-up costs. Fiscal year 1999 net income was
reduced by an after-tax charge of $27.1 million, or $.45 per diluted share
($30.0 million pre-tax) associated primarily with the First Colorado
acquisition and the termination of employee stock ownership plans acquired in
the mergers of three financial institutions the past two fiscal years. Fiscal
year 1998 net income was reduced by an after-tax charge of $21.5 million, or
$.37 per diluted share, ($29.7 million pre-tax), associated with merger-related
expenses and other nonrecurring charges.
Exit Costs and Termination Benefits
In November 1999, the Corporation announced an initiative to integrate the
Corporation's most recent seven acquisitions and new data processing system to
support community-banking operations. This plan was aimed at decreasing
expenses, increasing sustainable growth in revenues, and increasing
productivity through the elimination of duplicate or inefficient functions.
This plan was approved by the Corporation's Board of Directors effective
December 27, 1999. Major aspects of the plan included 21 branches to be sold or
closed, the elimination of 121 positions and the consolidation of the
correspondent loan servicing operations.
Implementation of this plan resulted in charges for exit costs and
termination benefits totaling $3.9 million ($2.9 million after-tax or $.05 per
diluted share) recorded in fiscal year 2000. At June 30, 2000, the liability
balance associated with these costs totaled $351,000.
Direct and incremental costs associated with the sale and closing of the
branches totaled $2.4 million. As of June 30, 2000, six branches were sold or
closed. It is expected that the remaining 15 branches will be sold or closed by
November 2000. The initiative eliminated 121 positions with personnel costs
consisting of severance, benefits and related professional services totaling
$1.5 million. This plan also included the consolidation of the correspondent
loan servicing functions to Omaha, Nebraska from Wichita, Kansas and Denver,
Colorado. As of June 30, 2000, this portion of the plan was completed.
48
Common Stock Repurchases
Effective April 28, 1999, the Corporation's Board of Directors authorized
the repurchase of up to five percent, or approximately 3,000,000 shares of the
Corporation's outstanding common stock. During the fourth quarter of fiscal
year 1999 the Corporation repurchased and cancelled 1,500,000 shares of its
common stock at a cost of $36.2 million. This first repurchase was completed on
December 29, 1999. Effective December 27, 1999, the Corporation's Board of
Directors authorized a second repurchase of up to 3,000,000 shares of the
Corporation's outstanding stock over the next 18 months. During the year ended
June 30, 2000, the Corporation purchased and cancelled 3,773,500 shares of its
common stock at a cost of $63.9 million. Since the first repurchase was
announced, the Corporation repurchased and cancelled 5,273,500 shares of its
common stock through June 30, 2000, at a cost of approximately $100.1 million.
From July 1, 2000, through August 25, 2000, an additional 726,500 shares were
repurchased for $12.3 million completing this second authorization.
On August 14, 2000, the Board of Directors authorized a third repurchase of
up to 10% of the Corporation's outstanding stock, or approximately 5,500,000
shares. This repurchase is to be completed no later than February 2002.
Repurchases can be made at any time and in an amount, depending upon market
conditions and various other factors. Any repurchase generally will be on the
open-market, although privately negotiated transactions are also possible. In
compliance with Nebraska law, all repurchased shares will be cancelled.
Subsequent Event--Key Strategic Initiatives
On August 14, 2000 the Board of Directors approved and management announced
a series of strategic initiatives aimed at increasing the overall operations of
the Corporation. Key initiatives include:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans resulting in a pre-tax charge to earnings in the range of
approximately $105 million to $125 million. The proceeds from this
disposition are expected to be used to reduce high-cost borrowings by up
to $1.0 billion, to repurchase additional shares of the Corporation's
common stock with the remainder reinvested in lower risk securities with
a predictable income stream.
. A thorough assessment of the Bank's delivery and servicing systems to
ensure the proper channels to achieve the growth potential and to
maintain a high level of customer service.
. The sale of the leasing company acquired as part of the February 1998
acquisition of Liberty is anticipated to result in a pre-tax charge to
earnings of approximately $7.0 million.
. Acceleration of the disposition of other real estate owned anticipated to
result in a pre-tax charge to earnings of approximately $6.0 million.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in
loans experienced over the past year, while maintaining credit quality.
. A change in the Corporation's fiscal year end from June 30 to December
31.
. An expansion of the Corporation's common stock repurchase program by up
to 10% of its outstanding shares, or approximately 5.5 million shares.
49
Management anticipates to sell the approximate $2.0 billion in investments
and mortgage loans, as well as the leasing portfolio, by December 31, 2000. The
estimated pretax charges disclosed above reflect management's expectations
given the current information available. The formal plan to achieve these
strategic initiatives is in process. Management is currently identifying all
significant actions to be taken and finalizing the expected timetable for
completion. The total estimated exit costs and termination benefits have not
been determined.
Subsequent Event--Change in Fiscal Year End
On August 14, 2000, the Board of Directors approved a change in the
Corporation's fiscal year end from June 30 to December 31. This change is
effective for calendar year 2000. A December 31 year end allows the Corporation
to be aligned with the financial industry from a reporting perspective and will
facilitate comparisons with industry norms. The By-laws were amended to reflect
this change in fiscal year. As a result, the Corporation's next annual meeting
of shareholders is scheduled for May 8, 2001.
Asset/Liability Management
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference, or mismatch, between the
amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. When interest rates
change, to the extent the Corporation's interest-earning assets have longer
maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-
bearing liabilities. This mismatch in the maturity and interest rate
sensitivity of assets and liabilities is commonly referred to as the "gap." A
gap is considered positive when the interest rate sensitive assets maturing or
repricing during a specified period exceed the interest rate sensitive
liabilities maturing or repricing during the same period. A gap is considered
negative when the interest rate sensitive liabilities maturing or repricing
during a specified period exceed the interest rate sensitive assets maturing or
repricing during the same period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income. Similarly,
during a period of declining interest rates, a negative gap would result in an
increase in net interest income while a positive gap would adversely affect net
interest income.
The Corporation has historically invested in interest-earning assets that
reprice more slowly than its interest-bearing liabilities. This mismatch
exposes the Corporation to interest rate risk. In a rising rate environment
liabilities will reprice faster than interest-earning assets, thereby
decreasing net interest income. The Corporation seeks to control its exposure
to interest rate risk by emphasizing shorter-term assets such as commercial and
consumer loans. In addition, the Corporation utilizes longer-term advances from
the Federal Home Loan Bank to extend the repricing characteristics of its
interest-bearing liabilities. The Corporation also enters into interest rate
swap agreements with other counterparties in order to lengthen synthetically
its short term debt obligations.
In connection with its asset/liability management program, the Corporation
has interest rate swap agreements with other counterparties under terms that
provide for an exchange of interest payments on the outstanding notional amount
of the swap agreement. These agreements are primarily used to artificially
lengthen the maturity of certain deposit liabilities. In accordance with these
arrangements the Corporation pays fixed rates and receives variable rates of
interest according to a specified index. The Corporation had swap agreements
with notional principal amounts of $2.5 billion at June 30, 2000, and $215.0
million at June 30, 1999 and 1998. For fiscal years 2000, 1999 and 1998, the
Corporation recorded $2.9 million, $2.8 million and $1.9 million, respectively,
in net interest expense from its interest rate swap agreements. The swap
agreements have maturities ranging from July 2000 to June 2008. See Note 16 to
the Consolidated Financial Statements for additional information on the
Corporation's swap agreements.
50
The following table represents management's projected maturity and repricing
of the Bank's interest-earning assets and interest-bearing liabilities at June
30, 2000. The amounts of interest-earning assets, interest-bearing liabilities
and interest rate swap agreements presented which mature or reprice within a
particular period were determined in accordance with the contractual terms and
expected behavior of such assets, liabilities and interest rate swap
agreements. Adjustable-rate loans and mortgage-backed securities are included
in the period in which they are first scheduled to adjust and not in the period
in which they mature. All loans and mortgage-backed securities are adjusted for
prepayment rates based on information from independent sources as of June 30,
2000 and the Bank's historical prepayment experience. Fixed-rate passbook
deposits, NOW accounts and non-indexed money market accounts are assumed to
reprice or mature according to the decay rates as defined by regulatory
guidelines. Indexed money market rate deposits are deemed to reprice or mature
within the 90-day category. Management believes that these assumptions
approximate actual experience and considers such assumptions reasonable;
however, the interest rate sensitivity of the Bank's interest-earning assets
and interest-bearing liabilities could vary substantially if actual experience
differs from the assumptions used.
51
Within 91 Days Over 1 3 Years
90 Days to 1 Year to 3 Years and Over Total
---------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
Interest-earning assets:
Fixed -rate mortgage
loans (1)............ $ 337,906 $ 463,567 $ 1,051,457 $3,133,382 $ 4,986,312
Other loans (2)....... 1,618,983 1,847,730 1,752,383 1,423,700 6,642,796
Investments (3)....... 317,195 14,667 16,225 942,359 1,290,446
---------- ----------- ----------- ---------- -----------
Interest-earning
assets............. 2,274,084 2,325,964 2,820,065 5,499,441 12,919,554
---------- ----------- ----------- ---------- -----------
Interest-bearing
liabilities:
Savings deposits...... 1,407,798 312,553 557,569 857,815 3,135,735
Other time deposits... 893,063 2,403,611 838,299 60,190 4,195,163
Borrowings (4)........ 2,228,729 1,602,495 1,151,465 100,522 5,083,211
Impact of interest
rate swap
agreements........... (2,500,000) -- 300,000 2,200,000 --
---------- ----------- ----------- ---------- -----------
Interest-bearing
liabilities........ 2,029,590 4,318,659 2,847,333 3,218,527 12,414,109
---------- ----------- ----------- ---------- -----------
Gap position............ 244,494 (1,992,695) (27,268) 2,280,914 505,445
---------- ----------- ----------- ---------- -----------
Cumulative gap
position............... $ 244,494 $(1,748,201) $(1,775,469) $ 505,445 $ 505,445
========== =========== =========== ========== ===========
Gap as a percentage of
the Bank's total
assets................. 1.77% (14.44)% (.20)% 16.54% 3.67%
Cumulative gap as a
percentage of the
Bank's total assets.... 1.77% (12.67)% (12.87)% 3.67% 3.67%
- --------
(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed
or adjustable interest rates.
(3) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of
$255.8 million.
(4) Includes advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and other borrowings.
The Bank's one-year cumulative gap is a negative $1.7 billion, or 12.67% of
the Bank's total assets at June 30, 2000, contrasted to a negative $1.3
billion, or 9.88% of the Bank's total assets at June 30, 1999. The interest
rate risk policy of the Bank generally authorizes a liability sensitive one-
year cumulative gap not to exceed 10.0%; however, a temporary limit increase to
15.0% was approved by the Board of Directors for the June 30, 2000 quarter.
This increase to 15.0% was made to allow more flexible management of interest
rate risk due to the anticipated restructure of the balance sheet.
The Corporation's interest rate sensitivity is also monitored through
analysis of the change in the net portfolio value ("NPV"). The Corporation's
Asset Liability Management Committee ("ALCO"), which includes senior management
representatives, monitors and considers methods of managing the rate
sensitivity and repricing characteristics of the balance sheet components,
consistent with maintaining acceptable levels of changes in the NPV ratio and
net interest income. A primary goal of the Corporation's combined portfolio is
that its capital is leveraged effectively into assets and liabilities which
maximize corporate profitability while minimizing exposure to changes in
interest rates. The ALCO and the Board of Directors review the interest rate
risk position of the Bank on at least a quarterly basis.
Several measures are employed to determine the Bank's exposure to interest
rate risk. Market value sensitivity analysis measures the change in the Bank's
NPV ratio in the event of sudden and sustained changes in market interest
rates. The NPV ratio is defined as the market value of the Bank's capital
divided by the market value of its assets. Interest rate sensitivity gap
analysis is used to compare the repricing characteristics of the Bank's assets
and liabilities. Finally, net interest income sensitivity analysis is used to
measure the impact of changing interest rates on corporate earnings.
52
If estimated changes to the NPV ratio and the sensitivity gap are not within
the limits established by the Board of Directors, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits. The Corporation's Board of Directors has adopted
an interest rate risk policy which establishes a minimum allowable NPV ratio
(generally 7.00%) over a range of hypothetical interest rates extending from
300 basis points below current levels to 300 basis points above current levels.
In addition, the policy establishes a maximum allowable change in the NPV ratio
of 3.00% in the event of an instantaneous and adverse change in interest rates
of 200 basis points. The OTS monitors the Bank's interest rate risk management
procedures under guidelines set forth in Thrift Bulletin 13a ("TB-13a"). This
bulletin requires that the Corporation's Board of Directors set interest rate
risk limits that would prohibit the Bank from exhibiting a post-shock NPV ratio
and interest rate sensitivity measure of "significant risk" or greater. The OTS
limits set a minimum NPV ratio of 6.00% at the 200 basis points rate shock
level, and a maximum change in NPV ratio of 4.00% at the same level. The limits
the Board has imposed on the Bank are more conservative than the limits set by
the OTS to maintain a risk rating better than "significant risk."
The following table presents the projected change in the Bank's NPV ratio
for various hypothetical rate shock levels as of June 30, 2000.
Hypothetical Market Market Change
Change in Value of Value of NPV Board in NPV Board
Interest Rates Capital Assets Ratio Limit Ratio Limit
- -------------- ---------- ----------- ----- ----- ------ ------
(Dollars in Thousands)
300 basis point rise.... $ 667,428 $12,275,919 5.44% 5.50% (3.15)%
200 basis point rise.... 826,774 12,620,922 6.55% 7.00% (2.04)% (3.00)%
100 basis point rise.... 999,147 12,986,200 7.69% 7.00% (.90)%
Base Scenario........... 1,146,232 13,339,477 8.59% 7.00% --
100 basis point
decline................ 1,283,603 13,688,834 9.38% 7.00% .79%
200 basis point
decline................ 1,351,845 13,976,075 9.67% 7.00% 1.08% (3.00)%
300 basis point
decline................ 1,228,537 14,148,903 8.68% 7.00% .09%
The preceding table indicates that at June 30, 2000, the Bank's NPV ratio
would decrease in the event of an immediate rise in interest rates, while the
Bank's NPV ratio would increase in the event of immediate decline in interest
rates. At June 30, 2000, the Bank's NPV ratios were within the targets set by
the Board of Directors in all rate scenarios except the 200 and 300 basis point
rise scenarios. Management had previously discussed with the Board that these
NPV ratios may fall outside the Board limits, but remain within regulatory
limits due to the anticipated balance sheet restructure. At June 30, 2000 the
Bank was within the limits set by the OTS to maintain a risk rating of better
than "significant risk." In September 2000, the Board approved the reduction of
the post shock NPV limits to a minimum of 6.00% (from 7.00%) except the 300
basis point rise shock which was reduced to 5.25% (from 5.50%). These
reductions were also made to allow more flexible management of interest rate
risk due to the anticipated restructure of the balance sheet.
The NPV ratio is calculated by the Corporation pursuant to guidelines
established by the OTS. The modeling calculation is based on the net present
value of discounted estimated cash flows utilizing prepayment assumptions and
market rates of interest provided by independent brokers and other public
sources as of June 30, 2000, with adjustments made to reflect the shift in
interest rates as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
53
Results of Operations
Net income for fiscal year 2000 was $104.0 million, or $1.79 per diluted and
basic share. These results compare to net income for fiscal year 1999 of $92.4
million, or $1.54 per diluted share ($1.55 per basic share) and to net income
for fiscal year 1998 of $87.4 million, or $1.52 per diluted share ($1.55 per
basic share). See "Ratios" for certain performance ratios of the Corporation
for fiscal years 2000, 1999 and 1998.
The increase in net income for fiscal year 2000 compared to 1999 is
primarily due to net increases of $11.8 million and $8.4 million, respectively,
in total other income and net interest income after provision for losses and a
net decrease of $8.0 million in the provision for income taxes. These increases
were partially offset by net increases of $13.3 million in total general and
administrative expenses, $1.5 million in amortization of intangible assets and
the cumulative effect of a change in accounting principle totaling $1.8
million.
The increase in net income for fiscal year 1999 compared to 1998 is
primarily due to net increases of $53.5 million in net interest income after
provision for losses and $4.0 million in total other operating income. These
increases to net income were partially offset by net increases of $33.7 million
in total general and administrative expenses (including an increase of $11.9
million in merger expenses), $7.9 million in amortization of intangible assets
and $10.9 million in the provision for income taxes.
Operating earnings, which excludes the effect of exit costs and termination
benefits, merger-related expenses and other nonrecurring income and charges,
totaled $103.3 million, or $1.77 per diluted share, for fiscal year 2000
compared to $119.5 million, or $1.99 per diluted share, for fiscal year 1999
and $108.9 million, or $1.89 per diluted share, for fiscal year 1998.
Fiscal year 2000 cash operating earnings totaled $117.3 million ($2.01 per
diluted share) compared to $131.9 million ($2.19 per diluted share) for fiscal
year 1999 and $114.2 million ($1.98 per diluted share) for fiscal year 1998.
Cash operating earnings are operating earnings less the effect of the
amortization of intangible assets, net of applicable income taxes. Management
believes that cash operating earnings are a significant measure of a company's
performance, and reflect the Corporation's ability to generate capital that
could be leveraged for future growth.
Net Interest Income and Interest Rate Spread
Net interest income totaled $342.1 million for fiscal year 2000 compared to
$332.3 million for fiscal year 1999, an increase of $9.8 million, or 3.0%; and
compared to $280.3 million for fiscal year 1998. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.36%, 2.84% and 2.78% at June
30, 2000, 1999 and 1998. This represents a decrease of 48 basis points
comparing the interest rate spread at June 30, 2000, to the interest rate
spread at June 30, 1999, and an increase of six basis points comparing the
spreads at June 30, 1999, to 1998. In addition, during fiscal years 2000, 1999
and 1998, interest rate spreads were 2.67%, 2.85% and 2.62%. This represents a
decrease of 18 basis points comparing the interest rate spread during fiscal
year 2000 to 1999 and an increase of 23 basis points comparing the spread
during fiscal year 1999 to 1998. The net yield on interest-earning assets
during fiscal years 2000, 1999 and 1998 was 2.78%, 2.99% and 2.88%,
representing a decrease of 21 basis points comparing fiscal year 2000 to 1999
and an increase of 11 basis points comparing fiscal year 1999 to 1998.
Net interest income for fiscal year 2000 increased over 1999 due primarily
to average interest-earning assets increasing $1.2 billion to $12.3 billion for
fiscal year 2000 compared to $11.1 billion for 1999. This increase was
partially offset by a net increase in average interest-bearing liabilities of
$1.3 billion to $12.1 billion for fiscal year 2000. The increases in these
average balances are due in part to growth in the loan portfolio, primarily
residential mortgage loans and commercial real estate loans, and the Midland
acquisition on March 1, 1999. The loan growth was partially funded with FHLB
advances. These net increases in total earning assets and costing liabilities
are partially offset by the compression of the interest rate spreads. The
interest rate
54
spread decreased 18 basis points due primarily to a 14 basis point increase in
costing liabilities as a result of the rise in short-term interest rates and
the liability sensitive balance sheet of the Corporation. Over the past year,
the Federal Reserve increased interest rates 175 basis points. The
Corporation's interest income will come under further pressure if interest
rates continue to rise. A continued rise in interest rates may erode the Bank's
assets at the same time that costs of funds are increasing. The future trend in
interest rate spreads and net interest income will be dependent upon such
factors as the composition and size of the Corporation's interest-earning
assets and interest-bearing liabilities, the interest rate risk exposure of the
Corporation and the maturity and repricing activity of interest-sensitive
assets and liabilities, as influenced by changes in and levels of both short-
term and long-term market interest rates.
Net interest income for fiscal year 1999 increased over 1998 primarily due
to average interest-earning assets increasing $1.4 billion to $11.1 billion for
fiscal year 1999 compared to $9.7 billion for 1998 and the 44 basis point
reduction in interest rates on interest-bearing liabilities over the respective
fiscal years. These increases were partially offset by a net increase of $1.5
billion in average interest-bearing liabilities to $10.8 billion for fiscal
year 1999 compared to $9.3 billion for 1998 and the 21 basis point decrease in
interest rates on interest-earning assets over the respective fiscal years. The
increases in the average balances are due to the acquisitions of AmerUs on July
31, 1998, and Midland on March 1, 1999. Contributing to the 23 basis point
increase in the fiscal year 1999 interest rate spread over 1998 is the
reduction in the cost of long-term callable advances from the FHLB. In the
fiscal year 1999 flat yield curve environment, the Corporation increased its
borrowing of long term fixed-rate FHLB advances that are convertible at the
option of the FHLB into adjustable-rate advances. These advances were borrowed
in lieu of other short-term funding alternatives and decreased the rate on FHLB
advances by 63 basis points for fiscal year 1999 over 1998.
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the fiscal years presented:
For the Year
Ended June 30, At June 30,
---------------- ----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Weighted average yield on:
Loans and leases......................... 7.75% 7.85% 8.13% 7.87% 7.70% 7.95%
Mortgage-backed securities............... 6.40 6.25 6.34 6.56 6.31 6.68
Investments.............................. 6.89 6.54 6.76 6.79 6.45 6.58
---- ---- ---- ---- ---- ----
Interest-earning assets................ 7.52 7.56 7.77 7.64 7.41 7.69
---- ---- ---- ---- ---- ----
Weighted average rate paid on:
Savings deposits......................... 3.11 2.80 2.90 3.32 2.88 2.84
Other time deposits...................... 5.31 5.38 5.81 5.76 5.17 5.49
Advances from FHLB....................... 5.51 5.26 5.89 5.98 5.05 5.69
Securities sold under agreements to
repurchase.............................. 5.62 5.94 6.08 4.99 5.72 5.96
Other borrowings......................... 7.80 8.10 9.73 8.69 7.27 8.75
---- ---- ---- ---- ---- ----
Interest-bearing liabilities........... 4.85 4.71 5.15 5.28 4.57 4.91
---- ---- ---- ---- ---- ----
Net interest rate spread................... 2.67% 2.85% 2.62% 2.36% 2.84% 2.78%
==== ==== ==== ==== ==== ====
Net yield on interest-earning assets....... 2.78% 2.99% 2.88% 2.50% 2.95% 2.99%
==== ==== ==== ==== ==== ====
55
The table below presents average interest-earning assets and average interest-
bearing liabilities, interest income and interest expense, and average yields
and rates during the periods indicated. The following table includes
nonaccruing loans averaging $70.5 million, $63.6 million and $48.5 million,
respectively, for fiscal years 2000, 1999 and 1998 as interest-earning assets
at a yield of zero percent:
Year Ended June 30,
----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- -------- ------ ----------- -------- ------ ---------- -------- ------
(Dollars in Thousands)
Interest-earning assets:
Loans and leases...... $ 9,798,198 $759,711 7.75% $ 8,933,834 $700,911 7.85% $7,629,067 $619,851 8.13%
Mortgage-backed
securities............ 1,291,061 82,563 6.40 1,231,838 77,039 6.25 1,280,279 81,168 6.34
Investments........... 1,239,548 85,416 6.89 939,179 61,404 6.54 838,921 56,669 6.76
----------- -------- ---- ----------- -------- ---- ---------- -------- ----
Interest-earning
assets................ 12,328,807 927,690 7.52 11,104,851 839,354 7.56 9,748,267 757,688 7.77
----------- -------- ---- ----------- -------- ---- ---------- -------- ----
Interest-bearing
liabilities:
Savings deposits...... 3,137,139 97,715 3.11 2,891,242 80,832 2.80 2,354,468 68,204 2.90
Other time deposits... 4,295,975 227,959 5.31 4,497,729 242,026 5.38 4,223,217 245,548 5.81
Advances from FHLB.... 4,373,510 240,924 5.51 3,000,837 157,787 5.26 2,061,056 121,414 5.89
Securities sold under
agreements to
repurchase............ 69,763 3,922 5.62 209,111 12,419 5.94 501,979 30,533 6.08
Other borrowings...... 192,666 15,029 7.80 172,379 13,957 8.10 120,106 11,690 9.73
----------- -------- ---- ----------- -------- ---- ---------- -------- ----
Interest-bearing
liabilities........... 12,069,053 585,549 4.85 10,771,298 507,021 4.71 9,260,826 477,389 5.15
----------- -------- ---- ----------- -------- ---- ---------- -------- ----
Net earnings balance.... $ 259,754 $ 333,553 $ 487,441
=========== =========== ==========
Net interest income..... $342,141 $332,333 $280,299
======== ======== ========
Interest rate spread.... 2.67% 2.85% 2.62%
==== ==== ====
Net yield on interest--
earning assets.......... 2.78% 2.99% 2.88%
==== ==== ====
56
The Corporation's net earnings balance (the difference between average
interest-bearing liabilities and average interest-earning assets) decreased
$73.8 million during fiscal year 2000 compared to 1999 and decreased $153.9
million during fiscal year 1999 compared to 1998. The ratio of average
interest-earning assets to average interest-bearing liabilities was 102.2%
during fiscal year 2000 compared to 103.1% and 105.3%, respectively, during
fiscal years 1999 and 1998.
The decrease in the net earnings balance for fiscal year 2000 compared to
1999 is primarily due to the acquisition of Midland and the repurchases of the
Corporation's common stock. Interest-earning average assets for fiscal year
2000 were fully impacted by the $83.0 million cash outlay to finance the
Midland acquisition on March 1, 1999, and by the $63.9 million to repurchase
common stock.
The decrease in the net earnings balance for fiscal year 1999 compared to
1998 is primarily due to the acquisitions of AmerUs and Midland and the
repurchase of 1,500,000 shares of common stock. The AmerUs acquisition was
financed by $40.0 million of one year notes, in part by the $45.0 million
unsecured term note due July 31, 2003, and by the outlay of existing cash. The
repurchase of common stock totaled $36.2 million.
The table below presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-
bearing liabilities, and the amount of change in each attributable to: (i)
changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The net
change attributable to change in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume and
the change due to rate. The following table demonstrates the effect of the
increased volume of interest-earning assets and interest-bearing liabilities,
the changes in interest rates and the effect on the interest rate spreads
previously discussed:
Year Ended June 30, 2000 Year Ended June 30, 1999
Compared to 1999 Compared to 1998
---------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
(In Thousands)
Interest income:
Loans and leases...... $ 65,539 $ (6,739) $ 58,800 $106,775 $(25,715) $ 81,060
Mortgage-backed
securities........... 3,761 1,763 5,524 (3,040) (1,089) (4,129)
Investments........... 20,545 3,467 24,012 6,601 (1,866) 4,735
-------- -------- -------- -------- -------- --------
Interest income..... 89,845 (1,509) 88,336 110,336 (28,670) 81,666
-------- -------- -------- -------- -------- --------
Interest expense:
Savings deposits...... 9,257 7,626 16,883 14,772 (2,144) 12,628
Other time deposits... (10,742) (3,325) (14,067) 15,407 (18,929) (3,522)
Advances from FHLB.... 75,292 7,845 83,137 50,549 (14,176) 36,373
Securities sold under
agreements to
repurchase........... (7,869) (628) (8,497) (17,409) (705) (18,114)
Other borrowings...... 1,596 (524) 1,072 4,472 (2,205) 2,267
-------- -------- -------- -------- -------- --------
Interest expense.... 67,534 10,994 78,528 67,791 (38,159) 29,632
-------- -------- -------- -------- -------- --------
Effect on net interest
income................. $ 22,311 $(12,503) $ 9,808 $ 42,545 $ 9,489 $ 52,034
======== ======== ======== ======== ======== ========
57
Provisions for Loan and Lease Losses and Real Estate Operations
The Corporation recorded loan loss provisions of $13.8 million, $12.4
million and $13.9 million in fiscal years 2000, 1999 and 1998, respectively.
Net loans and leases charged-off totaled $18.3 million for fiscal year 2000
compared to $12.1 million for 1999 and $9.3 million for 1998. The net charge-
offs are higher for fiscal year 2000 due to charge-offs totaling $6.9 million
relating to one commercial loan ($1.5 million), an apartment complex ($1.3
million) and leases ($4.1 million). For fiscal years 1999 and 1998 loss
reserves totaling $1.0 million and $3.9 million, respectively, were recorded to
conform the reserve positions of pooled acquisitions to the policies of the
Corporation. Excluding these reserves, the loan loss provisions totaled
$11.4 million for fiscal year 1999, an increase of approximately $1.4 million,
compared to $10.0 million for fiscal year 1998. This increase is primarily due
to additional reserves recorded to cover consumer loan losses.
At June 30, 2000, the Corporation's residential loan portfolio totaling $7.9
billion is secured by properties primarily located in Colorado (17%), Nebraska
(13%) and Kansas (11%). At June 30, 1999, the balance of these loans totaled
$7.3 billion and were secured by residential properties located primarily in
Colorado (20%), Nebraska (13%) and Kansas (10%). The commercial real estate
loan portfolio at June 30, 2000, totaling $1.1 billion is secured by properties
primarily located in Colorado (26%), Iowa (16%) and Kansas (11%). At June 30,
1999, commercial real estate loans totaled $835.3 million and were secured by
properties primarily located in Colorado (29%), Kansas (15%) and Iowa (14%).
The allowance for loan and lease losses is based upon management's
continuous evaluation of the collectibility of outstanding loans and leases,
which takes into consideration such factors as changes in the composition of
the loan and lease portfolios and economic conditions that may affect the
borrower's ability to pay, regular examinations by the Corporation's credit
review group of specific problem loans and leases and of the overall portfolio
quality and real estate market conditions in the Corporation's lending areas.
The allowance for credit losses totaled $70.6 million at June 30, 2000, or
108.5% of total nonperforming loans and leases, compared to $80.4 million, or
114.9%, at June 30, 1999, and $64.8 million, or 131.2%, at June 30, 1998.
The Corporation recorded net losses from real estate operations in fiscal
years 2000 and 1999 totaling $88,000 and $1.7 million, respectively, and net
income of $1.9 million in fiscal year 1998. Real estate operations reflect
provisions for real estate losses, net real estate operating activity, and
gains and losses on dispositions of real estate. The net increase in real
estate operations for fiscal year 2000 compared to 1999 is due primarily to a
net decrease in the provision for real estate losses totaling $1.5 million and
an increase in net gains on real estate dispositions. The net decrease in real
estate operations for fiscal year 1999 compared to 1998 is due primarily to a
decrease in net gains on dispositions of real estate totaling $1.5 million, a
net increase in operating expenses of approximately $600,000 and a net increase
in provisions for real estate losses.
Management of the Corporation believes that present levels of allowances for
loan losses are adequate to reflect the risks inherent in its portfolios.
However, there can be no assurance that the Corporation will not experience
increases in its nonperforming assets, that it will not increase the level of
its allowances in the future or that significant provisions for losses will not
be required based on factors such as deterioration in market conditions,
changes in borrowers' financial conditions, delinquencies and defaults.
58
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and problem asset groups. Nonperforming assets at June
30 are summarized as follows:
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
Nonperforming loans and leases (1)
Residential real estate....................... $ 48,996 $ 49,061 $ 43,212
Commercial real estate........................ 2,550 12,220 1,369
Consumer...................................... 5,119 4,859 2,651
Leases and other loans........................ 8,347 3,875 2,134
-------- -------- --------
Total....................................... 65,012 70,015 49,366
-------- -------- --------
Real estate (2)
Commercial.................................... 12,862 8,880 8,465
Residential................................... 16,803 14,384 8,821
Other......................................... -- -- 480
-------- -------- --------
Total....................................... 29,665 23,264 17,766
-------- -------- --------
Troubled debt restructurings (3)
Commercial.................................... 5,259 9,534 3,524
Residential................................... 172 195 778
-------- -------- --------
Total....................................... 5,431 9,729 4,302
-------- -------- --------
Total nonperforming assets...................... $100,108 $103,008 $ 71,434
======== ======== ========
Nonperforming loans and leases to total loans
and leases..................................... .61% .73% .62%
Nonperforming assets to total assets............ .73% .81% .69%
Total allowance for loan and lease losses (4)... $ 70,556 $ 80,419 $ 64,757
Allowance for loan and lease losses to total
loans and leases............................... .66% .84% .81%
Allowance for loan and lease losses to total
nonperforming assets........................... 70.48% 78.07% 90.65%
- --------
(1) Nonperforming loans and leases consist of nonaccruing loans (loans 90 days
or more past due) and accruing loans that are contractually past due 90
days or more. At June 30, 2000, 1999 and 1998, there were no accruing loans
contractually past due 90 days or more.
(2) Real estate consists of commercial and residential property acquired
through foreclosure or repossession (real estate owned and real estate in
judgment) and real estate from certain subsidiary operations, and does not
include performing real estate held for investment totaling $9.9 million,
$9.5 million and $4.4 million, respectively, at June 30, 2000, 1999 and
1998.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $59,000, $75,000 and $97,000, respectively, at June 30, 2000, 1999
and 1998, in allowance for losses established primarily to cover risks
associated with borrowers' delinquencies and defaults on loans and leases
held for sale.
Nonperforming loans and leases at June 30, 2000, decreased compared to 1999
primarily due to a decrease of $9.7 million in delinquent commercial real
estate offset by increases of $4.5 million and $260,000, respectively, in
leases and other loans and consumer loans. Nonperforming loans and leases at
June 30, 1999, increased $20.7 million compared to 1998 primarily due to
increases of $10.9 million, $5.8 million, $2.2 million and $1.8 million,
respectively, in delinquent commercial real estate, residential real estate,
consumer loans and other loans. The increases are due to the AmerUs and Midland
acquisitions and to growth in the respective portfolios.
59
The net increase of $6.4 million in real estate at June 30, 2000, compared
to 1999 is due to increases of $4.0 million and $2.4 million, respectively, in
commercial and residential real estate. The increases are primarily due to the
transfer of delinquent residential and commercial loans totaling $21.1 million
and $10.9 million, respectively, to nonperforming real estate. Partially
offsetting these increases are sales of residential and commercial properties
totaling $15.2 million and $6.2 million, respectively. The net increase of $5.5
million in real estate at June 30, 1999, compared to 1998 is due primarily to
net increases of $5.6 million and $415,000, in residential and commercial real
estate. This net increase is due primarily to real estate acquired from the
AmerUs and Midland acquisitions partially offset by real estate sales. Real
estate is located primarily in Missouri and Kansas at June 30, 2000, and,
before allowance for losses, totaled $8.7 million and $5.8 million,
respectively. At June 30, 1999, real estate was located primarily in Missouri
and Iowa and totaled $4.8 million and $3.6 million, respectively, before
allowance for losses.
Troubled debt restructurings decreased $4.3 million at June 30, 2000,
compared to June 30, 1999, due to the reclassification of $3.2 million of
troubled commercial restructurings to nonperforming loan status and
$1.1 million of commercial troubled debt restructurings to current loan status.
Troubled debt restructurings increased $5.4 million at June 30, 1999, compared
to June 30, 1998, due to the addition of 13 loans classified as commercial
troubled debt restructurings totaling approximately $16.1 million offset
primarily by the reclassifications of $7.1 million (to nonperforming loan
status) and $1.6 million (to current loan status) and payoffs totaling
approximately $1.9 million.
The ratio of nonperforming loans and leases to total loans and leases
decreased to .61% at June 30, 2000, based on loan and lease balances of $10.6
billion. This ratio compares to .73% and .62%, respectively, at June 30, 1999
and 1998, which were based on loan and lease balances of $9.6 billion and $8.0
billion. The ratio decreased at June 30, 2000, compared to 1999 due to the net
decrease in nonperforming loans and leases and the increase in the total
balance of loans and leases. This ratio at June 30, 1999, increased compared to
1998 due to a net increase in nonperforming loans and leases, primarily
delinquent residential and commercial loans, partially offset by increases in
the total balance of loans and leases. Nonperforming assets to total assets
decreased to .73% at June 30, 2000, compared to .81% at June 30, 1999 due to
the decrease in nonperforming assets combined with the increase in total
assets. Increasing nonperforming assets accounts for the .81% ratio for
nonperforming assets to total assets at June 30, 1999, compared to .69% at June
30, 1998, even though total assets also increased. The decrease in total
allowance for loan and lease losses to $70.6 million at June 30, 2000, compared
to $80.4 million at June 30, 1999, is primarily due to an increase in net
charge-offs in fiscal 2000 compared to 1999. The total allowance for loan and
lease losses increased to $80.4 million at June 30, 1999, compared to $64.8
million at June 30, 1998, due primarily to increases in allowances acquired in
purchase acquisitions. The percentage of allowance for loan and lease losses to
total loans and leases at June 30, 2000, of .66% decreased compared to .84% at
June 30, 1999, and .81% at June 30, 1998. The decrease comparing June 30, 2000
to 1999 is due primarily to the decrease in the allowance for loans and leases
and to the increase in the total loan and lease portfolio. The increase
comparing June 30, 1999 to 1998 is due primarily to the net increase in the
allowance for loan and lease losses. The total allowance for loan and lease
losses to total nonperforming assets decreased to 70.48% at June 30, 2000
compared to 78.07% at June 30, 1999 and 90.65% at June 30, 1998. The decrease
comparing June 30, 2000 to 1999 is due primarily to the decrease in the
allowance partially offset with the decrease in total nonperforming assets. The
decrease at June 30, 1999 compared to 1998 is due primarily to the increase in
nonperforming assets partially offset by the increase in the allowance for loan
and lease losses.
Non-Interest Income
Loan Servicing Fees
Loan servicing fees totaled $25.2 million, $23.0 million and $24.5 million
for fiscal years 2000, 1999 and 1998, respectively. The amount of revenue
generated from loan servicing fees, and changes in comparing fiscal years, is
primarily due to the average size of the Corporation's portfolio of mortgage
loans serviced for other institutions and the level of rates for service fees
collected partially offset by the amortization expense of
60
mortgage servicing rights. The loan servicing fees category also includes fees
collected for late loan payments. The net increase in loan servicing fees
comparing fiscal year 2000 to 1999 is primarily due to a decrease in
amortization expense of mortgage servicing rights. This decrease reflects a
reduction in prepayments due to the higher interest rate environment in fiscal
year 2000. The amount of amortization expense of mortgage servicing rights is
determined, in part, by mortgage loan paydowns in the servicing portfolio that
are influenced by changes in interest rates. The decrease in loan servicing
fees comparing fiscal year 1999 to 1998 is primarily due to lower average
service fee rates collected in 1999 compared to 1998.
Effective July 1, 1999, the amortization expense of mortgage servicing
rights was reclassified from general and administrative expenses to a reduction
of loan servicing fees. Prior fiscal years were also restated. Amortization
expense of servicing rights totaled $8.7 million, $12.0 million and $10.2
million, for fiscal years 2000, 1999 and 1998, respectively. The portfolio of
mortgage loans serviced for other institutions totaled $7.3 billion, $7.4
billion and $7.2 billion at June 30, 2000, 1999 and 1998.
The value of the Corporation's loan servicing portfolio increases as
mortgage interest rates rise and loan prepayments decrease. It is expected that
income generated from the Corporation's loan servicing portfolio will increase
in such an environment. However, this positive effect on the Corporation's
income is offset, in part, by a decrease in additional servicing fee income
attributable to new loan originations, which historically decrease in periods
of higher, or increasing, mortgage interest rates, and by an increase in
expenses from loan production costs since a portion of such costs cannot be
deferred due to lower loan originations. Conversely, the value of the
Corporation's loan servicing portfolio will decrease as mortgage interest rates
decline.
Retail Fees And Charges
Retail fees and charges totaled $43.2 million, $36.7 million and $30.3
million for fiscal years 2000, 1999 and 1998, respectively. The primary source
of this fee income is customer charges for retail financial services such as
checking account fees and service charges, charges for insufficient checks or
uncollected funds, stop payment fees, VISA debit card fees, overdraft
protection fees, transaction fees for personal checking and automatic teller
machine services. The net increase for fiscal year 2000 compared to 1999 is due
to increased fee structures and volume increases in checking account fees and
related ancillary fees for overdraft and insufficient funds charges, VISA debit
card fees and overall fees from the acquisition of Midland. The net increase
for fiscal year 1999 compared to 1998 primarily results from the AmerUs and
Midland acquisitions, accounted for as purchases and included in operations
since their respective dates of consummation, which together contributed $3.6
million in retail fees and charges for fiscal year 1999. Also contributing to
the increase is the emphasis on cross-selling of products available from the
Corporation's increased retail customer deposit base.
Gain (Loss) On Sales Of Loans
During fiscal years 2000, 1999 and 1998, the Corporation sold loans to third
parties through its mortgage banking operations totaling approximately $762.1
million, $2.0 billion and $1.2 billion, respectively, resulting in a pre-tax
loss of $110,000 for fiscal year 2000 and in net pre-tax gains of $3.4 million
and $3.1 million, respectively, for fiscal years 1999 and 1998. Mortgage loans
are generally sold in the secondary market with loan servicing retained and
without recourse to the Corporation. The net gains recorded in fiscal years
1999 and 1998 are attributable to the relatively stable interest rate
environments over the respective periods.
Gain On Sales Of Securities
During fiscal year 2000 there were no sales of securities available for
sale. During fiscal years 1999 and 1998, the Corporation sold securities
available for sale resulting in pre-tax gains of $4.4 million and $3.8 million
on sales of $235.6 million and $137.6 million, respectively. Mortgage-backed
securities accounted for most of the activity with pre-tax gains of $3.9
million and $2.5 million recorded in fiscal years 1999 and 1998.
61
Other Operating Income
Other operating income totaled $33.6 million, $24.2 million and $23.7
million for fiscal years 2000, 1999 and 1998, respectively. The major
components of other operating income are brokerage commissions, credit life and
disability commissions, insurance commissions and leasing operations.
Brokerage commission income totaled $9.8 million, $9.2 million and $5.3
million, respectively, for fiscal years 2000, 1999 and 1998. Brokerage
commission income increased for fiscal year 2000 compared to 1999 and 1999
compared to 1998 due to significant growth in the volume of customer
transactions for equity securities. A greater focus on cross-selling, an
increase in the number of sales locations due to acquisitions and a more
qualified staff also contributed to these increases.
Insurance commission income totaled $4.0 million, $2.8 million and $3.2
million, respectively, for fiscal years 2000, 1999 and 1998. The increase
comparing fiscal year 2000 to 1999 is primarily due to increased annuity sales
due to the higher interest rate environment in fiscal year 2000 and to an
increase in net reinsurance operations. The decrease in insurance commission
income comparing fiscal year 1999 to 1998 is due primarily to increased
competition and decreases in property and casualty insurance and net
reinsurance operations.
Credit life and disability commission income totaled $4.1 million, $2.0
million and $2.0 million, respectively, for fiscal years 2000, 1999 and 1998.
Commission income from credit life and disability is directly related to
consumer loan volume and the emphasis placed on selling the product. Credit
life and disability commission income from leasing activity continues to
decrease. This decrease is the reason credit life and disability commission
income is unchanged comparing fiscal year 1999 to 1998. Origination and service
fees from leasing operations totaled $476,000, $618,000 and $3.6 million,
respectively, for fiscal years 2000, 1999 and 1998. The net decrease in leasing
operations comparing fiscal years is due to the Corporation significantly
curtailing leasing operations. Nonrecurring charges totaling $597,000 were also
recorded in fiscal year 1998 for reserves on leasing operations.
Other operating income includes miscellaneous items that can fluctuate
significantly from year to year. Such amounts totaled approximately $15.2
million, $9.6 million and $9.6 million, respectively, for fiscal years 2000,
1999 and 1998. The increase comparing fiscal year 2000 to 1999 is due primarily
to the net pre-tax gain totaling $8.5 million on the sale of the corporate
headquarters building in December 1999.
Non-Interest Expense
General And Administrative Expenses
Total general and administrative expenses totaled $251.9 million, $238.6
million and $206.1 million for fiscal years 2000, 1999 and 1998, respectively.
Excluding charges for exit costs and termination benefits, merger-related
expenses and certain other nonrecurring charges, general and administrative
expenses totaled $248.0 million, $208.5 million and $180.9 million for fiscal
years 2000, 1999, and 1998.
The net increase of $13.3 million in general and administrative expenses for
fiscal year 2000 compared to 1999 is primarily due to net increases of $12.9
million in compensation and benefits, $17.6 million in other expenses, $6.5
million in data processing, $3.9 million in exit costs and termination
benefits, $2.3 million in occupancy and equipment and $1.2 million in
advertising. These increases were offset by net decreases of $29.9 million in
merger expenses and $1.2 million in regulatory insurance and assessments. The
charges for exit costs and termination benefits of $3.9 million reflect the
expenses and charges pursuant to the sale and closing of 21 branches ($2.4
million) and the elimination of 121 positions ($1.5 million). See Note 24 "Exit
Costs and Termination Benefits" to the Notes to Consolidated Financial
Statements for additional information. The Midland acquisition, which was
accounted for under the purchase method of accounting, contributed to the net
increases in additional general and administrative expenses for fiscal year
2000. The AmerUs acquisition, also accounted for as a purchase, contributed to
a lesser extent to the net increases for fiscal year 2000. These
62
acquisitions result in increased personnel wages, benefits and costs of
operating additional branches, as well as other expenses incurred on an
indirect basis attributable to these acquisitions. General and administrative
expenses also increased for fiscal year 2000 compared to 1999 due to higher
costs associated with the new data processing computer systems, higher item
processing costs from the customer deposit delivery system implemented in the
second quarter of fiscal 1999 and to decreases in deferred costs associated
with loan originations due to lower loan origination volume.
The net increase of $32.5 million in general and administrative expenses for
fiscal year 1999 compared to 1998 is primarily due to net increases in the
merger expenses category of $11.9 million, compensation and benefits of $10.7
million, occupancy and equipment of $8.2 million, other expenses of $5.6
million, advertising of $1.3 million and regulatory insurance and assessments
of $688,000. These increases were slightly offset by a net decrease of $5.9
million in data processing. The net increase comparing the two fiscal years is
primarily due to fiscal year 1999 merger expenses totaling $30.1 million
associated with the First Colorado acquisition and the termination of three
employee stock ownership plans compared to the $20.9 million of merger expenses
recorded in fiscal year 1998. The AmerUs and Midland acquisitions contributed a
net increase of approximately $16.1 million in general and administrative
expenses for fiscal year 1999 over 1998. These acquisitions resulted in
increased personnel wages and benefits and costs of operating additional
branches, as well as other expenses incurred on an indirect basis attributable
to these acquisitions. The net decrease in data processing for fiscal year 1999
compared to 1998 is due to accelerated amortization totaling $4.3 million
recorded in fiscal year 1998 for certain computer systems and software
necessitated by the Year 2000 compliance and the related planned systems
conversions. Merger expenses totaling $16.1 million associated with the First
Colorado acquisition consisted of $8.0 million in transaction costs, such as
fees for investment banking, accounting and legal, $6.7 million in costs to
combine operations and $1.4 million in severance and other termination costs.
The remaining amount of the merger expenses totaled $14.0 million and related
to the termination of three employee stock ownership plans acquired in mergers
the past two fiscal years. Such amount represents the market value of
unallocated shares distributed to plan participants upon the termination of
these employee stock ownership plans.
Intangible Assets Amortization
Total amortization expense of intangible assets for fiscal years 2000, 1999
and 1998 was $17.2 million, $15.7 million and $7.8 million, respectively. The
net increase in amortization expense of intangible assets for fiscal year 2000
compared to 1999 is primarily due to the finalization of purchase accounting
adjustments and the core value of deposits study for the Midland acquisition
consummated March 1, 1999. The net increase in amortization expense of
intangible assets for fiscal year 1999 compared to 1998 is primarily due to the
AmerUs and Midland acquisitions consummated in fiscal 1999. The amortization
expense of intangible assets associated with these two acquisitions totaled
$9.9 million and $7.8 million, respectively for fiscal years 2000 and 1999.
Provision for Income Taxes
For fiscal years 2000, 1999 and 1998 the provision for income taxes totaled
$55.3 million, $63.3 million and $52.4 million, respectively. The effective tax
rates for fiscal years 2000, 1999 and 1998 were 34.3%, 40.6% and 37.5%,
respectively. The effective tax rate varied from the statutory rate of 35.0%
for fiscal year 2000 due to the tax benefits generated from the creation of a
real estate investment trust and to increases in tax-exempt securities. The
effective tax rate varied from the statutory rate of for fiscal years 1999 and
1998 due to the nondeductibility of certain merger-related expenses and other
nonrecurring charges. A significant nondeductible merger-related expense for
fiscal year 1999 is the $14.0 million associated with the termination of the
employee stock ownership plans acquired in mergers. For the three fiscal years
ended June 30, 2000, the effective tax rates also vary from the statutory rate
due to the nondeductibility of amortization of intangible assets in relation to
the level of taxable income for the respective fiscal years.
Cumulative Effect of Change in Accounting Principle
Effective July 1, 1999, the Corporation adopted the provisions of Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities." This statement
requires that costs of start-up activities and organizational
63
costs be expensed as incurred. Prior to the adoption of this statement, these
costs were capitalized and amortized over periods ranging from five to 25
years. The effect of adopting the provisions of this statement was to record a
charge of $1.776 million, net of an income tax benefit of $978,000, or $.03 per
diluted share, as a cumulative effect of a change in accounting principle.
These costs consist of organizational costs primarily associated with the
creation of a real estate investment trust subsidiary and start-up costs of the
proof of deposit department for processing customer transactions following the
conversion of the Corporation's deposit system.
Ratios
The table below sets forth certain performance ratios of the Corporation for
the periods indicated:
Year Ended June
30
------------------
2000 1999 1998
----- ---- -----
Return on average assets: net income divided by average
total assets (1)......................................... .77% .77% .85%
Return on average equity: net income divided by average
equity (1)............................................... 10.85 9.95 10.96
Equity-to-assets ratio: average stockholders' equity to
average total assets..................................... 7.10 7.79 7.76
General and administrative expenses divided by average
assets (2)............................................... 1.87 2.00 2.01
- --------
(1) Return on average assets and return on average stockholders' equity for
fiscal year 2000 are .76% and 10.77%, respectively, excluding the after-tax
effect of nonrecurring income and charges totaling $756,000. Return on
average assets and return on average stockholders' equity for fiscal year
1999 are 1.00% and 12.86%, respectively, excluding the after-tax effect of
merger-related and other nonrecurring charges totaling $27.1 million.
Return on average assets and return on average stockholders' equity for
fiscal year 1998 are 1.06% and 13.65%, respectively, excluding the after-
tax effect of merger-related and other nonrecurring expenses totaling $21.5
million.
(2) General and administrative expenses divided by average assets for fiscal
year 2000 is 1.84% excluding the nonrecurring exit costs and termination
benefits totaling $3.9 million. The ratio for fiscal year 1999 is 1.75%
excluding the merger-related and other nonrecurring charges totaling $30.1
million. The ratio for fiscal year 1998 is 1.76% excluding the merger-
related and other nonrecurring expenses totaling $25.2 million.
The operating ratio for general and administrative expenses for fiscal year
2000 is lower compared to 1999 due to a net increase of $1.6 billion in average
assets partially offset by an increase of $13.3 million in general and
administrative expenses. The net increase in general and administrative
expenses for fiscal year 2000 over 1999 is due to a full year of expenses
associated with the Midland acquisition, higher costs from new computer systems
and item processing charges, and to lower loan origination volumes that
translates to decreases in deferred costs associated with loan originations.
The operating ratio for general and administrative expenses for fiscal year
1999 is relatively unchanged compared to 1998 due to a net increase of $32.5
million in such expenses offset by an increase of approximately $1.6 billion in
average assets over the same periods. The increase in general and
administrative expenses is primarily due to the AmerUs and Midland acquisitions
accounted for as purchases and the termination of the three employee stock
ownership plans acquired in mergers the past two fiscal years. The increase in
the average assets is attributable primarily to the AmerUs and Midland
acquisitions.
Implementation of New Accounting Pronouncements
Effective July 1, 1999, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 134 entitled "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement No. 65."
This statement conforms the subsequent accounting for securities retained after
the securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. No mortgage-backed
securities were reclassified upon initial application, therefore, the adoption
of this statement did not have an effect on the Corporation's financial
position, liquidity or results of operations. On July 1, 1999, the Corporation
also
64
adopted the provisions of Statement of Position 98-5 "Reporting the Costs of
Start-Up Activities." See "Cumulative Effect of Change in Accounting Principle"
for additional information on the effect of this statement.
Effective July 1, 2000, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." See Note 29 "Subsequent Event--Accounting
for Derivatives and Hedging Activities" to the Consolidated Financial
Statements under Item 8 of this Report for information on the initial effect
this statement had on the Corporation.
Liquidity and Capital Resources
The Corporation's principal asset is its investment in the capital stock of
the Bank. Since the Corporation does not generate any significant revenues
independent of the Bank, the Corporation's liquidity is dependent on the extent
to which it receives dividends from the Bank. The Bank's ability to pay
dividends to the Corporation is dependent on its ability to generate earnings
and is subject to a number of regulatory restrictions and tax considerations.
Under the capital distribution regulations of the OTS, the Bank is permitted to
pay capital distributions during a calendar year up to 100.0% of its retained
net income (net income determined in accordance with generally accepted
accounting principles less total capital distributions declared) for the
current calendar year combined with the Bank's retained net income for the
preceding two calendar years without prior approval of the OTS. At June 30,
2000, the Bank would be permitted to pay an aggregate amount approximating
$55.3 million in dividends under this regulation. Should the Bank's regulatory
capital fall below certain levels, applicable law would require approval by the
OTS of such proposed dividends and, in some cases, would prohibit the payment
of dividends.
The Corporation manages its liquidity at both the parent company and
subsidiary levels. At June 30, 2000, the cash of Commercial Federal Corporation
(the "parent company") totaled $44.4 million. Due to the parent company's
limited independent operations, management believes that its cash balance at
June 30, 2000, is currently sufficient to meet operational needs excluding
funds necessary for interest and principal payments and the repurchase of
common stock. The parent company's ability to make future interest and
principal payments on its $50.0 million of 7.95% fixed-rate subordinated
extendible notes due December 1, 2006, on its $46.4 million of 9.375% fixed-
rate junior subordinated debentures due May 15, 2027 and on its term and
revolving credit notes, is dependent upon its receipt of dividends from the
Bank. During fiscal years 2000 and 1999, the parent company received cash
dividends totaling $117.8 million and $73.3 million, respectively, from the
Bank. The dividends received from the Bank during fiscal year 2000 were for:
. common stock cash dividends totaling $19.4 million paid by the parent
company to its common stock shareholders,
. interest payments totaling $16.7 million on the parent company's debt,
. principal payments of $9.0 million on the parent company's five-year term
note,
. the financing, in part, of common stock repurchases totaling $63.1
million, and
. $9.6 million for the purchase by the parent company of non-rated, tax-
exempt securities from the Bank and the mortgage banking subsidiary.
Cash dividends paid by the parent company to its common stock shareholders
totaled $15.8 million and $13.5 million, respectively, during fiscal years 2000
and 1999. The payment of dividends on the common stock is subject to the
discretion of the Board of Directors of the Corporation and depends on a
variety of factors, including operating results and financial condition,
liquidity, regulatory capital limitations and other factors. The Bank will
continue to pay dividends to the parent company, pursuant to regulatory
restrictions, to cover future principal and interest payments on the parent
company's debt and quarterly cash dividends on common stock when and as
declared by the parent company. The parent company also receives cash from the
exercise of stock options and the sale of stock under its employee benefit
plans which totaled $2.4 million and
65
$9.7 million, respectively, during fiscal years 2000 and 1999, as well as from
the Bank for income tax benefits from operating losses of the parent company as
provided in the corporate tax sharing agreement.
On April 28, 1999, the Board of Directors authorized the repurchase of up to
five percent, or approximately 3,000,000 shares, of the Corporation's
outstanding common stock. This repurchase was completed on December 29, 1999.
Effective December 27, 1999, the Corporation's Board of Directors authorized a
second repurchase of up to 3,000,000 shares of the Corporation's outstanding
stock over the next 18 months. During the fiscal year end June 30, 2000, the
Corporation repurchased and cancelled 3,773,500 shares of its common stock at a
cost of $63.9 million. This second repurchase was completed on August 25, 2000.
During the fourth quarter of fiscal year 1999 the Corporation repurchased and
cancelled 1,500,000 shares at a cost of $36.2 million. On August 14, 2000, the
Corporation's Board of Directors authorized the repurchase of up to 10% of its
outstanding stock, or approximately 5,500,000 shares. This repurchase is to be
completed no later than February 2002.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB and (iv) cash generated from operations. As reflected in the
Consolidated Statement of Cash Flows, net cash flows provided by operating
activities for fiscal years 2000 and 1999 totaled $191.7 million and $251.5
million, respectively, and net cash flows used by operating activities for
fiscal year 1998 totaled $96.8 million. Amounts fluctuate from period to period
primarily as a result of mortgage banking activity relating to the purchase and
origination of loans for resale and the subsequent sale of such loans. The
purchase and origination of loans for resale totaling $711.2 million for fiscal
year 2000 is lower compared to $1.9 billion and $1.4 billion for fiscal years
1999 and 1998, respectively, primarily due to increased prepayment and
refinancing activity during fiscal years 1999 and 1998. Proceeds from the sales
of loans totaled $762.0 million for fiscal year 2000 compared to $2.0 billion
and $1.2 billion, respectively, in fiscal years 1999 and 1998.
Net cash flows used by investing activities totaled $1.2 billion and $840.0
million for fiscal years 2000 and 1999, respectively, and net cash flows
provided by investing activities totaled $112.4 million for fiscal year 1998.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. The
acquisition of First Colorado had no material effect on liquidity, except for
the net cash outlays totaling $16.1 million relating to nonrecurring merger
related costs, since this transaction was consummated in an exchange of common
stock between the financial institutions. The acquisition of AmerUs resulted in
a cash outlay of approximately $53.2 million and the acquisition of Midland
resulted in a cash outlay of $83.0 million. The AmerUs acquisition was financed
by $40.0 million of one-year purchase notes due July 31, 1999, from the seller
bearing interest at 150 basis points over the one-year Treasury bill rate, a
$10.0 million capital distribution from the Bank and, in part, by a $45.0
million term note borrowed by the Corporation on July 30, 1998. The Midland
acquisition was financed by parent company funds and a $25.0 million capital
distribution from the Bank. The Corporation's four fiscal year 1998
acquisitions, structured to be consummated as an exchange of common stock
between the Corporation and these respective financial institutions, resulted
in the Corporation issuing 9,368,063 shares of its common stock in fiscal year
1998. Cash outlays for nonrecurring merger-related costs associated with these
acquisitions approximated $19.8 million.
Net cash flows provided by financing activities totaled $889.6 million,
$724.7 million and $56.6 million, respectively, for fiscal years 2000, 1999 and
1998. Advances from the FHLB, retail deposits and securities sold under
agreements to repurchase have been the primary sources to balance the
Corporation's funding needs during each of the fiscal years presented.
Excluding deposits acquired in acquisitions, the Corporation experienced net
decreases in deposits of $325.8 million, $211.1 million and $212.9 million for
fiscal years 2000, 1999 and 1998, respectively. The decreases in deposits were
primarily due to depositors seeking higher-yielding investment options. During
fiscal years 2000 and 1999 the Corporation continued to borrow long-term FHLB
advances that are callable at the option of the FHLB. Such advances provide the
Corporation with lower costing interest-bearing liabilities than other funding
alternatives. At June 30, 2000, 1999 and 1998, the
66
Corporation had fixed-rate advances totaling $2.3 billion, $3.0 billion and
$1.0 billion, respectively, that were convertible into adjustable-rate
advances. At June 30, 2000, these convertible advances had call dates ranging
from July 2000 to March 2003. The one-year notes for $40.0 million from the
AmerUs acquisition were paid in full on July 30, 1999. The $32.5 million term
note due July 31, 2003, was refinanced on July 1, 1999. The proceeds to pay the
$40.0 million AmerUs note in full and the refinancing came from a term note for
$72.5 million due June 30, 2004, unsecured, with quarterly principal payments
of $1.8 million and interest payable quarterly at 100 basis points below the
lender's national base rate. At June 30, 2000, this term note had a remaining
principal balance of $65.3 million. In addition, on August 30, 1999, the
Corporation borrowed $10.0 million from the same lender on a revolving line of
credit. This revolving credit note has a balance of $10.0 million as of June
30, 2000 and is unsecured with interest terms the same as the term note. The
proceeds were used to help finance the Corporation's repurchase of its common
stock. During fiscal years 2000 and 1999, the Corporation repurchased shares at
a cost of $63.9 million and $36.2 million, respectively. On August 14, 1998,
First Colorado issued 1,400,000 shares of common stock prior to its merger with
the Corporation, resulting in the receipt of proceeds totaling $32.5 million.
At June 30, 2000, the Corporation issued commitments totaling $611.2 million
to fund and purchase loans and investment securities as follows: $125.4 million
of single-family fixed-rate mortgage loans, $120.3 million of single-family
adjustable-rate mortgage loans, $127.5 million of commercial real estate loans,
$17.6 million of consumer loans, $1.5 million of investment securities, and
$218.9 million of unused lines of credit for commercial and consumer use. These
outstanding loan commitments to extend credit in order to originate loans or
fund commercial and consumer loans lines of credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn. The Corporation expects to fund these commitments, as necessary, from
the sources of funds previously described. In addition, at June 30, 2000, the
Corporation had $289.8 million in mandatory forward delivery commitments to
sell residential mortgage loans.
The maintenance of an appropriate level of liquid resources to meet not only
regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral
element in the management of the Corporation's assets. The Bank is required by
federal regulation to maintain a minimum average daily balance of liquid assets
in each calendar quarter of not less than 4.0% of net withdrawable deposits
plus short-term borrowings or 4.0% of the average daily balance of net
withdrawable accounts plus short-term borrowings during the preceding quarter.
The Bank's liquidity ratio was 15.23% at June 30, 2000. Liquidity levels will
vary depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The Bank
does not foresee any difficulty in meeting its liquidity requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial
information are prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have
a more significant effect on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services.
Year 2000
The year 2000 posed important business issues regarding how existing
application software programs and operating systems, both internal and
external, could accommodate this date value. The Corporation did not experience
any data processing delays, mistakes or failures as a result of year 2000
issues. All of the significant computer programs of the Corporation that could
have been affected by this problem were provided by major third party vendors.
The Corporation completed the process of replacing/upgrading its integral
computer
67
systems and programs, as well as most equipment, in order to provide cost-
effective and efficient delivery of services to its customers, information to
management, and to provide additional capacity for processing information and
transactions due to acquisitions. Costs of the Year 2000 project were funded
through cash flows from operations. Most of the total project cost was
capitalized since it involved the purchase of computer systems, programs and
equipment. During fiscal year 2000, approximately $712,000 was expensed that
related to systems conversion costs, internal staff costs, as well as
consulting and other Year 2000 expenses. For fiscal year 1999, approximately
$4.4 million was expensed relating to these items. In addition, during fiscal
year 1998 the Corporation expensed $4.3 million due to accelerated amortization
of certain computer systems and software necessitated by Year 2000 compliance
and the related planned systems conversions. The adjusted carrying amount of
these computer systems and software was depreciated until their disposal at the
date of conversion.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included in the "Asset/Liability Management" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included under Item 7 of this Report, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Controls
Management of Commercial Federal Corporation is responsible for the
preparation, integrity, and fair presentation of its published consolidated
financial statements and all other information presented in this Annual Report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and, as such, include amounts based on
informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining effective
internal control over financial reporting. The internal control structure
contains monitoring mechanisms and actions are taken to correct deficiencies
identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even effective internal
control can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
Management assessed Commercial Federal Corporation's internal control over
financial reporting as of June 30, 2000. This assessment was based on the
criteria for effective internal control described in "Internal Control-
Integrated Framework" issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based upon this assessment, Management believes that
Commercial Federal Corporation maintained effective internal control over
financial reporting as of June 30, 2000.
/s/ William A. Fitzgerald
William A. Fitzgerald /s/ David S. Fisher
Chairman of the Board and David S. Fisher
Chief Executive Officer Chief Financial Officer
68
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial
condition of Commercial Federal Corporation and subsidiaries (the
"Corporation") as of June 30, 2000 and 1999, and the related consolidated
statements of operations, comprehensive income, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commercial
Federal Corporation and subsidiaries as of June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 26 to the consolidated financial statements, the
Corporation changed its method of accounting for start-up activities and
organizational costs to conform with the provisions of Statement of Position
98-5 "Reporting the Costs of Start-Up Activities."
/s/ Deloitte & Touche LLP
Omaha, Nebraska
August 15, 2000
69
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30,
------------------------
2000 1999
ASSETS ----------- -----------
(Dollars in Thousands)
Cash (including short-term investments of $1,086 and
$39,585)........................................... $ 199,566 $ 353,275
Investment securities available for sale, at fair
value.............................................. 70,478 83,811
Mortgage-backed securities available for sale, at
fair value......................................... 362,756 419,707
Loans and leases held for sale, net................. 183,356 104,347
Investment securities held to maturity (fair value
of $857,786 and $846,805).......................... 922,689 862,760
Mortgage-backed securities held to maturity (fair
value of $835,095 and $849,488).................... 857,382 862,838
Loans and leases receivable, net of allowances of
$70,497 and $80,344................................ 10,224,336 9,222,046
Federal Home Loan Bank stock........................ 255,756 194,129
Interest receivable, net of allowances of $70 and
$319............................................... 81,991 77,513
Real estate, net.................................... 39,129 31,513
Premises and equipment, net......................... 181,692 185,302
Prepaid expenses and other assets................... 183,057 125,544
Intangible assets, net of accumulated amortization
of $66,496 and $49,260............................. 230,850 252,677
----------- -----------
Total Assets.................................... $13,793,038 $12,775,462
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.......................................... $ 7,330,500 $ 7,655,415
Advances from Federal Home Loan Bank.............. 5,049,582 3,632,241
Securities sold under agreements to repurchase.... 33,379 128,514
Other borrowings.................................. 172,647 225,383
Interest payable.................................. 51,053 48,759
Other liabilities................................. 167,899 118,267
----------- -----------
Total Liabilities............................... 12,805,060 11,808,579
----------- -----------
Commitments and Contingencies....................... -- --
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued.......................... -- --
Common stock, $.01 par value; 120,000,000 shares
authorized;
55,922,884 and 59,593,849 shares issued and
outstanding..................................... 559 596
Additional paid-in capital........................ 303,635 364,320
Retained earnings................................. 699,724 611,529
Accumulated other comprehensive loss, net......... (15,940) (9,562)
----------- -----------
Total Stockholders' Equity...................... 987,978 966,883
----------- -----------
Total Liabilities and Stockholders' Equity...... $13,793,038 $12,775,462
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
70
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands
Except Per Share Data)
Interest Income:
Loans and leases receivable................... $759,711 $700,911 $619,851
Mortgage-backed securities.................... 82,563 77,039 81,168
Investment securities......................... 85,416 61,404 56,669
-------- -------- --------
Total interest income....................... 927,690 839,354 757,688
Interest Expense:
Deposits...................................... 325,674 322,858 313,752
Advances from Federal Home Loan Bank.......... 240,924 157,787 121,414
Securities sold under agreements to
repurchase................................... 3,922 12,419 30,533
Other borrowings.............................. 15,029 13,957 11,690
-------- -------- --------
Total interest expense...................... 585,549 507,021 477,389
Net Interest Income............................. 342,141 332,333 280,299
Provision for Loan and Lease Losses............. (13,760) (12,400) (13,853)
-------- -------- --------
Net Interest Income After Provision for Loan and
Lease Losses................................... 328,381 319,933 266,446
Other Income (Loss):
Loan servicing fees, net...................... 25,194 22,961 24,523
Retail fees and charges....................... 43,230 36,740 30,284
Real estate operations........................ (88) (1,674) 1,894
Gain (loss) on sales of loans................. (110) 3,423 3,092
Gain on sales of securities................... -- 4,376 3,765
Other operating income........................ 33,613 24,189 23,702
-------- -------- --------
Total other income.......................... 101,839 90,015 87,260
Other Expense:
General and administrative expenses -
Compensation and benefits..................... 111,720 98,869 88,129
Occupancy and equipment....................... 38,873 36,528 28,316
Data processing............................... 18,834 12,360 18,276
Regulatory insurance and assessments.......... 4,588 5,777 5,089
Advertising................................... 15,100 13,893 12,633
Other operating expenses...................... 58,875 41,250 35,646
Exit costs and termination benefits........... 3,941 -- --
Merger expenses............................... -- 29,917 18,034
-------- -------- --------
Total general and administrative expenses... 251,931 238,594 206,123
Amortization of intangible assets.............. 17,236 15,702 7,814
-------- -------- --------
Total other expense......................... 269,167 254,296 213,937
-------- -------- --------
Income Before Income Taxes and Cumulative Effect
of Change in Accounting Principle.............. 161,053 155,652 139,769
Provision for Income Taxes...................... 55,269 63,260 52,356
-------- -------- --------
Income Before Cumulative Effect of Change in
Accounting Principle........................... 105,784 92,392 87,413
Cumulative Effect of Change in Accounting
Principle, Net of Tax Benefit.................. (1,776) -- --
-------- -------- --------
Net Income...................................... $104,008 $ 92,392 $ 87,413
======== ======== ========
71
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
Year Ended June 30,
------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in Thousands Except Per
Share Data)
Weighted Average Number of Common Shares
Outstanding Used in Basic Earnings Per
Share Calculation....................... 58,024,192 59,539,111 56,381,051
Add Assumed Exercise of Outstanding Stock
Options as Adjustments for Dilutive
Securities............................... 218,173 587,735 1,304,230
----------- ----------- -----------
Weighted Average Number of Common Shares
Outstanding Used in Diluted Earnings Per
Share Calculation........................ 58,242,365 60,126,846 57,685,281
=========== =========== ===========
Basic Earnings Per Common Share:
Income before cumulative effect of
change in accounting principle......... $ 1.82 $ 1.55 $ 1.55
Cumulative effect of change in
accounting principle, net.............. (.03) -- --
----------- ----------- -----------
Net Income............................ $ 1.79 $ 1.55 $ 1.55
=========== =========== ===========
Diluted Earnings Per Common Share:
Income before cumulative effect of
change in accounting principle......... $ 1.82 $ 1.54 $ 1.52
Cumulative effect of change in
accounting principle, net.............. (.03) -- --
----------- ----------- -----------
Net Income............................ $ 1.79 $ 1.54 $ 1.52
=========== =========== ===========
Dividends Declared Per Common Share....... $ .275 $ .250 $ .212
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
72
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended June 30,
---------------------------
2000 1999 1998
-------- -------- -------
(Dollars in Thousands)
Net Income........................................ $104,008 $ 92,392 $87,413
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities
available for sale............................. (9,812) (10,443) 3,935
Less net gains on securities included in net
income......................................... -- (4,376) (3,765)
-------- -------- -------
Other Comprehensive Income (Loss) Before Income
Taxes............................................ (9,812) (14,819) 170
Income Tax Provision (Benefit).................... (3,434) (5,187) 59
-------- -------- -------
Other Comprehensive Income (Loss)................. (6,378) (9,632) 111
-------- -------- -------
Comprehensive Income.............................. $ 97,630 $ 82,760 $87,524
======== ======== =======
See accompanying Notes to Consolidated Financial Statements.
73
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income (Loss), Plan
Stock Capital Earnings Net Shares Total
------ ---------- -------- ------------- --------- --------
(Dollars in Thousands)
Balance, June 30, 1997.. $461 $290,337 $464,990 $ (41) $(13,592) $742,155
Mid Continent
Bancshares, Inc.
activity for three
months ended September
30, 1997.............. -- (797) (797) -- (28) (1,622)
Issuance of 10,865,530
shares in three-for-
two stock split
effected in the form
of a 50 percent stock
dividend.............. 109 (109) -- -- -- --
Issuance of 613,548
shares under certain
compensation and
employee plans........ 7 4,346 -- -- -- 4,353
Issuance of 1,290,174
shares of common stock
for acquisition of
business.............. 10 38,181 -- -- -- 38,191
Restricted stock and
deferred compensation
plans, net............ -- 7,625 -- -- -- 7,625
Commitment of release
of ESOP shares........ -- -- -- -- 2,216 2,216
Purchase and
cancellation of
101,879 shares of
common stock of
combining companies... -- (1,886) -- -- -- (1,886)
Cash dividends
declared.............. -- -- (17,361) -- -- (17,361)
Net income............. -- -- 87,413 -- -- 87,413
Change in unrealized
holding gain (loss) on
securities available
for sale, net......... -- -- -- 111 -- 111
---- -------- -------- ------- -------- --------
Balance, June 30, 1998.. 587 337,697 534,245 70 (11,404) 861,195
Issuance of 979,856
shares under certain
compensation and
employee plans........ 10 14,279 -- -- -- 14,289
Issuance of 1,378,580
shares of common
stock................. 14 32,401 -- -- -- 32,415
Restricted stock and
deferred compensation
plans, net............ -- 2,192 -- -- -- 2,192
Commitment of release
of ESOP shares........ -- -- -- -- 11,404 11,404
Termination of ESOP
plans................. -- 13,954 -- -- -- 13,954
Purchase and
cancellation of
1,500,000 shares of
common stock.......... (15) (36,203) -- -- -- (36,218)
Cash dividends
declared.............. -- -- (15,108) -- -- (15,108)
Net income............. -- -- 92,392 -- -- 92,392
Change in unrealized
holding gain (loss) on
securities available
for sale, net......... -- -- -- (9,632) -- (9,632)
---- -------- -------- ------- -------- --------
Balance, June 30, 1999.. $596 $364,320 $611,529 $(9,562) $ -- $966,883
==== ======== ======== ======= ======== ========
74
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Continued)
Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income (Loss), Plan
Stock Capital Earnings Net Shares Total
------ ---------- -------- ------------- --------- ---------
(Dollars in Thousands)
Balance, June 30, 1999.. $596 $364,320 $611,529 $ (9,562) $ -- $ 966,883
Issuance of 102,535
shares under certain
compensation and
employee plans........ 1 2,388 -- -- -- 2,389
Restricted stock and
deferred compensation
plans, net............ -- 784 -- -- -- 784
Purchase and
cancellation of
3,773,500 shares of
common stock.......... (38) (63,857) -- -- -- (63,895)
Cash dividends
declared.............. -- -- (15,813) -- -- (15,813)
Net income............. -- -- 104,008 -- -- 104,008
Change in unrealized
holding gain (loss) on
securities available
for sale, net......... -- -- -- (6,378) -- (6,378)
---- -------- -------- -------- ----- ---------
Balance, June 30, 2000.. $559 $303,635 $699,724 $(15,940) $ -- $ 987,978
==== ======== ======== ======== ===== =========
See accompanying Notes to Consolidated Financial Statements.
75
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30,
---------------------------------
2000 1999 1998
---------- ---------- ---------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................. $ 104,008 $ 92,392 $ 87,413
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Amortization of intangible assets......... 17,236 15,702 7,814
Provision for losses on loans and leases
and real estate.......................... 13,846 13,974 13,902
Depreciation and amortization............. 20,414 18,172 13,135
Amortization (accretion) of deferred
discounts and fees, net.................. 581 2,542 (2,163)
Amortization of mortgage servicing
rights................................... 8,703 12,021 10,177
Amortization of deferred compensation on
restricted stock and deferred
compensation plans and premiums on other
borrowings............................... 783 1,754 1,798
Termination of employee stock ownership
plans.................................... -- 13,954 --
Deferred tax provision.................... 34,302 17,093 2,504
Gain on sales of real estate, loans and
loan servicing rights, net............... (1,258) (4,618) (6,144)
Gain on sales of securities............... -- (4,376) (3,765)
Gain on sale of headquarters and
branches................................. (8,506) (1,076) --
Stock dividends from Federal Home Loan
Bank..................................... (7,479) (10,827) (8,413)
Proceeds from sales of loans.............. 761,960 1,958,807 1,178,244
Origination of loans for resale........... (185,994) (479,852) (648,969)
Purchases of loans for resale............. (525,236) (1,411,210) (721,703)
Increase (decrease) in interest
receivable............................... (4,478) 1,261 5
Increase (decrease) in interest payable
and other liabilities.................... 17,587 (22,804) (12,531)
Other items, net.......................... (54,785) 38,588 (8,107)
---------- ---------- ---------
Total adjustments....................... 87,676 159,105 (184,216)
---------- ---------- ---------
Net cash provided (used) by operating
activities........................... 191,684 251,497 (96,803)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of loans.......................... (1,430,920) (1,531,385) (787,496)
Repayment of loans, net of originations..... 222,190 1,122,811 465,595
Principal repayments of mortgage-backed
securities available for sale.............. 45,869 69,559 70,770
Purchases of mortgage-backed securities
available for sale......................... -- (446,186) (40,758)
Proceeds from sales of mortgage-backed
securities available for sale.............. -- 209,789 121,187
Principal repayments of mortgage-backed
securities held to maturity................ 195,043 290,726 287,135
Purchases of mortgage-backed securities held
to maturity................................ (160,073) (218,479) --
Maturities and repayments of investment
securities held to maturity................ 41,207 339,089 430,084
Purchases of investment securities held to
maturity................................... (105,865) (666,574) (368,084)
Purchases of investment securities available
for sale................................... -- (33,901) (81,778)
Proceeds from sales of investment securities
available for sale......................... -- 30,153 20,189
Maturities and repayments of investment
securities available for sale.............. 10,170 170,196 35,336
Purchases of mortgage loan servicing
rights..................................... (8,257) (21,959) (14,483)
Proceeds from sales of loan servicing
rights..................................... -- -- 412
Proceeds from sales of Federal Home Loan
Bank stock................................. 3,571 13,691 7,229
Purchases of Federal Home Loan Bank stock... (57,719) (51,213) (31,547)
Acquisitions, net of cash received (paid)... -- (88,351) 7,283
Proceeds from sales of real estate.......... 24,371 17,183 21,780
Payments to acquire real estate............. (406) (613) (2,806)
Purchases of premises and equipment, net.... (8,298) (40,675) (16,668)
Other items, net............................ (5,826) (3,820) (11,012)
---------- ---------- ---------
Net cash (used) provided by investing
activities........................... (1,234,943) (839,959) 112,368
---------- ---------- ---------
76
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
Year Ended June 30,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in deposits.................... $ (325,809) $ (211,102) $ (212,908)
Proceeds from Federal Home Loan Bank
advances............................... 3,413,000 2,400,000 1,665,165
Repayments of Federal Home Loan Bank
advances............................... (1,995,350) (1,386,781) (1,022,207)
Proceeds from securities sold under
agreements to repurchase............... 12,902 25,000 100,000
Repayments of securities sold under
agreements to repurchase............... (107,143) (235,955) (405,000)
Proceeds from issuances of other
borrowings............................. 50,000 152,200 12,254
Repayments of other borrowings.......... (80,742) (23,423) (67,181)
Proceeds from loan repayments from
employee stock ownership plans......... -- 11,058 --
Payments of cash dividends on common
stock.................................. (15,776) (13,539) (16,147)
Repurchases of common stock............. (63,895) (36,218) (1,886)
Issuance of common stock................ 2,363 45,095 6,519
Other items, net........................ -- (1,610) (1,982)
----------- ----------- -----------
Net cash provided by financing
activities....................... 889,550 724,725 56,627
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
(Decrease) increase in net cash
position............................... (153,709) 136,263 72,192
Balance, beginning of year.............. 353,275 217,012 177,403
Adjustments to convert acquisition to
fiscal year end........................ -- -- (32,583)
----------- ----------- -----------
Balance, end of year.................... $ 199,566 $ 353,275 $ 217,012
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest expense...................... $ 583,440 $ 506,137 $ 426,832
Income taxes, net..................... 6,514 54,110 59,270
Non-cash investing and financing
activities:
Loans exchanged for mortgage-backed
securities........................... 42,635 20,773 161,189
Loans transferred to real estate...... 24,002 17,671 7,205
Loans to facilitate the sale of real
estate............................... -- 259 302
Common stock issued in connection with
the acquisition of business.......... -- -- 32,267
Common stock received in connection
with employee benefit plans, net..... (135) (475) (4,180)
See accompanying Notes to Consolidated Financial Statements.
77
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
Note 1. Summary Of Significant Accounting Policies
Basis Of Consolidation
The consolidated financial statements are prepared on an accrual basis and
include the accounts of Commercial Federal Corporation (the "Corporation") and
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the "Bank"), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. Certain amounts for years prior
to fiscal year 2000 have been reclassified for comparative purposes.
Nature Of Business
The Corporation is a unitary non-diversified savings and loan holding
company whose primary asset is the Bank which is a consumer-oriented financial
institution that emphasizes single-family residential and construction real
estate lending, consumer lending, commercial real estate lending, commercial
and agribusiness lending, community banking operations, retail deposit
activities, mortgage banking and other retail financial services. The Bank
conducts loan origination activities through its branch office network, loan
offices of its wholly-owned mortgage banking subsidiary and a nationwide
correspondent network.
Use Of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities.
Management is also required to disclose contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
reporting period.
Cash And Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
cash, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for a one-day period.
Securities
Securities are classified in one of three categories and accounted for as
follows:
. debt securities that the Corporation has the positive intent and ability
to hold to maturity are classified as "held-to-maturity securities,"
. debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as "trading
securities" and
. debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as "available-for-sale
securities."
Held to maturity securities are reported at amortized cost. Trading
securities are reported at fair value, with unrealized gains and losses
included in earnings. Available-for-sale securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported net of
deferred income taxes as a separate component of accumulated other
comprehensive income (loss).
Premiums and discounts are amortized over the contractual lives of the
related securities on the level yield method. Any unrealized losses on
securities reflecting a decline in their fair value considered to be other than
temporary are charged against earnings. Realized gains or losses on securities
available for sale are based on the specific identification method and are
included in results of operations on the trade date of the sales transaction.
78
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans And Leases
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are recorded at the contractual amounts
owed by borrowers less unamortized discounts, net of premiums, undisbursed
funds on loans in process, deferred loan fees and allowance for loan losses.
Interest on loans is accrued to income as earned, except that interest is not
accrued on first mortgage loans contractually delinquent three months or more.
Any related discounts or premiums on loans purchased are amortized into
interest income using the level yield method over the contractual lives of the
loans, adjusted for actual prepayments. Loan origination fees, commitment fees
and direct loan origination costs are deferred and recognized over the
estimated average life of the loan as a yield adjustment.
A loan is considered to be impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. All impaired
loans are classified as substandard for risk classification purposes. When
management believes principal and interest are deemed uncollectable, impaired
loans are charged-off to the estimated value of the collateral associated with
the loan. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet the payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent that
cash payments are received.
Loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is determined by outstanding commitments from investors or
current investor yield requirements calculated on an aggregate loan basis.
Valuation adjustments, if necessary, are recorded in current operations to
reflect the lower of aggregate cost or market value.
Leases are accounted for as direct financing leases for financial statement
purposes. The total minimum rentals receivable and the residual value of leased
assets under each lease contract are recorded as assets, net of unearned
income. Unearned income is the excess of the total rentals receivable and
residual value over the cost of the leased asset. Unearned income is recognized
during the lease term utilizing the interest method. Direct origination costs
are deferred and recognized over the estimated life of the lease.
Real Estate
Real estate includes real estate acquired through foreclosure, real estate
in judgment and real estate held for investment. Real estate held for
investment includes equity in unconsolidated joint ventures and investment in
real estate partnerships.
To establish a new cost basis, real estate acquired through foreclosure and
in judgment are initially recorded at the lower of cost or fair value less
estimated costs to sell at the date of foreclosure. After foreclosure,
valuation allowances for estimated losses on real estate are provided when the
carrying value exceeds the fair value less estimated costs to sell the
property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities. Joint venture and
partnership investments are carried on the equity method of accounting and are
stated at net realizable value, where applicable. The Corporation's ability to
recover the carrying value of real estate held for investment (including
capitalized interest) is based upon future sales of land or projects. The
ability to sell this real estate is subject to market conditions and other
factors which may be beyond the Corporation's control.
79
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allowance For Loan And Lease Losses
The allowance for loan and lease losses is increased by charges to income
and decreased by charge-offs, net of recoveries. The allowance for loan and
lease losses consists of two elements. The first element is an allowance
established for specifically identified loans that are evaluated individually
for impairment and are considered to be individually impaired. A loan is
considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments
of principal and interest when due according to the contractual terms of the
loan agreement. Impairment is measured by (1) the present value of expected
future cash flows, (2) the loan's obtainable market price, or (3) the fair
value of the collateral if the loan is collateral dependent (the primary method
used by the Corporation). The second element is an estimated allowance
established for impairment on each of the Corporation's pools of outstanding
loans. These estimated allowances are based on several analysis factors
including the Corporation's past loss experience, general economic and business
conditions, geographic and industry concentrations, credit quality and
delinquency trends, and known and inherent risks in each of the portfolios.
These evaluations are inherently subjective as they require revisions as more
information becomes available.
Mortgage Servicing Rights
Mortgage servicing rights are established based on the cost of acquiring the
right to service mortgage loans or the allocated fair value of servicing rights
retained on originated loans sold. These costs are initially capitalized and
then amortized proportionately over the period of estimated net loan servicing
income.
Amortization of mortgage servicing rights is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the mortgage servicing rights. Projected net
servicing income is in turn determined on the basis of the estimated future
balance of the underlying mortgage loan portfolio. This portfolio decreases
over time from scheduled loan amortization and prepayments. The Corporation
estimates future prepayment rates based on relevant characteristics of the
servicing portfolio, such as loan types, interest rate stratification and
recent prepayment experience, as well as current interest rate levels, market
forecasts and other economic conditions.
The Corporation reports mortgage servicing rights at the lower of amortized
cost or fair value. The fair value of mortgage servicing rights is determined
based on the present value of estimated expected future cash flows, using
assumptions as to current market discount rates, prepayment speeds and
servicing costs per loan. Mortgage servicing rights are stratified by loan type
and interest rate for purposes of impairment measurement. Loan types include
government, conventional and adjustable-rate mortgage loans. Impairment losses
are recognized to the extent the unamortized mortgage servicing rights for each
stratum exceed the current fair value. Impairment losses are recorded as
reductions in the carrying value of the asset, through the use of a valuation
allowance, with a corresponding reduction to loan servicing income. No
valuation allowance for capitalized servicing rights was necessary as of June
30, 2000, 1999 or 1998.
Premises And Equipment
Land is carried at cost. Buildings, building improvements, leasehold
improvements and furniture, fixtures and equipment are stated at the lower of
cost or fair value less accumulated depreciation and amortization. Depreciation
is calculated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings and three to
15 years for furniture, fixtures and equipment. Leasehold improvements are
generally amortized on the straight-line method over the terms of the
respective leases. Maintenance and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets consist primarily of goodwill and core value of deposits.
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets acquired in business combinations. Core
80
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
value of deposits represents the identifiable intangible value assigned to core
deposit bases arising from purchase acquisitions. The Corporation reviews its
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the intangible asset may not be
recoverable. An impairment loss would be recognized if the sum of expected
future cash flows (undiscounted and without interest charges) resulting from
the use of the asset is less than the carrying amount of the asset. If an
assessment indicates that the value of the intangible asset may be impaired,
then an impairment loss is recognized for the difference between the carrying
value of the asset and its estimated fair value.
Core value of deposits is amortized on an accelerated basis over a period
not to exceed 10 years. Goodwill is amortized on a straight-line basis over
periods up to 25 years.
Derivative Financial Instruments
The Corporation utilizes derivative financial instruments as part of an
overall interest rate risk management strategy. Derivative financial
instruments utilized by the Corporation include interest rate swap agreements
and interest rate floor agreements. The Corporation is an end-user of
derivative financial instruments and does not conduct trading activities for
derivatives. These derivative financial instruments involve, to varying
degrees, elements of credit and market risk which are not recognized on the
balance sheet. Credit risk is defined as the possibility that a loss may occur
from the failure of another party to perform in accordance with the terms of
the contract which exceeds the value of any existing collateral. Market risk is
the possibility that future changes in market conditions may make the
derivative financial instrument less valuable. The Corporation evaluates the
risks associated with derivatives in much the same way as the risks with on-
balance sheet financial instruments. The derivative's risk of credit loss is
generally a small fraction of the notional value of the instrument and is
represented by the fair value of the derivative instrument. The Corporation
attempts to limit its credit risk by dealing with creditworthy counterparties
and obtaining collateral where appropriate.
Interest rate swap agreements are used principally as a tool to
synthetically extend the maturities of certain deposit liabilities for asset
liability management and interest rate risk management purposes. These
contracts represent an exchange of interest payment streams based on an agreed-
upon notional principal amount with at least one stream based on a specified
floating-rate index. The underlying principal balances of the deposit
liabilities are not affected. Under these agreements, the Corporation pays
fixed rates of interest and receives variable rates of interest that are based
on the same rates the Corporation pays on the hedged deposit liabilities. As
the swaps have the opposite interest rate characteristics of the hedged deposit
liabilities, the interest rate swap agreements qualify for settlement
accounting. Accordingly, net settlement amounts are reported as adjustments to
interest expense on an accrual basis over the lives of the agreements. Cash
flows are reported net as operating activities.
Interest rate floor agreements require the seller to pay the purchaser the
amount by which the market interest rate falls below the agreed-upon floor. Any
payments are at specified dates and are applied to a notional principal amount.
These positions are designed to protect the value of the mortgage servicing
rights from the effects of increased prepayment activity that generally results
from declining interest rates. Realized gains and losses on positions used as
hedges of capitalized mortgage servicing rights are deferred and amortized to
expense over the remaining life of the original agreement. Unrealized gains and
losses are considered in the impairment analysis of the fair value of mortgage
servicing rights. Premiums are amortized to expense on a straight-line basis
over the life of the agreement. Unamortized premiums paid are included in other
assets. Cash payments received from these agreements are recognized upon
receipt as a reduction to amortization expense.
Income Taxes
The Corporation files a consolidated federal income tax return and separate
state income tax returns. The Corporation and its subsidiaries entered into a
tax-sharing agreement that provides for the allocation and payment of federal
and state income taxes. The provision for income taxes of each corporation is
computed on
81
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a separate company basis, subject to certain adjustments. The Corporation
calculates income taxes on the liability method. Under the liability method the
net deferred tax asset or liability is determined based on the tax effects of
the differences between the book and tax bases of the various assets and
liabilities of the Corporation giving current recognition to changes in tax
rates and laws.
Earnings Per Common Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock (1) were
exercised or converted into common stock or (2) resulted in the issuance of
common stock that then shared in the earnings of the entity.
Note 2. Acquisitions
Fiscal Year 1999 Acquisitions
On July 31, 1998, the Corporation consummated its acquisition of AmerUs, a
wholly-owned subsidiary of AmerUs Group Co. The Corporation acquired through a
taxable acquisition all of the outstanding shares of the common stock of AmerUs
for total consideration of $178,269,000. This consideration consisted of
certain assets retained by AmerUs Group Co. totaling $85,027,000, cash totaling
$53,242,000, and one-year promissory notes for $40,000,000. AmerUs was a
federally chartered savings bank headquartered in Des Moines, Iowa and operated
47 branches located in Iowa, Missouri, Nebraska, Kansas, Minnesota and South
Dakota. At July 31, 1998, before purchase accounting adjustments, AmerUs had
total assets of $1,266,800,000, deposits of $949,700,000 and stockholder's
equity of $84,800,000. This acquisition was accounted for as a purchase. Core
value of deposits totaling $16,242,000 is amortized on an accelerated basis
over 10 years. Goodwill totaling $107,739,000 is amortized on a straight-line
basis over 25 years.
The accounts and consolidated results of operations for fiscal year 1999
include the results of AmerUs beginning July 31, 1998. The following table
summarizes results on an unaudited consolidated pro forma basis for the last
two fiscal years as though this purchase had occurred at the beginning of
fiscal year 1998:
Fiscal Year Ended
June 30,
-----------------
1999 1998
-------- --------
Total interest income and other income....................... $921,607 $871,127
Net income................................................... 69,345 69,481
Diluted earnings per common share............................ 1.15 1.67
On August 14, 1998, the Corporation consummated its acquisition of First
Colorado. The Corporation acquired in a tax-free reorganization all 18,564,766
outstanding shares of First Colorado's common stock in exchange for 18,278,789
shares of its common stock. Based on the Corporation's closing stock price of
$26.375 at August 14, 1998, the total consideration for this acquisition
approximated $482,154,000. This acquisition was accounted for as a pooling of
interests. First Colorado, headquartered in Lakewood, Colorado, was a unitary
savings and loan holding company and the parent company of First Federal Bank
of Colorado, a federally chartered stock savings bank that operated 27 branches
located in Colorado. At July 31, 1998, First Colorado had assets of
$1,572,200,000, deposits of $1,192,700,000 and stockholders' equity of
$254,700,000.
On March 1, 1999, the Corporation consummated its acquisition of Midland,
parent company of Midland Bank. The Corporation acquired all of the outstanding
shares of Midland's common stock. The total purchase consideration of this
acquisition was $83,000,000 in cash, including cash to pay off existing Midland
debt totaling $5,550,000, the retirement of preferred stock of both Midland and
Midland Bank totaling $11,562,000 and $810,000 for advisor fees. Midland Bank
was a privately held commercial bank headquartered in Lee's
82
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summit, Missouri that operated eight branches in the greater Kansas City area.
At February 28, 1999, Midland had total assets of $399,231,000, deposits of
$353,090,000 and stockholders' equity of $24,236,000. This acquisition was
accounted for as a purchase. Core value of deposits totaling $9,298,000 is
amortized on an accelerated basis over 10 years. Goodwill totaling $54,389,000
is amortized on a straight-line basis over 25 years. The effect of the Midland
acquisition on the Corporation's consolidated financial statements as if this
acquisition had occurred at the beginning of fiscal year 1999 is not material.
Fiscal Year 1998 Acquisitions
On January 30, 1998, the Corporation consummated its acquisition of First
National Bank Shares, LTD ("First National"). The Corporation acquired all of
the outstanding shares of First National's common stock for 992,842 shares of
the Corporation's common stock for an aggregate value approximating
$32,267,000. At January 30, 1998, before purchase accounting adjustments, First
National had assets of $147,800,000, deposits of $131,300,000 and stockholders'
equity of $12,000,000. First National operated seven branches located in
Kansas. This acquisition was accounted for as a purchase. Core value of
deposits totaling $6,045,000 is amortized on an accelerated basis over 10
years. Goodwill totaling $19,162,000 is amortized on a straight-line basis over
25 years. The effect of the First National acquisition on the Corporation's
consolidated financial statements as if this acquisition had occurred at the
beginning of fiscal year 1998 is not material.
On February 13, 1998, the Corporation consummated its acquisition of Liberty
Financial Corporation ("Liberty"), a privately held bank holding company. The
Corporation acquired all of the outstanding shares of Liberty's common stock
for 4,015,555 shares of the Corporation's common stock for an aggregate value
of approximately $135,349,000. Liberty operated 38 branches in Iowa and seven
in the metropolitan area of Tucson, Arizona. At January 31, 1998, Liberty had
assets of $658,100,000, deposits of $569,800,000 and stockholders' equity of
$50,100,000. This acquisition was accounted for as a pooling of interests.
On February 27, 1998, the Corporation consummated its acquisition of Mid
Continent Bancshares, Inc. ("Mid Continent"). The Corporation acquired all of
the outstanding shares of Mid Continent's common stock for 2,641,945 shares of
the Corporation's common stock for an aggregate value of approximately
$86,961,000. Mid Continent operated ten branches located in Kansas. At February
27, 1998, Mid Continent had total assets of $405,700,000, deposits of
$258,600,000 and stockholders' equity of $41,200,000. This acquisition was
accounted for as a pooling of interests.
On May 29, 1998, the Corporation consummated its acquisition of Perpetual
Midwest Financial, Inc. ("Perpetual"). The Corporation acquired in a tax-free
reorganization all of the outstanding shares of Perpetual's common stock for
1,717,721 shares of the Corporation's common stock for an aggregate value of
approximately $57,222,000. At May 29, 1998, Perpetual had total assets of
$412,200,000, deposits of $323,400,000, and stockholders' equity of
$36,000,000. Perpetual operated five branches located in Iowa. This acquisition
was accounted for as a pooling of interests.
The Corporation's historical consolidated financial statements were restated
for all periods prior to the acquisitions of First Colorado, Liberty, Mid
Continent and Perpetual to include the accounts and results of operations of
these financial institutions. Prior to merger into the Corporation, results of
operations for Mid Continent were reported on a September 30 fiscal year basis.
In restating prior periods, the accounts and results of operations of Mid
Continent were conformed to the fiscal year ended June 30, 1998. Mid
Continent's accounts and results of operations for the three months ended
September 30, 1998, including total interest
83
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income and other income of $9,507,000, total interest expense of $4,558,000 and
net income of $977,000 were included in results of operations for the restated
combined companies for both fiscal years 1998 and 1997. These amounts, net of a
cash dividend of $180,000, are included in the Corporation's Consolidated
Statement of Stockholders' Equity only for the fiscal year ended June 30, 1998.
Note 3. Investment Securities
Investment securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 Cost Gains Losses Value
- ------------- --------- ---------- ---------- --------
Available for sale:
U.S. Treasury and other Government
agency obligations................. $ 71,591 $ -- $ (3,535) $ 68,056
States and political subdivisions... 2,491 -- (69) 2,422
-------- ----- -------- --------
$ 74,082 $ -- $ (3,604) $ 70,478
======== ===== ======== ========
Weighted average interest rate...... 6.61%
========
Held to maturity:
U.S. Treasury and other Government
agency obligations................. $826,043 $ 1 $(61,629) $764,415
States and political subdivisions... 49,224 143 (1,700) 47,667
Other securities.................... 47,422 -- (1,718) 45,704
-------- ----- -------- --------
$922,689 $ 144 $(65,047) $857,786
======== ===== ======== ========
Weighted average interest rate...... 6.68%
========
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1999 Cost Gains Losses Value
- ------------- --------- ---------- ---------- --------
Available for sale:
U.S. Treasury and other Government
agency obligations................. $ 80,185 $ 6 $ (1,429) $ 78,762
States and political subdivisions... 4,652 2 (61) 4,593
Other securities.................... 459 -- (3) 456
-------- ----- -------- --------
$ 85,296 $ 8 $ (1,493) $ 83,811
======== ===== ======== ========
Weighted average interest rate...... 6.45%
========
Held to maturity:
U.S. Treasury and other Government
agency obligations................. $755,195 $ 79 $(15,720) $739,554
States and political subdivisions... 49,857 145 (459) 49,543
Other securities.................... 57,708 -- -- 57,708
-------- ----- -------- --------
$862,760 $ 224 $(16,179) $846,805
======== ===== ======== ========
Weighted average interest rate...... 6.53%
========
As of June 30, 2000 and 1999, the Corporation recorded unrealized losses on
securities available for sale as decreases to accumulated other comprehensive
income totaling $3,604,000 and $1,485,000, respectively, net of deferred tax
benefits of $1,345,000 and $555,000.
84
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 2000, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Available for
Sale Held to Maturity
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
Due in one year or less................... $ 4,743 $ 4,709 $ 14,770 $ 14,727
Due after one year through five years..... 20,749 20,074 16,112 16,012
Due after five years through ten years.... 15,094 14,384 178,237 172,320
Due after ten years....................... 33,496 31,311 713,570 654,727
-------- ------- -------- --------
$ 74,082 $70,478 $922,689 $857,786
======== ======= ======== ========
Activity from the sales of investment securities available for sale for the
years ended June 30 is summarized as follows:
Gross Gross
Realized Realized Net
Fiscal Year Ended Proceeds Gains Losses Gain
- ----------------- -------- -------- -------- -----
2000........................................... $ -- $ -- $ -- $ --
1999........................................... 30,153 491 -- 491
1998........................................... 20,189 1,287 (4) 1,283
At June 30, 2000 and 1999, investment securities totaling $90,567,000 and
$101,130,000, respectively, were pledged primarily to secure public funds and
securities sold under agreements to repurchase.
85
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Mortgage-Backed Securities
Mortgage-backed securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 Cost Gains Losses Value
- ------------- --------- ---------- ---------- --------
Available for sale:
Federal Home Loan Mortgage
Corporation........................ $ 77,912 $ 57 $ (4,644) $ 73,325
Government National Mortgage
Association........................ 34,290 -- (941) 33,349
Federal National Mortgage
Association........................ 241,956 53 (16,153) 225,856
Collateralized Mortgage
Obligations........................ 28,006 -- (2,173) 25,833
Other............................... 4,491 28 (126) 4,393
-------- ------ -------- --------
$386,655 $ 138 $(24,037) $362,756
======== ====== ======== ========
Weighted average interest rate...... 6.20%
========
Held to maturity:
Federal Home Loan Mortgage
Corporation........................ $201,191 $ 767 $ (7,953) $194,005
Government National Mortgage
Association........................ 343,623 97 (8,289) 335,431
Federal National Mortgage
Association........................ 73,116 654 (2,146) 71,624
Collateralized Mortgage
Obligations........................ 231,183 19 (4,975) 226,227
Privately Issued Mortgage Pool
Securities......................... 8,269 524 (985) 7,808
-------- ------ -------- --------
$857,382 $2,061 $(24,348) $835,095
======== ====== ======== ========
Weighted average interest rate...... 6.58%
========
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1999 Cost Gains Losses Value
- ------------- --------- ---------- ---------- --------
Available for sale:
Federal Home Loan Mortgage
Corporation........................ $ 85,380 $ 24 $ (3,128) $ 82,276
Government National Mortgage
Association........................ 44,319 88 (544) 43,863
Federal National Mortgage
Association........................ 260,267 44 (10,731) 249,580
Collateralized Mortgage
Obligations........................ 37,968 537 (121) 38,384
Other............................... 5,548 70 (14) 5,604
-------- ------ -------- --------
$433,482 $ 763 $(14,538) $419,707
======== ====== ======== ========
Weighted average interest rate...... 6.67%
========
Held to maturity:
Federal Home Loan Mortgage
Corporation........................ $239,873 $ 837 $(13,065) $227,645
Government National Mortgage
Association........................ 358,975 2,437 (2,734) 358,678
Federal National Mortgage
Association........................ 83,888 845 (1,579) 83,154
Collateralized Mortgage
Obligations........................ 169,539 55 (468) 169,126
Privately Issued Mortgage Pool
Securities......................... 10,563 413 (91) 10,885
-------- ------ -------- --------
$862,838 $4,587 $(17,937) $849,488
======== ====== ======== ========
Weighted average interest rate...... 6.10%
========
86
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage-backed securities held to maturity at June 30 are classified by
type of interest payment and contractual maturity term as follows:
2000 1999
--------------------------- ---------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
--------- -------- -------- --------- -------- --------
Adjustable rate......... $309,855 $304,130 6.74% $369,922 $362,589 5.77%
Fixed rate, 5-year
term................... 12,072 11,998 6.50 17,820 17,816 6.31
Fixed rate, 7-year
term................... 3,008 2,985 5.50 17,860 17,812 5.64
Fixed rate, 15-year
term................... 203,140 193,156 6.11 195,746 189,411 6.00
Fixed rate, 30-year
term................... 98,124 96,599 7.42 91,951 92,734 7.32
-------- -------- ---- -------- -------- ----
626,199 608,868 6.63 693,299 680,362 6.05
Collateralized mortgage
obligations............ 231,183 226,227 6.46 169,539 169,126 6.30
-------- -------- ---- -------- -------- ----
$857,382 $835,095 6.58% $862,838 $849,488 6.10%
======== ======== ==== ======== ======== ====
As of June 30, 2000 and 1999, the Corporation recorded unrealized losses on
securities available for sale as decreases to accumulated other comprehensive
income totaling $23,899,000 and $13,775,000, respectively, net of deferred
income tax benefits of $8,907,000 and $5,143,000.
Activity from the sales of mortgage-backed securities available for sale for
the years ended June 30 is summarized as follows:
Gross Gross
Realized Realized Net
Fiscal Year Ended Proceeds Gains Losses Gain
- ----------------- -------- -------- -------- ------
2000.......................................... $ -- $ -- $ -- $ --
1999.......................................... 209,789 3,885 -- 3,885
1998.......................................... 121,187 2,511 (29) 2,482
At June 30, 2000 and 1999, mortgage-backed securities totaling $542,947,000
and $370,735,000, respectively, were pledged as collateral primarily for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase and interest rate swap agreements.
Note 5. Loans and Leases Held for Sale
Loans and leases held for sale at June 30, 2000 and 1999, totaled
$183,356,000 and $104,347,000, respectively, with weighted average rates of
8.15% and 6.76%. Loans held for sale are secured by single-family residential
properties totaling $182,977,000 at June 30, 2000, with a weighted average rate
of 8.15%, consisting of fixed and adjustable rate mortgage loans totaling
$175,716,000 and $7,261,000, respectively. Leases held for sale totaled
$379,000 at June 30, 2000, consisting of fixed rate leases with a weighted
average rate of 9.62%.
Loans held for sale at June 30, 1999, were secured by single-family
residential properties totaling $103,174,000 and consisted entirely of fixed
rate mortgage loans with a weighted average rate of 6.72%. Leases held for sale
totaled $1,173,000 at June 30, 1999, and consisted of fixed rate leases with a
weighted average rate of 9.73%.
87
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Loans and Leases Receivable
Loans and leases receivable at June 30 are summarized as follows:
2000 1999
----------- ----------
Conventional mortgage loans.......................... $ 6,783,152 $6,509,981
FHA and VA loans..................................... 500,363 406,171
Commercial real estate loans......................... 1,008,078 756,412
Construction loans................................... 570,803 346,349
Consumer, other loans and leases..................... 1,588,056 1,442,654
----------- ----------
10,450,452 9,461,567
Unamortized premiums, net............................ 743 4,846
Unearned income...................................... (16,714) (22,445)
Deferred loan costs, net............................. 24,665 11,546
Loans-in-process..................................... (164,313) (153,124)
Allowance for loan and lease losses.................. (70,497) (80,344)
----------- ----------
$10,224,336 $9,222,046
=========== ==========
Weighted average interest rate....................... 7.87 % 7.70 %
=========== ==========
At June, 30, 2000, conventional, FHA and VA loans, including loans held for
sale, totaling $7,906,406,000 are secured by residential properties located as
follows: 17% in Colorado, 13% in Nebraska, 11% in Kansas and the remaining 59%
in 47 other states. At June 30, 1999, conventional, FHA and VA loans, including
loans held for sale, totaling $7,287,850,000 were secured by residential
properties located as follows: 20% in Colorado, 13% in Nebraska, 10% in Kansas,
and the remaining 57% in 47 other states. The commercial real estate portfolio
at June 30, 2000, is secured by properties located as follows: 26% in Colorado,
16% in Iowa, 11% in Kansas and the remaining 47% in 24 other states. The
commercial real estate portfolio at June 30, 1999, was secured by properties
located as follows: 29% in Colorado, 15% in Kansas, 14% in Iowa and the
remaining 42% in 22 other states. The lease portfolio totaling $77,981,000 and
$103,985,000 at June 30, 2000 and 1999, respectively, includes contracts to
lessees throughout the United States and involved in various industries. The
commercial operating loan portfolio, including agricultural loans, is well
diversified with no industry constituting a concentration.
88
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nonperforming loans and leases at June 30, 2000 and 1999, aggregated
$65,012,000 and $70,015,000, respectively. Of the nonperforming loans and
leases at June 30, 2000, approximately 20% are secured by properties located in
Iowa, 8% in Kansas, 7% each in Florida and Maryland and the remaining 58% in 46
other states. Of the nonperforming loans and leases at June 30, 1999,
approximately 22% were secured by properties located in Kansas, 9% in Iowa, 6%
each in California and Florida and the remaining 57% located in 46 other
states.
Also included in loans and leases at June 30, 2000 and 1999, are loans with
carrying values of $5,431,000 and $9,729,000, respectively, the terms of which
have been modified in troubled debt restructurings. During the fiscal years
ended June 30, 2000, 1999 and 1998, the Corporation recognized interest income
on these loans aggregating $430,000, $470,000 and $380,000, respectively. Under
their original terms the Corporation would have recognized interest income of
$444,000, $475,000 and $499,000, respectively. At June 30, 2000, the
Corporation had no material commitments to lend additional funds to borrowers
whose loans were subject to troubled debt restructurings. Impaired loans, a
portion of which are included in the balances for troubled debt restructurings
at June 30, 2000, 1999 and 1998, and the resulting interest income as
originally contracted and as recognized, are not material for fiscal years
2000, 1999 or 1998.
At June 30, 2000 and 1999, the Corporation pledged real estate loans
totaling $5,864,455,000 and $3,365,770,000, respectively, as collateral for
Federal Home Loan Bank advances and other borrowings.
Note 7. Real Estate
Real estate at June 30 is summarized as follows:
2000 1999
------- -------
Real estate owned and in judgment, net of allowance for losses
of $2,596 and $4,894.......................................... $21,250 $22,026
Real estate held for investment, which includes equity in
unconsolidated joint ventures and investments in real estate
partnerships, net of allowance for losses of $653 and $734.... 17,879 9,487
------- -------
$39,129 $31,513
======= =======
At June 30, 2000 and 1999, real estate is comprised primarily of commercial
real estate (57% and 54%, respectively) with the difference in residential real
estate. Real estate located by states at June 30, 2000, is as follows: 24% in
Nebraska, 22% in Missouri and the remaining 54% in 36 other states. Real estate
located by states at June 30, 1999, was as follows: 30% in Nebraska, 15% in
Missouri and the remaining 55% in 37 other states.
89
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Allowances for Losses on Loans and Leases and Real Estate
An analysis of the allowances for losses on loans and leases and real estate
is summarized as follows:
Loans and Real
Leases Estate Total
--------- ------- --------
Balance, June 30, 1997(1)....................... $ 60,929 $ 3,846 $ 64,775
Provision charged to operations................. 13,853 49 13,902
Charges......................................... (14,157) (2,136) (16,293)
Recoveries...................................... 4,816 61 4,877
Allowances acquired in acquisitions............. 1,273 52 1,325
First Colorado activity for the six months ended
June 30, 1997, net............................. 428 (52) 376
Mid Continent activity for the three months
ended September 30, 1997, net.................. (38) 12 (26)
Change in estimate of allowance for bulk
purchased loans................................ (2,324) -- (2,324)
Charge-offs to allowance for bulk purchased
loans.......................................... (23) -- (23)
-------- ------- --------
Balance, June 30, 1998(1)....................... 64,757 1,832 66,589
Provision charged to operations................. 12,400 1,574 13,974
Charges......................................... (15,760) (1,408) (17,168)
Recoveries...................................... 3,674 18 3,692
Allowances acquired in acquisitions............. 17,307 3,612 20,919
Change in estimate of allowance for bulk
purchased loans................................ (1,959) -- (1,959)
-------- ------- --------
Balance, June 30, 1999(1)....................... 80,419 5,628 86,047
Provision charged to operations................. 13,760 86 13,846
Charges......................................... (24,162) (2,514) (26,676)
Recoveries...................................... 5,833 49 5,882
Change in estimate of allowance for bulk
purchased loans................................ (5,294) -- (5,294)
-------- ------- --------
Balance, June 30, 2000(1)....................... $ 70,556 $ 3,249 $ 73,805
======== ======= ========
- --------
(1) Includes $59,000, $75,000, $97,000 and $77,000 at June 30, 2000, 1999, 1998
and 1997 in allowance for losses established primarily to cover risks
associated with borrowers' delinquencies and defaults on loans and leases
held for sale.
90
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9. Loan Servicing
The Corporation's mortgage banking subsidiary services real estate loans for
investors that are not included in the accompanying consolidated financial
statements. The mortgage banking subsidiary also services a substantial portion
of the Corporation's real estate loan portfolio. Loan servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding advance payments by borrowers for taxes and insurance, making
inspections as required of the mortgage premises, collecting amounts due from
delinquent mortgagors, supervising foreclosures in the event of unremedied
defaults and generally administering the loans for the investors to whom they
have been sold. The amount of loans serviced for others at June 30, 2000, 1999
and 1998, was $7,271,014,000, $7,448,814,000 and $7,239,726,000, respectively.
Custodial escrow balances maintained in connection with loan servicing totaled
approximately $118,390,000, $120,246,000 and $119,014,000 at June 30, 2000,
1999 and 1998.
The mortgage servicing portfolio is covered by servicing agreements pursuant
to the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these
agreements, the Corporation may be required to advance funds temporarily to
make scheduled payments of principal, interest, taxes or insurance if the
borrower fails to make such payments. Although the Corporation cannot charge
any interest on these advance funds, the Corporation typically recovers the
advances within a reasonable number of days upon receipt of the borrower's
payment. In the absence of any payment, advances are recovered through FHA
insurance, VA guarantees or FNMA or FHLMC reimbursement provisions in
connection with loan foreclosures. The amount of funds advanced by the
Corporation for these servicing agreements was not material.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "Prepaid expenses and other assets." The
activity of mortgage servicing rights at June 30 is summarized as follows:
2000 1999 1998
------- ------- -------
Beginning balance.................................. $84,752 $67,836 $61,976
Purchases of mortgage servicing rights............. 8,257 21,959 14,483
Mortgage servicing rights capitalized through loan
originations...................................... 2,145 6,702 3,183
Amortization expense............................... (8,703) (12,021) (10,177)
Conforming accounting practices of combining
companies......................................... -- -- (1,100)
First Colorado activity for the six months ended
June 30, 1997, net................................ -- -- 72
Mid Continent activity for the three months ended
September 30, 1997, net........................... -- -- (382)
Other items, net................................... (80) 276 (219)
------- ------- -------
Ending balance..................................... $86,371 $84,752 $67,836
======= ======= =======
At June 30, 2000, 1999 and 1998 the fair value of the Corporation's mortgage
servicing rights totaled approximately $134,057,000, $106,906,000 and
$87,409,000, respectively. The establishment of valuation allowances were not
necessary during fiscal years 2000, 1999 or 1998. At June 30, 2000, 1999 and
1998, the Corporation utilized interest rate floor agreements with notional
amounts totaling $335,000,000, $375,000,000 and $215,000,000, respectively,
designed to offset impairment losses due to potential declining interest rates.
See Note 16 "Derivative Financial Instruments" for additional information.
At June 30, 2000, 1999 and 1998, there were no commitments to purchase
mortgage loan servicing rights or to sell any bulk packages of mortgage
servicing rights.
91
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10. Premises And Equipment
Premises and equipment at June 30 are summarized as follows:
2000 1999
--------- --------
Land........................................................ $ 41,231 $ 27,878
Buildings and improvements.................................. 123,276 117,127
Leasehold improvements...................................... 7,066 6,621
Furniture, fixtures and equipment........................... 131,636 138,962
--------- --------
303,209 290,588
Less accumulated depreciation and amortization.............. 121,517 105,286
--------- --------
$ 181,692 $185,302
========= ========
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $20,414,000, $18,172,000 and
$13,135,000 for fiscal years ended June 30, 2000, 1999 and 1998, respectively.
Rent expense totaled $6,335,000, $4,489,000 and $3,571,000 for fiscal years
ended June 30, 2000, 1999 and 1998. The Bank has operating lease commitments on
certain premises and equipment. Annual minimum operating lease commitments as
of June 30, 2000, are as follows: 2001--$4,556,000; 2002--$3,966,000; 2003--
$3,125,000; 2004--$2,622,000; 2005--$1,796,000; 2006 and thereafter--
$8,348,000.
Note 11. Intangible Assets
An analysis of intangible assets is summarized as follows:
Core Value
Goodwill of Deposits Total
-------- ----------- --------
Balance, June 30, 1997........................ $ 23,932 $34,234 $ 58,166
Additions relating to acquisitions............ 20,290 6,544 26,834
Amortization expense.......................... (1,860) (5,954) (7,814)
-------- ------- --------
Balance, June 30, 1998........................ 42,362 34,824 77,186
Additions relating to acquisitions............ 155,928 35,265 191,193
Amortization expense.......................... (6,718) (8,984) (15,702)
-------- ------- --------
Balance, June 30, 1999........................ 191,572 61,105 252,677
Final purchase accounting adjustments relating
to acquisitions.............................. 6,830 (9,702) (2,872)
Amortization expense.......................... (8,673) (8,563) (17,236)
Write-offs due to branch sales and closings... (1,367) (352) (1,719)
-------- ------- --------
Balance, June 30, 2000........................ $188,362 $42,488 $230,850
======== ======= ========
No impairment adjustment was necessary to intangible assets during fiscal
years 2000, 1999 or 1998.
92
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Deposits
Deposits at June 30 are summarized as follows:
2000 1999
---------------- ----------------
Description and interest rates Amount % Amount %
------------------------------ ---------- ----- ---------- -----
Passbook accounts (average of 4.48% and
3.70%)................................... $1,575,380 21.5% $1,137,282 14.9%
NOW accounts (average of .71% and 1.20%).. 1,028,640 14.0 1,036,921 13.5
Market rate savings (average of 4.01% and
3.62%)................................... 531,317 7.3 909,233 11.9
---------- ----- ---------- -----
Total savings (no stated maturities).. 3,135,337 42.8 3,083,436 40.3
---------- ----- ---------- -----
Certificates of deposits:
Less than 3.00%.......................... 7,685 .1 6,555 .1
3.00%-3.99%............................. 6,740 .1 73,342 1.0
4.00%-4.99%............................. 771,419 10.5 1,816,539 23.7
5.00%-5.99%............................. 2,007,819 27.4 2,310,800 30.2
6.00%-6.99%............................. 1,328,741 18.1 307,487 4.0
7.00%-7.99%............................. 70,974 1.0 53,311 .7
8.00%-8.99%............................. 1,298 -- 3,488 --
9.00% and over.......................... 487 -- 457 --
---------- ----- ---------- -----
Total certificates of deposit (fixed
maturities; average of 5.31% and 5.38%).. 4,195,163 57.2 4,571,979 59.7
---------- ----- ---------- -----
$7,330,500 100.0% $7,655,415 100.0%
========== ===== ========== =====
Interest expense on deposit accounts for the years ended June 30 is
summarized as follows:
2000 1999 1998
-------- -------- --------
Passbook accounts................................... $ 59,215 $ 41,616 $ 39,788
NOW accounts........................................ 7,423 12,223 10,092
Market rate savings................................. 31,077 26,993 18,324
Certificates of deposit............................. 227,959 242,026 245,548
-------- -------- --------
$325,674 $322,858 $313,752
======== ======== ========
93
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At June 30, 2000, scheduled maturities of certificates of deposit are as
follows:
Year Ending June 30,
-----------------------------------------------------------------
Rate 2001 2002 2003 2004 2005 Thereafter Total
---- ---------- -------- ------- ------- ------- ---------- ----------
Less than 3.00%......... $ 7,606 $ 4 $ 1 $ 74 $ -- $ -- $ 7,685
3.00%-3.99%........... 6,708 14 18 -- -- -- 6,740
4.00%-4.99%........... 545,941 149,940 41,227 18,058 11,167 5,086 771,419
5.00%-5.99%........... 1,827,485 120,056 38,486 17,060 1,750 2,982 2,007,819
6.00%-6.99%........... 898,675 409,336 18,234 705 1,600 191 1,328,741
7.00%-7.99%........... 9,703 60,041 177 101 849 103 70,974
8.00%-8.99%........... 401 656 21 12 7 201 1,298
9.00% and over........ 144 9 10 5 4 315 487
---------- -------- ------- ------- ------- ------ ----------
$3,296,663 $740,056 $98,174 $36,015 $15,377 $8,878 $4,195,163
========== ======== ======= ======= ======= ====== ==========
Certificates of deposit in amounts of $100,000 or more totaled $693,420,000
and $792,343,000, respectively, at June 30, 2000 and 1999. Brokered
certificates of deposit totaled $82,366,000 and $97,438,000, respectively, at
June 30, 2000 and 1999.
At both June 30, 2000 and 1999, the Corporation utilized interest rate swap
agreements with notional amounts totaling $2,540,000,000 and $215,000,000,
respectively, to artificially lengthen the maturity of certain deposits. Under
these agreements, the Corporation pays fixed rates of interest and receives
variable rates of interest that are based on the same rates that the
Corporation pays on the hedged deposits. See Note 16 "Derivative Financial
Instruments" for additional information.
At June 30, 2000 and 1999, deposits of certain state and municipal agencies
and other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $500,121,000 and $224,733,000 and investment
securities with carrying values of $82,039,000 and $84,762,000. In compliance
with regulatory requirements, at June 30, 2000 and 1999, the Corporation
maintained $74,285,000 and $72,285,000, respectively, in cash on hand and
deposits at the Federal Reserve Bank. The funds at the Federal Reserve Bank
were held in noninterest earning reserves against certain transaction checking
accounts and nonpersonal certificates of deposit.
94
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13. Advances From The Federal Home Loan Bank
The Corporation was indebted to the Federal Home Loan Bank at June 30 as
follows:
2000 1999
----------------------------------- -------------------
Weighted Weighted
Interest Rate Average Average
Range Rate Amount Rate Amount
-------------- -------- ---------- -------- ----------
Scheduled Maturities
Due:
Within 1 year......... 5.82% - 8.31% 6.87% $1,772,592 6.33% $ 295,606
Over 1 year to 2
years................ 6.22 - 7.04 6.80 152,640 6.21 194,595
Over 2 years to 3
years................ 6.54 - 7.69 7.20 317,825 6.18 328,640
Over 3 years to 4
years................ -- - -- -- -- 6.47 29,825
Over 4 years to 5
years................ 6.23 - 6.72 6.40 300,000 -- --
Over 5 years.......... 4.18 - 7.29 5.20 2,506,525 4.70 2,783,575
---- ---- ---- ---------- ---- ----------
4.18% - 8.31% 5.98% $5,049,582 5.05% $3,632,241
==== ==== ==== ========== ==== ==========
Fixed-rate advances totaling $2,346,000,000 at June 30, 2000, are
convertible into adjustable-rate advances at the option of the Federal Home
Loan Bank. At June 30, 2000, these convertible advances had call dates ranging
from July 2000 to March 2003. These advances consist primarily of $40,000,000
within the category of scheduled maturities due over one year to two years and
$2,306,000,000 within the category due over five years. At June 30, 1999,
convertible advances totaled $3,046,000,000.
At June 30, 2000 and 1999, outstanding advances were collateralized by real
estate loans totaling $5,864,455,000 and $3,365,770,000, respectively. The
Corporation is also required to hold shares of Federal Home Loan Bank stock in
an amount at least equal to the greater of 1.0% of certain of its residential
mortgage loans or 5.0% of its outstanding advances. The Corporation was in
compliance with this requirement at June 30, 2000 and 1999, holding Federal
Home Loan Bank stock totaling $255,756,000 and $194,129,000, respectively. At
June 30, 2000 and 1999, there were no commitments for advances from the Federal
Home Loan Bank.
95
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14. Securities Sold Under Agreements To Repurchase
At June 30, 2000 and 1999, securities sold under agreements to repurchase
identical securities totaled $33,379,000 and $128,514,000, respectively. An
analysis of securities sold under agreements to repurchase identical securities
for the years ended June 30 is summarized as follows:
2000 1999
-------- --------
Maximum month-end balance................................. $132,432 $334,294
Average balance........................................... $ 69,763 $209,111
Weighted average interest rate during the period.......... 5.62% 5.94%
Weighted average interest rate at end of period........... 4.99% 5.72%
At June 30, 2000, securities sold under agreements to repurchase totaling
$8,379,000 matured overnight with $25,000,000 maturing in September 2000
resulting in a weighted average maturity of 83 days. At June 30, 2000,
mortgage-backed securities with carrying values totaling $32,035,000 and fair
values totaling $30,681,000 were pledged as collateral. At June 30, 1999,
mortgage-backed securities and investment securities with carrying values
totaling $123,628,000 and $16,369,000 and fair values totaling $122,374,000 and
$16,095,000, respectively, were pledged as collateral.
It is the Corporation's policy to enter into repurchase agreements only with
major brokerage firms that are primary dealers in government securities. At
June 30, 2000, there were no repurchase agreements with any broker with
balances at risk in excess of 10.0% of stockholders' equity.
Note 15. Other Borrowings
Other borrowings at June 30 consist of the following:
2000 1999
-------- --------
Subordinated extendible notes, interest 7.95%, due December
1, 2006..................................................... $ 50,000 $ 50,000
Guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures, interest
9.375%, due May 15, 2027.................................... 45,000 45,000
Term note, adjustable interest, due June 30, 2004............ 65,250 --
Revolving line of credit, adjustable interest, due June 30,
2004........................................................ 10,000 --
Term note, adjustable interest, due July 31, 2003............ -- 32,500
Purchase notes, adjustable interest, due July 31, 1999....... -- 40,000
Collateralized mortgage obligations.......................... 2,397 3,483
Federal Funds, interest 6.06%, due July 1, 1999.............. -- 54,400
-------- --------
$172,647 $225,383
======== ========
On December 2, 1996, the Corporation completed the issuance of $50,000,000
of 7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the
"Notes"). Contractual interest on the Notes is set at 7.95% until December 1,
2001, and is paid monthly. The interest rate for the Notes reset at the
Corporation's option on December 1, 2001, to a rate and for a term of one, two,
three or five years determined by the Corporation. Thereafter, the interest
rate will reset at the Corporation's option on the expiration date of each new
interest period prior to maturity. Any new interest rate shall not be less than
105% of the effective interest rate on comparable maturity U. S. Treasury
obligations. The Notes may not be redeemed prior to December 1, 2001.
Thereafter, the Corporation may elect to redeem the Notes in whole on December
1, 2001, and on any subsequent interest reset date at par plus accrued interest
to the date fixed for redemption. The Notes are unsecured general obligations
of the Corporation. The Indenture, among other provisions, limits the ability
of the Corporation to pay cash dividends or to make other capital distributions
under certain circumstances.
96
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective May 14, 1997, CFC Preferred Trust, a special-purpose wholly-owned
trust subsidiary of the Corporation, completed an offering of 1,800,000 shares
(issue price of $25.00 per share) totaling $45,000,000 of fixed-rate 9.375%
cumulative trust preferred securities due May 15, 2027. Also, effective May 14,
1997, the Corporation purchased all of the common securities of CFC Preferred
Trust for $1,391,775. CFC Preferred Trust invested the total proceeds of
$46,391,775 received in 9.375% junior subordinated deferrable interest
debentures (the "Debentures") issued by the Corporation. Interest paid on the
Debentures is distributed to holders of the cumulative trust preferred
securities and to the Corporation as holder of the common securities. Under
current tax law, distributions to the holders of the cumulative trust preferred
securities are tax deductible for the Corporation. The Debentures, unsecured,
rank junior and are subordinate in right of payment of all senior debt of the
Corporation. The obligations of the Corporation under the Debentures, the
indenture, the relevant trust agreement and the guarantees constitute a full
and unconditional guarantee by the Corporation of the obligations of the trust
under the trust preferred securities and rank subordinate and junior in right
of payment to all liabilities of the Corporation. The distribution rate payable
on the cumulative trust preferred securities is cumulative and payable
quarterly in arrears. The Corporation has the right, subject to events of
default, to defer payments of interest on the Debentures by extending the
interest payment periods not exceeding 20 consecutive quarters. No extension
period may extend beyond the redemption or maturity date of the Debentures. The
Debentures mature on May 15, 2027, which may be shortened to not earlier than
May 15, 2002, if certain conditions are met. The cumulative trust preferred
securities would qualify as Tier 1 capital of the Corporation should the
Corporation become subject to the Federal Reserve capital requirements for bank
holding companies.
During July 1999, the Corporation entered into a term and revolving credit
agreement totaling $82,500,000. This credit facility is in the form of an
unsecured, five-year term note due June 30, 2004. On July 1, 1999, $32,500,000
was drawn down to refinance a term note from the same lender for the same
amount maturing July 31, 2003. On July 30, 1999, $40,000,000 was drawn down to
pay in full the $40,000,000 one-year purchase notes due July 31, 1999. At June
30, 2000, this term note had a remaining principal balance of $65,250,000.
Terms of the note require quarterly principal payments of $1,812,500 and
quarterly interest payable at a monthly adjustable rate priced at 100 basis
points below the lender's national base rate, or 8.50% at June 30, 2000. On
August 30, 1999, the Corporation borrowed $10,000,000 from the revolving line
of credit. This revolving line of credit had a balance of $10,000,000 as of
June 30, 2000, and is unsecured with interest terms the same as the term note.
On July 31, 1998, the Corporation partially financed the acquisition of
AmerUs with $40,000,000 of one-year purchase notes from the seller due July 31,
1999. The purchase notes required the payment of principal and interest on the
maturity date. The interest rate was adjusted monthly at 150 basis points over
the one-year Treasury bill rate. These notes were paid in full on July 30,
1999.
At June 30, 2000, notes issued in conjunction with collateralized mortgage
obligations bear interest at 8.75% and are due in varying amounts contractually
through 2019. The notes are secured by FNMA and FHLMC mortgage-backed
securities with book values of approximately $7,331,000 and $9,345,000,
respectively, at June 30, 2000 and 1999. As the principal balance on the
collateral on these notes repay, the notes are correspondingly repaid.
Contractual principal maturities of other borrowings as of June 30, 2000,
for the next five fiscal years are as follows: 2001--$7,440,000; 2002--
$7,440,000; 2003--$7,440,000; 2004--$53,690,000; 2005--$190,000; 2006 and
thereafter--$96,447,000.
97
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16. Derivative Financial Instruments
The following summarizes the Corporation's interest rate swap agreements,
by maturity date, at June 30:
2000 1999
--------------------------- -------------------------
Interest Rate Interest Rate
Notional ---------------- Notional ----------------
Amount Paying Receiving Amount Paying Receiving
---------- ------ --------- -------- ------ ---------
Scheduled Maturities Due:
2000.................... $ -- -- % -- % $ 75,000 6.24% 4.43%
2001.................... 140,000 6.00 6.16 140,000 6.00 4.77
2002.................... 100,000 7.07 6.76 -- -- --
2003.................... 200,000 6.71 6.34 -- -- --
2004.................... 500,000 6.01 6.05 -- -- --
2005.................... 800,000 6.28 6.31 -- -- --
Thereafter.............. 800,000 7.07 6.67 -- -- --
---------- ---- ---- -------- ---- ----
$2,540,000 6.53% 6.39% $215,000 6.08% 4.65%
========== ==== ==== ======== ==== ====
Under the interest rate swap agreements, the Corporation pays fixed rates
of interest and receives variable rates of interest that are based on the same
rates that the Corporation pays on the hedged deposit liabilities. The
variable interest rates are based on either the 13-week average yield of the
three-month U.S. Treasury bill or the three-month LIBOR average. Net interest
settlement is quarterly. Net interest expense on the swap agreements totaled
$2,830,000, $2,849,000 and $1,926,000, respectively, for fiscal years 2000,
1999 and 1998. The fair value of the interest rate swaps at June 30, 2000,
totaled approximately $8,686,000 which represents the amount that would be
received if the swap agreements were terminated.
In June 2000 the Corporation entered into three forward rate swap
agreements with notional amounts totaling $100,000,000 to extend three
existing interest rate swaps that mature in fiscal year 2001. Under these
forward rate swap agreements, the Corporation pays fixed rates of interest and
receives variable rates of interest that are based on the weekly unweighted
average of the three-month U.S. Treasury bill. Net interest settlement is
quarterly.
The interest rate swap agreements were collateralized at June 30, 2000, by
mortgage-backed securities with carrying values of $8,528,000 and at June 30,
1999, by mortgage-backed securities with carrying values of $7,941,000.
Entering into interest rate swap agreements involves the credit risk of
dealing with intermediary and primary counterparties and their ability to meet
the terms of the respective contracts. The Corporation is exposed to credit
loss in the event of nonperformance by the counterparties to the interest rate
swaps if the Corporation is in a net interest receivable position at the time
of potential default by the counterparties. However, at June 30, 2000 and
1999, the Corporation was in a net interest payable position. The Corporation
does not anticipate nonperformance by the counterparties.
At June 30, 2000 and 1999, the Corporation had interest rate floor
agreements with notional amounts totaling $335,000,000 and $375,000,000,
respectively. These interest rate floor agreements with strike rates ranging
from 3.84% to 6.32%, are designed to offset impairment losses on mortgage loan
servicing rights due to decreasing interest rates. By purchasing floor
agreements, the Corporation would be paid cash based on the differential
between a short-term rate and the strike rate, applied to the notional
principal amount, should the current short-term rate fall below the strike
rate level of the agreement. These interest rate floor agreements
98
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
mature between November 2000 and January 2003. Premiums paid to enter into
these agreements are deferred and totaled $116,000, $541,000 and $138,000,
respectively, for fiscal years 2000, 1999 and 1998. During fiscal years 2000,
1999 and 1998, amortization expense on these premiums totaled $267,000,
$188,000 and $122,000. In addition, during fiscal years 1999 and 1998,
agreements were sold resulting in deferred gains of $135,000 and $41,000. These
deferred gains are amortized as a credit to expense and during fiscal years
2000, 1999 and 1998 totaled $69,000, $109,000 and $27,000, respectively. The
deferred premiums are amortized over the lives of the respective agreements and
the deferred gains are amortized over the remaining lives of the agreements
sold. The fair value of the interest rate floor agreements at June 30, 2000,
resulted in a gain position of approximately $102,000 which represents the
amount that would be received to terminate the floor agreements.
During fiscal year 2000, the Corporation entered into three interest rate
cap agreements totaling $300,000,000. These interest rate cap agreements were
called in June 2000, resulting in a net loss of $69,000. These agreements would
have paid interest quarterly when the three-month LIBOR exceeded 7.5%.
Throughout the life of these agreements, the Corporation did not owe any
interest to the counterparty. The premiums received totaled $4,800,000.
Premiums amortized to income during fiscal 2000 totaled $699,000.
Note 17. Income Taxes
The following is a comparative analysis of the provision for federal and
state taxes on income:
Year Ended June 30,
------------------------
2000 1999 1998
------- ------- -------
Current:
Federal............................................. $19,757 $42,937 $46,154
State............................................... 1,210 3,230 3,698
------- ------- -------
20,967 46,167 49,852
------- ------- -------
Deferred:
Federal............................................. 36,689 16,789 2,188
State............................................... (2,387) 304 316
------- ------- -------
34,302 17,093 2,504
------- ------- -------
Total provision for income taxes...................... $55,269 $63,260 $52,356
======= ======= =======
The following is a reconciliation of the statutory federal income tax rate
to the consolidated effective tax rate:
Year Ended June 30,
------------------------
2000 1999 1998
------ ------ ------
Statutory federal income tax rate.................. 35.0 % 35.0 % 35.0 %
Nondeductible merger-related expenses and other
nonrecurring charges.............................. .2 4.9 1.8
Amortization of discounts, premiums and intangible
assets............................................ 1.7 1.4 .4
Tax exempt interest................................ (1.2) (.8) (1.0)
Income tax credits................................. (.4) (.4) (.5)
State income taxes, net of federal income taxes.... (.5) 1.5 2.0
Other items, net................................... (.5) (1.0) (.2)
------ ------ ------
Effective tax rate................................. 34.3 % 40.6 % 37.5 %
====== ====== ======
99
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred tax assets and liabilities at June 30 are as
follows:
2000 1999
------- -------
Deferred tax liabilities:
Real estate investment trust deferred income............... $35,688 $ 8,803
Federal Home Loan Bank stock............................... 21,557 19,060
Core value of acquired deposits............................ 12,041 11,108
Mortgage servicing rights.................................. 9,327 6,699
Differences between book and tax basis of premises and
equipment................................................. 8,749 6,645
Deferred loan fees......................................... 4,337 7,632
Basis differences between tax and financial reporting
arising from acquisitions................................. 1,627 1,847
Other items................................................ 6,792 6,932
------- -------
100,118 68,726
------- -------
Deferred tax assets:
Allowance for losses on loans and real estate not currently
deductible................................................ 27,285 29,945
Basis differences between tax and financial reporting
arising from acquisitions................................. 9,743 10,718
State operating loss carryforwards......................... 7,678 5,085
Employee benefits.......................................... 3,993 2,919
Collateralized mortgage obligations........................ 1,969 2,584
Accretion of discounts on purchased items.................. 1,422 1,786
Other items................................................ 5,612 5,436
------- -------
57,702 58,473
Valuation allowance.......................................... (5,074) (5,089)
------- -------
52,628 53,384
------- -------
Net deferred tax liability................................... $47,490 $15,342
======= =======
The valuation allowance, primarily attributable to state operating loss
carryforwards, was $5,074,000 at June 30, 2000. The valuation allowance
decreased from $5,089,000 at June 30, 1999, primarily due to expirations in
state net operating losses available for income tax purposes.
A deferred tax liability has not been recognized for the bad debt reserves
of the Bank created in the tax years which began prior to December 31, 1987
(the base year). At June 30, 2000, these reserves totaled approximately
$105,266,000 with an unrecognized deferred tax liability approximating
$38,527,000. This unrecognized deferred tax liability could be recognized in
the future, in whole or in part, if there is a change in federal tax law, the
Bank fails to meet certain definitional tests and other conditions in the
federal tax law, certain distributions are made with respect to the stock of
the Bank, or the bad debt reserves are used for any purpose other than
absorbing bad debt losses.
Note 18. Stockholders' Equity and Regulatory Restrictions
On December 19, 1988, the Board of Directors adopted a Shareholder Rights
Plan and declared a dividend of stock purchase rights. This dividend consisted
of one primary right and one secondary right for each outstanding share of
common stock payable on December 30, 1988, and for each share of common stock
issued by the Corporation at any time after December 30, 1988, and prior to the
earlier of the occurrence of certain events or expiration of these rights.
These rights are attached to and trade only together with the common stock
shares. The provisions of the Shareholder Rights Plan are designed to protect
the interests of the stockholders of record in the event of an unsolicited or
hostile attempt to acquire the Corporation at a price or on terms that
100
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
are not fair to all shareholders. Unless rights are exercised, holders have no
rights as a stockholder of the Corporation (other than rights resulting from
such holder's ownership of common shares), including, without limitation, the
right to vote or to receive dividends. Effective December 18, 1998, the
Corporation's Shareholder Rights Plan was amended primarily to extend the
expiration date of such rights to December 19, 2008, unless earlier redeemed by
the Corporation. At June 30, 2000, no such rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of these shares and their qualifications, limitations and restrictions.
The preferred stock may rank prior to the common stock as to dividend rights,
liquidation preferences, or both, and may have full or limited voting rights.
The capital distribution regulations of the OTS permit the Bank to pay
capital distributions during a calendar year up to 100.0% of its retained net
income for the current calendar year combined with the Bank's retained net
income for the preceding two calendar years without requiring an application
for approval to be filed with the OTS. Retained net income is net income
determined in accordance with generally accepted accounting principles less
total capital distributions declared. At June 30, 2000, the Bank is permitted
to pay an aggregate amount approximating $55,280,000 in dividends under this
regulation. If the Bank's regulatory capital would fall below certain levels,
then applicable regulations would require approval by the OTS of any proposed
dividends and, in some cases, would prohibit the payment of dividends.
On November 17, 1997, the Board of Directors declared a three-for-two stock
split in the form of a 50 percent stock dividend to stockholders of record on
November 28, 1997. The stock dividend was distributed on December 15, 1997, and
totaled 10,865,530 shares of common stock. A total of $109,000 was transferred
from additional paid-in capital to common stock to record this distribution.
Fractional shares resulting from the stock split were paid in cash.
On April 28, 1999, the Board of Directors authorized the repurchase of up to
five percent, or approximately 3,000,000 shares, of the Corporation's
outstanding common stock. This repurchase was completed on December 29, 1999.
Effective December 27, 1999, the Board of Directors authorized a second
repurchase of up to 3,000,000 shares of the Corporation's outstanding stock
over the next 18 months. During fiscal year 1999 the Corporation repurchased
and cancelled 1,500,000 shares of its common stock at a cost of $36,218,000.
During fiscal year 2000 a total of 3,773,500 shares of common stock were
repurchased and cancelled at a cost of $63,895,000. From July 1, 2000, through
August 25, 2000, an additional 726,500 shares were repurchased for $12,289,000
completing this second authorization. On August 14, 2000, the Board of
Directors authorized a third repurchase of up to 10% of the Corporation's
outstanding stock, or approximately 5,500,000 shares. This repurchase is to be
completed no later than February 2002.
Note 19. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Regulators can initiate certain mandatory, and
possibly additional discretionary, actions if the Bank fails to meet minimum
capital requirements. These actions could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
101
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following table of tangible, core and total risk-based capital. Prompt
corrective action provisions pursuant to FDICIA require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for prompt corrective action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios as set forth in the following table. At June 30, 2000
and 1999, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital requirements:
As of June 30, 2000
------------------------------
Required
Actual Capital Capital
-------------- --------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
OTS capital adequacy:
Tangible capital............................ $890,051 6.55% $203,743 1.50%
Core capital................................ 896,091 6.59 407,667 3.00
Risk-based capital.......................... 961,520 12.59 610,757 8.00
FDICIA regulations to be classified well-
capitalized:
Tier 1 leverage capital..................... 896,091 6.59 679,445 5.00
Tier 1 risk-based capital................... 896,091 11.74 458,067 6.00
Total risk-based capital.................... 961,520 12.59 763,446 10.00
As of June 30, 1999
------------------------------
Required
Actual Capital Capital
-------------- --------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
OTS capital adequacy:
Tangible capital............................ $880,400 6.97% $189,412 1.50%
Core capital................................ 890,967 7.05 379,142 3.00
Risk-based capital.......................... 957,676 13.70 559,279 8.00
FDICIA regulations to be classified well-
capitalized:
Tier 1 leverage capital..................... 890,967 7.05 631,903 5.00
Tier 1 risk-based capital................... 890,967 12.74 419,459 6.00
Total risk-based capital.................... 957,676 13.70 699,099 10.00
As of June 30, 2000, the most recent notification from the OTS categorized
the Bank as "well-capitalized" under the regulatory framework for prompt
corrective action provisions under FDICIA. There are no conditions or events
since such notification that management believes have changed the Bank's
classification.
Note 20. Commitments and Contingencies
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve
elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Statement of Financial Condition. The contractual amounts of
these instruments represent the maximum credit risk to the Corporation. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
102
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents outstanding commitments, excluding undisbursed
portions of loans in process, as follows:
At June 30,
------------------
2000 1999
--------- --------
Originate mortgage loans.................................... $ 288,511 $296,879
Purchase mortgage loans..................................... 102,347 106,000
Unused lines of credit for commercial and consumer use...... 218,887 277,510
Purchase investment securities.............................. 1,500 81,500
Purchase mortgage-backed securities......................... -- 9,953
--------- --------
$ 611,245 $771,842
========= ========
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily
represent future cash requirements since many of the commitments may expire
without being drawn upon. The Corporation evaluates each customer's credit
worthiness on a separate basis and requires collateral based on this
evaluation. Collateral consists mainly of residential family units and personal
property.
At June 30, 2000 and 1999, the Corporation had approximately $289,770,000
and $77,686,000, respectively, in mandatory forward delivery commitments to
sell residential mortgage loans. At June 30, 2000 and 1999, loans sold subject
to recourse provisions totaled approximately $13,178,000 and $16,601,000,
respectively, which represents the total potential credit risk associated with
these particular loans. Any credit risk would, however, be offset by the value
of the single-family residential properties that collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a
material adverse effect on the Corporation's financial position or results of
operations.
On September 12, 1994, the Bank and the Corporation commenced litigation
relating to supervisory goodwill against the United States in the United States
Court of Federal Claims seeking to recover monetary relief for the government's
refusal to honor certain contracts that it had entered into with the Bank. The
suit alleges that such governmental action constitutes a breach of contract and
an unlawful taking of property by the United States without just compensation
or due process in violation of the Constitution of the United States. The
Corporation and the Bank are pursuing alternative damage claims of up to
approximately $230,000,000. The Bank also assumed a lawsuit in the merger with
Mid Continent against the United States also relating to a supervisory goodwill
claim filed by the former Mid Continent. The litigation status and process of
these legal actions, as well as that of numerous actions brought by others
alleging similar claims with respect to supervisory goodwill and regulatory
capital credits, make the value of the claims asserted by the Bank (including
the Mid Continent claim) uncertain as to their ultimate outcome, and contingent
on a number of factors and future events which are beyond the control of the
Bank, both as to substance, timing and the dollar amount of damages that may be
awarded to the Bank and the Corporation if they finally prevail in this
litigation.
103
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 21. Employee Benefit and Incentive Plans
Retirement Savings Plan
The Corporation maintains a contributory deferred savings 401(k) plan
covering substantially all employees. The Corporation's matching contributions
are equal to 100% of the first 8% of participant contributions. Participants
vest immediately in their own contributions. For contributions of the
Corporation, participants vest over a five-year period and, thereafter, vest
100% on an annual basis if employed on the last day of each calendar year.
Contribution expense was $3,926,000, $3,737,000 and $2,312,000 for fiscal years
ended June 30, 2000, 1999 and 1998, respectively.
Stock Option And Incentive Plans
The Corporation maintains the 1996 Stock Option and Incentive Plan (the
"1996 Plan"), the 1984 Stock Option and Incentive Plan, as amended (the "1984
Plan"), and various stock option and incentive plans assumed in certain mergers
since 1995. These plans permit the granting of stock options, restricted stock
awards and stock appreciation rights. The Corporation's stock options expire
over periods not to exceed 10 years from the date of grant with the option
price equal to market value on the date of grant. Stock options are generally
exercisable and vest on the date of grant and over various periods not
exceeding three years. Recipients of restricted stock have the usual rights of
a shareholder, including the rights to receive dividends and to vote the
shares; however, the common stock will not be vested until certain restrictions
are satisfied. The term of the 1984 Plan extends to July 31, 2002, and the term
of the 1996 Plan to September 11, 2006.
The following table presents the activity of all stock option plans for each
of the three fiscal years ended June 30, 2000, and the stock options
outstanding at the end of the respective fiscal years:
Stock Option Weighted Average Price Aggregate
Shares Per Share Amount
------------ ---------------------- ---------
Outstanding at June 30, 1997.... 2,970,835 $12.20 $ 36,232
Granted....................... 744,972 33.91 25,261
Exercised..................... (831,300) 7.77 (6,463)
Canceled...................... (20,251) 15.16 (307)
---------- ------ --------
Outstanding at June 30, 1998.... 2,864,256 19.11 54,723
Granted....................... 766,825 24.19 18,549
Exercised..................... (1,000,491) 12.78 (12,785)
Canceled...................... (41,483) 32.32 (1,357)
---------- ------ --------
Outstanding at June 30, 1999.... 2,589,107 22.84 59,130
Granted....................... 796,756 15.49 12,342
Exercised..................... (184,845) 11.58 (2,141)
Canceled...................... (251,216) 27.49 (6,906)
---------- ------ --------
Outstanding at June 30, 2000.... 2,949,802 $21.16 $ 62,425
========== ====== ========
Exercisable at June 30, 2000.... 2,161,431 $22.67 $ 48,994
========== ====== ========
Shares available for future
grants at June 30, 2000:
1984 Plan..................... 34,300
1996 Plan..................... 1,988,000
104
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Corporation's stock
options outstanding at June 30, 2000:
Shares Subject to Outstanding Options Shares Exercisable
------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Stock Option Remaining Average Stock Option Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life in Years Price Exercisable Price
--------------- ------------ ---------------- -------- ------------ --------
$ 2.22 - $ 2.34 44,580 1.34 $ 2.29 44,580 $ 2.29
6.26 - 9.01 107,332 4.51 8.77 107,332 8.77
11.58 - 13.77 385,875 6.24 13.25 385,875 13.25
14.53 - 15.69 734,076 9.88 15.64 70,538 15.20
17.22 - 22.17 410,858 6.60 20.11 410,858 20.11
24.19 - 25.26 679,414 8.84 24.22 554,581 24.22
34.16 587,667 7.87 34.16 587,667 34.16
---------------- --------- ---- ------ --------- ------
$ 2.22 - $34.16 2,949,802 7.98 $21.16 2,161,431 $22.67
================ ========= ==== ====== ========= ======
During fiscal years 2000 and 1999, non-incentive stock options for 60,000
shares (1984 Plan) and 50,000 shares (1996 Plan), respectively, of the
Corporation's common stock were granted to directors of the Corporation and the
Bank. Stock options under the 1996 Plan were also granted to executives and
managers during fiscal year 2000 for 653,538 shares and to executives, managers
and employees during fiscal year 1999 for 766,825 shares. These grants were
awarded in accordance with a management incentive plan. Also, during fiscal
year 2000 the Board of Directors elected to receive their director fees as
discounted stock options resulting in the issuance of 83,218 shares of stock
options under the 1996 Plan.
The Corporation applies APB Opinion No. 25 in accounting for its stock
option and incentive plans so no compensation cost is recognized for stock
options granted. The effect on the Corporation's net income and earnings per
share is presented in the following table as if compensation cost was
determined based on the fair value at the grant dates for stock options awarded
pursuant to the provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation."
Year Ended June 30,
------------------------
2000 1999 1998
-------- ------- -------
Net income:
As reported.......................................... $104,008 $92,392 $87,413
Pro forma............................................ 102,400 84,101 79,615
Earnings per share:
Basic--
As reported.......................................... $ 1.79 $ 1.55 $ 1.55
Pro forma............................................ 1.76 1.41 1.41
Diluted--
As reported.......................................... $ 1.79 $ 1.54 $ 1.52
Pro forma............................................ 1.79 1.42 1.40
105
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the weighted-average assumptions
used as follows:
Fiscal Year
---------------------------
2000 1999 1998
----------- ------- -------
Dividend yield...................................... 1.47%-2.25% 1.07% .64%
Expected stock price volatility..................... 29% 26% 24%
Risk-free interest rates............................ 5.97%-6.75% 5.50% 5.72%
Expected option lives............................... 6 years 6 years 6 years
Restricted stock is also granted for awards earned each fiscal year under
management incentive plans. On the grant dates of June 30, 1999 and 1998, the
Corporation issued restricted stock for 39,072 shares and 39,494 shares,
respectively, with an aggregate market value of $906,000 and $1,249,000,
respectively. The awards of restricted stock vest 20% on each anniversary of
the grant date, provided that the employee has completed the specified service
requirement, or earlier if the employee dies or is permanently and totally
disabled or upon a change in control. Total deferred compensation on the
unvested restricted stock totaled $805,000, $1,887,000 and $1,944,000, at June
30, 2000, 1999 and 1998, respectively, and is recorded as a reduction of
stockholders' equity. The value of the restricted shares is amortized to
compensation expense over the five-year vesting period. Compensation expense
applicable to the restricted stock totaled $607,000, $960,000 and $731,000 for
fiscal years 2000, 1999 and 1998, respectively.
106
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Postretirement Benefits
The Corporation recognizes the cost of providing postretirement benefits
other than pensions over the employee's period of service. The determination of
the accrual liability requires a calculation of the accumulated postretirement
benefit obligation ("APBO") which represents the actuarial present value of
postretirement benefits to be paid out in the future (primarily health care
benefits to be paid to retirees) that have been earned as of the end of the
year. The Corporation's postretirement benefit plan is unfunded. The following
table reconciles the status of the plan with the amounts recognized in the
Consolidated Statement of Financial Condition at June 30:
2000 1999
------- -------
Change in benefit obligation:
APBO at the beginning of the year.......................... $ 1,110 $ 906
Service cost--benefits earned during the fiscal year....... 58 47
Interest cost on benefit obligation........................ 74 57
Actuarial (gain) loss...................................... (37) 269
Retiree contributions...................................... 120 111
Benefits paid.............................................. (246) (280)
------- -------
APBO at the end of the year.............................. $ 1,079 $ 1,110
======= =======
Change in the fair value of plan assets:
Fair value of plan assets at the beginning of the year..... $ -- $ --
Retiree contributions...................................... 120 111
Employer contributions..................................... 126 169
Benefits paid.............................................. (246) (280)
------- -------
Fair value of plan assets at the end of the year......... $ -- $ --
======= =======
Funded status of the plan:
Funded status at the end of the year....................... $(1,079) $(1,110)
Unrecognized prior service cost............................ (230) (259)
Unrecognized net loss...................................... 468 533
------- -------
Accrued postretirement benefit cost at the end of the
year included in other liabilities...................... $ (841) $ (836)
======= =======
107
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following sets forth the components of the net periodic postretirement
benefit cost for the fiscal years ended June 30:
2000 1999 1998
---- ---- ----
Service cost--benefits earned during the fiscal year.......... $ 58 $ 47 $ 63
Interest cost on accumulated postretirement benefit
obligation................................................... 74 57 81
Amortization of prior service costs........................... (29) -- --
Amortization (accretion) of net loss (gain)................... 27 (17) 4
---- ---- ----
Net periodic postretirement benefit expense................. $130 $ 87 $148
==== ==== ====
The weighted average discount rate used to determine the APBO was 8.0%, 7.0%
and 7.0%, respectively, for fiscal years ended June 30, 2000, 1999 and 1998.
The assumed health care cost trend rate used in measuring the APBO as of July
1, 1999, was 7.0% decreasing gradually until it reaches 5.0% in 2008, when it
remains constant. Assumed health care cost trend rates have a significant
effect on the amounts reported for the Corporation's health benefit plan. A
one-percentage point change in assumed health care cost trend rates would have
the following effects:
One-Percentage Point
------------------------
Increase Decrease
---------- -----------
Total service and interest cost components for
fiscal year 2000................................... $16 $(14)
APBO as of June 30, 2000............................ 63 (59)
The Corporation maintains an unfunded postretirement survivor income plan
for certain key executives that provides benefits to beneficiaries based upon
the death of such executives and their employment status at the time of death
(i.e., normal retirement, termination or death prior to retirement). At June
30, 2000, 1999 and 1998, the accrued postretirement benefit cost included in
other liabilities totaled $476,000, $337,000 and $220,000, respectively, and
the net postretirement benefit cost charged to operations totaled $139,000,
$117,000 and $95,000 for the respective fiscal years. The weighted average
discount rate used to determine the accrued postretirement benefit cost was
8.0%, 7.0% and 7.0%, respectively, for fiscal years ended June 30, 2000, 1999
and 1998, and the assumed annual rate of increase for compensation was 3.0% for
the last three fiscal years.
108
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 22. Financial Information (Parent Company Only)
CONDENSED STATEMENT OF FINANCIAL CONDITION
------------------------------------------
June 30,
---------------------
ASSETS 2000 1999
------ ---------- ----------
Cash.................................................... $ 44,374 $ 10,412
Investment securities available for sale, at fair
value.................................................. 562 --
Investment securities held to maturity (fair value of
$8,614)................................................ 8,711 --
Other assets............................................ 3,571 4,600
Equity in CFC Preferred Trust........................... 1,392 1,392
Equity in Commercial Federal Bank....................... 1,120,268 1,130,201
---------- ----------
Total Assets........................................ $1,178,878 $1,146,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Other liabilities..................................... $ 19,258 $ 10,830
Unsecured promissory term note........................ 65,250 72,500
Unsecured line of credit.............................. 10,000 --
Subordinated extendible notes......................... 50,000 50,000
Junior subordinated deferrable interest debentures.... 46,392 46,392
---------- ----------
Total Liabilities................................... 190,900 179,722
---------- ----------
Stockholders' Equity.................................... 987,978 966,883
---------- ----------
Total Liabilities and Stockholders' Equity.......... $1,178,878 $1,146,605
========== ==========
CONDENSED STATEMENT OF OPERATIONS
---------------------------------
Year Ended June 30,
---------------------------
2000 1999 1998
-------- -------- -------
Revenues:
Dividend income from the Bank................... $117,818 $ 67,904 $47,627
Interest income................................. 767 2,373 3,157
Other income.................................... 54 362 1,711
Expenses:
Interest expense................................ (14,526) (13,175) (9,329)
Operating expenses.............................. (1,218) (8,557) (9,286)
-------- -------- -------
Income before income taxes, extraordinary items
and equity in undistributed earnings (losses) of
subsidiaries..................................... 102,895 48,907 33,880
Income tax benefit................................ (5,430) (4,042) (3,719)
-------- -------- -------
Income before extraordinary items and equity in
undistributed earnings (losses) of subsidiaries.. 108,325 52,949 37,599
Cumulative effect of change in accounting
principle, net of tax benefit.................... (12) -- --
-------- -------- -------
Income before equity in undistributed earnings of
subsidiaries..................................... 108,313 52,949 37,599
Equity in undistributed earnings (losses) of
subsidiaries..................................... (4,305) 39,443 49,814
-------- -------- -------
Net income.................................... $104,008 $ 92,392 $87,413
======== ======== =======
109
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
-----------------------------
2000 1999 1998
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $104,008 $ 92,392 $ 87,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary items, net of tax benefit...... 12 -- --
Equity in undistributed losses (earnings) of
subsidiaries................................ 4,305 (39,443) (49,814)
Other items, net............................. 9,457 16,639 (31)
-------- --------- --------
Total adjustments.......................... 13,774 (22,804) (49,845)
-------- --------- --------
Net cash provided by operating activities.. 117,782 69,588 37,568
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities held to
maturity...................................... (8,711) -- --
Purchase of investment securities available for
sale.......................................... (581) -- --
Purchase of stock of and cash distributions
into the Bank................................. -- -- (426)
Payments for acquisitions...................... -- (179,556) --
Other items, net............................... 30 2,479 11,373
-------- --------- --------
Net cash provided (used) by investing
activities................................ (9,262) (177,077) 10,947
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable........ 50,000 85,000 --
Payment of notes payable....................... (47,250) (13,500) (40,395)
Repurchases of common stock.................... (63,895) (36,218) (1,886)
Issuance of common stock....................... 2,363 45,095 6,519
Proceeds from loan repayments from employee
stock ownership plans......................... -- 11,058 --
Payment of cash dividends on common stock...... (15,776) (13,539) (16,147)
Other items, net............................... -- -- 204
-------- --------- --------
Net cash provided (used) by financing
activities................................ (74,558) 77,896 (51,705)
-------- --------- --------
CASH AND CASH EQUIVALENTS
Increase (decrease) in net cash position....... 33,962 (29,593) (3,190)
Balance, beginning of year..................... 10,412 40,005 43,379
Adjustments to convert acquisition to fiscal
year end...................................... -- -- (184)
-------- --------- --------
Balance, end of year........................... $ 44,374 $ 10,412 $ 40,005
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for :
Interest expense............................. $ 16,611 $ 10,722 $ 9,651
Income taxes, net............................ 24,275 54,249 51,366
Non-cash investing and financing activities:
Common stock issued in connection with the
acquisition of business..................... -- -- 32,267
Common stock received in connection with
employee benefit plans, net................. (135) (475) (4,180)
110
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 23. Segment Information
The Corporation has identified two distinct lines of business operations for
the purposes of management reporting: Community Banking and Mortgage Banking.
These segments were determined based on the Corporation's financial accounting
and reporting processes with insurance and securities brokerage operations
aggregated with Community Banking. Management makes operating decisions and
assesses performance based on a continuous review of these two primary
operations.
The Community Banking segment involves a variety of traditional banking and
financial services. These services include retail banking services, consumer
checking and savings accounts, and loans for consumer, commercial real estate,
residential mortgage and business purposes. Also included in this segment is
insurance and securities brokerage services. The Community Banking services are
offered through the Bank's branch network, including traditional offices,
supermarkets, ATMs, 24-hour telephone centers and the Internet. Community
Banking is also responsible for the Corporation's investment and mortgage-
backed securities portfolios and the corresponding management of deposits,
advances from the FHLB and certain other borrowings.
The Mortgage Banking segment involves the origination and purchase of
residential mortgage loans, the sale of these mortgage loans in the secondary
mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans. Mortgage Banking operations
are conducted through the Bank's branches, offices of a mortgage banking
subsidiary and a nationwide correspondent network of mortgage loan originators.
The Bank allocates expenses to the Mortgage Banking operation on terms that are
not necessarily indicative of those which would be negotiated between unrelated
parties. The Mortgage Banking segment also originates and sells loans to the
Bank. Substantially all loans sold to the Bank from the Mortgage Banking
operation are at net book value, resulting in no gains or losses. In fiscal
year 1999 and previous years, these sales were primarily at par such that the
Mortgage Banking operation recorded losses equal to the expenses it incurred
net of fees collected. All of these losses are deferred by the Bank and
amortized over the estimated life of the loans the Bank purchased.
The Parent Company includes interest income earned on intercompany cash
balances and intercompany transactions, interest expense on Parent Company debt
and operating expenses for general corporate purposes.
111
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The contribution of the major business segments to the consolidated results
for the last three fiscal years ended June 30 is summarized in the following
table:
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
----------- -------- ---------- ------------- ------------
FISCAL 2000:
Net interest income
(loss)............... $ 310,923 $ 21,495 $ (14,526) $ 24,249 $ 342,141
Provision for loan and
lease losses......... 12,993 767 -- -- 13,760
Total other income.... 110,770 58,237 114,334 (181,502) 101,839
Total other expense... 242,653 34,319 1,218 (9,023) 269,167
Net income before
income taxes and
cumulative effect of
change in accounting
principle............ 166,047 44,646 98,590 (148,230) 161,053
Income tax provision
(benefit)............ 46,711 13,988 (5,430) -- 55,269
Income before
cumulative effect of
of change in
accounting
principle............ 119,336 30,658 104,020 (148,230) 105,784
Cumulative effect of
change in accounting
principle, net....... 1,759 5 12 -- 1,776
Net income............ 117,577 30,653 104,008 (148,230) 104,008
Total revenue......... 1,000,338 79,750 114,334 (164,893) 1,029,529
Intersegment revenue.. 42,582 11,083 114,246
Depreciation and
amortization......... 19,160 1,243 11 -- 20,414
Total assets.......... 13,922,296 324,987 1,178,878 (1,633,123) 13,793,038
FISCAL 1999:
Net interest income
(loss)............... $ 312,502 $ 11,075 $ (10,802) $ 19,558 $ 332,333
Provision for loan and
lease losses......... 11,980 420 -- -- 12,400
Total other income.... 95,020 41,015 107,709 (153,729) 90,015
Total other expense... 224,578 21,549 8,557 (388) 254,296
Net income before
income taxes......... 170,964 30,121 88,350 (133,783) 155,652
Income tax provision
(benefit)............ 57,474 9,828 (4,042) -- 63,260
Net income.......... 113,490 20,293 92,392 (133,783) 92,392
Total revenue......... 909,055 64,228 110,082 (142,476) 940,889
Intersegment revenue.. 33,764 6,952 109,034 -- --
Depreciation and
amortization......... 16,382 1,760 30 -- 18,172
Total assets.......... 12,909,398 282,374 1,146,605 (1,562,915) 12,775,462
FISCAL 1998:
Net interest income
(loss)............... $ 255,535 $ 13,778 $ (6,172) $ 17,158 $ 280,299
Provision for loan and
lease losses......... 13,433 420 -- -- 13,853
Total other income.... 93,453 38,349 99,152 (143,694) 87,260
Total other expense... 187,926 19,593 9,286 (2,868) 213,937
Net income before
income taxes......... 147,629 32,114 83,694 (123,668) 139,769
Income tax provision
(benefit)............ 45,214 10,862 (3,719) (1) 52,356
Net income............ 102,415 21,252 87,413 (123,667) 87,413
Total revenue......... 820,667 72,439 102,309 (140,206) 855,209
Intersegment revenue.. 19,769 18,271 100,505 -- --
Depreciation and
amortization......... 11,628 1,497 10 -- 13,135
Total assets.......... 10,550,020 440,052 964,319 (1,555,152) 10,399,229
112
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 24. Exit Costs and Termination Benefits
On November 5, 1999, the Corporation announced an initiative to integrate
the Corporation's most recent seven acquisitions and new data processing system
to support community-banking operations. Major aspects of the plan included:
. 21 branches to be sold or closed, and
. the elimination of 121 positions and the consolidation of the
correspondent loan servicing operations.
Implementation of this plan resulted in charges for exit costs and
termination benefits totaling $4,291,000 ($3,124,000 after-tax or $.05 per
diluted share) recorded in the second quarter ended December 31, 1999. In the
fourth quarter of fiscal year 2000, these charges were adjusted downward by
$350,000 ($220,000 after-tax) due to a change in estimated personnel costs.
This adjustment resulted in final costs recorded for fiscal year 2000 of
$3,941,000 ($2,904,000 after-tax, or $.05 loss per share). At June 30, 2000,
the liability balance associated with these costs totaled $351,000.
The branches to be sold and closed were located in Iowa (15), Kansas (5) and
Missouri (1). Direct and incremental costs associated with these costs totaled
$2,377,000. As of June 30, 2000, six branches were sold or closed. Of the
remaining 15 branches, four were sold in July and August 2000 and two are
scheduled to sell in September 2000. Two branches are also scheduled to close
in September 2000 and six to close in November 2000. The status of one branch
is presently pending. The plan also eliminated 121 positions with personnel
costs consisting of severance, benefits and related professional services
totaling $1,564,000. This plan also included the consolidation of the
correspondent loan servicing functions to Omaha, Nebraska from Wichita, Kansas
and Denver, Colorado. As of June 30, 2000, this portion of the plan was
completed.
Note 25. Merger Expenses and Other Nonrecurring Charges
During fiscal years 1999 and 1998 the Corporation incurred merger expenses
and other nonrecurring charges totaling $30,043,000 and $29,729,000,
respectively. The amounts for fiscal year 1999 are associated with the First
Colorado acquisition and the termination of three employee stock ownership
plans acquired in mergers during the past two fiscal years.
The amounts for fiscal year 1998 are due to the Liberty, Mid Continent and
Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The Corporation finalized its plans for systems
conversions and Year 2000 compliance in fiscal year 1998 resulting in a
reduction in the estimated useful lives of such computer systems and software.
113
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These merger expenses incurred in fiscal years 1999 and 1998 are detailed in
the following table. Other nonrecurring items not classified in the merger
expenses category of general and administrative expenses are noted
parenthetically where such items are included in the Corporation's Consolidated
Statement of Operations.
Year Ended June 30,
---------------------
1999 1998
------- -------
Merger expenses:
Termination of employee stock ownership plans.......... $13,954 $ --
Transaction costs relating to the combinations......... 8,015 8,992
Employee severance and other termination costs......... 1,449 6,555
Costs to combine operations............................ 6,499 2,487
------- -------
29,917 18,034
------- -------
Other nonrecurring items:
Additional loan loss reserves--(provision for loan and
lease losses)......................................... 1,000 3,931
Gain on sale of First Colorado branch--(other operating
income)............................................... (1,076) --
Reserves on leasing operations--(other operating
income)............................................... -- 597
Accelerated amortization of computer systems and
software--(data processing)........................... -- 4,314
Conforming accounting practices of combining
companies--(compensation and benefits)................ 202 489
Conforming accounting practices of combining
companies--(other operating expenses)................. -- 2,364
------- -------
126 11,695
------- -------
Total merger expenses and other nonrecurring items,
before taxes............................................ 30,043 29,729
Income tax benefit, net.................................. (2,954) (8,291)
------- -------
Total merger expenses and other nonrecurring items,
after-tax............................................... $27,089 $21,438
======= =======
Note 26. Cumulative Effect Of Change In Accounting Principle
Effective July 1, 1999, the Corporation adopted the provisions of Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities," which requires
that costs of start-up activities and organizational costs be expensed as
incurred. Prior to the adoption of this statement, these costs were capitalized
and amortized over periods ranging from five to 25 years. The effect of
adopting the provisions of this statement was to record a charge of $1,776,000,
net of an income tax benefit of $978,000, or $.03 per diluted share, as a
cumulative effect of a change in accounting principle in the accompanying
consolidated statement of operations. These costs consist of organizational
costs primarily associated with the creation of a real estate investment trust
subsidiary and start-up costs of the proof of deposit department for processing
customer transactions following the complete conversion of the Corporation's
deposit system.
114
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 27. Quarterly Financial Data (Unaudited)
The following summarizes the unaudited quarterly results of operations for
the last three fiscal years ended June 30:
Quarter Ended
--------------------------------------------
June 30 March 31 December 31 September 30
-------- -------- ----------- ------------
FISCAL 2000:
Total interest income............. $239,280 $232,529 $232,344 $223,537
Net interest income............... 83,125 85,071 86,338 87,607
Provision for loan and lease
losses........................... (3,300) (3,700) (3,460) (3,300)
Gain (loss) on sales of loans,
net.............................. (112) (239) 363 (122)
Net income........................ 24,321 26,490 28,759 24,438
Earnings per common share:
Basic:
Income before cumulative
effect of change in
accounting principle......... .43 .46 .49 .44
Cumulative effect of change in
accounting principle, net.... -- -- -- (.03)
Net income.................... .43 .46 .49 .41
Diluted:
Income before cumulative
effect of change in
accounting principle......... .43 .46 .49 .44
Cumulative effect of change in
accounting principle, net.... -- -- -- (.03)
Net income.................... .43 .46 .49 .41
Dividends declared per share...... .07 .07 .07 .065
FISCAL 1999:
Total interest income............. $220,706 $216,072 $203,715 $198,861
Net interest income............... 88,856 87,442 81,415 74,620
Provision for loan and lease
losses........................... (2,800) (2,800) (3,000) (3,800)
Gain on sales of securities and
loans, net....................... 30 883 3,293 3,593
Net income........................ 29,874 16,169 31,226 15,123
Earnings per common share:
Basic........................... .49 .27 .53 .26
Diluted......................... .49 .27 .52 .25
Dividends declared per share...... .065 .065 .065 .055
FISCAL 1998:
Total interest income............. $190,317 $189,573 $189,974 $187,824
Net interest income............... 72,575 71,463 68,618 67,643
Provision for loan and lease
losses........................... (3,389) (2,817) (5,959) (1,688)
Gain on sales of securities, loans
and
loan servicing rights, net....... 2,717 830 2,733 957
Net income........................ 22,375 13,628 25,455 25,955
Earnings per common share:
Basic........................... .39 .24 .46 .47
Diluted......................... .38 .23 .45 .46
Dividends declared per share...... .055 .055 .055 .047
115
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 28. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the Corporation disclose
estimated fair value amounts of its financial instruments. It is management's
belief that the fair values presented below are reasonable based on the
valuation techniques and data available to the Corporation as of June 30, 2000
and 1999, as more fully described in the following discussion. It should be
noted that the operations of the Corporation are managed from a going concern
basis and not a liquidation basis. As a result, the ultimate value realized for
the financial instruments presented could be substantially different when
actually recognized over time through the normal course of operations. The
valuation does not consider the intangible franchise value of the institution,
which management believes to be substantial.
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation at June 30, 2000 and 1999. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
2000 1999
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- --------- ---------
SELECTED ASSETS
Cash (including short-term
investments)..................... $ 199,566 $ 199,566 $ 353,275 $ 353,275
Investment securities............. 993,167 928,264 946,571 930,616
Mortgage-backed securities........ 1,220,138 1,197,851 1,282,545 1,269,195
Loans and leases receivable, net.. 10,407,692 10,190,988 9,326,393 9,533,833
Federal Home Loan Bank stock...... 255,756 255,756 194,129 194,129
SELECTED LIABILITIES
Deposits:
Passbook accounts............... 1,575,380 1,575,380 1,137,282 1,137,282
NOW checking accounts........... 1,028,640 1,028,640 1,036,921 1,036,921
Market rate savings accounts.... 531,317 531,317 909,233 909,233
Certificates of deposit......... 4,195,163 4,149,657 4,571,979 4,556,506
---------- ---------- --------- ---------
Total deposits................ 7,330,500 7,284,994 7,655,415 7,639,942
Advances from Federal Home Loan
Bank............................. 5,049,582 4,999,942 3,632,241 3,591,178
Securities sold under agreements
to repurchase.................... 33,379 33,274 128,514 128,341
Other borrowings.................. 172,647 164,419 225,383 225,201
OFF-BALANCE SHEET INSTRUMENTS
Derivative financial instruments.. 417 8,788 498 (2,052)
Commitments....................... -- (686) -- 955
The following sets forth the methods and assumptions used in determining the
fair value estimates for the Corporation's financial instruments at June 30,
2000 and 1999.
Cash And Short-Term Investments
The book value of cash and short-term investments is assumed to approximate
the fair value of these assets.
Investment Securities
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities.
116
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage-Backed Securities
For mortgage-backed securities available for sale and held to maturity the
Corporation utilized quotes for similar or identical securities in an actively
traded market, where such a market exists, or obtained quotes from independent
security brokers to determine the fair value of these assets.
Loans And Leases Receivable, Net
The fair value of loans and leases receivable was estimated by discounting
anticipated future cash flows using the current market rates at which similar
loans and leases would be made to borrowers with similar credit ratings and for
similar remaining maturities. When using the discounting method to determine
fair value, loans and leases were gathered by homogeneous groups with similar
terms and conditions and discounted at derived current market rates or rates at
which similar loans and leases would be made to borrowers as of June 30, 2000
and 1999. The fair value of loans held for sale was determined based on quoted
market prices for the intended delivery vehicle of those loans, generally
agency mortgage-backed securities. In addition, when computing the estimated
fair value for all loans and leases, allowances for loan and lease losses were
subtracted from the calculated fair value for consideration of credit issues.
Federal Home Loan Bank Stock
The fair value of such stock approximates book value since the Corporation
is able to redeem this stock with the Federal Home Loan Bank at par value.
Deposits
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, NOW checking accounts and market rate savings accounts, fair
value is determined to approximate the carrying value (the amount payable on
demand) since such deposits are primarily withdrawable immediately; (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates offered on
certificates of deposit with similar remaining maturities as of June 30, 2000
and 1999. In accordance with the provisions of this statement, no value has
been assigned to the Corporation's long-term relationships with its deposit
customers (core value of deposits intangible) since such intangible is not a
financial instrument as defined under this statement.
Advances From Federal Home Loan Bank
The fair value of these advances was estimated by discounting the expected
future cash flows using current interest rates as of June 30, 2000 and 1999,
for advances with similar terms and remaining maturities.
Securities Sold Under Agreements To Repurchase
The fair value of securities sold under agreements to repurchase was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of June 30, 2000 and 1999, over the contractual
maturity of such borrowings.
Other Borrowings
Included in other borrowings at June 30, 2000 and 1999, are subordinated
extendible notes and guaranteed preferred beneficial interests in the
Corporation's junior subordinated debentures with carrying values of
$50,000,000 and $45,000,000, respectively, with the fair value of such
borrowings based on quoted market prices or dealer quotes. The fair value of
other borrowings, excluding the aforementioned borrowings, was estimated by
discounting the expected future cash flows using derived interest rates
approximating market as of June 30, 2000 and 1999, over the contractual
maturity of such other borrowings.
117
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative Financial Instruments
The fair value of the interest rate swap and floor agreements, obtained from
market quotes from independent security brokers, is the estimated amount that
would be paid to terminate the swap agreements and the estimated amount that
would be received to terminate the floor agreements.
Commitments
The fair value of commitments to originate, purchase, and sell residential
mortgage loans was determined based on quoted market prices for forward
purchases and sales of such product. The fair value of commitments to originate
other loans was estimated by discounting anticipated future cash flows using
the current market rates at which similar loans would be made to borrowers with
similar credit ratings and for similar remaining maturities as of June 30, 2000
and 1999.
Limitations
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instruments
without attempting to estimate the value of anticipated future business,
customer relationships and the value of assets and liabilities that are not
considered financial instruments. These estimates do not reflect any premium or
discount that could result from offering the Corporation's entire holdings of a
particular financial instrument for sale at one time. Furthermore, since no
market exists for certain of the Corporation's financial instruments, fair
value estimates may be based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of June 30, 2000 and 1999, are not intended to
represent the underlying value of the Corporation, on either a going concern or
a liquidation basis.
Note 29. Subsequent Event--Accounting For Derivatives and Hedging Activities
Effective July 1, 2000, the Corporation adopted the provisions of Statement
of Financial Accounting No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires the recognition of
all derivative financial instruments as either assets or liabilities in the
statement of financial condition and measurement of those instruments at fair
value. Changes in the fair values of those derivatives will be reported in
earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in
the fair value or cash flows of the asset or liability hedged. Under the
provisions of SFAS No. 133, the method that will be used for assessing the
effectiveness of a hedging derivative, as well as the measurement approach for
determining the ineffective aspects of the hedge, must be established at the
inception of the hedge.
The Corporation has identified four types of derivative instruments which
were recorded on the Corporation's Consolidated Statement of Financial
Condition on July 1, 2000. The derivative instruments are:
.interest rate swap agreements,
.interest rate cap agreements,
.interest rate floor agreements, and
.fixed-rate conforming loan commitments.
118
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate swap agreements are used to synthetically extend the
maturities of certain deposits for asset liability management and interest rate
risk management purposes. These agreements qualify as a cash flow hedge under
SFAS No. 133. Since the swap agreements qualify as a cash flow hedge, the fair
value of these agreements totaling $8,686,000 were recorded as a credit to
other comprehensive income in stockholders' equity at July 1, 2000, net of
income taxes of $3,238,000, or $5,448,000 after-tax. Changes in fair value on
these interest rate swap agreements will be adjusted through other
comprehensive income as long as the cash flow hedge requirements are met.
The interest rate cap agreements, interest rate floor agreements and the
loan commitments do not qualify for hedge accounting so their fair value
adjustments will be recorded to operations. At July 1, 2000, the fair value of
these derivatives was equal to a loss of $1,002,000. This adjustment was
recorded against operations as of July 1, 2000, as a cumulative adjustment of a
change in accounting principle, net of income taxes of $360,000, or $642,000
after-tax. Future changes in fair value on these derivatives will be recorded
through current operations.
As permitted by SFAS No. 133, on July 1, 2000, the Corporation transferred
all of its securities from the held-to-maturity portfolio to the available-for-
sale and trading portfolios as follows:
Securities Transferred
------------------------------------------
Available
for Sale Trading Total Total Pretax
Security (at Fair Value) (at Fair Value) Book Value Fair Value Loss
-------- --------------- --------------- ---------- ---------- --------
Investment securities... $ 494,007 $363,779 $ 922,689 $ 857,786 $(64,903)
Mortgage-backed
securities............. 674,861 160,234 857,382 835,095 (22,287)
---------- -------- ---------- ---------- --------
$1,168,868 $524,013 $1,780,071 $1,692,881 $(87,190)
========== ======== ========== ========== ========
As of July 1, 2000, the transfer of the securities had the following effect
on earnings and other comprehensive income:
Adjustment to
Adjustment Other
to Comprehensive Total
Earnings Income Adjustments
---------- ------------- -----------
Investment securities................... $(27,593) $(37,310) $(64,903)
Mortgage-backed securities.............. (9,569) (12,718) (22,287)
-------- -------- --------
Pre-tax loss............................ $(37,162) $(50,028) $(87,190)
Income tax benefit...................... 13,828 18,615 32,443
-------- -------- --------
Net loss................................ $(23,334) $(31,413) $(54,747)
======== ======== ========
The impact to earnings resulted in a loss of approximately $23,334,000 that
was recorded against current operations as of July 1, 2000, as a cumulative
adjustment of a change in accounting principle, net of tax benefits. Future
changes in fair value for any remaining portion of the securities in the
trading portfolio will be recorded through current operations. Changes in fair
value in the remaining available-for-sale portfolio will be adjusted through
other comprehensive income.
119
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The total effect to the Corporation on adopting the provisions of SFAS
No. 133 as of July 1, 2000 is as follows:
Net Income
Pre-tax Tax
Loss Benefit Net Loss
-------- ------- --------
Recorded to current operations as a cumulative
adjustment of a change in accounting
principle...................................... $(38,164) $14,188 $(23,976)
======== ======= ========
Recorded as a net loss to other comprehensive
income in total stockholders' equity........... $(41,342) $15,377 $(25,965)
======== ======= ========
Note 30. Subsequent Event--Key Strategic Initiatives
On August 14, 2000 the Board of Directors approved and management announced
a series of strategic initiatives aimed at improving the overall operations of
the Corporation. Key initiatives include:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans. The proceeds from this disposition are expected to be
used to reduce high-cost borrowings, to repurchase additional shares of
the Corporation's common stock and the remainder reinvested in lower risk
securities.
. A thorough assessment of the Bank's delivery and servicing systems.
. The sale of the leasing company acquired as part of the February 1998
acquisition of Liberty.
. Acceleration of the disposition of other real estate owned.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in
loans experienced over the past year, while maintaining credit quality.
. A change in the Corporation's fiscal year end from June 30 to December
31.
. An expansion of the Corporation's common stock repurchase program by up
to 10% of its outstanding shares, or approximately 5.5 million shares.
Management anticipates to sell the approximate $2.0 billion in investments
and mortgage loans, as well as the leasing portfolio, by December 31, 2000. The
formal plan to achieve these strategic initiatives is in process. Management is
currently identifying all significant actions to be taken and finalizing the
expected timetable for completion. The total estimated exit costs and
termination benefits have not been determined.
120
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMMERCIAL FEDERAL CORPORATION
The directors of the Corporation as of June 30, 2000, are as follows:
Age at First Year
June 30, Elected as Current Term
Name 2000 Director to Expire
---- -------- ---------- ------------
Talton K. Anderson..................... 63 1991 2001
William A. Fitzgerald.................. 62 1984 2002
Michael P. Glinsky..................... 55 1997 2003
Robert F. Krohn........................ 67 1984 2003
Carl G. Mammel......................... 67 1991 2001
James P. O'Donnell..................... 52 1991 2001
Robert D. Taylor....................... 53 1996 2002
Aldo J. Tesi........................... 49 1996 2002
Joseph J. Whiteside.................... 59 1999 2003
George R. Zoffinger.................... 52 1999 2003
The principal occupation of each director of the Corporation for the last
five years is set forth below:
Talton K. Anderson--Owner and President of two automobile dealerships in
Omaha, Nebraska, and one in Lincoln, Nebraska. Mr. Anderson is also the
President of a Nebraska-based automobile leasing company and a reinsurance
company.
William A. Fitzgerald--Chairman of the Board and Chief Executive Officer of
the Corporation and the Bank. Mr. Fitzgerald joined Commercial Federal in 1955.
He was named Vice President in 1968, Executive Vice President in 1973,
President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in
1994. Mr. Fitzgerald is well known in the banking community for his
participation in numerous industry organizations, including the Federal Home
Loan Bank Board, the Heartland Community Bankers, the Board of America's
Community Bankers and the Board of Governors of the Federal Reserve System
Thrift Institutions Advisory Council. Mr. Fitzgerald joined Commercial
Federal's Board of Directors in 1973.
Michael P. Glinsky--Executive Vice President and Chief Financial Officer
since April 2000 of NorthPoint Communications Group, Inc., a broadband
telecommunications company. Mr. Glinsky is retired Executive Vice President and
Chief Financial Officer of U S WEST, Inc., an international telecommunications,
entertainment and directory and information services company, a position he
held from 1996 to 1998. Mr. Glinsky also served as managing partner of the
Denver office of Coopers & Lybrand LLP from 1990 to 1996 and served in various
other capacities with that firm since 1967.
Robert F. Krohn--Chairman and Chief Executive Officer since 1995 of PSI
Group, Inc., a national mail presort company. Mr. Krohn is the former President
and Chief Executive Officer of HDR, Inc., an international architecture,
planning and engineering firm. Mr. Krohn served as Chairman of the Board of the
Corporation and the Bank from 1990 through 1994.
Carl G. Mammel--President of Mammel Foundation and Chairman of the Board of
Mammel & Associates and member of the board of Silverstone Group, a consulting
firm providing services in employee benefits, human resource consulting and
risk management solutions. Mr. Mammel is also a member of the board of M
Financial Corporation, a network of financial service firms throughout the
United States.
121
James P. O'Donnell--Executive Vice President, Chief Financial Officer and
Corporate Secretary of ConAgra, Inc., an Omaha, Nebraska-based international
diversified food company.
Robert D. Taylor--President and Chief Executive Officer from October 1998 of
Executive Aircraft Corporation, Wichita, Kansas, which sells, maintains and
refurbishes corporate jet aircraft. Since October 1995, Mr. Taylor also owns
and is President of Taylor Financial, a financial consulting and investment
firm based in Wichita, Kansas.
Aldo J. Tesi--President since September 1999 of Election Systems and
Software, Omaha, Nebraska, a technology services company. Mr. Tesi is retired
Group President of First Data Card Enterprise, a leading third-party provider
of credit, debit, private label and commercial card processing services, a
position he held from 1997. Prior to this position, Mr. Tesi was President of
First Data Resources from 1992 to 1997, and served in various other senior
level capacities with the firm since 1979.
Joseph J. Whiteside--Senior Advisor since February 1996 to U. S. National
Australia Bank and Chairman of WeatherWise USA, Inc., a Pittsburgh-based
company that provides financial and other services to the public utilities
industry. From 1994 to 1996, Mr. Whiteside served as Executive Vice President
and Chief Financial Officer of Michigan National Corp., a bank holding company
based in Farmington Hills, Michigan.
George R. Zoffinger--President and Chief Executive Officer of Constellation
Capital Corp. since March 1997. Mr. Zoffinger served as President and Chief
Executive Office of Constellation Bank Corp. from December 1991 to December
1995 and as President and Chief Executive Officer of Value Property Trust from
October 1995 to February 1998. Mr. Zoffinger serves as a director of New Jersey
Resources, Inc., MFN Financial Corp., Admiralty Bank Corp. and Atlas Steel
Corp.
The executive officers of the Corporation and the Bank as of September 20,
2000, are as follows:
Name Age Current Position(s)
---- --- -------------------
William A. Fitzgerald... 62 Chairman of the Board and Chief Executive Officer
of the Corporation and the Bank
David S. Fisher......... 44 Chief Financial Officer and Executive Vice
President of the Corporation and the Bank
Gary L. Matter.......... 55 Senior Vice President, Controller and Secretary
of the Corporation and Executive Vice President,
Controller and Secretary of the Bank
Roger L. Lewis.......... 50 Executive Vice President and Assistant Secretary
of the Bank
The principal occupation of each executive officer of the Corporation and
the Bank for the last five years is set forth below:
William A. Fitzgerald--Chairman of the Board and Chief Executive Officer of
the Corporation and the Bank. See Mr. Fitzgerald's biography as listed in the
preceding section for directors.
David S. Fisher--Chief Financial Officer and Executive Vice President of the
Corporation and the Bank. Mr. Fisher joined the Bank on June 23, 2000. Mr.
Fisher served as Senior Vice President and Treasurer of Associated Banc-Corp
from May 1998 to May 2000 responsible for financial analysis and planning,
investments, funding, asset/liability management, treasury and accounting
functions. Previously, Mr. Fisher was Senior Vice President and director of
funds management and bank investments at First of America Bank Corporation from
1988 to 1998.
122
Gary L. Matter--Executive Vice President of the Bank since April 1998. Mr.
Matter, a Senior Vice President of the Corporation and Controller and Secretary
of the Corporation and the Bank since November 1993, joined the Bank in
December 1990, as First Vice President and Controller.
Roger L. Lewis--Executive Vice President of the Bank since April 1998. Mr.
Lewis, Assistant Secretary of the Bank, joined the Bank in 1986 as Vice
President and Director of Public Relations until he was named First Vice
President and Director of Marketing in March 1988. Mr. Lewis was named a Senior
Vice President in 1996.
Section 16(a) Beneficial Ownership Reporting Compliance
Officers, directors and persons who own more than 10% of the outstanding
common stock of the Corporation are required to file reports detailing their
ownership and changes of ownership in the Corporation's common stock, and to
furnish the Corporation with copies of all reports. Management believes that
during the fiscal year ended June 30, 2000, all of the Corporation's officers,
directors and persons who own more than 10% of the Corporation's common stock
complied with these reporting requirements with the exception of Director
Talton K. Anderson who did file, but not timely file, his February 2000 Form 4
on common stock purchases.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the cash and noncash compensation for each of
the last three fiscal years awarded to or earned by (1) the Chief Executive
Officer, and (2) the four highest paid executive officers of the Corporation
and the Bank whose salary and bonus earned in fiscal year 2000 exceeded
$100,000 for services rendered in all capacities to the Corporation and its
subsidiaries.
Long-Term
Compensation Awards
---------------------
Annual
Compensation(1) Restricted Securities
Name and Principal ----------------- Stock Underlying All Other
Position Year Salary Bonus Awards(2) Options(3) Compensation(4)
------------------ ---- -------- -------- ---------- ---------- ---------------
William A. Fitzgerald... 2000 $590,106 $ -- $ -- 113,527 $46,162
Chairman and Chief 1999 562,000 -- 155,635 96,477 44,960
Executive Officer of 1998 477,000 211,955 256,226 150,000 38,160
the Corporation and the
Bank
James A. Laphen......... 2000 432,600 -- -- -- 34,608
President and Chief 1999 412,000 -- 114,106 72,358 32,960
Operating Officer of 1998 353,000 156,856 164,766 55,000 28,240
the Corporation and the
Bank(5)
Russell G. Olson........ 2000 262,864 -- -- 15,000 9,396
Executive Vice 1999 251,132 -- 55,905 13,500 10,094
President of the 1998 91,872 44,455 44,465 6,000 --
Bank(6)
Gary L. Matter.......... 2000 218,750 -- -- 15,000 17,500
Senior Vice President, 1999 206,667 -- 46,537 13,500 16,534
Controller and 1998 177,000 68,951 77,639 25,800 14,160
Secretary of the
Corporation, Executive
Vice President,
Controller and
Secretary of the Bank
Gary D. White........... 2000 154,688 -- -- 15,000 10,041
Executive Vice 1999 146,250 -- 32,903 11,500 11,700
President of the 1998 125,750 48,992 57,684 24,800 10,060
Bank(7)
(Footnotes on next page)
123
- --------
(1) Does not include certain perquisite and other personal benefits which do
not exceed the lesser of $50,000 or 10.0% of the individual's salary and
bonus.
(2) Represents awards under the policy of the Stock Option Committee adopted in
conjunction with the Corporation's Executive Incentive Plan. See
"Compensation and Stock Option Committee Report on Executive Compensation
-- Overview and Objectives." There was no restricted stock granted during
fiscal year 2000. Restricted stock granted in fiscal years 1998 and 1999
vests over a period of five years, at a rate of 20.0% per year, assuming
continued service with the Corporation. Based on the closing sales price of
the common stock of $15.5625 at June 30, 2000, the number and value of the
unvested restricted stock holdings for Messrs. Fitzgerald, Laphen, Olson,
Matter and White were 13,668 shares (value of $212,708), 9,598 shares
(value of $149,369), 2,773 shares (value of $43,155), 4,091 shares (value
of $63,666) and 2,950 shares (value of $45,909). Dividends are payable on
these shares if and to the extent paid on the common stock generally. Upon
a change in control of the Corporation, all restrictions on the restricted
stock immediately lapse.
(3) Non-incentive and incentive stock options awarded in fiscal year 2000 to
Messrs. Fitzgerald, Olson, Matter and White vest in varying increments over
three years.
(4) Includes net contributions to the Bank's 401(k) Plan for each of the named
executive officers to match elective deferral contributions made by each to
this plan and amounts paid under the Bank's Supplemental Retirement Plan.
Matching contributions under the Bank's 401(k) Plan amounted to $9,198,
$10,244, $9,396, $10,164 and $10,041 while the employer matching
contributions under the Supplemental Retirement Plan were $36,964, $24,364,
none, $7,336 and none for Messrs. Fitzgerald, Laphen, Olson, Matter and
White, respectively.
(5) Mr. Laphen retired on July 31, 2000. Mr. Laphen will continue to receive
the annual base salary of $432,600 payable semi-monthly through July 31,
2003. Restricted stock previously awarded will continue to vest annually as
if Mr. Laphen remained in employment. Mr. Laphen will also receive certain
other benefits for various periods up through July 31, 2003.
(6) Mr. Olson was appointed an officer on February 13, 1998, in connection with
the Corporation's acquisition of Liberty Financial Corporation.
Compensation information for fiscal year 1998 reflects only compensation
received subsequent to February 13, 1998. Mr. Olson resigned from
employment on August 18, 2000.
(7) Mr. White retired on August 31, 2000. Mr. White received a lump sum
totaling $155,925 in September 2000. Restricted stock previously awarded
will continue to vest annually as if Mr. White remained in employment. Mr.
White will also receive certain other benefits up through August 31, 2001.
124
Option Grants Table
The following table contains information concerning the grant of stock
options under the Corporation's Stock Option and Incentive Plan to the Chief
Executive Officer and each of the other executive officers named in the Summary
Compensation Table during the fiscal year ended June 30, 2000. All such option
grants vest over a three year period in varying increments.
Individual Grants
-------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in or Base Expiration ---------------------
Name Granted Fiscal Year Price Date 5% 10%
---- ---------- ------------ -------- ---------- ---------- ----------
William A. Fitzgerald... 113,527 17.37% $15.69 5/17/10 $1,120,211 $2,838,836
James A. Laphen......... -- -- N/A N/A -- --
Russell G. Olson........ 15,000 2.30 15.69 5/17/10 148,010 375,087
Gary L. Matter.......... 15,000 2.30 15.69 5/17/10 148,010 375,087
Gary D. White........... 15,000 2.30 15.69 5/17/10 148,010 375,087
Aggregated Option Exercises in Fiscal Year and Fiscal Year-end Option Value
The following table sets forth information concerning the exercise of
options by the Chief Executive Officer and the other executive officers named
in the Summary Compensation Table during the last fiscal year, as well as the
value of such options held by such persons at the end of the fiscal year.
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at Fiscal
Shares Fiscal Year-End Year-End
Acquired Value (Exercisable/ (Exercisable/
Name on Exercise Realized Unexercisable) Unexercisable)(1)
---- ----------- -------- --------------- -----------------
William A. Fitzgerald... $-- $-- 317,592/145,695 $45,461/--
James A. Laphen......... -- -- 180,051/ 24,122 31,881/--
Russell G. Olson........ -- -- 15,000/ 19,500 --/--
Gary L. Matter.......... -- -- 40,298/ 19,500 --/--
Gary D. White........... -- -- 42,883/ 18,834 78,361/--
- --------
(1) Based on the closing sales price of the common stock as reported on the New
York Stock Exchange on June 30, 2000, which was $15.5625.
Directors' Compensation
Directors receive $500 per month for service on the Board of the Corporation
and $1,500 per month plus $750 per meeting attended for service on the Board of
the Bank, with the exception of William A. Fitzgerald, who does not receive
director's compensation. Fees for members of the committees of the Corporation
and the Bank are paid at the rate of $750 per committee meeting attended. The
chairman of the Audit Committee, Compensation and Stock Option Committee, and
the Finance Committee each receive an additional $2,000 per year. Effective
July 1, 1999, the 1996 Stock Option and Incentive Plan was amended to allow
directors to substitute cash compensation and shares of the Corporation's
common stock for non-incentive stock options with an exercise price equal to
75% of the market value of the optioned shares. The aggregate difference
between the exercise price and the market value of the underlying shares equals
the compensation foregone. In no event shall the exercise price of the stock
option be less than 50% of the market value of the underlying shares on the
date of the grant. All directors receiving remuneration elected to receive the
discounted non-incentive stock options. During fiscal year 2000, discounted
non-incentive stock options to purchase 83,218 shares were granted to the non-
employee directors of the Corporation and the Bank.
125
Pursuant to the 1984 Stock Option and Incentive Plan, effective May 17,
2000, non-incentive stock options to purchase 60,000 shares were granted to the
non-employee directors of the Corporation and the Bank.
Employment and Change in Control Agreements
Set forth below is a discussion of certain employment and change in control
agreements entered into between the Corporation and the Bank and those
executive officers listed in the Summary Compensation Table.
The agreement with William A. Fitzgerald, which became effective in June
1995, provides for Mr. Fitzgerald's employment as Chairman of the Board and
Chief Executive Officer of the Corporation and the Bank for a term of three
years. Pursuant to the agreement, Mr. Fitzgerald receives an annual salary and
bonus determined by agreement with the Board of Directors, but in no event less
than the rate of compensation Mr. Fitzgerald received on June 8, 1995. The base
compensation following his election as Chairman of the Board of Directors was
$385,000. The Board of Directors of the Corporation and the Bank reviewed the
employment agreement and again extended the agreement for an additional one-
year period beyond the effective expiration date. The contract provides for
termination for cause or in certain events specified by regulatory authorities.
The contract is also terminable by the Bank without cause wherein Mr.
Fitzgerald would be entitled to receive all compensation and benefits through
the effective date of termination, plus a severance payment equal to 36 months
of base salary. Mr. Fitzgerald shall be entitled to the same benefits and
severance in the event he becomes disabled while the agreement is in effect. In
the event Mr. Fitzgerald dies while the agreement is in effect, his heirs shall
receive a severance payment equal to 12 months of base salary. the agreement
provides, among other things, for Mr. Fitzgerald's participation in an
equitable manner in all benefits available to executive officers of the
Corporation and the Bank, including:
. short-term and long-term incentive compensation and deferred
compensation;
. health, disability, life insurance, retirement and vacation benefits;
. any benefits available under prequisite programs.
Effective June 1, 1997, the Corporation and the Bank entered into an
employment agreement with James A. Laphen, which provided for Mr. Laphen's
employment as President and Chief Operating Officer of the Corporation and the
Bank for a term of three years. Pursuant to this agreement, Mr. Laphen received
an annual salary and bonus determined by the agreement with the Board of
Directors, but in no event less than the rate of compensation Mr. Laphen
received on June 1, 1997. Mr. Laphen's base compensation on June 1, 1997 was
$330,000. Upon the resignation and retirement of Mr. Laphen, no extension to
his employment agreement was granted. Mr. Laphen retired on July 31, 2000.
Effective February 10, 1999, the Bank entered into a one-year employment
agreement with Russell G. Olson which provided for his employment as Executive
Vice President at an annual salary equal to $252,360. Mr. Olson's employment
agreement was not extended. Mr. Olson resigned from employment on August 18,
2000.
The Corporation and the Bank had also entered into change in control
agreements with Messrs. Fitzgerald, Laphen, Olson, Matter and White. Under
these agreements, in the event of the executive's involuntary termination of
employment in anticipation of, or after, a change in control of the Corporation
or the Bank, other than for "cause," the executive will be paid in equal
monthly installments, the base salary and all commissions and bonuses
(including short-term and long-term incentive compensation awards and stock
options granted under the Corporation's executive incentive plan) in effect at
the time of termination for a period of 35.88 months. During this period, the
executive shall also continue to participate in any health, disability, life
insurance and perquisite plans of any successor corporation in which such
executive was entitled to participate with the Corporation prior to the change
in control. All benefits and payments under the agreements shall be
126
reduced, if necessary, to the largest aggregate amount that will result in no
portion thereof being subject to federal excise tax or being nondeductible to
the Corporation and the Bank for federal income tax purposes. Messrs. Olson's,
Matter's and White's severance shall be reduced by amounts received by the
executive as a result of alternative employment obtained during the period in
which salary, commissions and bonuses are payable under the change in control
agreements. Further, Messrs. Fitzgerald's, Laphen's and Olson's severance
payments under their change in control agreements shall be reduced by the
amount of severance received under their employment agreements.
A "change in control" shall be deemed to have occurred under these
agreements in each of the following events:
. at any time a majority of the directors of the Corporation or the Bank
are not the persons for whom election proxies have been solicited by the
Boards of Directors of the Corporation and the Bank, or persons then
serving as directors appointed by such Boards, except where such
appointments are necessitated by removal of directors;
. at any time 49% or more of the outstanding stock of the Corporation or
the Bank is acquired or beneficially owned by any person or entity
(excluding the Corporation, the Bank or the executive) or any combination
of persons or entities acting in concert; or
. at any time the shareholders of the Corporation or the Bank approve an
agreement to merge or consolidate the Corporation or the Bank with or
into another corporation, or to sell or otherwise dispose of all, or
substantially all, of the assets of the Corporation or the Bank.
The executive shall also be entitled to receive such payment in the event of
a "constructive involuntary termination," which under the terms of the
agreements shall be deemed to have occurred if, in anticipation of or following
a change in control:
. the agreement or the executive's employment is terminated;
. the executive's compensation is reduced, responsibilities diminished or
job title lowered;
. the level of the executive's participation in incentive compensation is
reduced or eliminated;
. the executive's benefit coverage or perquisites are reduced or
eliminated, except to the extent such reduction or elimination applies to
all other employees; or
. the executive's office location is changed to a location more than 50
miles from the location of the executive's office at the time of the
change in control.
In connection with his retirement, Mr. Laphen's employment agreement and
change in control agreement were terminated. Change in control agreements were
terminated in connection with Mr. White's retirement and Mr. Olson's
resignation.
Pursuant to the terms of a separate agreement between the Bank and William
A. Fitzgerald, in the event of Mr. Fitzgerald's termination of employment with
the Bank, Mr. Fitzgerald will be entitled to receive in 120 equal monthly
installments an amount equal to three times his highest annual salary received
from the Bank during the five-year period ending with the close of the fiscal
year in which he attains age 65 (or, in the case of death or disability prior
to age 65, the year in which he became disabled or died). In the event of his
death before the payment of all installments, all remaining installments shall
be paid to his designated beneficiary. In the event of the death of both Mr.
Fitzgerald and the designated beneficiary, all remaining unpaid installments
shall be paid in one lump sum payment to the estate of the designated
beneficiary. Pursuant to the terms of the agreement, the right to receive any
and all unpaid installments will be forfeited upon the occurrence of any of the
following events (1) without the approval of the Board of Directors, Mr.
Fitzgerald has or possesses, directly or indirectly, any interest competing
with or inimical to the interests of the Bank within an area within a 300 mile
radius of Omaha, Nebraska, or (2) Mr. Fitzgerald engages in any activity or
conduct which, in the opinion of the Board, is inimical to the interests of the
Bank.
127
Compensation and Stock Option Committee Report on Executive Compensation
Overview And Objectives
Composed exclusively of outside directors, Michael P. Glinsky, Robert S.
Milligan, James P. O'Donnell (Chairman) and Aldo J. Tesi, the Compensation and
Stock Option Committee (the "Committee") of the Board of Directors establishes
the Corporation's and the Bank's executive compensation policies. The Committee
is responsible for developing the Corporation's and the Bank's executive
compensation policies generally, and for implementing those policies for the
Corporation's executive officers and the Bank's senior executive officers (the
Chairman of the Board and Chief Executive Officer of the Corporation and the
Bank and the President and Chief Operating Officer of the Corporation and the
Bank). The Chief Executive Officer of the Bank, under the direction and
pursuant to the policies of the Committee, implements the executive
compensation policies for the remainder of the Bank's executive officers. The
Corporation established structured compensation guidelines recommended by an
outside professional consulting firm in fiscal year 1994. In fiscal year 1999,
the Corporation requested an update to ensure its compensation practices were
relevant to the growth and changes the Corporation experienced during that
year, and were not unusual or unreasonable.
The Committee's overall objectives in designing and administering the
specific elements of the Corporation's and the Bank's executive compensation
program are as follows:
. to align executive compensation to increases in shareholder value, as
measured by favorable long-term operating results and continued
strengthening of the Corporation's financial condition;
. to provide incentives for executive officers to work towards achieving
successful annual results as a step in fulfilling the Corporation's long-
term operating results and strategic objectives;
. to link, as closely as possible, executive officers' receipt of incentive
awards with the attainment of specified performance objectives;
. to maintain a competitive mix of total executive compensation with
particular emphasis on awards directly related to increases in long-term
shareholder value; and
. to attract, retain and motivate top performing executive officers in a
cost effective manner for the long-term success of the Corporation.
The Board of Directors strongly believes that it is in the best interests of
shareholders to encourage ownership of stock by management. Accordingly, the
Stock Option Committee established the following guidelines on stock ownership.
The Committee feels such guidelines will align shareholders' and management's
interests and enhance employee performance.
Chief Executive Officer: 5 times annual salary
Chief Operating Officer: 5 times annual salary
Executive Vice Presidents: 3 times annual salary
In furtherance of the above objectives, the Corporation's executive
compensation program for fiscal year 2000 consisted of the following
components.
Base Salary
The Committee makes recommendations to the Board concerning executive
compensation on the basis of regional and national surveys of salaries paid to
executive officers of other savings and loan holding companies, non-diversified
banks, other financial institutions similar to the Corporation in size, market
capitalization and other characteristics, and where applicable, other
industries. The Committee's objective is to provide base salaries as well as
the appropriate mix of total compensation that is reasonably competitive with
total compensation paid by the Corporation's peers as identified in such
surveys.
128
Executive Incentive Plan
The Corporation maintains an Executive Incentive Plan which provides for
annual incentive compensation based on achieving a combination of Corporation
and individual performance objectives. Under this plan, the Committee
establishes challenging corporate objectives, such as a targeted level of
annual net income, at the beginning of the fiscal year. If the Corporation
meets such objectives, an amount equal to 4.5% of net income is set aside for
payment to executive officers (defined for this purpose as the Bank's Chief
Executive and Chief Operating Officers, Executive, Senior, and First Vice
Presidents and such other officers as are designated by the Committee for any
fiscal year) as short-term and long-term compensation. If the Corporation meets
less than a designated percentage (85% for fiscal year 2000) of the performance
objectives established for a fiscal year, no funds are made available for
awards under this plan for such fiscal year. If the Corporation meets between
designated percentages (between 85% and 100% for fiscal year 2000) of the
specified objectives, an amount between 2.25% and 4.5% of net income is set
aside. The distribution of awards under the plan is determined by the relative
success of individual executive officers in meeting specified performance
objectives. Fulfillment of these objectives promotes both the short-term and
the long-term success of the Corporation and is in the best interests of all
shareholders. During fiscal year 2000, no funds were made available for awards
under this plan, and no cash or restricted stock awards were granted to
executive officers. As it is the Committee's objective to place emphasis on
awards directly related to increases in long-term shareholder value, non-
incentive and incentive stock options in the amount of 653,538 shares (1.2% of
outstanding shares) were approved for award to executives and key managers upon
achievement of satisfactory performance goals.
Pursuant to a policy adopted in June 1993 and subsequently amended and
restated by the Stock Option Committee (the "Stock Option Committee"), whose
members are all outside directors, the Stock Option Committee determines, in
its discretion, whether, to whom and in what amounts restricted stock and/or
incentive/non-incentive stock options will be awarded for any fiscal year.
Shares of restricted stock awarded under this policy normally vest over five
years, assuming the individual's continued service with the Corporation or the
Bank, thus helping to retain, qualified officers. The Stock Option Committee
determines the vesting of the stock options awarded under this policy at the
time of the award. The policy may be amended or terminated at any time by
action of the Committee.
1984 And 1996 Stock Option And Incentive Plans
The Corporation maintains the 1984 Stock Option and Incentive Plan, as
Amended and Restated, and the 1996 Stock Option and Incentive Plan
(collectively, the "Option Plans") as a means of providing key employees the
opportunity to acquire a proprietary interest in the Corporation and to align
their interests with those of the Corporation's stockholders. Under each plan,
participants are eligible to receive stock options, stock appreciation rights
or shares of restricted stock. Awards under the Option Plans are subject to
vesting and forfeiture as determined by the Committee. Options and stock
appreciation rights are generally granted at the market value of the common
stock on the date of grant. Thus, such awards acquire value only if the
Corporation's stock price increases. Under the 1996 plan, the Stock Option
Committee may, at the election of a director or employee selected by the Stock
Option Committee, permit such individual to receive stock options in lieu of
cash compensation. The exercise price of such stock options will be discounted
below the market value of the underlying common stock, such that the aggregate
discount on the exercise price of the stock options is equal to the
compensation foregone by the individual. See "Option Grants Table" and
"Directors' Compensation" for fiscal year 2000 awards under the Option Plans.
Pursuant to the Option Plans, effective May 17, 2000, non-incentive stock
options to purchase 119,857 shares were granted to the Chief Executive Officer
and the executive officers and incentive stock options to purchase 53,670
shares were granted to the Chief Executive Officer and the executive officers
of the Corporation and the Bank. These options vest one-third on the one year
anniversary, one-third on the two year anniversary and one-third on the three
year anniversary. In addition, on June 23, 2000, the Chief Financial Officer
was granted non-incentive stock options totaling 43,536 shares and incentive
stock options totaling 6,464 shares. These options were 100% vested on the
grant date.
129
The Committee believes that the Option Plans align shareholders', officers'
and employees' interests and help to retain and motivate executive officers to
improve long-term shareholder value.
Compensation of the Chief Executive Officer
The Committee determines the Chief Executive Officer's compensation on the
basis of several factors. In determining Mr. Fitzgerald's base salary for
fiscal year 2000, the Committee conducted surveys of compensation paid to chief
executive officers of similarly situated thrifts and non-diversified banks both
regionally and nationally. Mr. Fitzgerald received only long-term compensation
under the Executive Incentive Compensation Program in fiscal year 2000 based on
his achievement of objectives established by the Committee in the following
areas:
. Return on Average Assets
. Core Profitability
. Leadership Inside and Outside the Corporation
. Capital Compliance and Regulatory Guidelines
In order to further align the compensation, rewards and performance
measurements with shareholder expectations, the Committee revised the criteria
to reflect market measurements generally viewed by analysts that follow the
Corporation's peer group. These measurements will be tied to specific
objectives established during the Corporation's annual planning meetings and
benchmarked to the performance of the Corporation's peer group.
Mr. Fitzgerald achieved his performance objectives during fiscal year 2000.
Pursuant to the policy of the Stock Option Committee effective for fiscal year
2000, Mr. Fitzgerald received on May 17, 2000, incentive stock options to
purchase 12,746 shares of common stock at an exercise price of $15.69 per
share, which vest 50% on the two year anniversary of the date of grant and 50%
on the three year anniversary. In addition to incentive stock options, Mr.
Fitzgerald received non-incentive stock options to purchase 100,781 shares of
common stock at an exercise price of $15.69 per share, which vest 37.55% on the
one year anniversary of the date of grant 31.22% on the two year anniversary of
the date of grant and 31.23% on the three year anniversary.
The Committee believes that the Corporation's executive compensation program
serves the Corporation and all of its shareholders by providing a direct link
between the interests of executive officers and shareholders generally, and by
helping to attract and retain qualified executive officers who are dedicated to
the long-term success of the Corporation.
COMPENSATION AND STOCK OPTION
COMMITTEE
Michael P. Glinsky
Robert S. Milligan
James P. O'Donnell, Chairman
Aldo J. Tesi
130
Comparative Stock Performance Graph
The graph set forth below compares the cumulative total shareholder return
on the Corporation's common stock over the last five years with the cumulative
total return on the S&P 500 Index and an index comprised of the top 50 publicly
traded thrifts in the United States based on total asset size over the same
period. Cumulative total-return on the stock or the index equals the total
increase in value since June 30, 1995, assuming reinvestment of all dividends
paid into the stock or the index, respectively. The graph was prepared assuming
that $100 was invested on June 30, 1995, in the Corporation's common stock and
in the respective indices.
[STOCK PERFORMANCE GRAPH]
Cumulative Total Return as of
June 30,
-----------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Commercial Federal Corporation................... $100 $142 $208 $268 $198 $135
S&P 500 Index.................................... 100 126 170 221 271 291
Peer Group....................................... 100 126 205 268 220 186
131
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
Persons and groups owning in excess of 5.0% of the common stock of the
Corporation are required to file certain reports regarding such ownership
pursuant to the Securities Exchange Act of 1934, as amended. Based upon these
reports, and certain other available information, the following table sets
forth, as of June 30, 2000, certain information as to the Corporation's common
stock beneficially owned by each stockholder owning in excess of 5.0% of the
Corporation's common stock, the directors of the Corporation, the executive
officers listed in the Summary Compensation Table under Item 11 of this Report
and by all executive officers and directors of the Corporation as a group.
Shares of Common Stock Percent of Shares
and Nature of of Common Stock
Beneficial Owner Beneficial Ownership(1) Outstanding
---------------- ----------------------- -----------------
Franklin Mutual Advisers, LLC........ 4,663,852 8.34%
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
Wallace R. Weitz & Co................ 3,044,120 5.44%
1125 South 103 Street, Suite 600
Omaha, NE 68124
Directors:
Talton K. Anderson................... 82,075 .15%
William A. Fitzgerald................ 823,651 1.46%
Michael P. Glinsky................... 23,769 .04%
Robert F. Krohn...................... 196,347 .35%
Carl G. Mammel....................... 156,202 .28%
James P. O'Donnell................... 35,802 .06%
Robert D. Taylor..................... 112,036 .20%
Aldo J. Tesi......................... 30,592 .05%
Joseph J. Whiteside.................. 10,060 .02%
George R. Zoffinger.................. 10,241 .02%
Executive Officers Listed in
Compensation Table:
James A. Laphen...................... 334,027 .60%
Russell G. Olson..................... 143,624 .26%
Gary L. Matter....................... 82,044 .15%
Gary D. White........................ 104,042 .19%
All Directors and Executive Officers
as a Group (19 persons)............. 2,373,622 4.18%
- --------
(1) Unless otherwise indicated, as to ownership of shares by executive officers
and directors, the amounts include certain shares of common stock owned by
businesses in which the director or executive officer is an officer or
major stockholder, or by spouses or as a custodian or trustee for minor
children, over which shares the named individual or all executive officers
and directors as a group effectively exercise sole or shared voting and
investment power. Includes shares totaling 27,990 (Anderson), 317,592
(Fitzgerald), 22,331 (Glinsky), 28,532 (Krohn), 26,992 (Mammel), 27,456
(O'Donnell), 27,682 (Taylor), 27,400 (Tesi), 8,948 (Whiteside), 9,129
(Zoffinger), 180,051 (Laphen), 15,000 (Olson), 40,298 (Matter), 42,883
(White) and 920,129 (all directors and executive officers as a group)
having the right to purchase common stock within 60 days pursuant to the
exercise of stock options, as well as stock held in retirement accounts or
funds for the benefit of the named individuals or group.
132
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions With Management And Others
The Bank offers first and second mortgages, refinance, equity and various
consumer loans to its directors, officers and employees. Loans to executive
officers and directors are made in the ordinary course of business on
substantially the same terms and collateral, including interest rates and loan
fees charged, as those of comparable transactions prevailing at the time and
do not involve more than the normal risk of collectibility or present other
unfavorable features.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
(a) Independent Auditors' Report
(b) Consolidated Statement of Financial Condition at June 30, 2000 and
1999
(c) Consolidated Statement of Operations for the Year Ended June 30,
2000, 1999 and 1998
(d) Consolidated Statement of Comprehensive Income for the Year Ended
June 30, 2000, 1999 and 1998
(e) Consolidated Statement of Stockholders' Equity for the Year Ended
June 30, 2000, 1999 and 1998
(f) Consolidated Statement of Cash Flows for the Year Ended June 30,
2000, 1999 and 1998
(g) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is not applicable, not required or is included in the
consolidated financial statements or related notes included in Item 8 of
this Report.
(3) Exhibits:
See "Index to Exhibits" of this Report.
(B) Reports on Form 8-K:
On April 28, 2000, the Corporation filed a Form 8-K announcing the
retirement of James A. Laphen, President and Chief Operating Officer, on or
before December 31, 2000.
On June 1, 2000, the Corporation filed a Form 8-K announcing the
appointment of David S. Fisher as Chief Financial Officer.
(C) Exhibits to this Form 10-K are filed or incorporated by reference as
listed in the "Index to Exhibits" of this Report.
(D) No financial statement schedules required by Regulation S-X are filed, and
as such are excluded from the Annual Report as provided by Exchange Act
Rule 14a-3(b)(i).
133
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, there unto duly authorized.
Commercial Federal Corporation
/s/ William A. Fitzgerald
By: _________________________________
William A. Fitzgerald
Chairman of the Board andChief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
--------- ----- ----
/s/ William A. Fitzgerald Principal Executive September 28, 2000
______________________________________ Officer
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ David S. Fisher Principal Financial September 28, 2000
______________________________________ Officer
David S. Fisher
Chief Financial Officer
/s/ Gary L. Matter Principal Accounting September 28, 2000
______________________________________ Officer
Gary L. Matter
Senior Vice President,
Controller and Secretary
/s/ Talton K. Anderson Director September 28, 2000
______________________________________
Talton K. Anderson
Director
______________________________________
Michael P. Glinsky
/s/ Robert F. Krohn Director September 28, 2000
______________________________________
Robert F. Krohn
/s/ Carl G. Mammel Director September 28, 2000
______________________________________
Carl G. Mammel
/s/ James P. O'Donnell Director September 28, 2000
______________________________________
James P. O'Donnell
/s/ Robert D. Taylor Director September 28, 2000
______________________________________
Robert D. Taylor
/s/ Aldo J. Tesi Director September 28, 2000
______________________________________
Aldo J. Tesi
/s/ Joseph J. Whiteside Director September 28, 2000
______________________________________
Joseph J. Whiteside
/s/ George R. Zoffinger Director September 28, 2000
______________________________________
George R. Zoffinger
134
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibits
------- --------------------
3.1 Articles of Incorporation of Registrant, as amended and restated
(incorporated by reference to the Registrant's Current Report on Form
8-K dated July 3, 1998)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Current Report on Form 8-K dated August
18, 2000)
4.1 Form of Certificate of Common Stock of Registrant (incorporated by
reference to the Registrant's Form S-1 Registration Statement No. 33-
00330)
4.2 Shareholder Rights Agreement between Commercial Federal Corporation
and Harris Trust and Savings Bank, as amended (incorporated by
reference to the Registrant's Form 10-Q Quarterly Report for the
Quarterly Period Ended September 30, 1998)
4.3 The Corporation hereby agrees to furnish upon request to the
Securities and Exchange Commission a copy of each instrument defining
the rights of holders of the Cumulative Trust Preferred Securities and
the Subordinated Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
10.2 Change of Control Executive Severance Agreement with William A.
Fitzgerald dated June 8, 1995 (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreements entered into
with Executive Vice Presidents, Senior Vice Presidents and First Vice
Presidents (incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1, 1994
(incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended June 30, 1994--File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan Effective
July 1, 1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994--File No. 0-
13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive Plan,
as Amended and Restated Effective August 1, 1992 (incorporated by
reference to the Registrant's Form S-8 Registration Statement No. 33-
60448)
10.7 Employment Agreement with William A. Fitzgerald, dated May 15, 1974,
as Amended February 14, 1996 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1996--File No. 1-11515)
10.8 Commercial Federal Savings and Loan Association Survivor Income Plan,
as Amended February 14, 1996 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended June
30, 1996--File No. 1-11515)
10.9 Commercial Federal Corporation 1996 Stock Option and Incentive Plan as
Amended (incorporated by reference to the Registrant's Form S-8
Registration Statement Nos. 333-20739 and 333-58607)
10.10 Railroad Financial Corporation 1994 Stock Option and Incentive Plan,
Railroad Financial Corporation 1991 Directors' Stock Option Plan and
Railroad Financial Corporation 1986 Stock Option and Incentive Plan,
as Amended February 22, 1991 (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 33-63221 and Post-
Effective Amendment No. 1 to Registration Statement No. 33-01333 and
No. 33-10396)
Exhibit
Number Identity of Exhibits
------- --------------------
10.11 Railroad Financial Corporation 1994 Stock Option and Incentive Plan
(incorporated by reference to the Registrant's Form S-8 Registration
Statement No. 33-63629)
10.12 Mid Continent Bancshares, Inc. 1994 Stock Option Plan (incorporated by
reference to the Registrant's Post-Effective Amendment No. 1 to Form
S-4 under cover of Form S-8--File No. 333-42817)
10.13 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan
(incorporated by reference to the Registrant's Post-Effective
Amendment No. 1 to Form S-4 under cover of Form S-8--File No. 333-
45613)
10.14 First Colorado Bancorp, Inc. 1992 Stock Option Plan and First Colorado
Bancorp, Inc, 1996 Stock Option Plan (incorporated by reference to the
Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of
Form S-8 - File No. 333-49967)
10.15 Commercial Federal 401(k) Plan for Acquired Companies (incorporated by
reference to the Registrant's Form S-8 Registration Statement No. 333-
91065)
10.16 Change of Control Executive Severance Agreement with David S. Fisher
dated June 23, 2000 (filed herewith)
10.17 Separation, Waiver and Release Agreement with James A. Laphen dated
June 8, 2000 (filed herewith)
10.18 Separation, Waiver and Release Agreement with Joy J. Narzisi dated
November 1, 1999 (filed herewith)
10.19 Retirement, Waiver and Release Agreement with Gary D. White dated
August 24, 2000 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)