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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
[x] ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[_] EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 1-11515
COMMERCIAL FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 South 72nd Street, Omaha, Nebraska 68124
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 21, 1998, was
$1,334,200,492. As of September 21, 1998, there were issued and outstanding
60,390,988 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1998 - Parts I, II and IV.
2. Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders -Part III.
1
PART I
Item 1. Business
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GENERAL
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Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. The Corporation incurs
interest expense on $50.0 million of subordinated extendible notes, $46.4
million of junior subordinated deferrable interest debentures and an unsecured
promissory term note which totaled $1.0 million at June 30, 1998, and was paid
in full on July 29, 1998. Such interest is payable monthly on the subordinated
extendible notes and quarterly on the junior subordinated deferrable interest
debentures. The Corporation also paid scheduled quarterly principal payments of
$1.0 million on the promissory term note. See Note 15 of the Notes to
Consolidated Financial Statements in the Annual Report for additional
information on the debt of the Corporation. The Corporation also pays operating
expenses primarily for shareholder and stock related expenditures such as the
annual report, proxy, corporate filing fees and assessments and certain costs
directly attributable to the holding company. In addition, common stock cash
dividends totaling $8.8 million, or $.212 per common share, were declared during
fiscal year 1998.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt and for the common stock cash dividends paid to the Corporation's
shareholders. During fiscal year 1998 the Corporation received, in cash,
dividends totaling $47.4 million from the Bank which were made primarily to
cover (i) interest payments totaling $9.2 million on the parent company's debt,
(ii) principal payments of $3.0 million on the parent company's five-year
promissory term note, (iii) common stock cash dividends totaling $7.0 million
paid by the parent company to its shareholders through June 30, 1998, (iv)
principal and interest payments totaling $26.3 million on a revolving credit
note acquired from the Liberty acquisition, and (v) certain fees totaling $1.9
million in connection with the acquisition of Liberty Financial Corporation
("Liberty").
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is evolving from a
thrift institution into a community banking institution offering commercial and
consumer banking, mortgage banking and trust and investment services. The
Corporation completed four acquisitions in fiscal year 1998 and subsequent to
June 30, 1998, completed two other acquisitions and announced another pending
acquisition. Two of these fiscal year 1998 acquisitions were commercial banks
that have allowed the Bank to expand its banking services with commercial and
agricultural loans, business checking, equipment leasing and trust services. The
Bank has now moved from being primarily a single-family residential lender to a
full service banking institution with branches not only in traditional locations
but also, nontraditional locations such as supermarkets and convenience stores,
more ATM outlets and expanded services in telephone bill paying and Internet
banking. All loan origination activities are conducted through the Bank's branch
office network, through the loan offices of Commercial Federal Mortgage
Corporation ("CFMC"), its wholly-owned mortgage banking subsidiary, and through
a nationwide correspondent network of mortgage loan originators. The Corporation
also provides insurance and securities brokerage and other retail financial
services.
2
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage and commercial
financing, consumer loans and other types of loans, which, in turn, are affected
by the interest rates at which such financings may be offered, the availability
of funds, and other factors, such as the supply of housing for mortgage loans
and regional economic situations.
At June 30, 1998, the Corporation had assets of $8.9 billion and stockholders'
equity of $643.0 million, and through the Bank operated 50 branches in Iowa, 37
branches in Kansas, 34 branches in Nebraska, 21 branches in metropolitan Denver,
Colorado, 19 branches in Oklahoma, and seven branches in Arizona. The increase
in branches over fiscal year 1997 was the result of four acquisitions during
fiscal year 1998. On January 30, 1998, the Corporation consummated the
acquisition of First National Bank Shares, LTD (First National) of Great Bend,
Kansas (seven branches and total assets of $147.8 million). On February 13,
1998, the Corporation consummated the acquisition of Liberty of West Des Moines,
Iowa (45 branches and total assets of $658.1 million). On February 27, 1998, the
Corporation consummated the acquisition of Mid Continent Bancshares, Inc. (Mid
Continent) of El Dorado, Kansas (ten branches and total assets of approximately
$405.7 million). On May 29, 1998, the Corporation consummated the acquisition of
Perpetual Midwest Financial, Inc. (Perpetual ) of Cedar Rapids, Iowa (five
branches and total assets of approximately $412.2 million). The accounts and
results of operation of First National are reflected in the Corporation's
consolidated financial statements beginning January 30, 1998, since this
acquisition was accounted for as a purchase. The Liberty, Mid Continent and
Perpetual acquisitions were accounted for under the pooling of interests method
and, accordingly, the Corporation's historical consolidated financial statements
were restated for all periods prior to those acquisitions to include the
accounts and results of operations of these financial institutions. The Bank is
one of the largest retail financial institutions in the Midwest, and, based upon
total assets at June 30, 1998, the Corporation was the 14th largest publicly-
held thrift institution holding company in the United States. In addition, CFMC
serviced a loan portfolio totaling $11.7 billion at June 30, 1998, with $7.115
billion in loans serviced for third parties and $4.536 million in loans serviced
for the Bank. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General" in the Corporation's 1998 Annual Report to
Stockholders (the "Annual Report") which is incorporated herein by reference.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family residential, consumer, commercial real
estate, business lending and agribusiness loans) and providing customers with a
full array of financial products and a high level of customer service. As part
of its long-term strategic plan, the Corporation intends to expand its
operations within its market areas through direct marketing efforts aimed at
increasing market share, branch expansions, and opening additional branches. The
Corporation's retail strategy will continue to be centered on attracting new
customers and selling both new and existing customers multiple products and
services. Additionally, the Corporation will continue to build and leverage an
infrastructure designed to increase non-interest income. Complementing its
strategy of internal growth, the Corporation continues to grow its current
franchise through an ongoing program of selective acquisitions of other
financial institutions. As mentioned, during fiscal year 1998, the Corporation
consummated the acquisitions of four financial institutions. See "Acquisitions
During Fiscal Year 1998" herein. Subsequent to June 30, 1998, the Corporation
completed two other acquisitions and entered into a definitive agreement to
acquire another financial institution. See "Subsequent Events - Acquisitions
Consummated" and "Subsequent Event - Pending Acquisition" herein. Acquisition
candidates will be selected based on the extent to which the candidates can
enhance the Corporation's retail presence in both new and underserved markets
and enhance the Corporation's existing retail network.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
3
RECENT DEVELOPMENTS
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Subsequent Events - Acquisitions Consummated.
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AmerUs Bank. On July 31, 1998, the Corporation consummated its acquisition of
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AmerUs Bank (AmerUs), a wholly-owned subsidiary of AmerUs Group Co. Under the
terms of the stock purchase agreement, the Corporation acquired through a
taxable acquisition all of the outstanding shares of the common stock of AmerUs
for total consideration of approximately $178.3 million. Such consideration
consisted of (i) certain assets retained by AmerUs Group Co. in lieu of cash
(primarily FHA Title One single-family residential mortgage loans and a
receivable for income tax benefits) totaling approximately $85.0 million, (ii)
cash (as adjusted per the agreement) totaling approximately $53.3 million, and
(iii) a one-year promissory note for $40.0 million bearing interest, adjusted
monthly, at 150 basis points over the one-year Treasury bill rate. AmerUs was a
federally chartered savings bank headquartered in Des Moines, Iowa and operated
47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2)
and South Dakota (1). At July 31, 1998, before purchase accounting adjustments,
AmerUs had total assets of approximately $1.3 billion, deposits of approximately
$950.0 million and stockholder's equity of approximately $84.8 million. This
acquisition will be accounted for as a purchase. See Note 30 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
First Colorado Bancorp, Inc. On August 14, 1998, the Corporation consummated its
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acquisition of First Colorado Bancorp, Inc. (First Colorado). Under the terms of
the agreement, the Corporation acquired in a tax-free reorganization all
18,564,766 outstanding shares of First Colorado's common stock in exchange for
18,278,789 shares of its common stock. Based on the Corporation's closing stock
price of $26.375 at August 14, 1998, the total consideration for this
acquisition, including cash paid for fractional shares, approximated $482.2
million. An additional requirement of the transaction with First Colorado was
the issuance of 1,400,000 shares of First Colorado common stock immediately
prior to the consummation of the merger. Such requirement was necessary to cure
the taint on the treasury stock of First Colorado so this transaction could be
accounted for as a pooling of interests. These shares offered directly by First
Colorado resulted in gross cash proceeds (prior to any transaction costs) of
$33.4 million less the placement agent's commission of $919,000, or net proceeds
to First Colorado totaling $32.5 million. First Colorado, headquartered in
Lakewood, Colorado, was a unitary savings and loan holding company and the
parent company of First Federal Bank of Colorado, a federally chartered stock
savings bank that operated 27 branches located in Colorado, with 23 branches
located in the Denver metropolitan area and four in Colorado's western slope
region. At July 31, 1998, on a pro forma basis including the net proceeds of
$32.5 million from the private placement of 1,400,000 shares on August 14, 1998,
First Colorado had assets of approximately $1.6 billion, deposits of
approximately $1.2 billion and stockholders' equity of approximately $254.7
million. The acquisition will be accounted for as a pooling of interests. See
Note 30 of Notes to Consolidated Financial Statements in the Annual Report for
additional information.
Subsequent Event - Pending Acquisition.
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Midland First Financial Corporation. On August 14, 1998, the Corporation entered
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into a reorganization and merger agreement with Midland First Financial
Corporation (Midland), parent company of Midland Bank. Under the terms of the
agreement, the Corporation will acquire in a taxable acquisition all of the
outstanding shares of Midland's common stock. The total purchase consideration
of this pending acquisition is $83.0 million, including cash to pay off
existing Midland debt totaling $5.6 million, the retirement of preferred stock
of both Midland and Midland Bank totaling $11.6 million and $810,000 for advisor
fees. If under certain conditions this transaction is terminated by Midland a
breakup fee of $2.5 million would be payable to the Corporation by Midland.
Midland Bank is a privately-held commercial bank headquartered in Lee's Summit,
Missouri that operates eight branches in the greater Kansas City area. At June
30, 1998, Midland had total assets of approximately $397.0 million, deposits of
approximately $352.0 million and stockholders' equity of approximately $25.7
million. This pending acquisition, approved by Midland's shareholders, is
subject to receipt of regulatory approvals and other conditions, and is expected
to close during the quarter ending March 31, 1999. See Note 31 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
4
Acquisitions During Fiscal Year 1998.
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For additional information on fiscal year 1998 acquisitions see Note 2 to the
Notes to the Consolidated Financial Statements in the Annual Report.
First National Bank Shares, LTD. On January 30, 1998, the Corporation
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consummated its acquisition of First National Bank Shares, LTD, parent company
of First United National Bank and Trust Company, a commercial bank headquartered
in Great Bend, Kansas. Under the terms of the merger agreement, all of the
outstanding shares of First National's common stock were exchanged for 992,842
shares of the Corporation's common stock. Based on the Corporation's closing
price on January 30, 1998, of $32.50 per share, the exchange of the
Corporation's common stock resulted in a total aggregate value approximating
$32.3 million. At January 30, 1998, before purchase accounting adjustments,
First National had assets of approximately $147.8 million, deposits of
approximately $131.3 million and stockholders' equity of approximately $12.0
million. First National operated seven branches located in Kansas. This
acquisition was accounted for as a purchase.
Liberty Financial Corporation. On February 13, 1998, the Corporation consummated
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its acquisition of Liberty Financial Corporation, a privately held commercial
bank and thrift holding company. Pursuant to the terms of the merger agreement,
all 8,748,500 outstanding shares of Liberty's common stock were exchanged for
4,015,555 shares of the Corporation's common stock (exchange ratio of .459 based
on an average closing price of $33.7062) for total consideration of
approximately $135.3 million. Liberty operated 38 branches in Iowa and seven in
the metropolitan area of Tucson, Arizona and at January 31, 1998, had assets of
approximately $658.1 million, deposits of approximately $569.8 million and
stockholders' equity of approximately $50.1 million. This acquisition was
accounted for as a pooling of interests.
Mid Continent Bancshares, Inc. On February 27, 1998, the Corporation consummated
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its acquisition of Mid Continent Bancshares, Inc., parent company of
Mid-Continent Federal Savings Bank. Pursuant to the terms of the merger
agreement, all outstanding shares of Mid Continent's common stock were exchanged
for 2,641,945 shares of the Corporation's common stock (exchange ratio of 1.3039
based on an average closing price of $32.9156) for total consideration of
approximately $87.0 million. Mid Continent operated ten branches located in
Kansas and at February 27, 1998, had total assets of approximately $405.7
million, deposits of approximately $258.6 million and stockholders' equity of
approximately $41.2 million. This acquisition was accounted for as a pooling of
interests.
Perpetual Midwest Financial, Inc. On May 29, 1998, the Corporation consummated
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its acquisition of Perpetual Midwest Financial, Inc., parent company of
Perpetual Savings Bank, FSB. Under the terms of the merger agreement, the
Corporation acquired in a tax-free reorganization all 1,989,261 outstanding
shares of Perpetual's common stock in exchange for .8636 shares, or 1,717,721
shares of the Corporation's common stock. Based on the Corporation's closing
price on May 29, 1998, of $33.3125 per share, the transaction had an aggregate
value of approximately $57.2 million. At May 29, 1998, Perpetual had total
assets of approximately $412.2 million, deposits of approximately $323.4
million, and stockholders' equity of approximately $36.0 million. Perpetual
operated five branches located in Iowa. This acquisition was accounted for as a
pooling of interests.
Authorized Shares Increased.
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Subsequent to June 30, 1998, stockholders approved an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock to 120,000,000 shares pursuant to a special meeting of
stockholders called on July 3, 1998, for shareholders of record at May 14, 1998.
See "General - Recent Developments - Special Meeting of Stockholders" herein.
5
Merger Expenses and Other Nonrecurring Charges.
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During fiscal year 1998, the Corporation incurred merger expenses and other
nonrecurring charges totaling $29.7 million due to the Liberty, Mid Continent
and Perpetual acquisitions and the accelerated amortization of certain computer
systems and software necessitated by Year 2000 compliance and the related
planned systems conversions. The $29.7 million recorded in fiscal year 1998
consists of $25.4 million in merger-related expenses and $4.3 million related to
the accelerated amortization of certain computer systems and software of the
Corporation necessitated by Year 2000 compliance and the related planned systems
conversions. The Corporation finalized its plans for systems conversions and
Year 2000 compliance in fiscal year 1998 resulting in a reduction in the
estimated useful lives of such computer systems and software.
The merger-related expenses totaling $25.4 million consists of $9.0 million in
transition costs as a result of the three acquisitions, $7.0 million in
personnel expenses for severance, retention and other employee related costs,
$4.9 million in costs to combine operations and conform certain accounting
practices and $4.5 million in additional loss reserves primarily to conform the
original loan portfolios and leasing operations to the reserve policies of the
Corporation.
Three-for-Two Stock Split.
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On November 17, 1997, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock dividend to
stockholders of record on November 28, 1997. Par value of the common stock
remained at $.01 per share. The stock dividend was distributed on December 15,
1997, and totaled 10,865,530 shares of common stock. Fractional shares resulting
from the stock split were paid in cash totaling $24,366 based on the closing
price on the record date. All references to the number of shares, per share
amounts and stock prices for all periods presented have been adjusted on a
retroactive basis to reflect the effect of this stock split. The Board of
Directors also increased the Corporation's quarterly cash dividend from $.0467
per common share after adjusting for the three-for-two stock split to $.055 per
common share representing an increase of over 17 percent. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Stock
Prices and Dividends" in the Annual Report.
Special Meeting of Stockholders.
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At the Special Meeting of Stockholders on July 3, 1998, held primarily to act
upon the First Colorado merger, three proposals were approved. The proposals
approved were (i) the First Colorado transaction and an amendment to the
Corporation's Articles of Incorporation to increase the number of authorized
shares of common stock from 50,000,000 to 70,000,000 shares, (ii) an amendment
to further increase the number of authorized shares from 70,000,000 to
120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock Option
and Incentive Plan to increase the number of shares available for grant by
2,400,000 shares.
Year 2000.
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The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Corporation may be
significantly affected by the Year 2000 issue due to the nature of financial
information. Software, hardware and equipment both within and outside the
Corporation's direct control and with whom the Corporation electronically or
operationally interfaces are likely to be affected. If computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations that rely on
the data field information, such as interest, payment or due dates and other
operating functions, may generate results that could be significantly misstated,
and the Corporation could experience a temporary inability to process
transactions and engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this issue are provided by major third party vendors. The
Corporation is in the process of replacing/upgrading most of its computer
systems and programs, as well as most equipment, in order to provide
cost-effective and efficient delivery of services to its customers, information
to management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment. In
addition, during fiscal year 1998 the Corporation expensed $4.3 million due to
accelerated amortization of certain computer systems and software necessitated
by Year 2000 compliance and the related planned systems conversions. The
adjusted carrying amount of these computer systems and software will continue to
be depreciated until their disposal at the date of conversion.
6
The third party vendors have advised the Corporation that all such computer
systems and programs either are or shortly will be Year 2000 compliant. The
Corporation has scheduled certain operations to be converted as early as October
1998 so testing can commence and conversion problems resolved. Final conversions
are scheduled for completion early in calendar year 1999.
The Corporation has also initiated formal communications with non-mainframe
software and hardware vendors to determine the extent to which the Corporation's
interface systems may be vulnerable to those third parties' failure to remediate
their own Year 2000 issues. If the third party vendors are unable to resolve
Year 2000 issues in time, the conversion is delayed significantly or major
problems arise as a result of the conversion, the Corporation would likely
experience significant data processing delays, mistakes or failures. Theses
delays, mistakes or failures could have significant adverse impact on the
financial condition and results of operations of the Corporation. In addition,
there can be no assurance that the systems of other companies on which the
Corporation's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Corporation's systems, would not have a material adverse effect on the
Corporation. The Corporation has developed a Year 2000 contingency plan that
addresses, among other issues, critical operations and potential failures
thereof, and strategies for business continuation.
Supervisory Goodwill Lawsuit.
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On September 12, 1994, the Bank and the Corporation commenced litigation against
the United States in the United States Court of Federal Claims seeking to
recover monetary relief for the government's refusal to honor certain contracts
that it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States. The Bank also assumed a lawsuit in the merger
with Mid Continent against the United States relating to a supervisory goodwill
claim filed by the former Mid Continent. The litigation status and process of
these legal actions, as well as that of numerous actions brought by others
alleging similar claims with respect to supervisory goodwill and regulatory
capital credits, make the value of the claims asserted by the Bank (including
the Mid Continent claim) uncertain as to their ultimate outcome, and contingent
on a number of factors and future events which are beyond the control of the
Bank, both as to substance, timing and the dollar amount of damages that may be
awarded to the Bank and the Corporation if they finally prevail in this
litigation.
Regulatory Capital Compliance.
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The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios as set forth in the following tables of
tangible, core and total risk-based capital. Prompt Corrective Action provisions
contained in the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") require specific supervisory actions as capital levels decrease. To
be considered well-capitalized under the regulatory framework for Prompt
Corrective Action under FDICIA, the Bank must maintain minimum Tier 1 leverage,
Tier 1 risk-based and total risk-based capital ratios as set forth in the
following tables. At June 30, 1998, the Bank exceeded the minimum requirements
for the well-capitalized category. As of June 30, 1998, the most recent
notification from the OTS categorized the Bank as "well-capitalized" under the
regulatory framework for Prompt Corrective Action provisions under FDICIA. There
are no conditions or events since such notification that management believes
have changed the Bank's classification.
7
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements as of June 30, 1998:
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Actual Capital Required Capital
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(Dollars in Thousands) Amount Ratio Amount Ratio
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OTS Capital Adequacy:
Tangible capital $ 609,801 6.94% $ 131,849 1.5%
Core capital 619,557 7.04 263,990 3.0
Risk-based capital 667,590 13.77 387,760 8.0
FDICIA Regulations to be Classified Well-Capitalized:
Tier 1 leverage capital 619,557 7.04 439,983 5.0
Tier 1 risk-based capital 619,557 12.78 290,820 6.0
Total risk-based capital 667,590 13.77 484,700 10.0
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See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
Effects of New Accounting Pronouncements.
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During fiscal year 1998, the Corporation adopted the provisions of the following
accounting pronouncements: Statement No. 125 entitled "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" and
Statement No. 128 entitled "Earnings Per Share." See Note 1 to the Consolidated
Financial Statements in the Annual Report for a discussion of these new
accounting pronouncements and their effect on the Corporation.
Other Information.
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Additional information concerning the general development of the business of the
Corporation during fiscal year 1998 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
Forward Looking Statements.
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This document contains or incorporates by reference forward-looking statements
that involve inherent risks and uncertainties. The Corporation cautions readers
that a number of important factors could cause actual results to differ
materially from those in the forward looking statements. Those factors include
fluctuations in interest rates, inflation, government regulations, the progress
of integrating acquisitions, economic conditions, adequacy of allowance for
credit losses, the costs or difficulties associated with the resolution of Year
2000 issues on computer systems greater than anticipated, technology changes and
competition in the geographic and business areas in which the Corporation
conducts its operations. Management does not disclaim its responsibility to
provide a discussion and analysis enabling the reader to assess the sources and
effects of material changes in information from the end of last fiscal year.
These statements are based on management's current expectations. Actual results
in future periods may differ materially from those currently expected because of
various risks and uncertainties.
8
MARKET RISK
- -----------
The Corporation's Assets Liability Management Committee ("ALCO"), which includes
senior management representatives, monitors and considers methods of managing
the rate and sensitivity repricing characteristics of the balance sheet
components consistent with maintaining acceptable levels of changes in net
portfolio value ("NPV") and net interest income. A primary purpose of the
Corporation's asset and liability management is to mange interest rate risk to
effectively invest the Corporation's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base. Management has sought to decrease the average
maturity of its assets by emphasizing the origination of adjustable-rate
residential mortgage loans, consumer loans and adjustable-rate mortgage loans
for the acquisition, development, and construction of residential and commercial
real estate, all of which are retained by the Bank for its portfolio. In
addition, long-term, fixed-rate single-family residential mortgage loans are
underwritten according to guidelines of the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and the
Federal National Mortgage Association ("FNMA"), and are either swapped with the
FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by
such loans which are then sold or sold directly for cash in the secondary
market, or are retained for the Corporation's loan portfolio if such loans have
characteristics which are consistent with the Corporation's asset and liability
goals and long-term interest rate yield requirements.
9
Interest rate sensitivity analysis is used to measure the Corporation's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet instruments (interest rate swap agreements and
interest rate floor agreements) in the event of a range of assumed changes in
market interest rates. NPV represents the market value of portfolio equity and
is equal to the market value of assets minus the market value of liabilities,
with adjustments made for changes in the fair value of interest rate swap and
floor agreements pursuant to the hypothetical changes in interest rates. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained one hundred to four hundred basis points
increase or decrease in market interest rates. The Corporation's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the NPV of 10%, 20%, 30% and 40% in the event of a sudden and
sustained one hundred to four hundred basis points increase or decrease in
market interest rates. The following table presents the Corporation's projected
change in NPV for the various rate shock levels at June 30, 1998. All market
risk sensitive instruments presented in this table are held to maturity or
available for sale.
- ------------------------------------------------------------------------------------------------------------------------------
Percent Change
----------------------------
Hypothetical Hypothetical Hypothetical
Change in Market Value of Change From Change From Board
Interest Rates Portfolio Equity Base Scenario Base Scenario Limit
- --------------------------------- ------------------ --------------- --------------- -----------
(Dollars in Thousands)
400 basis point rise $ 552,566 $ (445,073) (45)% (40)%
300 basis point rise 671,127 (326,512) (33) (30)
200 basis point rise 799,082 (198,557) (20) (20)
100 basis point rise 920,292 (77,347) (8) (10)
Base Scenario 997,639 -- -- --
100 basis point decline 1,047,532 49,893 5 10
200 basis point decline 1,066,870 69,231 7 20
300 basis point decline 1,104,926 107,287 11 30
400 basis point decline 1,156,201 158,562 16 40
- ------------------------------------------------------------------------------------------------------------------------------
The preceding table indicates that at June 30, 1998, in the event of a sudden
and sustained increase in prevailing market interest rates, the Corporation's
NPV would be expected to decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Corporation's NPV
would be expected to increase. At June 30, 1998, the Corporation's estimated
changes in NPV were within the targets established by the Board of Directors in
all rate scenarios except the 300 and 400 basis point rise scenarios.
NPV is calculated by the Corporation pursuant to guidelines established by the
OTS. The modeling calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market rates
of interest provided by independent broker quotations and other public sources
as of June 30, 1998, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
10
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Corporation's primary loan products, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable-rate loans in the Corporation's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the NPV. Finally, the ability of
many borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. The Bank's one-year
cumulative gap is a negative $1.084 billion, or 12.26% of the Bank's total
assets of $8.838 billion at June 30, 1998. The interest rate risk policy of the
Bank authorizes a liability sensitive one-year cumulative gap not to exceed
10.0%. Such exception to the Bank's interest rate risk policy regarding the
negative gap exceeding 10.0% was approved after noting that, on a pro forma
basis, the projected one-year cumulative gap is within policy guidelines
considering the AmerUs and First Colorado acquisitions consummated in July and
August 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" and Note 16 of Notes to Consolidated
Financial Statements for additional information in the Annual Report.
11
LENDING ACTIVITIES
- ------------------
General. The Corporation's lending activities focus primarily on the
- -------
origination of first mortgage loans for the purpose of financing or refinancing
single-family residential properties, single-family residential construction
loans, commercial real estate loans, consumer and home improvement loans.
Increased emphasis on consumer loans during fiscal year 1998 increased
substantially over fiscal years 1997 and 1996. Residential loan origination
activity, including activity through correspondents, was substantially higher
for fiscal year 1998 compared to fiscal years 1997 and 1996 due primarily to
loan refinancing activity. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 168 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's various loan offices
located in its existing market areas, loan offices of CFMC and through its
nationwide correspondent network.
At June 30, 1998, the Corporation's total loan and mortgage-backed securities
portfolio was $7.6 billion, representing over 86.0% of its $8.9 billion of total
assets at that date. The carrying value of mortgage-backed securities totaled
$914.3 million at June 30, 1998, representing 12.0% of the Corporation's total
loan and mortgage-backed securities portfolio at such date. The Corporation's
total loan and mortgage-backed securities portfolio was secured primarily by
real estate at June 30, 1998. Commercial real estate and land loans
(collectively referred to as "income property loans") are secured by various
types of commercial properties including office buildings, shopping centers,
warehouses and other income producing properties. Commercial real estate lending
is expected to be a growth area for the Corporation in fiscal year 1999. The
Corporation believes that it has a number of potentially productive markets
available to it pursuant to its fiscal year 1998 acquisitions. The Corporation's
single-family residential construction lending activity is primarily
attributable to operations in Las Vegas, Nevada, Florida and in its primary
market areas. Residential construction lending will also operate in Tucson,
Arizona; Des Moines and Cedar Rapids, Iowa; and upon the completion of the
Midland acquisition, Springfield Missouri; in addition to the Corporation's
current markets. Lending operations have also begun on a limited basis in the
Dallas/Fort Worth area. Multi-family residential loans consist of loans secured
by various types of properties, including townhomes, condominiums and apartment
projects with more than four dwelling units.
Agricultural lending is new to the Corporation, however, First National and
Liberty had successful operations, and many of the loan officers of those former
institutions were able to be retained. The Corporation expects to expand this
business line in the markets served by the former First National and Liberty
branches and to its contiguous branches. The argicultural lending is primarily
for equipment, land and production. Another line of business acquired from
Liberty is lease financing that consist of the origination, servicing and
securitization of commerical equipment leases. The types of equipment leased
consists primarily of office equipment and commercial equipment.
12
The Corporation's primary emphasis continues to be on the origination of loans
secured by existing single-family residences. Adjustable-rate single-family
residential loans are originated primarily for retention in the Corporation's
loan portfolio to match more closely the repricing of the Corporation's
interest-bearing liabilities as a result of changes in interest rates.
Fixed-rate single-family residential loans are originated using underwriting
guidelines, appraisals and documentation which are acceptable to the FHLMC, GNMA
and the FNMA to facilitate the sale of such loans to such agencies in the
secondary market. The Corporation also originates fixed-rate single-family
residential loans using internal lending policies in accordance with what
management believes are prudent underwriting standards but which may not
strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family
residential loans are originated or purchased for the Corporation's loan
portfolio if such loans have characteristics which are consistent with the
Corporation's asset and liability goals and long-term interest rate yield
requirements. At June 30, 1998, fixed-rate single-family residential loans
increased $1.051 billion over last fiscal year to $3.565 billion compared to
$2.514 billion at June 30, 1997. The adjustable-rate portfolio decreased to
$1.542 billion at June 30, 1998 compared to $2.330 billion at June 30, 1997. The
net changes in both fixed-rate and adjustable-rate portfolios is due to the loan
refinancing activity in fiscal year 1998.
In past years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. However, the
Corporation has initiated commercial and multi-family real estate lending with
such loans secured by properties located within the Corporation's primary market
areas. Such loans, which are subject to prudent credit review and other
underwriting standards and collection procedures, are expected to constitute a
greater portion of the Corporation's lending business in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, savings account, agricultural loans and commercial business loans
through the Corporation's branch and loan office network and direct mail
solicitation. Management intends to continue to increase its consumer loan
origination activity with strict adherence to prudent underwriting and credit
review procedures.
Regulatory guidelines generally limit loans and extensions of credit to one
borrower. At June 30, 1998, all loans and leases were within the Corporation's
limitation of $167.9 million to one borrower. See "Regulation - Limitation on
Loans to One Borrower."
13
Composition of Loan Portfolio. The following table sets forth the composition of
- -----------------------------
the Corporation's loan and mortgage-backed securities portfolios (including
loans held for sale and mortgage-backed securities available for sale) as of the
dates indicated:
June 30,
----------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in Thousands)
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $4,640,808 59.8% $4,408,020 58.4% $4,053,222 57.2%
Multi-family residential 97,303 1.3 82,584 1.1 74,252 1.1
Land 18,333 0.2 60,748 0.8 51,625 0.7
Commercial real estate 429,564 5.5 432,657 5.7 402,572 5.7
---------- --------- ---------- --------- ---------- ---------
Total 5,186,008 66.8 4,984,009 66.0 4,581,671 64.7
Construction loans -
Single-family residential 268,981 3.5 265,785 3.5 250,287 3.5
Multi-family residential 2,979 -- 6,320 -- 4,448 0.1
Land -- -- -- -- -- --
Commercial real estate 40,479 0.5 20,093 0.3 21,678 0.3
---------- --------- ---------- --------- ---------- ---------
Total 312,439 4.0 292,198 3.8 276,413 3.9
FHA and VA loans 465,968 6.0 435,692 5.8 390,777 5.5
Mortgage-backed securities 907,182 11.7 1,099,511 14.6 1,269,539 17.9
---------- --------- ---------- --------- ---------- ---------
Total real estate loans 6,871,597 88.5 6,811,410 90.2 6,518,400 92.0
Consumer and other loans -
Home improvement and other
consumer loans 654,575 8.5 605,246 8.0 452,240 6.4
Savings account loans 16,280 0.2 14,264 0.2 11,814 0.2
Leases 62,182 0.8 46,174 0.6 33,236 0.5
Commercial loans 155,692 2.0 72,949 1.0 68,269 0.9
---------- --------- ---------- --------- ---------- ---------
Total consumer and other loans 888,729 11.5 738,633 9.8 565,559 8.0
---------- --------- ---------- --------- ---------- ---------
Total loans $7,760,326 100.0% $7,550,043 100.0% $7,083,959 100.0%
---------- ========= ---------- ========= ---------- =========
June 30,
--------------------------------------------------
1995 1994
------------------------ ------------------------
Amount Percent Amount Percent
---------- ----------- ---------- -----------
Loan Portfolio
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $3,886,586 56.4% $3,319,157 54.6%
Multi-family residential 63,878 0.9 59,387 1.0
Land 41,071 0.6 40,970 0.7
Commercial real estate 327,697 4.8 303,134 5.0
---------- --------- ---------- ---------
Total 4,319,232 62.7 3,722,648 61.3
Construction loans -
Single-family residential 233,265 3.4 84,268 1.4
Multi-family residential 1,380 -- 1,612 --
Land 1,600 -- 1,640 --
Commercial real estate 13,949 0.2 1,821 0.1
---------- --------- ---------- ---------
Total 250,194 3.6 89,341 1.5
FHA and VA loans 435,693 6.3 434,569 7.1
Mortgage-backed securities 1,496,084 21.7 1,512,773 24.9
---------- --------- ---------- ---------
Total real estate loans 6,501,203 94.3 5,759,331 94.8
Consumer, leases and other loans -
Home improvement and other
consumer loans 294,799 4.3 242,625 4.0
Savings account loans 10,146 0.2 10,066 0.2
Leases 35,902 0.5 11,692 0.2
Commercial loans 49,239 0.7 49,999 0.8
---------- --------- ---------- ---------
Total consumer and other loans 390,086 5.7 314,382 5.2
---------- --------- ---------- ---------
Total loans $6,891,289 100.0% $6,073,713 100.0%
---------- ========= ---------- =========
(Continued on next page)
14
Composition of Loan Portfolio (continued):
- ------------------------------------------
June 30,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ----------- --------- ----------- ---------
(Dollar in Thousands)
Balance forward of total loans $ 7,760,326 100.0% $ 7,550,043 100.0% $ 7,083,959 100.0%
====== ====== ======
Add (subtract):
Unamortized premiums, net
of discounts 13,068 14,996 14,551
Deferred loan fees, net 10,998 (1,872) (4,968)
Loans in process (107,651) (98,983) (113,656)
Allowance for loan and
lease losses (59,795) (57,079) (56,651)
Allowance for losses on
mortgage-backed securities (282) (497) (742)
----------- ----------- -----------
Loan portfolio $ 7,616,664 $ 7,406,608 $ 6,922,493
=========== =========== ===========
June 30,
----------------------------------------------
1995 1994
--------------------- ---------------------
Amount Percent Amount Percent
----------- --------- ----------- ---------
(Dollars in Thousands)
Balance forward of total loans $ 6,891,289 100.0% $ 6,073,713 100.0%
====== ======
Add (subtract):
Unamortized premiums, net
of discounts 10,464 16,743
Deferred loan fees, net (2,358) (2,004)
Loans in process (102,369) (45,221)
Allowance for loan and
lease losses (55,853) (51,052)
Allowance for losses on
mortgage-backed securities (2,293) (2,233)
----------- -----------
Loan portfolio $ 6,738,880 $ 5,989,946
=========== ===========
- ----------------------------------------------------------------------------------------------------------
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated Financial
Statements in the Annual Report.
15
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities and
before any reduction for unamortized premiums (net of discounts), undisbursed
loan proceeds, deferred loan fees and allowance for loan losses) as of the dates
indicated:
June 30,
----------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ---------------------- --------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------- ----------- ------- ----------- ------- ----------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Nebraska $ 985,906 16.5% $ 937,025 16.4% $ 929,982 17.7% $ 836,054 16.7% $ 767,988 18.1%
Colorado 764,660 12.8 826,177 14.5 845,417 16.1 910,743 18.2 798,147 18.8
Kansas 678,734 11.4 557,657 9.8 510,159 9.7 443,428 8.9 374,311 8.8
Iowa 676,099 11.3 618,177 10.8 500,986 9.5 455,741 9.1 318,622 7.5
Oklahoma 318,198 5.3 264,710 4.6 229,563 4.4 211,984 4.2 145,736 3.4
Georgia 227,971 3.8 235,665 4.1 217,957 4.2 202,331 4.0 210,299 4.9
Missouri 181,764 3.0 170,316 3.0 174,542 3.3 183,706 3.7 160,888 3.8
Arizona 180,740 3.0 155,315 2.7 108,972 2.1 98,122 2.0 92,911 2.2
Virginia 161,793 2.7 140,498 2.5 123,806 2.4 111,081 2.2 81,290 1.9
Texas 158,614 2.7 187,189 3.3 204,339 3.9 226,132 4.5 181,741 4.3
Maryland 157,180 2.6 138,886 2.4 112,160 2.1 100,768 2.0 76,370 1.8
Nevada 130,159 2.2 109,475 1.9 80,696 1.5 51,874 1.0 41 -.-
Florida 123,528 2.1 116,881 2.0 111,770 2.1 100,533 2.0 92,576 2.2
Illinois 111,142 1.9 92,381 1.6 79,626 1.5 78,088 1.6 57,410 1.4
California 106,046 1.8 128,740 2.3 151,869 2.9 155,164 3.1 173,030 4.1
New Jersey 98,061 1.6 107,022 1.9 113,824 2.2 119,223 2.4 110,267 2.6
Ohio 93,325 1.6 76,049 1.3 47,396 0.9 47,851 1.0 37,603 0.9
Washington 91,670 1.5 91,054 1.6 64,967 1.2 55,947 1.1 40,656 1.0
Connecticut 64,975 1.1 72,154 1.3 75,946 1.5 81,418 1.6 83,002 2.0
Minnesota 62,765 1.1 63,885 1.1 42,144 0.8 32,866 0.7 23,347 0.5
North Carolina 60,634 1.0 69,465 1.2 31,601 0.6 23,260 0.5 19,683 0.5
Pennsylvania 59,083 1.0 68,728 1.2 59,943 1.1 53,421 1.1 43,271 1.0
Massachusetts 55,902 0.9 68,061 1.2 44,300 0.8 45,233 0.9 17,658 0.4
Alabama 50,285 0.8 37,653 0.7 39,544 0.8 38,171 0.8 38,621 0.9
Indiana 40,357 0.7 34,689 0.6 27,191 0.5 25,048 0.5 13,652 0.3
Michigan 38,495 0.7 46,762 0.8 46,650 0.9 45,865 0.9 46,298 1.1
New York 38,382 0.6 48,395 0.8 38,794 0.7 40,532 0.8 27,700 0.7
Other States 247,947 4.3 248,890 4.4 234,717 4.6 230,535 4.5 213,440 4.9
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -----
$5,964,415 100.0% $5,711,899 100.0% $5,248,861 100.0% $5,005,119 100.0% $4,246,558 100.0%
========== ======= ========== ======= ========== ======= ========== ======= ========== =====
16
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities and before any reduction
for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowance for loan losses) by state and property type at June 30,
1998:
Conventional FHA/VA
Residential Residential Multi Land Sub Commercial % of
State 1-4 Units Loans Family Loans Total Loans Total Total
- ----------------- ------------ ------------ ---------- ----------- ------------- ----------- ------------ -------
(Dollars in Thousands)
Nebraska $ 838,034 $ 77,362 $ 18,152 $ 1,962 $ 935,510 $ 50,396 $ 985,906 16.5%
Colorado 616,910 14,378 16,383 1,973 649,644 115,016 764,660 12.8
Kansas 510,585 123,475 5,831 1,095 640,986 37,748 678,734 11.4
Iowa 459,072 12,318 42,221 7,851 521,462 154,637 676,099 11.3
Oklahoma 257,919 27,842 8,948 -- 294,709 23,489 318,198 5.3
Georgia 215,520 12,451 -- -- 227,971 -- 227,971 3.8
Missouri 153,718 24,663 510 -- 178,891 2,873 181,764 3.0
Arizona 122,070 8,600 3,920 5,452 140,042 40,698 180,740 3.0
Virginia 137,260 24,533 -- -- 161,793 -- 161,793 2.7
Texas 136,375 15,835 2,904 -- 115,114 3,500 158,614 2.7
Maryland 121,502 35,678 -- -- 157,180 -- 157,180 2.6
Nevada 97,880 4,170 1,236 -- 103,286 26,873 130,159 2.2
Florida 105,847 9,611 177 -- 115,635 7,893 123,528 2.1
Illinois 101,954 9,188 -- -- 111,142 -- 111,142 1.9
California 95,872 7,062 -- -- 102,934 3,112 106,046 1.8
New Jersey 97,338 723 -- -- 98,061 -- 98,061 1.6
Ohio 87,757 5,568 -- -- 93,325 -- 93,325 1.6
Washington 82,095 9,575 -- -- 91,670 -- 91,670 1.5
Connecticut 64,866 109 -- -- 64,975 -- 64,975 1.1
Minnesota 58,726 4,039 -- -- 62,765 -- 62,765 1.1
North Carolina 57,980 2,654 -- -- 60,634 -- 60,634 1.0
Pennsylvania 57,744 1,339 -- -- 59,083 -- 59,083 1.0
Massachusetts 55,778 124 -- -- 55,902 -- 55,902 0.9
Alabama 42,914 7,371 -- -- 50,285 -- 50,285 0.8
Indiana 33,696 6,661 -- -- 40,357 -- 40,357 0.7
Michigan 34,514 3,981 -- -- 38,495 -- 38,495 0.7
New York 37,781 329 -- -- 38,110 272 38,382 0.6
Other States 228,082 16,329 -- -- 244,411 3,536 247,947 4.3
---------- ---------- ---------- ---------- ------------ ---------- ------------ ------
Total $4,909,789 $ 465,968 $ 100,282 $ 18,333 $ 5,494,372 $ 470,043 $ 5,964,415 100.0%
========== ========== ========== ========== ============ ========== ============ ======
% of Total 82.3% 7.8% 1.7% 0.3% 92.1% 7.9% 100.0%
==== === === === ==== === =====
17
Contractual Principal Repayments. The following table sets forth certain
- ---------------------------------
information at June 30, 1998, regarding the dollar amount of all loans and
mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of possible prepayments. Demand loans (loans having no stated schedule
of repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of
mortgage loans and mortgage-backed securities, management believes that the
following table will bear little resemblance to what will be the actual
repayments of the loan and mortgage-backed securities portfolios. Loan balances
have not been reduced for (i) unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
- -------------------------------------------------------------------------------------------------------------------------------
Due During the Year Ended June 30,
---------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
After
1999 2000-2003 2003 Total
---------------- ---------------- ---------------- ----------------
Principal Repayments (In Thousands)
- --------------------
Real estate loans:
Single-family residential (1) -
Fixed-rate $ 97,588 $ 861,776 $ 2,605,534 $ 3,564,898
Adjustable-rate 23,663 115,969 1,402,246 1,541,878
Multi-family residential, land
and commercial real estate -
Fixed-rate 33,224 64,252 69,292 166,768
Adjustable-rate 21,028 69,262 288,142 378,432
--------- ----------- ----------- -----------
175,503 1,111,259 4,365,214 5,651,976
--------- ----------- ----------- -----------
Construction loans:
Fixed-rate 32,712 53,848 -- 86,560
Adjustable-rate 189,232 36,647 -- 225,879
--------- ----------- ----------- -----------
221,944 90,495 -- 312,439
--------- ----------- ----------- -----------
Mortgage-backed securities:
Fixed-rate 39,090 72,934 193,493 305,517
Adjustable-rate 9,864 46,681 545,120 601,665
--------- ----------- ----------- -----------
48,954 119,615 738,613 907,182
--------- ----------- ----------- -----------
Consumer, other loans and leases:
Fixed-rate 200,693 528,480 43,808 772,981
Adjustable-rate 26,921 65,019 23,808 115,748
--------- ----------- ----------- -----------
227,614 593,499 67,616 888,729
--------- ----------- ----------- -----------
Principal repayments $ 674,015 $ 1,914,868 $ 5,171,443 $ 7,760,326
========= =========== =========== ===========
- -------------------------------------------------------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans.
18
Scheduled contractual principal repayments do not reflect the actual maturities
of such assets. The average maturity of loans is substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Corporation the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" in the Annual Report.
The following table sets forth the amount of all loans, leases and mortgage-
backed securities due after June 30, 1999 (July 1, 1999 and thereafter), which
have fixed interest rates and those which have adjustable interest rates. Such
loans, leases and mortgage-backed securities have not been reduced for (i)
unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowance for loan and lease losses or (ii) nonperforming loans
and leases.
- ----------------------------------------------------------------------------
Adjustable
Fixed-Rate Rate Total
----------- ----------- -----------
(Dollars In Thousands)
Real estate loans:
Single-family residential $ 3,467,310 $ 1,518,215 $ 4,985,525
Multi-family residential,
land and commercial 133,544 357,404 490,948
Construction loans 53,848 36,647 90,495
Mortgage-backed securities 266,427 591,801 858,228
Consumer, other loans and leases 572,288 88,827 661,115
----------- ----------- -----------
Principal repayments due
after June 30, 1999 $ 4,493,417 $ 2,592,894 $ 7,086,311
=========== =========== ===========
- ----------------------------------------------------------------------------
LOAN ORIGINATIONS
- -----------------
RESIDENTIAL LOANS. The Corporation, through its 168 branch network, and CFMCs
loan offices and nationwide correspondent network, originates and purchase both
fixed-rate and adjustable-rate mortgage loans secured by single-family units.
Such residential mortgage loans are either (i) conventional mortgage loans which
comply with the requirements for sale to, or conversion into securities issued
by, FNMA or FHLMC ("conventional conforming loans"), (ii) mortgage loans which
exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise
generally comply with FNMA and FHLMC loan requirements ("conventional
nonconforming loans") or (iii) FHA/VA loans which qualify for sale in the form
of securities guaranteed by GNMA. The Corporation originates substantially all
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans")with loan-to-value ratios at or below 80.0% unless the
borrower obtains private mortgage insurance (through the Corporation's mortgage
banking subsidiary, which premium the borrower pays with their mortgage payment)
for the Corporation's benefit covering that portion of the loan in excess of
80.0% of the appraised value. Occasional exceptions to the 80.0% loan-to-value
ratio for conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
19
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans generally are also
originated with terms of 15 and 30 years. However, certain adjustable-rate loans
contain provisions which permit the borrower, at the borrower's option, to
convert at certain periodic intervals over the life of the loan to a long-term
fixed-rate loan. The adjustable-rate loans currently have interest rates which
are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Cost of Funds Index. The amount of any such interest rate
increase is limited to one or two percentage points annually and four to six
percentage points over the life of the loan. Certain adjustable-rate loans are
also offered which have interest rates fixed over annual periods ranging from
two through seven years; and also ten year loans, with such loans repricing
annually after the fixed interest-rate term. Adjustable-rate loans are primarily
offered at the fully indexed contractual rate. The Corporation applies its
underwriting criteria to such loans based on the amount of the loan for which
the borrower could qualify at the indexed rate. At June 30, 1998, approximately,
.81%, or $38.2 million, of the Corporation's residential real estate loan
portfolio was 90 days or more delinquent See "Asset Quality" herein.
RESIDENTIAL CONSTRUCTION LOANS. Prior to 1995, the Corporation was not actively
- ------------------------------
pursuing construction loans, but provided interim construction financing that
was tied to permanent real estate mortgage loans. Beginning in fiscal year 1995,
the Corporation's single-family residential construction lending activity has
increased primarily as a result of the construction lending operations conducted
by an institution the Corporation acquired in October 1995. During fiscal years
1998, 1997 and 1996, the Corporation originated $335.9 million, $256.1 million
and $263.6 million, respectively, of residential construction loans. The
Corporation conducts its single-family residential construction lending
operations predominantly in its primary six-state market area, Florida and Las
Vegas, Nevada. The residential construction lending operations, which loans are
subject to prudent credit review and other underwriting standards and
procedures, are expected to increase from fiscal year 1998. At June 30, 1998,
approximately .84%, or $2.3 million, of the Corporation's residential loan
portfolio was 90 days or more delinquent.
Construction financing is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate. Risk of loss on
a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost (including interest) thereof. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Corporation may be required to
advance funds beyond the amount originally committed to permit completion of the
project. If the estimate of value proves to be inaccurate, the Corporation may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
20
COMMERCIAL REAL ESTATE AND LAND LOANS. The Corporation originated commercial
- -------------------------------------
real estate loans totaling $172.7 million, $73.5 million and $69.8 million,
respectively, during fiscal years 1998, 1997 and 1996. Commercial real estate
lending may entail significant additional risks compared with residential real
estate lending. These additional risks are due to larger loan balances which are
more sensitive to economic conditions, business cycle downturns and construction
related risks. The payment of principal and interest due on the Corporation's
commercial real estate loans is substantially dependent upon the performance of
the projects securing such loans. As an example, to the extent that the
occupancy and rental rates are not high enough to generate the income necessary
to make such payments, the Corporation could experience an increased rate of
delinquency and could be required either to declare such loans in default and
foreclose upon such properties or to make concessions on the terms of the
repayment of such loans. At June 30, 1998, approximately .28%, or $1.4 million
of the Corporation's commercial real estate and land loans were 90 days or more
delinquent. See "Asset Quality" herein.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $2.670
billion at June 30, 1998, compared to $488.4 million of such loans outstanding
at June 30, 1998. This restriction has not and is not expected to materially
affect the Corporation's business.
CONSUMER LOANS. Federal regulations permit federal savings institutions to make
- --------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. Consumer loans originated by the Corporation are primarily second
mortgage loans, loans to depositors on the security of their savings accounts
and loans secured by automobiles. The Corporation has increased its secured
consumer lending activities in order to meet its customers' financial needs and
will continue to increase such lending activities in the future in its primary
market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Corporation, and a borrower may be able to
assert against such assignee claims and defenses which it has against the seller
of the underlying collateral. At June 30, 1998, approximately .50%, or $2.5
million, of the Corporation's consumer loans are 90 days or more delinquent. See
"Asset Quality" herein.
BULK LOAN PURCHASES. Between January 1991 and June 30, 1992, as part of its
- -------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the Resolution Trust Corporation ("RTC"),
comprised of 46,500 loans primarily collateralized by single-family residential
properties with principal balances aggregating $2.5 billion. These purchased
loans had a weighted average yield of 8.71%. At June 30, 1998, 1997 and 1996,
the aggregate principal balance of these bulk purchased loans associated with
such restructuring was $388.5 million, $494.6 million and $574.4 million
respectively.
Based upon both a review and analysis of the information provided by the seller
with respect to each loan package and management's own due diligence review of a
certain percentage (usually 5.0% to 10.0%) of the loans within a loan package,
management established specific estimated allowance amounts which were allocated
from the discount amounts on the loan packages. At June 30, 1998, 1997 and 1996,
$8.5 million, $10.8 million and $12.8 million, respectively, of the discount
amount relating to these purchased loans was allocated to an estimated allowance
amount for potential credit risk associated with such bulk purchased loans.
These allowances are available to absorb losses associated with the respective
purchased loan packages and are not available to absorb losses from other loans.
At June 30, 1998, 1997 and 1996, $15.4 million, $18.3 million and $17.8,
respectively, of these purchased loans were past due 90 days or more.
21
To the extent opportunities to make similar bulk purchases of loans become
available, the Corporation will consider making such purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1998, 1997 and 1996, the
Corporation purchased $232.4 million, $300.2 million and $310.5 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
Loan Sales. In addition to originating loans for its portfolio, the
- -----------
Corporation, through its mortgage banking subsidiary, participates in secondary
mortgage market activities by selling whole and securitized loans to
institutional investors or other financial institutions with the Corporation
generally retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole
loans to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or
FHLMC which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1998, 1997 and 1996, the Corporation sold an aggregate of
$1.146 billion, and $846.0 million and $900.6 million, respectively in mortgage
loans resulting in net gains of $2.7 million, $1.9 million and $1.9 million,
respectively, in fiscal years 1998, 1997 and 1996. Of the amount of mortgage,
loans sold during fiscal year 1998, $1.444 billion were sold in the secondary
market, of which 42.9% were converted into GNMA securities, 46.3% were sold
directly to FNMA or FHLMC for cash or were exchanged for securities issued by
FNMA or FHLMC, and the remaining were sold to other institutional investors. At
June 30, 1998, the carrying value of loans held for sale totaled $289.7 million.
The net gains recorded in fiscal years 1998 and 1997 are attributable to the
relatively stable interest rate environments over the respective periods.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on a annual basis. However, in connection with a 1987 acquisition of
a financial institution, the Bank assumed agreements providing for recourse in
the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1998, the remaining balance
of such loans sold with recourse totaled $20.6 million.
22
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.
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Loans originated:
Real estate loans-
Residential loans $ 1,174,963 $ 822,871 $ 959,707
Construction loans 335,898 256,105 263,570
Commercial real estate and land loans 172,709 73,544 69,759
Consumer loans and leases 715,144 537,462 474,575
------------ ------------ -----------
Loans and leases originated $ 2,398,714 $ 1,689,982 $ 1,767,611
============ ============ ===========
Loans purchased:
Conventional mortgage loans-
Residential loans $ 1,276,846 $ 833,893 $ 607,878
Bulk loan purchases 232,353 300,212 310,466
Mortgage-backed securities 40,758 25,745 85,649
------------ ------------ -----------
Loans purchased $ 1,549,957 $ 1,159,850 $ 1,003,993
============ ============ ===========
Loans securitized:
Conventional mortgage loans securitized
into mortgage-backed securities $ 161,189 $ 46,165 $ 63,445
============ ============ ===========
Acquisitions:
Residential real estate loans $ 9,661 $ 83,413 $ 138,679
Consumer and other loans 68,482 51,639 27,599
Mortgage-backed securities 16,567 36,194 82,580
------------ ------------ -----------
Loans from acquisitions $ 94,710 $ 171,246 $ 248,858
============ ============ ===========
Loans sold:
Conventional mortgage loans $ 1,146,406 $ 845,957 $ 900,623
Mortgage-backed securities 118,705 98,798 243,065
------------ ---------- -----------
Loans sold $ 1,265,111 $ 944,755 $ 1,143,688
============ ========== ===========
________________________________________________________________________________
23
LOAN SERVICING. The Corporation, through its mortgage banking subsidiary,
- --------------
servicing substantially all of the mortgage loans that it originates and
purchase (whether retained for the Bank's portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1998, the Bank's
mortgage banking subsidiary was servicing approximately 125,900 loans and
participations for others with principal balances aggregating $7.115 billion,
compared to 133,200 loans with principal balances totaling $7.396 billion at
June 30, 1997. At June 30, 1998, adjustable-rate mortgage loans represented
17.6% of the aggregate dollar amount of loans in the servicing portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General," -- "Loan Servicing Fees" and -- "Note 23 -Segment
Information" in the Annual Report for information pertaining to revenue from
servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .50% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .41% and .41%,
respectively, for fiscal years 1998 and 1997. The Corporation's servicing
portfolio is subject to reduction primarily by reason of normal amortization and
prepayment of outstanding mortgage loans. In general, the value of the
Corporation's loan servicing portfolio may also be adversely affected as
mortgage interest rates decline and loan prepayments increase. It is expected
that income generated from the Corporation's loan servicing portfolio also will
decline in such an environment. This negative effect on the Corporation's income
may be offset somewhat by a rise in origination and servicing fee income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates. The weighted average mortgage loan note
rate of the Corporation's servicing portfolio at June 30, 1998, was 7.80%
compared to 7.91% at June 30, 1997.
At June 30, 1998, approximately 95.0% of the Corporation's mortgage servicing
portfolio for other institutions was covered by servicing agreements pursuant to
the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these
agreements, the Corporation may be required to advance funds temporarily to make
scheduled payments of principal, interest, taxes or insurance if the borrower
fails to make such payments. Although the Corporation cannot charge any interest
on such advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1998, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $2.4 million.
INTEREST RATES AND LOAN FEES. Interest rates charged by the Corporation on its
- ----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. In addition to interest
earned on loans, the Corporation receives loan origination fees for originating
certain loans. These fees are a percentage of the principal amount of the
mortgage loan and are charged to the borrower.
LOAN COMMITMENTS. At June 30, 1998, the Corporation had issued commitments of
- ----------------
$566.5 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are generally expected to settle within three
months following June 30, 1998. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in the Annual Report.
COLLECTION PROCEDURES. If a borrower fails to make required payments on a loan,
- ---------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
24
ASSET QUALITY
- -------------
Nonperforming Assets. Loans are reviewed on a regular basis and are placed on a
- --------------------
nonaccruing status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on a nonaccruing status when
either principal or interest is 90 days or more past due. Interest accrued and
unpaid at the time a loan is placed on nonaccruing status is charged against
interest income. Subsequent payments are applied to the outstanding principal
balance until such time as the loan is removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. Such property is stated at the lower of cost or fair value, minus
estimated costs to sell. Valuation allowances for estimated losses on real
estate are subsequently provided when the carrying value exceeds the fair value
minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when a
delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of ownership
would still be retained by the borrower. The evaluation of borrowers and
collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring. In
these circumstances, the Corporation would strive to ensure that the borrower's
continued participation in and management of the collateral does not put the
Corporation at further risk of loss. In situations in which the borrower is not
performing under the restructured terms, foreclosure proceedings are commenced
when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Corporation would not otherwise consider. A loan classified as a troubled debt
restructuring may be reclassified as current if such loan has returned to a
performing status at a market rate of interest for at least 8 to 12 months, the
loan-to-value ratio is 80.0% or less, the cash flows generated from the
collateralized property support the loan amount subject to minimum debt service
coverage as defined and overall applicable economic conditions are favorable.
Such loans have decreased steadily over the past five fiscal years to a balance
of $4.3 million at June 30, 1998, compared to $10.6 million and $15.6 million,
respectively, at June 30, 1997 and 1996. No materially significant loans
classified as troubled debt restructuring have been added to the Corporation's
nonperforming assets since fiscal year 1994.
The Corporation's nonperforming assets totaling $68.4 million decreased by $2.5
million, or 3.5%, at June 30, 1998, compared to June 30, 1997, primarily as a
result of net decreases of $6.3 million in troubled debt restructurings and
$480,000 in real estate offset by a net increase of $4.3 million in
nonperforming loans.
25
The following table sets forth information with respect to the Bank's
nonperforming assets as June 30 as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousand)
Loans and leases accounted for on a nonaccrual basis: (1)
Real estate-
Residential $ 40,468 $ 36,134 $ 36,458 $ 31,601 $ 28,010
Commercial 1,369 900 2,444 854 5,866
Consumer, other loans and leases 4,630 4,242 1,229 808 866
-------- -------- -------- -------- --------
Total 46,467 41,276 40,131 33,263 34,742
-------- -------- -------- -------- --------
Accruing loans which are contractually
past due 90 days or more - 894 144 88 409
-------- -------- -------- -------- --------
Total nonperforming loans and leases 46,467 42,170 40,275 33,351 35,151
-------- -------- -------- -------- --------
Real estate: (2)
Commercial 8,432 8,417 9,323 9,161 17,489
Residential 8,709 9,568 5,014 3,971 4,618
Other 459 95 253 114 -
-------- -------- -------- -------- --------
Total 17,600 18,080 14,590 13,246 22,107
-------- -------- -------- -------- --------
Troubled debt restructurings: (3)
Commercial 3,524 9,489 14,533 17,211 19,455
Residential 778 1,126 1,052 1,944 2,397
-------- -------- -------- -------- --------
Total 4,302 10,615 15,585 19,155 21,852
-------- -------- -------- -------- --------
Nonperforming assets $ 68,369 $ 70,865 $ 70,450 $ 65,752 $ 79,110
======== ======== ======== ======== ========
Nonperforming loans and leases to total loans and leases (4) 0.68% 0.65% 0.69% 0.62% 0.77%
Nonperforming assets to total assets 0.77% 0.83% 0.90% 0.86% 1.16%
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases $ 51,333 $ 46,270 $ 43,886 $ 40,573 $ 33,731
Bulk purchased loans (5) 8,462 10,809 12,765 15,280 17,321
-------- -------- -------- -------- --------
Total $ 59,795 $ 57,079 $ 56,651 $ 55,853 $ 51,052
======== ======== ======== ======== ========
Allowance for bulk purchased loan
losses to bulk purchased loans (5) 2.18% 2.19% 2.22% 2.18% 2.00%
Allowance for loan and lease losses
to total loans and leases (less bulk purchased loans) 0.79% 0.78% 0.84% 0.86% 0.91%
Allowance for loans and lease losss
to total loans and leases (4) 0.87% 0.88% 0.97% 1.04% 1.12%
Allowance for loan and lease losses
to total nonperforming assets 87.46% 80.55% 80.41% 84.94% 64.53%
Allowance for loan and lease losses
to total nonperforming loans and leases
(less nonperforming bulk purchased loans) (6) 165.12% 193.84% 195.27% 260.90% 191.10%
- --------------------------------------------------------------------------------
(Continued on next page)
26
(1) During fiscal years 1997 and 1996, the Corporation recorded interest
totaling $49,000 and $51,000, respectively, on accruing loans contractually
past due 90 days or more. During fiscal year 1998, no interest income was
recorded. Had these nonaccruing loans been current in accordance with their
original terms and outstanding throughout this fiscal year or since
origination, the Corporation would have recorded gross interest income on
these loans of $3.5 million, $2.8 million and $2.4 million, respectively,
during fiscal years 1998, 1997 and 1996.
(2) Real estate as a component of nonperforming assets does not include
performing real estate held for investment, which totaled $3.2 million, $2.7
million and $2.8 million, respectively, at June 30, 1998, 1997 and 1996.
(3) During fiscal years 1998, 1997 and 1996, the Corporation recognized interest
income on these loans classified as troubled debt restructurings aggregating
$380,000, $852,000 and $1.3 million, respectively, whereas under their
original terms the Corporation would have recognized interest income of
$499,000, $1.1 million and $1.6 million, respectively. At June 30, 1998,
the Corporation had no material commitments to lend additional funds to
borrowers whose loans were subject to troubled debt restructuring.
(4) Based on the total balance of loans and lease receivable (before any
reduction for unamortized discounts net of premiums, undisbursed loan
proceeds, deferred loan fees and allowance for loan and lease losses) at the
respective dates.
(5) At June 30, 1998, 1997 and 1996, $8.5 million, $10.8 million and $12.8
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans is included in the total
allowance for loan losses to provide for the credit risk associated with
these bulk purchased loans, which had balances of $388.5 million, $494.6
million and $574.4 million, respectively, at June 30, 1998, 1997 and 1996.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(6) Nonperforming bulk purchased loans approximating $15.4 million, $18.3
million and $17.8 million, respectively, at June 30, 1998, 1997 and 1996,
and the allowance for loan losses associated with the total bulk purchased
loans, have been excluded from this calculation since these allowances are
not available to absorb the losses associated with other loans in the
portfolio.
- --------------------------------------------------------------------------------
For a discussion of the major components of the $2.5 million decrease in
nonperforming assets during the fiscal year ended June 30, 1998, compared to
June 30, 1997 see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Provision for Loan Losses and Real Estate
Operations" in the Annual Report.
27
The geographic concentration of nonperforming loans and leases at June 30 was as
follows:
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
State (In Thousands)
- -----
Kansas $ 6,030 $ 2,973 $ 2,496 $ 861 $ 1,169
Iowa 4,013 4,632 2,052 989 2,317
California 3,377 2,977 4,624 3,758 3,966
Oklahoma 3,178 2,303 1,496 1,019 541
Nebraska 2,595 2,629 2,352 2,037 1,551
Maryland 2,258 1,623 1,548 743 613
Georgia 2,127 2,601 3,389 2,559 2,355
Texas 2,028 3,274 3,290 3,601 4,417
Missouri 1,944 2,402 2,018 1,864 1,720
Illinois 1,579 1,754 1,158 1,234 1,502
Florida 1,502 1,389 891 1,553 1,148
Virginia 1,479 656 880 446 790
Alabama 1,307 510 517 381 303
New Jersey 1,277 1,060 1,069 1,680 1,361
Arizona 1,195 973 469 596 681
Colorado 1,166 1,489 2,789 2,794 5,016
Pennsylvania 852 855 663 715 823
Connecticut 752 860 739 643 37
New York 671 606 447 855 407
Indiana 345 489 238 411 145
North Carolina 293 392 205 455 237
Washington 182 449 647 745 841
Other States 6,317 5,274 6,298 3,412 3,211
------- ------- ------- ------- -------
Nonperforming loans and leases $46,467 $42,170 $40,275 $33,351 $35,151
======= ======= ======= ======= =======
Nonperforming loans and leases at June 30, 1998, consisted of 1,371 loans with
an average balance of $33,893. Nonperforming loans totaling $46.5 million at
June 30, 1998, consisted of $1.4 million (nine loans) collateralized by
commercial real estate, $38.2 million (781 loans) collateralized by residential
real estate, $2.3 million (16 loans) collateralized by residential construction
real estate, $2.5 million (509 loans) of consumer loans and $2.1 million (56
loans) of commercial and other operating loans and leases.
28
The geographic concentration of nonperforming real estate at June 30 was as
follows
- ----------------------------------------------------------------------------------------------------------------------
State 1998 1997 1996 1995 1994
----- ------- ------- -------- -------- -------
(In Thousands)
Nebraska $ 5,417 $ 5,565 $ 5,356 $ 5,770 $ 6,868
Colorado 2,640 5,161 6,011 6,823 4,027
Kansas 1,876 873 64 234 184
Iowa 1,345 1,129 834 609 874
Oklahoma 1,299 509 384 391 1,348
Missouri 465 522 125 262 219
Texas 445 220 1,608 999 8,323
New Jersey 317 240 270 280 90
Florida 297 277 312 197 115
Georgia 140 933 187 510 2,549
Nevada 138 603 -- -- --
Pennsylvania 111 102 116 326 351
California 52 1,191 187 109 64
Other states 3,511 1,940 2,063 743 1,484
Unallocated reserves (453) (1,185) (2,927) (4,007) (4,389)
--------- --------- --------- --------- --------
Nonperforming real estate $ 17,600 $ 18,080 $ 14,590 $ 13,246 $ 22,107
========= ========= ========= ========= ========
- ----------------------------------------------------------------------------------------------------------------------
At June 30, 1998, total nonperforming commercial real estate amounted to $8.4
million (26 properties) or 47.9% of the $17.6 million in total nonperforming
real estate (consisting of 238 properties), $459,000 (4 loans) consisting of
nonperforming agricultural loans and the remaining $8.7 million (208 properties)
consisting of nonperforming residential real estate. The Corporation's
commercial real estate at June 30, 1998 is located primarily in Nebraska and
Colorado.
Under the Corporation's credit policies and practices, certain real estate loans
meet the definition of impaired loans under Statement of Financial Accounting
Standards No.114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." A loan is
considered impaired when it is probable that the Corporation, based upon current
information, will not collect amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Certain loans are
exempt from the provisions of the aforementioned accounting statements,
including large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment which, for the Corporation, include one-to-four family
first mortgage loans, consumer loans and leases. Loan impairment is measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a principal expedient, at the observable
market price of the loan or the fair value of the collateral if the loan is
collateral dependent.
Loans reviewed for impairment by the Corporation are primarily limited to loans
modified in a troubled debt restructuring (after July 1, 1994) and commercial
real estate loans. The Corporation's impaired loan identification and
measurement processes are conducted in conjunction with the Corporation's review
of classified assets and adequacy of its allowance for possible loan losses.
Specific factors utilized in the impaired loan identified process include, but
are not limited to, delinquency status, loan-to-value ratio, debt coverage and
certain other conditions pursuant to the Corporation's classification policy. At
June 30, 1998, the Corporation had impaired loans totaling $3.4 million, net of
specific reserves, of which $2.5 million are classified as troubled debt
restructurings. This balance of troubled debt restructurings is included in the
Corporation's $3.5 million balance as shown in the table for nonperforming
assets.
29
CLASSIFICATION OF ASSETS . Savings institutions required to review their assets
- -------------------------
on a regular basis and, as warranted, classify them as "substandard ,"
"doubtful," or "loss" as defined by OTS regulations. Adequate general valuation
allowances are required to be established for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as loss
or charge off such amount. An asset which does not currently warrant
classification as substandard but which posses credit deficiencies or potential
weaknesses deserving close attention is required to be designated as "special
mention." In addition, a savings institution is required to set aside adequate
valuation allowances to the extent that any affiliate possesses assets which
pose a risk to the savings institution. The OTS has the authority to approve,
disapprove or modify any asset classification or any amount established as an
allowance pursuant to such classification. Based on a review of the
Corporation's portfolio at June 30, 1998, pursuant to reporting on the quarterly
thrift financial report, the Corporation had $46.6 million in assets classified
as special mention, $80.3 million in assets classified as substandard, $581,000
in assets classified as doubtful and no assets classified as loss. As required,
specific valuation allowances have been established in an amount equal to 100.0%
of all assets classified as loss. Substantially all nonperforming assets at June
30, 1998, are classified as either substandard or loss pursuant to applicable
asset classification standards. Of the Corporation's loans and leases which were
not classified at June 30, 1998, there were no loans or leases where known
information about possible credit problems of borrowers caused management to
have serious doubts as to the ability of the borrowers to comply with present
loan or lease repayment terms.
LOANS AND REAL ESTATE REVIEW POLICY. Management of the Corporation has the
- -----------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan, lease and real estate portfolios.
Management is also responsible for the determination of all specific and general
provisions for loan and real estate losses, taking into consideration a number
of factors, including changes in the composition of the Corporation's loan and
lease portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
effect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
lease and real estate portfolios, and regular review of specific problem loans
and real estate. see "Nonperforming Assets" herein.
Management also has the responsibility of ensuring timely charge-offs of loans,
lease and real estate balances, as appropriate, when general and economic
conditions warrant a change in the value of these loans, leases and real estate.
To ensure that credit risk is properly and timely monitored, this responsibility
has been delegated to a credit review group which consists of key personnel of
the Corporation knowledgeable in the specific areas of loan, lease and real
estate valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and leases and the likelihood of
liquidation of real estate and other assets and their book value, (ii) to
identify problem assets at the earliest possible time, (iii) to ensure an
adequate level of allowances for possible losses to cover identified and
anticipated credit risks, (iv) to monitor the Corporation's compliance with
established policies and procedures, and (v) to provide the Corporation's
management with information obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loans, lease or real estate weakness. Accordingly, these types of
loans, leases and real estate are assigned a credit risk rating ranging from one
(excellent) to six (loss). Loans, leases and real estate with minimal credit
risk (not adversely classified or with a credit risk rating of one to four)
generally have reserves established on the basis of the Corporation's historical
loss experience. Loans, leases and real estate adversely classified
(substandard, loss or with a credit risk rating of five or six) generally have
greater reserves similarly established on the basis of the Corporation's
historical loss experience, as well as specific reserves established as
applicable to recognize permanent declines in the value of loans, leases or real
estate.
30
It is management's responsibility to maintain a reasonable allowance for loan
and lease losses applicable to all categories of loans and leases through
periodic charges to operations. The Corporation employs a systematic methodology
to determine the amount of general loan and lease losses, in addition to
specific valuation allowances, to be recorded as a percentage of the respective
loan and lease balances as follows:
________________________________________________________________________________
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
RESIDENTIAL REAL ESTATE LOANS:
Current .25%
90 days delinquent (or classified substandard) 7.50
RESIDENTIAL CONSTRUCTION LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 12.50
COMMERCIAL REAL ESTATE LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
COMMERCIAL OPERATING LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
AGRICULTURAL LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
CONSUMER LOANS:
Current .50
Classified substandard and 90 days delinquent 20.00
120 days delinquent 100.00
(The unsecured balance of consumer loans over
120 days delinquent is generally written off.)
LEASES:
Current 2.00
90 days delinquent (or classified substandard) 30.00
CREDIT CARD/TAXSAVER:
Current credit card 3.00
Current taxsaver .50
90 days delinquent (or classified substandard) 20.00
120 days delinquent 100.00
________________________________________________________________________________
As appropriate, management of the Corporation attempts to ensure that the
Corporation's reserves are in general compliance with previously established
regulatory examination guidelines.
31
ALLOWANCE FOR LOSSES ON LOANS AND LEASES. The allowance for loan and lease
- ----------------------------------------
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans and leases, which takes into consideration such factors as
changes in the composition of the loan and lease portfolio and economic
conditions that may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem loans and leases
and of the overall portfolio quality and real estate market conditions in the
Corporation's lending areas. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Provision for Loan Losses and
Real Estate Operations" in the Annual Report.
The Corporation's policy is to charge-off loans or leases or portions thereof
against the allowance for loan and lease losses in the period in which loans or
leases or portions thereof are determined to be uncollectible. A majority of the
Corporation's loans are collateralized by residential or commercial real estate.
Therefore, the collectibility of such loans is susceptible to changes in
prevailing real estate market conditions and other factors which can cause the
fair value of the collateral to decline below the loan balance. When the
Corporation records charge-offs on these loans, it also begins the foreclosure
process of taking possession of the real estate which served as collateral for
such loans. Recoveries of loan and lease charge-offs generally occur only when
the loan deficiencies are completely cured. Upon foreclosure and conversion of
the loan into real estate owned, the Corporation may realize a credit to real
estate operations through the disposition of such real estate when the sale
proceeds exceed the carrying value of the real estate.
During fiscal years 1998 and 1997, consumer loan charge-offs, net of recoveries,
totaled $8.6 million and $8.7 million, respectively, compared to $3.8 million
during fiscal year 1996. Consumer loan balances increased to $670.9 million at
June 30, 1998, compared to $619.5 million and $464.1 million, respectively, at
June 30, 1997 and 1996. Net consumer loan charge-offs of the Corporation reflect
the overall increase in its consumer loan portfolio. With improved underwriting
and credit review procedures in place, along with improved collection efforts
implemented during fiscal year 1997, management does not anticipate increases in
the loan loss provisions or in net charge-offs for consumer loans in fiscal
1999 to be any greater than in fiscal years 1998 or 1997. In addition,
management expects the same approximate net amount of charge-offs by loan
category during fiscal year 1999 compared to the actual net charge-off results
for fiscal year 1998. The loan and lease loss provision increased during fiscal
year 1998 compared to 1997 due primarily to the net increase of $403.4 million
in the total loan and lease portfolio at June 30, 1998 compared to 1997, and to
additional nonrecurring loss reserves recorded in the current fiscal year to
conform reserve positions of fiscal 1998 acquisitions to the policies of the
Corporation.
Although management believes that the Corporation's allowance for loan and lease
losses is adequate to reflect the risk inherent in its portfolios, there can be
no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrower's
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans and leases on
a regular basis as an integral part of their examination process. Such agencies
may require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
32
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:
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
(Dollars in Thousands)
Allowance for losses on
loans and leases at beginning of year $ 57,079 $ 56,651 $ 55,853 $ 51,052 $ 50,895
--------- --------- --------- --------- ---------
Loans and leases charged-off:
Single-family residential (2,837) (2,230) (1,226) (1,247) (1,119)
Multi-family residential
and commercial real estate -- (300) (214) (842) (2,789)
Consumer and other (11,013) (12,597) (5,387) (2,199) (1,477)
--------- --------- --------- --------- ---------
Loans and leases charged-off (13,850) (15,127) (6,827) (4,288) (5,385)
--------- --------- --------- --------- ---------
Recoveries:
Single-family residential 197 15 35 88 150
Multi-family residential
and commercial real estate 745 297 56 1,090 164
Consumer and other 1,680 2,474 894 720 549
--------- --------- --------- --------- ---------
Recoveries 2,622 2,786 985 1,898 863
--------- --------- --------- --------- ---------
Net loans and leases charged-off (11,228) (12,341) (5,842) (2,390) (4,522)
--------- --------- --------- --------- ---------
Provision charged to operations 15,325 12,284 7,211 7,530 8,977
--------- --------- --------- --------- ---------
Activity of combining companies to convert
to June 30 fiscal year (38) 475 -- (116) 652
Allowances acquired in acquisitions 1,004 1,966 1,944 1,818 --
Estimated allowance added
for bulk purchased loans (1) -- -- -- -- 39
Change in estimate of allowance
for bulk purchased loans (1)(2) (2,324) (1,878) (2,273) (1,705) (4,357)
Charge off to allowance
for bulk purchased loans (1) (23) (78) (242) (336) (632)
--------- --------- --------- --------- ---------
Allowances for losses on loans and leases at end of year $ 59,795 $ 57,079 $ 56,651 $ 55,853 $ 51,052
========= ========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------------
Ratio of net loans charged-off to average
loans outstanding during the year 0.17% 0.21% 0.11% 0.05% 0.11%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) At June 30, 1998, 1997 and 1996, $8.5 million, $10.8 million and $12.8
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans, was included in the total
allowance for loan losses. Such bulk purchased loans had balances of $388.5
million, $494.6 million and $574.4 million, respectively, at June 30, 1998,
1997 and 1996. These allowances are available only to absorb losses
associated with the respective bulk purchased loans and are not available to
absorb losses from other loans.
(2) Consists primarily of changes in estimates of allowance amounts for bulk
purchased loans resulting from the 100% payoff of such purchased loans or
from loan principal pay-downs such that these reclassed allowance amounts
will be amortized into income as a yield adjustment over the respective
remaining lives of the related purchased loans.
- --------------------------------------------------------------------------------
33
INVESTMENT ACTIVITIES
- ---------------------
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) equal to the monthly average of not less than a
specified percentage (currently 5.0%) of its net withdrawable savings deposits
plus short-term borrowings. The Corporation is also required to maintain average
daily balances of short-term liquid assets at a specified percentage (currently
1.0%) of the total of net withdrawable savings accounts and borrowings payable
in one year or less.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1998,
the Corporation had total average liquid assets of $594.4 million, which
consisted of $110.9 million in cash, $7.9 million in federal funds and $475.6
million in agency-backed securities. The Corporation's liquidity and short-term
liquidity ratios were 9.35% and 2.80%, respectively, at June 30, 1998. See
"Regulation -- Liquidity Requirements." The Corporation's management objective
is to maintain liquidity at a level sufficient to assure adequate funds, taking
into account anticipated cash flows and available sources of credit, to allow
future flexibility to meet withdrawal requests, to fund loan commitments, to
maximize income while protecting against credit risks and to manage the
repricing characteristics of the Corporation's assets and liabilities. Such
liquid funds are managed in an effort to produce the highest yield consistent
with maintaining safety of principal and within regulations governing the thrift
industry. The relative size and mix of investment securities in the
Corporation's portfolio are based on management's judgment compared to the
yields and maturities available on other investment securities. The Corporation
emphasizes low credit risk in selecting investment options.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Treasury and other Government agency obligations $ 388,199 $ 425,267 $ 300,035
Obligations of states and political subdivisions 48,571 14,068 18,642
Other securities 18,258 19,182 10,703
---------- ---------- ---------
Total investment securities held to maturity 455,028 458,517 329,380
Interest-earning cash on deposit (federal funds) 6,586 3,965 12,124
---------- ---------- ---------
Total Investments $ 461,614 $ 462,482 $ 341,504
========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------
34
The following table sets forth the scheduled maturities, carrying values, market
values and weighted average yields for the Corporation's investment securities
held to maturity at June 30, 1998:
- --------------------------------------------------------------------------------------------------------
One Year Over One Within Over Five Within
or Less Five Years Ten Years
------------------- ------------------ ------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $56,944 5.51% $68,578 6.22% $222,723 6.86%
States and political subdivisions 5,111 4.70 12,158 4.75 19,897 5.11
Other debt securities 25 8.00 25 4.00 -- --
------- ---- ------- ---- -------- ----
Total $62,080 5.44% $80,761 5.99% $242,620 6.71%
======= ==== ======= ==== ======== ====
More Than
Ten Years Total
-------------------- ---------------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ------- --------- ------ -------
(Dollars in Thousands)
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $39,954 7.67% $388,199 $388,893 6.63%
States and political subdivisions 11,405 7.16 48,571 48,628 5.46
Other debt securities 18,208 7.28 18,258 18,385 7.28
------- ---- -------- -------- ----
Total $69,567 7.48% $455,028 $455,906 6.53%
======= ==== ======== ======== ====
- --------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report.
35
SOURCES OF FUNDS
- ----------------
General. Deposits have historically been the major source of the Corporation's
- -------
funds for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, securities sold under
agreements to repurchase, prepayment and maturity of investment securities, and
other borrowings. At June 30, 1998, deposits made up 66.4% of total
interest-bearing liabilities compared to 69.5% at June 30, 1997. Deposit levels
are significantly influenced by general interest rates, economic conditions and
competition. Other borrowings, primarily FHLB advances, are utilized to
compensate for any decreases in the normal or expected inflow of deposits.
The Corporation anticipates that it will in the future continue to grow its
franchise through an ongoing program of selective acquisitions of other
financial institutions. During fiscal year 1998 the Corporation consummated the
acquisitions of four financial institutions: First National, Liberty, Mid
Continent and Perpetual, and subsequent to June 30, 1998 completed the
acquisitions of AmerUs and First Colorado and entered into a definitive
agreement to acquire Midland. During fiscal year 1997 the Corporation
consummated the acquisitions of Heritage and Investors. See Notes 2, 30 and 31
to the Consolidated Financial Statements for additional information on these
completed and pending acquisitions. Such completed and pending acquisitions
present the Corporation with the opportunity to further expand its retail
network over last fiscal year in the Iowa, Nebraska, Kansas, and Colorado
markets and to enter the Missouri, Minnesota, South Dakota and Arizona markets,
as well as to increase its earnings potential by increasing its mortgage and
consumer loan volumes funded by deposits which generally bear lower rates of
interest than alternative sources of funds.
Deposits. The Corporation's deposit strategy is to emphasize retail branch
- --------
deposits through extensive marketing efforts and product promotion, such as by
offering a variety of checking accounts and deposit programs to satisfy customer
needs. As such, during fiscal year 1998, NOW accounts increased $232.6 million,
from $569.5 million at June 30, 1997, to $802.1 million at June 30, 1998.
At June 30, 1998 non-interest bearing deposits totaled $378.6 million, or
7.1% of total deposits, compared to $326.2 million, or 6.0% at June 30, 1997, an
increase of $52.4 million.
As a community bank, the Corporation plans to increase its non-interest
bearing NOW accounts. In addition, the Corporation intends to continue pricing
its certificates of deposit products at rates that minimize the Corporation's
total costs of funds. The competition for certificates of deposit is very strong
in a market of shrinking funds as individuals continually seek the most
attractive investment alternatives available. Rates on deposits are priced based
on investment opportunities as the Corporation attempts to control the flow of
funds in its deposit accounts according to its business objectives and the cost
of alternative sources of funds.
Fixed-term, fixed-rate retail certificates at June 30, 1998, represented 62.6%
(or $3.356 billion) of total deposits compared to 68.9% at June 30, 1997 (or
$3.758 billion). The Corporation offers certificate accounts with terms ranging
from one month to 120 months.
Total deposits decreased $90.4 million during fiscal year 1998 from $5.454
billion at June 30, 1997, to $5.363 billion at June 30, 1998. This net decrease
is primarily a result of depositors leaving for higher interest rates for
more attractive investment alternatives.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 12 in the Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
36
The following table sets forth the balances and percentages of the various types
of deposits offered by the Corporation at the dates indicated and the change in
the dollar amount of deposits between such dates:
June 30, 1998 June 30, 1997 June 30, 1996
---------------------------------- --------------------------------- -----------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
---------- -------- ---------- ----------- -------- ---------- ----------- --------
(Dollars in Thousands)
Passbook accounts $ 890,181 16.6% $ 6,582 $ 883,599 16.2% $ 151,471 $ 732,128 14.0%
NOW accounts 802,084 14.9 232,593 569,491 10.4 73,633 495,858 9.5
Market rate savings 314,449 5.9 71,963 242,486 4.5 2,509 239,977 4.6
Certificates of deposit 3,356,426 62.6 (401,570) 3,757,996 68.9 1,628 3,756,368 71.9
----------- ----- --------- ----------- ----- --------- ----------- -----
Total Deposits $ 5,363,140 100.0% $ (90,432) $ 5,453,572 100.0% $ 229,241 $ 5,224,331 100.0%
=========== ===== ========= =========== ===== ========= =========== =====
37
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated:
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ------------------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Passbook accounts $ 778,992 4.53% $ 774,158 4.06% $ 635,416 4.16%
NOW accounts 756,236 1.52 506,506 1.63 580,862 1.13
Market rate savings 238,332 4.04 248,404 3.24 227,824 3.50
Certificates of deposit 3,625,881 5.67 3,833,370 5.71 3,529,716 6.02
----------- ----- ----------- ----- ----------- -----
Average deposit accounts $ 5,399,441 4.85% $ 5,362,438 4.97% $ 4,973,818 5.09%
----------- ----- ----------- ----- ----------- -----
- --------------------------------------------------------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
Rate
----
Less than 3.00% $ 4,890 $ 7,234 $ 9,383
3.00% - 3.99% 7,858 6,384 21,881
4.00% - 4.99% 360,732 229,375 324,341
5.00% - 5.99% 2,382,212 2,531,778 2,266,012
6.00% - 6.99% 552,493 838,896 782,120
7.00% - 7.99% 44,097 127,063 331,018
8.00% - 8.99% 3,598 12,272 16,631
9.00% and over 546 4,994 4,982
----------- ----------- -----------
Certificates of deposit $ 3,356,426 $ 3,757,996 $ 3,756,368
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------------
The following table presents the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity for the three
fiscal years ended June 30, as indicated:
- --------------------------------------------------------------------------------------------------------------------------------
Maturity Period 1998 1997 1996
------------------------------ ---------- ---------- ----------
(In Thousands)
Three months or less $ 110,598 $ 115,705 $ 155,481
Over three through six months 50,758 46,382 57,916
Over six through twelve months 59,084 61,988 90,900
Over twelve months 47,338 73,045 81,189
---------- ---------- ----------
Total $ 267,778 $ 297,120 $ 385,486
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------------
38
Borrowings. The Corporation has also relied upon other borrowings, primarily
- ----------
advances from the FHLB, as additional sources of funds. Advances from the FHLB
are typically secured by the Corporation's stock in the FHLB and a portion of
first mortgage real estate loans. The maximum amount of FHLB advances which the
FHLB will advance for purposes other than meeting deposit withdrawals fluctuates
from time to time in accordance with federal regulatory policies. The
Corporation is required to maintain an investment in FHLB stock in an amount
equal to the greater of 1.0% of the aggregate unpaid loan principal of the
Corporation's loans secured by home mortgage loans, home purchase contracts and
similar obligations, or 5.0% of advances from the FHLB to the Corporation. The
Corporation is also required to pledge such stock as collateral for FHLB
advances. In addition to this collateral requirement, the Corporation is
required to pledge additional collateral which may be unencumbered whole
residential first mortgages with an aggregate unpaid principal amount equal to
158.0% of the Corporation's total outstanding FHLB advances. Alternatively, the
Corporation can pledge 90.0% of the market value of U.S. government or U.S.
government agency guaranteed securities, including mortgage-backed securities,
as collateral for the outstanding FHLB advances. Pursuant to this requirement,
as of June 30, 1998, the Corporation had pledged $3.0 billion of its real estate
loans and held FHLB stock of $119.4 million.
At June 30, 1998, the Corporation had advances totaling approximately $2.272
billion from the FHLB at interest rates ranging from 4.87% to 7.19% and at a
weighted average rate of 5.66%. At June 30, 1997, such advances from the FHLB
totaled $1.597 billion at interest rates ranging from 5.06% to 8.85% and at a
weighted average rate of 5.96%. Fixed-rate advances totaling $966,000,000 at
June 30, 1998 with a weighted average rate of 4.93% are convertible into
adjustable-rate advances at the option of the FHLB with call dates ranging from
July 1998 to May 2000. Such convertible advances consist primarily of amounts
totaling $276,000,000 with scheduled maturities due over three years to four
years and $675,000,000 with maturities due over five years.
The Corporation also borrows funds under repurchase agreements. During fiscal
years 1998 and 1997 the Corporation utilized securities sold under agreements to
repurchase primarily for liquidity and asset liability management purposes.
Under a repurchase agreement, the Corporation sells securities (generally,
government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued
mortgage-backed securities) and agrees to buy such securities back at a
specified price at a subsequent date. Repurchase agreements are generally made
for terms ranging from one day to four years, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold. At June 30, 1998,
the Corporation's repurchase agreements aggregated $334.3 million at an average
rate of 5.96%. The Corporation's repurchase agreements were collateralized by
$262.5 million and $79.2 million, respectively, of mortgage-backed securities
and investment securities at June 30, 1998. At June 30, 1998, these repurchase
agreements had maturities ranging from September 1998 to December 1999 with a
weighted average maturity of 225 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
- --------------------------------------------------------------------------------------------------------
Year Ended June 30,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In Thousands)
Balance at end of year $ 334,294 $ 639,294 $ 380,755
Maximum month-end balance $ 639,294 $ 696,318 $ 380,755
Average balance $ 501,979 $ 591,288 $ 189,568
Weighted average interest rate during the year 6.08% 6.19% 7.14%
Weighted average interest rate at end of year 5.96% 6.04% 6.51%
- --------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's FHLB advances, securities
sold under agreements to repurchase and other borrowings. See Notes 13, 14 and
15 to the Notes to the Consolidated Financial Statements in the Annual Report.
39
Customer Services. The Corporation aggressively markets its various checking and
- -----------------
loan products as they are mass market entry points to target all consumers. This
enables the Corporation to attract and service customers to which it can cross-
sell its numerous services on a cost-effective, profitable basis with the goal
of providing them with 100% of their financial needs. Accordingly, management
continues to update data processing equipment in the Corporation's branch
operations in order to provide a cost-effective and efficient delivery of
services to its customers. The Corporation also has been proactive in the
implementation of new consumer-oriented technologies, offering home banking
services by providing Microsoft's Money, Intuit's Quicken, and Quicken Lite
financial software to its customer base. The Corporation continues to strive to
meet the customer's financial needs. This is exemplified by the availability of
home banking via personal computers, extended evening and weekend branch hours,
extended hour customer service lines, and 24-hour telephone bill paying
services. Additional information about the Corporation and its competitive
products also can be accessed through the Corporation's "web site" at
http://www.comfedbank.com. At June 30, 1998, there were 143 strategically
located proprietary automatic teller machines ("ATMs") in use. These ATMs are
also linked with a series of regional, national and international ATM services,
including CASHBOX, SHAZAM, CIRRUS, NETS, and MINIBANK. As a result of the
Corporation's participation in these ATM services, electronic banking machines
are currently available worldwide for the convenience of the Corporation's
customers.
SUBSIDIARIES
- ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1998, the Bank was authorized to invest up to
$264.2 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1998, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $9.6
million plus unsecured loans totaling $241,000 for a net investment of $9.8
million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has one subsidiary, Commercial Federal Service Corporation,
engaged in activities not permissible for national banks. Investments in such
subsidiary must be 100% deducted from capital. See "Regulation -- Regulatory
Capital Requirements." At June 30, 1998, the total investment in such subsidiary
was $3.9 million which was deducted from capital. Capital deductions are not
required for investment in subsidiaries engaged in non-national bank activities
as agent for customers rather than as principal, subsidiaries engaged solely in
mortgage banking activities, and certain other exempted subsidiaries.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
At June 30, 1998, the Bank had twelve wholly-owned subsidiaries, two of which
own and operate certain real estate properties of the Bank. As such, these
subsidiaries are considered engaged in permissible activities and do not require
deductions from capital as discussed above. In 1994, CFMC was approved by the
OTS to be classified as an "operating subsidiary" and as such, CFMC ceased to be
subject to the regulatory investment in service corporation limitations. The
remaining wholly-owned subsidiaries, exclusive of CFMC, are classified as
service corporations. Descriptions of the principal active subsidiaries of the
Bank follow.
See Exhibit 21. "Subsidiaries of the Corporation" herein for a complete listing
of all subsidiaries of the Corporation.
Commercial Federal Mortgage Corporation. CFMC is a full-service mortgage
- ---------------------------------------
banking company. The Corporation's real estate lending, secondary marketing,
mortgage servicing and foreclosure activities are conducted primarily through
CFMC. At June 30, 1998, CFMC serviced 65,700 loans for the Bank and 125,900
loans for others. See "Loan Originations -- Loan Servicing."
40
Commercial Federal Investment Services, Inc. ("CFIS"). CFIS offers customers
- -----------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 35 of the Corporation's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities.
Commercial Federal Insurance Corporation ("CFIC"). CFIC was formed in November
- -------------------------------------------------
1983 and serves as a full-service independent insurance agency, offering a full
line of homeowners, commercial (including property and casualty), health, auto
and life insurance products. Additionally, a wholly-owned subsidiary of CFIC
provides reinsurance on credit life and disability policies written by an
unaffiliated carrier for consumer loan borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC"). CFSC was formed primarily to
- ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC are fully excluded from regulatory capital. See
"Regulation -- Regulatory Capital Requirements."
Tower Title & Escrow Company ("TTE"). TTE was formed in 1996 with operations
- ------------------------------------
consisting of escrow closings, title insurance and title searches. TTE services
the Corporation's loan production process and offers its services to other
lending institutions.
Liberty Leasing Company ("LLC"). LLC, a former subsidiary of Liberty,
- -------------------------------
originates, services and securitizes primarily commercial equipment leases.
EMPLOYEES
- ---------
At June 30, 1998, the Corporation and its wholly-owned subsidiaries had 2,524
employees (2,371 full-time equivalent employees). The Corporation provides its
employees with a comprehensive benefit program, including basic and major
medical insurance, dental plan, a deferred compensation 401(k) plan, life
insurance, accident insurance, short and long-term disability coverage and sick
leave. The Corporation also offers loans with below market rates to its
employees who qualify based on term of employment (except that no preferential
rates or terms are offered to executive officers and senior management). The
Corporation considers its employee relations to be good.
EXECUTIVE OFFICERS
- ------------------
For certain information concerning the Registrant's directors and executive
officers as of June 30, 1998, refer to Part III -- Item 10. "Directors and
Executive Officers of the Registrant" of this report.
COMPETITION
- -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate loans. Its most direct competition for savings
deposits has come historically from commercial banks and from thrift
institutions located in its primary market areas. The Corporation's primary
market area for savings deposits includes Iowa, Nebraska, Colorado, Kansas,
Oklahoma and Arizona and, for loan originations, includes Iowa, Nebraska,
Colorado, Kansas, Oklahoma, Arizona, Florida and Las Vegas, Nevada (primarily
residential construction lending). Management believes that the Corporation's
extensive branch network has enabled the Corporation to compete effectively for
deposits and loans against other financial institutions. The Corporation has
been able to attract savings deposits primarily by offering depositors a wide
variety of deposit accounts, convenient branch locations, a full range of
financial services and competitive rates of interest.
The Corporation's competition for real estate, consumer and commercial loans
comes principally from other thrift institutions, mortgage banking companies,
commercial banks, insurance companies and other institutional lenders. The
Corporation competes for loans principally through the efficiency and quality of
the service provided to borrowers and the interest rates and loan fees charged.
41
REGULATION
----------
GENERAL
- -------
As a federal savings bank, the Bank is subject to extensive regulation by the
OTS. The lending and deposit taking activities and other investments of the Bank
must comply with various regulatory requirements. The OTS periodically examines
the Bank for compliance with various regulatory requirements and the FDIC also
has the authority to conduct special examinations of the Bank because its
deposits are insured by the SAIF. The Bank must file reports with the OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Corporation is subject
to the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein.
The laws and regulations governing savings institutions have been through at
least two major revisions in recent years. First, the Riegel-Neal Interstate
Banking and Efficiency Act of 1994, effective on June 1, 1997, permits
commercial banks interstate branching which could result in more intense
competition from out of state banks. Second, on September 30, 1996, the
Regulatory Paperwork Reduction Act was signed into law. Among other things,
this legislation substantially eliminated the premium differential between SAIF-
insured institutions and BIF-insured institutions. The new legislation also
provides for the merger of SAIF and BIF if certain conditions are met by
January 1, 1999.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES
- -------------------------------------------
The U. S. Congress is in the process of drafting legislation which may have a
profound effect on the financial services industry. On May 13, 1998, the U. S.
House of Representatives passed H.R. 10, the "Financial Services Competition Act
of 1998," which calls for a sweeping modernization of the banking system that
would permit affiliations between commercial banks, securities firms, insurance
companies and, subject to certain limitations, other commercial enterprises.
The stated purposes of H.R. 10 are to enhance consumer choice in the financial
services marketplace, level the playing field among providers of financial
services and increase competition. H.R. 10 removes many of the statutory
restrictions contained in current laws regulating the financial services
industry and calls for a new regulatory framework of financial institutions and
their holding companies. H.R. 10, however, preserves the thrift charter and all
existing thrift powers, but would restrict the activities of new unitary thrift
holding companies. On September 11, 1998, the Senate Banking Committee approved
a substantially similar version of this legislation, although the Senate version
included a prohibition against the sale of existing unitary savings and loan
holding companies to commercial companies. At this time, it is unknown whether
H.R. 10 will be enacted into law, or if enacted, what form the final version of
such legislation might take and how such legislation may affect the
Corporation's business and operations.
42
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
At June 30, 1998, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1998:
- ---------------------------------------------------------------------------------------------------------
Dollars in Thousands Actual Requirement Excess
- ---------------------------------------------------------------------------------------------------------
Bank's stockholder's equity $680,668
Less unrealized holding gain on securities
available for sale, net (539)
Less intangible assets (66,415)
Less investments in non-includable subsidiaries (3,913)
- --------------------------------------------------------------------------------------------------------
Tangible capital $609,801 $ 131,849 $ 477,952
- ---------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets (1) 6.94% 1.50% 5.44%
- ---------------------------------------------------------------------------------------------------------
Tangible capital $609,801
Plus certain restricted amounts of other intangible assets 9,756
- ---------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital) $619,557 $ 263,990 $ 355,567
- ---------------------------------------------------------------------------------------------------------
Core capital to adjusted assets (2) 7.04% 3.00% 4.04%
- ---------------------------------------------------------------------------------------------------------
Core Capital $619,557
Plus general loan loss allowances 48,202
Less amount of land loans and non-residential
construction loans in excess of an 80.0% loan-to-value ratio (169)
- ---------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital) $667,590 $ 387,760 $ 279,830
- ---------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets (3) 13.77% 8.00% 5.77%
- ---------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $8,789,908
(2) Based on adjusted total assets totaling $8,799,663
(3) Based on risk-weighted assets totaling $4,847,004
- ---------------------------------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized,
adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized; and authorized banking regulatory agencies to take
prompt corrective action with respect to institutions in the three
undercapitalized categories. These corrective actions become increasingly more
stringent as an institution's regulatory capital declines. In addition, the OTS
has adopted a prompt corrective action rule under which a savings institution
that has a core capital ratio of less than 4.0% would be deemed to be
"undercapitalized" and may be subject to certain sanctions. At June 30, 1998,
the Bank exceeded the minimum requirements for the well-capitalized category as
shown in the following table:
- -------------------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- -------------------------------------------------------------------------------------------
Percentage of adjusted assets 7.04% 12.78% 13.77%
Minimum requirements to be
classified well-capitalized 5.00% 6.00% 10.00%
- -------------------------------------------------------------------------------------------
43
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "-- Prompt Corrective Regulatory
Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights. Purchased mortgage servicing rights may be
included in tangible capital to the extent they are permitted to be included
within the calculation of core capital.
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. Effective December 31, 1994, no newly added
intangible assets other than purchased mortgage servicing rights and purchased
credit relationships to the extent described below are permitted to be included
in core capital. Purchased mortgage servicing rights and certain qualifying
intangible assets may be included in the calculation of core capital, subject to
a maximum aggregate limitation of the lesser of (i) 50% of the amount of core
capital computed before the deduction for any disallowed qualifying intangible
assets or mortgage servicing rights; and (ii) the lesser of 90% of their fair
market value or 100% of the remaining unamortized book value. In addition, a
sublimit applies for purchased credit card relationships equal to the lesser of
(i) 25% of the amount of core capital computed before the deduction of any
disallowed qualifying intangible assets and (ii) the lesser of 90% of the fair
market value of such credit card relationships and 100% of the unamortized book
value of such relationships. The Bank's core capital of $619.6 million at June
30, 1998, includes no qualifying supervisory goodwill and $9.8 million of
restricted amounts of certain intangible assets (core value of deposits).
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempted from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not
applied to federal savings associations existing as of August 9, 1989, that were
either chartered as a state savings bank or state cooperative bank prior to
October 1, 1982, or that acquired their principal assets from such an
association.
Accordingly, at June 30, 1998, the Bank had approximately $3.9 million of debt
and equity invested in CFSC which is engaged in activities not permissible for
national banks which was deducted from capital. See "Business -- Subsidiaries."
44
Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loss allowances. Allowances for
loan and lease losses includable in capital are includable only up to 1.25% of
risk-weighted assets. In addition, equity investments and those portions of
nonresidential construction and land loans, and loans with loan-to-value ratios
in excess of 80.0% must be deducted from total capital under the same phase-out
period as is applied to investments in subsidiaries engaged in activities not
permissible for national banks. The Bank's investments subject to this
deduction totaled $169,000 at June 30, 1998, which was deducted from capital in
accordance with applicable regulations.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each on-balance-sheet asset and the credit-equivalent
amount of each off-balance-sheet item after being multiplied by an assigned risk
weight. Under the OTS risk-weighting system, cash and securities backed by the
full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80.0% and average annual occupancy rates over 80.0%, and certain
qualifying loans for the construction of one- to four-family residences pre-sold
to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non-
qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100.0%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100.0% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
The OTS' risk-based capital requirements require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The Bank has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the rule and believes
that it will not be required to increase its total capital as a result of the
rule.
The OTS has adopted a prompt corrective action rule under which a savings
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. See "Prompt
Corrective Regulatory Action."
45
In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of
the OTS may treat the failure of any savings institution to maintain capital at
or above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
- -----------------------------
The Bank is a member of the FHLB System. The FHLB System consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. The FHLB of Topeka serves as
a reserve or central bank for its member institutions within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Topeka. Under applicable law, long-term advances may
only be made for the purpose of providing funds for residential housing lending.
Pursuant to the acquisitions of Liberty and Perpetual in fiscal year 1998, the
Bank acquired advances from the FHLB of Des Moines. The Bank has not borrowed
additional advances as of June 30, 1998 from this district. At June 30, 1998 the
Bank had advances of $2.3 billion from the FHLB of Topeka and Des Moines.
As a member of the FHLB, the Bank is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to the greater of (i) 1.0%
of the Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
(ii) 5.0% of its then outstanding advances (borrowings) from the FHLB. The Bank
was in compliance with this requirement at June 30, 1998, with an investment in
FHLB stock totaling $119.4 million compared to a required amount of $113.6
million. During fiscal years 1998, 1997 and 1996 the Bank received income from
its investment in FHLB stock totaling $7.6 million, $5.0 million and $4.5
million, respectively.
LIQUIDITY REQUIREMENTS
- ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquidity assets (defined as cash, deposits maintained pursuant
Federal Reserve Board requirements, time and savings deposits in certain
institutions, U.S. Treasury and other government agency obligations, obligations
of states and political subdivisions thereof, shares in mutual funds with
certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. This liquidity requirement, which is currently
5.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0% depending upon economic conditions and the savings flows of
savings associations. Regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet liquidity requirements. The average liquidity and
short-term liquidity ratios of the Bank as of June 30, 1998, were 9.35% and
2.80%, respectively.
On May 14, 1997, the OTS proposed the following amendments in an effort to
update, simplify and streamline its liquidity regulation: (i) exclude accounts
with unexpired maturities exceeding one year from the definition of "net
withdrawable accounts," (ii) streamline the average balance calculations of
liquid assets and liquidity base; (iii) reduce the liquid asset requirement from
5.0% to 4.0% and remove the 1.0% short-term requirement, (iv) expand the
categories of liquid assets that count toward satisfaction of the liquidity
requirement, and (v) add a general safety and soundness requirement.
46
QUALIFIED THRIFT LENDER TEST
- ----------------------------
The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a
qualified thrift lender ("QTL") test. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank. Upon the expiration of
three years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65.0% of "portfolio assets." Under the HOLA, portfolio assets are
defined as total assets less intangibles, property used by a savings institution
in its business and liquidity investments in an amount not exceeding 20.0% of
assets. Qualified Thrift Investments consist of (i) loans, equity positions or
securities related to domestic, residential real estate or manufactured housing,
(ii) stock in an FHLB and (iii) loans for educational purposes, loans to small
businesses and loans made through credit cards or credit card accounts. In
addition, subject to a 20.0% of portfolio assets limit, savings institutions are
able to treat as Qualified Thrift Investments (i) 50% of the dollar amount of
residential mortgage loans originated for sale and sold within 90 days of
origination, (ii) 200.0% of their investments in loans to finance "starter
homes" and loans for construction, development or improvement of housing and
community service facilities or for financing small businesses in "credit-needy"
areas, (iii) loans for the purchase or construction of churches, schools,
nursing homes and hospitals, other than those covered in (ii) and loans for the
improvement and upkeep of such properties, (iv) loans for personal family or
household purposes, and (v) shares of stock issued by the FHLMC or the FNMA. In
order to maintain QTL status, the savings institution must maintain a weekly
average percentage of Qualified Thrift Investments to portfolio assets equal to
65.0% on a monthly average basis in nine out of 12 months. A savings
institution that fails to maintain QTL status will be permitted to requalify
once, and if it fails the QTL test a second time, it will become immediately
subject to all penalties as if all time limits on such penalties had expired.
At June 30, 1998, approximately 84.1% of the Bank's portfolio assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a
"Tier 1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of:
(a) 75.0% of its net income for the previous four quarters; or (b) up to 100.0%
of its net income to date during the calendar year plus an amount that would
reduce by one-half the amount by which its ratio of total capital to assets
exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital ratio requirements but not in excess of the
fully phased-in requirements (a "Tier 2 Association") is permitted, after
notice, to make capital distributions without OTS approval of up to 75.0% of its
net income for the previous four quarters, less dividends already paid for such
period. At June 30, 1998, the Bank qualified as a Tier 1 Association, and would
be permitted to pay an aggregate amount approximating $139.1 million in
dividends under these regulations. A savings institution that fails to meet
current minimum capital requirements (a "Tier 3 Association") is prohibited from
making any capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that its is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association. The
Bank is a Tier 1 Association. Despite the above authority, the OTS may prohibit
any savings institution from making a capital distribution that would otherwise
be permitted by the regulation, if the OTS were to determine that the
distribution constituted an unsafe or unsound practice. Furthermore, under the
OTS's prompt corrective action regulations, which took effect on December 19,
1992, the Bank would be prohibited from making any capital distributions if,
after making the distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less
than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "-- Prompt
Corrective Regulatory Action."
47
ENFORCEMENT
- -----------
Under the Federal Deposit Insurance Act of 1996 (the "FDI Act"), the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-related parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on a savings institution. Civil penalties cover a wide range of
violations and actions and range up to $25,000 per day unless a finding of
reckless disregard is made, in which case penalties may be as high as $1.0
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1.0 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
DEPOSIT INSURANCE
- -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment is based on the capital adequacy
and supervisory rating of the institution and is assigned by the FDIC.
The FDIC has adopted a risk-based deposit insurance assessment system under
which the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period. Well capitalized institutions are
institutions satisfying the following capital ratio standards: (i) total risk-
based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of
6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately
capitalized institutions are institutions that do not meet the standards for
well capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant
to which the assessment rate for well-capitalized institutions with the highest
supervisory ratings would be reduced to zero and institutions in the lower risk
assessment classification will be assessed at the rate of .27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of .064% of insured deposits
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for FICO obligations at the rate of .013% of insured deposits. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments. The Corporation's annual deposit insurance rate in effect
prior to this recapitalization was .23% of insured deposits, declining to .18%
of insured deposits for the quarter ended December 31, 1996, and reduced to
.064% of insured deposits effective January 1, 1997.
48
The FDI Act provides that the BIF and SAIF will be merged into a single deposit
insurance fund effective December 31, 1999, but only if there are no insured
savings associations on that date. The legislation directed the Department of
Treasury to make recommendations to Congress for the establishment of a single
charter for banks and thrifts. Management of the Corporation cannot predict
accurately at this time what effect this legislation will have on the
Corporation.
The FDIC is authorized to raise insurance premiums for SAIF-member institutions
in certain circumstances. If the FDIC determines to increase the assessment
rate for all SAIF-member institutions, institutions in all risk categories could
be affected. While an increase in premiums for the Bank could have an adverse
effect on the Bank's earnings, a decrease in premiums could have a positive
impact on the earnings of the Bank.
Since the SAIF now meets its designated reserve ratio as a result of the special
assessment, SAIF members are now permitted to convert to the status of members
of the BIF and may merge with or transfer assets to a BIF member. However,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of the SAIF deposit insurance premiums effectively eliminated this
disparity and as of January 1, 1997, had the effect of increasing the net income
of the Bank and restoring the competitive equality between BIF-insured and SAIF-
insured institutions.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2.0% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the Tier 1 capital requirement for state non-
member banks of 4.0% of total assets for all but the most highly rated state
non-member banks.
49
TRANSACTIONS WITH RELATED PARTIES
- ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Corporation) and any companies which are controlled by such parent holding
company are affiliates of the savings institution. Generally, Sections 23A and
23B (i) limit the extent to which the savings institution or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10.0% of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to an amount equal
to 20.0% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10.0% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
50
CLASSIFICATION OF ASSETS
- ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets,
Doubtful Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. That portion of an asset classified loss is
considered uncollectible and of such little value that its continuance as an
asset, without establishment of a specific valuation allowance or charge-off, is
not warranted. This classification does not necessarily mean that an asset has
absolutely no recovery or salvage value; but rather, it is not practical or
desirable to defer writing off a basically worthless asset (or portion thereof)
even though partial recovery may be effected in the future.
With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for off-
balance sheet items, such as letters of credit, when loss becomes probable and
estimable.
In August 1993, the OTS issued revised guidance for the classification of assets
and a new policy on the classification of collateral-dependent loans (where
proceeds from repayment can be expected to come only from the operation and sale
of the collateral). With limited exceptions, effective September 30, 1993, for
troubled collateral-dependent loans where it is probable that the lender will be
unable to collect all amounts due, an institution must classify as "loss" any
excess of the recorded investment in the loan over its "value", and classify the
remainder as "substandard". The "value" of a loan is either all present value
of the expected future cash flows, the loan's observable market price or the
fair value of the collateral. The Bank does not anticipate any adverse impact
from the implementation of the revised guidance for classification of assets or
collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all credit
losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit losses
forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
Additionally, an adequate level of ALLL should reflect an additional
margin for imprecision inherent in most estimates of expected credit
losses.
51
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of the following amounts:
(a) 50 percent of the portfolio that is classified doubtful,
(b) 15 percent of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable, supported by the
weight of reliable evidence and that all relevant factors have been
appropriately considered. The Bank has reviewed the Policy Statement and does
not believe that it will adversely affect the level of the Bank's allowances for
loan losses.
PROMPT CORRECTIVE REGULATORY ACTION
- -----------------------------------
Under FDICIA, the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must
include a guarantee by the institution's holding company that the institution
will comply with the plan until it has been adequately capitalized on average
for four consecutive quarters, under which the holding company would be liable
up to the lesser of 5.0% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
52
Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order
or written directive to meet or maintain a specific capital level is deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
ratio of 4.0% or greater (or 3.0% or greater if the savings institution has a
composite 1 CAMELS rating). An "undercapitalized institution" is a savings
institution that has (i) a total risk-based capital ratio less than 8.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage
ratio of less than 4.0% (or 3.0% if the institution has a composite 1 CAMELS
rating). A "significantly undercapitalized" institution is defined as a savings
institution that has: (i) a total risk-based capital ratio of less than 6.0%; or
(ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a leverage
ratio of less than 3.0%. A "critically undercapitalized" savings institution is
defined as a savings institution that has a ratio of core capital to total
assets of less than 2.0%. The OTS may reclassify a well capitalized savings
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category if the OTS
determines, after notice and an opportunity for a hearing, that the savings
institution is in an unsafe or unsound condition or that the institution has
received and not corrected a less-than-satisfactory rating for any CAMELS rating
category. The Bank is classified as "well capitalized" under the OTS
regulations.
STANDARDS FOR SAFETY AND SOUNDNESS
- ----------------------------------
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
- --------------------------------
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. The final rule and the
guidelines took effect on August 9, 1995. The guidelines require savings
associations to maintain internal controls and information systems and internal
audit systems that are appropriate for the size, nature and scope of the
association's business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk exposure, and
asset growth. The guidelines further provide that savings associations should
maintain safeguards to prevent the payment of compensation, fees and benefits
that are excessive or that could lead to material financial loss, and should
take into account factors such as comparable compensation practices at
comparable institutions. If the OTS determines that a savings association is
not in compliance with the safety and soundness guidelines, it may require the
association to submit an acceptable plan to achieve compliance with the
guidelines. A savings association must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan. Failure to
submit or implement a compliance plan may subject the association to regulatory
sanctions. Management believes that the Bank already meets substantially all
the standards adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will materially affect
the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
53
FEDERAL RESERVE SYSTEM
- ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$47.3 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1998, the Bank met its reserve requirements.
LIMITATIONS ON LOANS TO ONE BORROWER
- ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000 (ii) the savings
association is in compliance with its fully phased-in capital standards, (iii)
the loans comply with applicable loan-to-value requirements, (iv) the aggregate
amount of loans made under this authority does not exceed 150.0% of unimpaired
capital and surplus and (v) the savings association is, and continues to be, in
compliance with its fully phased in capital requirements. At June 30, 1998, the
Bank's loan to one borrower limitation was $167.9 million and all loans to one
borrower were within such limitation.
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $2.7 billion. At June 30,
1998 the Bank's nonresidential real property loans totaled $488.4 million.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
- -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA.
As such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- -----------------------
The Board of Directors of the Corporation operates the Corporation as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose such
restrictions as deemed necessary to address such risk including limiting: (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company. See "Qualified
Thrift Lender Test."
54
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for
bank holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
RESTRICTIONS ON ACQUISITIONS
- ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an under-
capitalized savings institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
55
TAXATION
- --------
The Corporation is subject to the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Corporation and its subsidiaries, including
the Bank, file a consolidated federal income tax return based on a fiscal year
ending June 30. Consolidated taxable income is determined on an accrual basis.
Prior to July 1, 1996, savings institutions that met certain definitional tests
and other conditions prescribed by the Code were allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income if
more favorable than the bad debt deduction based on actual loss experience (i.e.
experience method). The bad debt deduction for fiscal year 1996 was computed
under the percentage of taxable income method since it yielded a greater
deduction than did the experience method.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) required recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These tax law
changes resulted in the recognition to income tax expense of additional deferred
tax liabilities of approximately $191,000 in fiscal year 1997. The recapture of
excess reserves has no effect on the Corporation's results of operations since
income taxes were provided for in prior years in accordance with SFAS No. 109,
"Accounting for Income Taxes." The recapture may be delayed for a one or two-
year period if the Corporation originates more residential loans than its
average originations in the past six years. The Corporation met the origination
requirement for fiscal year 1998, therefore delaying the recapture until the
four-year period beginning in fiscal year 1999.
In accordance with provisions of SFAS No. 109, a deferred tax liability has not
been recognized for the bad debt reserves of the Bank created in the tax years
which began prior to December 31, 1987 (the base year). At June 30, 1998, the
amount of these reserves totaled approximately $85,464,000 with an unrecognized
deferred tax liability approximating $30,853,000. Such unrecognized deferred tax
liability could be recognized in the future, in whole or in part, if (i) there
is a change in federal tax law, (ii) the Bank fails to meet certain definitional
tests and other conditions in the federal tax law, (iii) certain distributions
are made with respect to the stock of the Bank or (iv) the bad debt reserves are
used for any purpose other than absorbing bad debt losses.
During fiscal year 1998, the Internal Revenue Service completed its examination
of the Corporation's consolidated federal income tax returns through June 30,
1995. Such examination had no effect on the Corporation's results operations for
fiscal year 1998.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation (which is filed separately) and will be assessed at
a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to
3.81% of the Bank's income before tax (including subsidiaries) as reported on
the regular books and records. The Corporation also pays franchise or state
income taxes in a number of jurisdictions in which the Corporation or its
subsidiaries conduct business. For further information regarding federal income
taxes payable by the Corporation, see Note 17 of the Notes to the Consolidated
Financial Statements.
56
Item 2. Properties
- --------------------------------------------------------------------------------
At June 30, 1998, the Corporation conducted business through 34 offices in
Nebraska, 37 offices in Kansas, 21 offices in Colorado, 19 offices in Oklahoma,
50 offices in Iowa and seven offices in Arizona. See Item 1. Business - "Recent
Developments--Pending Acquisitions" for additional branches that will be added
pursuant to pending acquisitions.
At June 30, 1998, the Corporation owned the buildings for 118 of its branch
offices and leased the remaining 50 offices under leases expiring (not assuming
exercise of renewal options) between July 1998 and August 2031. The Corporation
has 143 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma,
Iowa, Arizona and Missouri. At June 30, 1998, the total net book value of land,
office properties and equipment owned by the Corporation was $111.8 million.
Management believes that the Corporation's premises are suitable for its present
and anticipated needs.
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill
Lawsuit" for other legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
A Special Meeting of Stockholders was called on July 3, 1998, for holders of
record at May 14, 1998. The purpose of the meeting was as follows:
1. Approval of the First Colorado transaction. In addition, an amendment
to the Corporation's Articles of Incorporation to increase the number
of shares authorized to 70,000,000 (from 50,000,000) was required to
consummate the acquisition of First Colorado.
2. Approval of an amendment to the Corporation's Articles of
Incorporation to further increase the number of authorized shares from
70,000,000 to 120,000,000 shares. In the event the First Colorado
transaction was not approved, this amendment would increase the
authorized shares from 50,000,000 to 100,000,000 shares. This increase
in the total number of authorized shares would allow the Corporation
to meet its future needs and provide greater flexibility in responding
to advantageous business opportunities including possible future
acquisition opportunities.
3. Approval of an amendment to the Corporation's 1996 Stock Option and
Incentive Plan to increase the number of shares available for grant by
2,400,000. The purpose for this amendment was to encourage stock
ownership and to attract, retain and motivate the best available
personnel and provide incentives for such individuals to promote the
success of the Corporation.
At the Special Meeting of Stockholders on July 3, 1998, the three proposals were
approved. The proposals approved were (i) the First Colorado transaction and an
amendment to the Corporation's Articles of Incorporation to increase the number
of authorized shares of common stock from 50,000,000 to 70,000,000 shares, (ii)
an amendment to further increase the number of authorized shares from 70,000,000
to 120,000,000 shares and (iii) an amendment to the Corporation's 1996 Stock
Option and Incentive Plan to increase the number of shares available for grant
by 2,400,000.
57
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------------
The information contained under "Regulation -- Restrictions on Capital
Distributions" in Part I of this Report and the section "Stock Prices and
Dividends" appearing on page 31 of the Annual Report is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
The presentation of selected financial data for the years ended June 30, 1994
through 1998 is included in the "Selected Consolidated Financial Data" section
appearing on pages 11 and 12 of the Annual Report and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1998 compared
to fiscal year 1997 and fiscal year 1997 compared to fiscal year 1996 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 13 through 32 of the Annual
Report and are incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The information contained under "Business -- Market Risk" in Part I of this
Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
The "Independent Auditors' Report," "Consolidated Financial Statements" and
"Notes to Consolidated Financial Statements" set forth on pages 33 through 79 of
the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
- --------------------------------------------------------------------------------
None.
58
PART III
Item 10. Directors and Executive Officers of the Registrant
________________________________________________________________________________
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
The executive officers of the Corporation and the Bank as of June 30, 1998, are
as follows:
Age at
Name June 30, 1998 Current Position(s) as of June 30, 1998
- -------------------------------------------------------------------------------------------------------------------
William A. Fitzgerald 60 Chairman of the Board and Chief Executive Officer of the
Corporation and the Bank
James A. Laphen 50 President, Chief Operating Officer and Chief Financial
Officer of the Corporation and the Bank
Gary L. Matter 53 Senior Vice President, Controller and Secretary of the
Corporation and Executive Vice President, Controller and
Secretary of the Bank
Joy J. Narzisi 43 Senior Vice President, Treasurer and Assistant Secretary
of the Corporation and Executive Vice President,
Treasurer and Assistant Secretary of the Bank
Roger L. Lewis 48 Executive Vice President and Assistant Secretary of
the Bank
Russell G. Olson 44 Executive Vice President of the Bank
Jon W. Stephenson 50 Executive Vice President of the Bank
Gary D. White 53 Executive Vice President of the Bank
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer of the
- ---------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Heartland
Community Bankers, the board of America's Community Bankers and the Board of
Governors of the Federal Reserve System Thrift Institutions Advisory Council.
Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973.
James A. Laphen is President, Chief Operating Officer and Chief Financial
- ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania and, prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
Gary L. Matter was named Executive Vice President of the Bank and Director of
- --------------
Finance in April 1998. Mr. Matter, a Senior Vice President of the Corporation
and Controller and Secretary of the Corporation and the Bank since November
1993, joined the Bank in December 1990, as First Vice President and Controller.
Mr. Matter, a certified public accountant, was the Treasurer of Anchor Glass
Container Corporation from June 1983 to November 1990.
59
Joy J. Narzisi, Treasurer and Senior Vice President of the Corporation, and
- --------------
Assistant Secretary of the Bank, joined the Bank in September 1980. Ms. Narzisi
was named Executive Vice President of the Bank and Director of Lending/Asset
Management in April 1998. Ms. Narzisi was named Senior Vice President and
Assistant Secretary of the Bank in July 1995 after first being appointed
Treasurer of the Corporation in November 1994, Treasurer of the Bank in 1991 and
First Vice President in June of 1989. Prior to 1989, Ms. Narzisi was Investment
Portfolio Manager since July 1987.
Roger L. Lewis was named Executive Vice President of the Bank in April 1998. Mr.
- --------------
Lewis, Assistant Secretary of the Bank, joined the Bank in 1986 as Vice
President and Director of Public Relations until he was named First Vice
President and Director of Marketing in March 1988. Mr. Lewis was named a Senior
Vice President in 1996. Prior to joining Commercial Federal, Mr. Lewis was Vice
President and Communications Director for Omaha National Bank.
Russell G. Olson was named Executive Vice President of the Bank and Director of
- ----------------
Commercial Banking in April 1998. Mr. Olson joined the Bank in February 1998 as
Senior Vice President pursuant to the acquisition of Liberty Financial
Corporation of West Des Moines, Iowa, where he was President and Chief Executive
Officer.
Jon W. Stephenson was appointed Executive Vice President of the Bank in April
- -----------------
1998 and serves as Director of Retail Banking. Mr. Stephenson was named Director
of Retail Banking in March 1997 and Senior Vice President in July 1995. Mr.
Stephenson joined the Bank as First Vice President in July 1994, with
responsibility for Oklahoma retail operations. Mr. Stephenson, a certified
public accountant, was President and Chief Executive Officer of Home Federal
Savings and Loan Association of Ada, Oklahoma prior to joining Commercial
Federal.
Gary D. White was named Executive Vice President and Director of Corporate
- -------------
Services in April 1998. Previous positions held include Senior Vice President
for Administration and Special Projects in February 1997, Director of
Nebraska/Iowa in July 1995, Director of Residential Mortgage Lending in May
1994, and First Vice President and Director of Human Resources in March 1984.
Mr. White joined the Bank in 1976 as an Investment Account Executive and also
has held the positions of Branch Manager and Employment Manager.
Item 11. Executive Compensation
- -------------------------------------------------------------------------------
The information under the section captioned "Proposal I -- Election of
Directors --Executive Compensation" in the Proxy Statement is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders" and "Proposal I -- Election
of Directors" in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
60
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A.) The following documents are filed as part of this report:
(1.) Consolidated Financial Statements (incorporated herein by reference
from the indicated section of the Annual Report):
(a.) Independent Auditors' Report.
(b.) Consolidated Statement of Financial Condition at June 30, 1998
and 1997.
(c.) Consolidated Statement of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996
(d.) Consolidated Statement of Operations for the Years Ended June
30, 1998, 1997 and 1996
(e.) Consolidated Statement of Cash Flows for the Years Ended June
30, 1998, 1997 and 1996.
(f.) Notes to Consolidated Financial Statements.
(2.) Financial Statement Schedules:
All schedules have been omitted as the required information is not
applicable, not required or is included in the consolidated
financial statements or related notes thereto included in Item 8.
(3.) Exhibits:
3.1 Articles of Incorporation of Registrant, as amended and
restated (incorporated by reference to the Registrant's
Current Report on Form 8-K dated July 3, 1998)
3.2 Bylaws of Registrant, as amended and restated
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-00330)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K
Current Report Dated January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to
the Securities and Exchange Commission a copy of each
instrument defining the rights of holders of the
Cumulative Trust Preferred Securities and the
Subordinated Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated
June 8, 1995 (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60
589)
10.2 Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen dated June 8,
1995 (incorporated by reference to the Registrant's Form
S-4 Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement
entered into with Executive Vice Presidents, Senior Vice
Presidents and First Vice Presidents (incorporated by
reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective
July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation
Plan Effective July 1, 1994 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the
Fiscal Year Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated Effective August
1, 1992 (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 33-60448)
61
10.7 Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996 (incorporated by
reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended June 30, 1996 - File No. 1-
11515)
10.8 Employment Agreement with William A. Fitzgerald,
dated May 15, 1974, as Amended February 14, 1996
(incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended June 30,
1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association
Survivor Income Plan, as Amended February 14, 1996
(incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended June 30,
1996 - File No. 1-11515)
10.10 Employee Agreement with James A. Laphen dated June 1,
1997 (incorporated by reference to the Registrant's
Form 10-K for the fiscal year ended June 30, 1997 -
File No. 1-11515)
10.11 Commercial Federal Corporation 1996 Stock Option and
Incentive Plan as amended (incorporated by reference
to the Registrant's Form S-8 Registration Statement
No. 333-20739)
10.12 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as
Amended February 22, 1991 (incorporated by reference
to the Registrant's Form S-8 Registration Statement
No. 33-63221 and Post-Effective Amendment No. 1 to
Registration Statement No. 33 -01333 and No.
33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan (incorporated by reference to the
Registrant's Form S-8 Registration Statement No.
33- 63629)
10.14 Mid Continent Bancshares, Inc. 1994 Stock Option Plan
(incorporated by reference to the Registrant's Post-
Effective Amendment to Form S-4 under cover of Form
S-8 - File No. 333-42817)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option
and Incentive Plan (incorporated by reference to the
Registrant's Post-Effective Amendment to Form S-4
File No. 333-45613)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to
Stockholders for the Fiscal Year Ended June 30, 1998
(filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
(B.) Reports on Form 8-K:
The Corporation filed no reports on Form 8-K during the three
months ended June 30, 1998.
(C.) Exhibits to this Form 10-K are attached or incorporated by
reference as stated above.
(D.) No financial statement schedules required by Regulation S-X are
filed, and as such are excluded from the Annual Report as
provided by Exchange Act Rule 14a-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1998 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 28, 1998 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and as of the date indicated.
Principal Executive Officer:
Date: September 28, 1998 By: /s/ William A. Fitzgerald
-------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Principal Financial Officer:
Date: September 28, 1998 By: /s/ James A. Laphen
-------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
Principal Accounting Officer:
Date: September 28, 1998 By: /s/ Gary L. Matter
------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
Directors:
Date: September 28, 1998 By: /s/ Talton K. Anderson
----------------------
Talton K. Anderson
Director
Date: September 28, 1998 By: /s/ Michael P. Glinsky
----------------------
Michael P. Glinsky
Director
63
Date: September 28, 1998 By: /s/ W. A. Krause
----------------
W. A. Krause
Director
Date: September 28, 1998 By: /s/ Robert F. Krohn
-------------------
Robert F. Krohn
Director
Date: September 28, 1998 By: /s/ Carl G. Mammel
------------------
Carl G. Mammel
Director
Date: September 28, 1998 By: /s/ Robert S. Milligan
----------------------
Robert S. Milligan
Director
Date: September 28, 1998 By: /s/ James P. O'Donnell
----------------------
James P. O'Donnell
Director
Date: September 28, 1998 By: /s/ Robert D. Taylor
--------------------
Robert D. Taylor
Director
Date: September 28, 1998 By: /s/ Aldo J. Tesi
----------------
Aldo J. Tesi
Director
64
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibits
- ------ --------------------
3.1 Articles of Incorporation of Registrant (incorporated by
reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated
by reference to the Registrant's Form S-1 Registration
Statement No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K Current
Report Dated January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to the
Securities and Exchange Commission a copy of each instrument
defining the rights of holders of the Cumulative Trust
Preferred Securities and the Subordinated Extendible Notes of
the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8,
1995 (incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William
A. Fitzgerald and James A. Laphen dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement entered
into with Executive Vice Presidents, Senior Vice Presidents and
First Vice Presidents (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1,
1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994 - File
No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996 (incorporated by reference to
the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.8 Employment Agreement with William A. Fitzgerald, dated May 15,
1974, as Amended February 14, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor Income
Plan, as Amended February 14, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.10 Employment Agreement with James A. Laphen dated June 1, 1997 (filed
herewith).
10.11 Commercial Federal Corporation 1996 Stock Option and Incentive
Plan as amended (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 333-20739)
INDEX TO EXHIBITS
(Continued)
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- ------
10.12 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan, Railroad Financial Corporation 1991 Directors' Stock
Option Plan and Railroad Financial Corporation 1986 Stock
Option and Incentive Plan, as Amended February 22, 1991
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-63221 and Post-Effective
Amendment No. 1 to Registration Statement No. 33-01333 and No.
33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan (incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-63629)
10.15 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive
Plan (incorporated by reference to the Registrant's Post-Effective
Amendment to Form S-4 File No. 333-45613)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1997 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)