Mid Continent Bancshares, Inc.
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CONTENTS
A Letter to Our Shareholders 1
Business of the Bancorp and Savings Bank 2-3
Selected Consolidated Financial Highlights 4-5
Market and Dividend Information 6
Management's Discussion and Analysis 7-27
Consolidated Financial Statements 28-68
Directors and Officers and Other Information 69-70
Mid Continent Bancshares, Inc.
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A letter to Our Shareholders
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Dear Stockholder:
During the fiscal year of 1997 there were numerous and exciting changes with Mid
Continent Bancshares, Inc. and Mid-Continent Federal Savings Bank.
In retrospect, the year and the financial changes for the Bank was outstanding.
The Bank's assets increased 19.1%, to $405 million.
During the year the loan portfolio increased from $171 million to $233 million.
The increase was in adjustable rate and short-term fixed-rate mortgages held for
investment. The Bank's loan servicing portfolio increased to $1.291 billion.
The Bank's deposits accounts balances increased by $22 million. The Bank's High
Performance checking accounts has continued to increase at a rapid rate with the
total number of accounts being approximately 19,000.
The stockholders' equity increased from $36.8 million to $40.0 million, or 8.6%.
Looking to the future, Mid Continent Bancshares on September 2, 1997 executed a
definitive agreement with Commercial Federal of Omaha, Nebraska to merge. The
Board of Directors, after a long deliberation, concluded that this was in the
best interest of the stockholders, the future of the Bank, its employees, and
the communities it serves.
Commercial Federal is an outstanding company and has the same business and
community responsibilities as Mid-Continent. The Board of Directors encourage
you to vote in the affirmative for the merger of these two companies.
We thank you, the stockholders of Mid Continent Bancshares, for your confidence
you have shown in the Bank, the Board of Directors, management and our
employees.
Very truly yours,
MID CONTINENT BANCSHARES, INC.
/s/Richard T. Pottorff
Richard T. Pottorff
Chairman of the Board and President
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Mid Continent Bancshares, Inc.
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BUSINESS OF THE BANCORP
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Mid Continent Bancshares, Inc. ("Bancorp") is a Kansas corporation organized in
January, 1994. On June 27, 1994, the Bancorp acquired all the capital stock of
Mid-Continent Federal Savings Bank ("Savings Bank") in the conversion of the
Savings Bank from a federal mutual savings and loan association to a federal
stock savings bank. Bancorp, as a unitary savings and loan holding company,
under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Savings Bank retains a
specified amount of its assets in housing-related investments.
The Bancorp's business activities to date have been limited to its investment in
the Savings Bank, loans made to the Savings Bank for use in the normal course of
its business and to the Mid-Continent Federal Savings Bank Employee Stock
Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the Bancorp's
common stock in the initial public offering and the repurchase of limited
amounts of Bancorp stock. The loans bear interest rates and have terms and
conditions which prevailed in the market place at the time they were originated.
As of September 30, 1997 the Bancorp has reacquired 290,000 shares of its common
stock in the open market.
BUSINESS OF THE SAVINGS BANK
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Mid-Continent Federal Savings Bank is a federally chartered stock savings bank
located in El Dorado, Kansas in Butler County, Kansas. The Savings Bank was
founded in 1925 with a charter from Kansas under the name Mid-Continent Savings
and Loan Association. In 1935, the Savings Bank adopted a federal charter and
changed its name to Mid-Continent Federal Savings and Loan Association of El
Dorado. Its present name, Mid-Continent Federal Savings Bank, was obtained in
1994 at the time it obtained a charter as a savings bank. The Savings Bank
completed its conversion from mutual to stock form in June, 1994 at which time
all of its stock was acquired by Mid Continent Bancshares, Inc. The Savings Bank
has been a member of the Federal Home Loan Bank of Topeka since 1937 and its
deposits are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
Mid-Continent is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. The Savings Bank purchases one-to-four
family residential loans through approximately 125 correspondents located in
Kansas, Oklahoma, and in Missouri. The Savings Bank also invests in
mortgage-related securities, U.S. government and agency obligations. These
activities are funded with deposits from the general public and borrowings from
the Federal Home Loan Bank and Mid Continent Bancshares, Inc. The Savings Bank
has offices in El Dorado, Newton, Winfield, Augusta, Derby and Wichita, Kansas,
which are located in its primary market area of Butler, Cowley, Sedgwick and
Harvey Counties in the State of Kansas. The Savings Bank opened one full service
branch in Wichita, Kansas and another in Derby, Kansas in fiscal 1997. The
Savings Bank offers its customers fixed-rate and adjustable-rate mortgage loans,
as well as FHA/VA loans and consumer loans, including home equity and savings
account loans. Adjustable-rate mortgage loans
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Mid Continent Bancshares, Inc.
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generally are originated for retention in the Savings Bank's portfolio while
fixed-rate mortgage loans are generally sold into the secondary market. All
consumer loans are retained in the Savings Bank's portfolio.
The Savings Bank is actively engaged in the purchase and sale of certain
mortgage loans through a correspondent network. These purchased loans and loans
originated by the Savings Bank are sold, generally without recourse, into the
secondary market with the Savings Bank generally retaining the servicing rights.
The sale of loans in the secondary market is the source of a significant amount
of income in the form of gain on the sale of loans and fees generated from
servicing the loans.
The principal sources of funds for the Savings Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, mortgage-related
securities and investment securities, and borrowings from the Federal Home Loan
Bank of Topeka and the Bancorp. Principal sources of income are interest and
fees on loans, mortgage-related securities and investment securities. The
Savings Bank's principal expense is interest paid on deposits.
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Mid Continent Bancshares, Inc.
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Selected Consolidated Financial Highlights
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The following table sets forth certain information at the dates and the periods
indicated. Average data presented herein is primarily calculated on the basis of
daily balances. All dollar amounts are in thousands except per share data and
selected ratios.
At September 30,
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1993 1994 1995 1996 1997
------------ -------------- -------------- --------------- ---------------
Dollars in Thousands
Total Amount of:
Assets $170,012 $202,628 $270,923 $340,186 $405,262
Loans receivable 56,623 102,243 124,796 171,158 233,311
Mortgage-related securities 42,856 45,030 40,004 34,383 28,124
Loans held for sale 27,734 5,527 22,108 13,718 13,894
Investments and FHLB Stock 15,144 24,374 56,449 90,562 86,065
Mortgage servicing rights 3,243 6,312 11,625 12,496 13,615
Excess of cost over fair value of
assets acquired (Goodwill) 252 161 83 22 --
Cash and cash equivalents 17,701 10,823 5,677 5,618 17,327
Savings deposits 145,838 154,764 195,716 214,493 236,333
Other borrowings 7,500 9,000 33,000 81,700 121,800
Stockholders' equity 12,792 35,208 36,735 36,807 39,982
Number of:
Real estate loans outstanding 2,124 1,985 2,568 2,864 3,628
Deposit accounts 17,557 21,743 27,192 29,609 35,226
Full service offices 6 6 7 8 10
Employees 100 112 119 150 166
Principal balance of loans serviced
for others $580,768 $908,112 $1,189,892 $1,229,153 $1,291,331
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SUMMARY OF OPERATIONS
Year Ended September 30,
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Dollars in Thousands
1993 1994 1995 1996 1997
------------- ------------ ------------- ------------- ------------
Interest Income $12,885 $11,549 $16,225 $20,173 $26,047
Interest Expense 7,376 5,944 9,004 12,268 16,834
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Net interest income 5,509 5,605 7,221 7,905 9,213
Provision for loan losses 154 6 224 75 143
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Net interest income after provision for 5,355 5,599 6,997 7,830 9,070
loan losses
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Non-interest income:
Loan servicing fees 1,804 2,689 4,407 4,779 4,841
Amortization of mortgage servicing rights (679) (899) (1,305) (1,651) (1,742)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 618 1,032 1,846 2,539 3,067
Gain on sale of loans held for sale, net 2,596 896 706 1,367 1,194
Other income 358 83 139 138 159
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Total non-interest income 4,697 3,801 7,754 7,172 7,519
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Total non-interest expense (1) 5,632 6,340 8,202 9,983 9,742
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Income before income tax expense and cumulative
effect of change in accounting principle 4,420 3,060 6,549 5,019 6,847
Income tax expense 1,616 1,195 2,443 1,893 2,677
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Income before cumulative effect of change in
accounting principle 2,804 1,865 4,106 3,126 4,170
Cumulative effect of change in accounting 136
principle (2)
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Net income $2,804 $2,001 $4,106 $3,126 $4,170
============= ============ ============= ============= ============
Earnings per share (3) $0.30 $1.97 $1.59 $2.15
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Cash dividends per share $0.40 $0.40 $0.40
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Selected Financial Ratios
Year Ended September 30,
1993 1994 1995 1996 1997
Return on average assets 1.61% 1.14% 1.75% 1.07% 1.11%
Return on average equity 24.12% 10.54% 11.86% 8.54% 10.95%
Dividend payout ratio -- -- 20.30% 25.16% 18.60%
Average total equity to average assets 6.67% 10.81% 14.74% 12.56% 10.14%
Net interest rate spread 3.23% 3.15% 2.90% 2.58% 2.38%
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(1) For 1996, includes a $1,053 one time assessment to recapitalize the SAIF
insurance fund.
(2) The cumulative effect of accounting change reflects the adoption of SFAS
No. 109 for fiscal year 1994.
(3) Earnings per share is based on net income subsequent to the Conversion on
June 27, 1994.
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MARKET AND DIVIDEND INFORMATION
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Mid Continent Bancshares, Inc.'s common stock trades on the Nasdaq National
Market system under the symbol "MCBS".
The following table sets forth the quarterly high and low sale prices for the
common stock throughout the fiscal years ended September 30, 1996 and 1997:
Quarter Ended High Low
September 30, 1995 19 1/8 15 1/2
December 31, 1995 18 1/2 17
March 31, 1996 18 1/2 17 3/8
June 30, 1996 19 1/4 17 7/8
September 30, 1996 19 3/8 17 1/2
December 31, 1996 25 1/2 18 3/4
March 31, 1997 27 1/8 23 3/8
June 30, 1997 29 1/4 25 1/8
September 30, 1997 38 7/8 28 3/4
During the years ended September 30, 1996 and 1997, the Bancorp declared and
paid cash dividends to shareholders as follows:
Declaration Date Shareholder Record Date Payment Date Amount Per Share
- ---------------- ----------------------- ------------ ----------------
December 21, 1995 January 4, 1996 January 18, 1996 $0.10
March 28, 1996 April 11, 1996 April 25, 1996 0.10
June 27, 1996 July 11, 1996 July 25, 1996 0.10
September 26, 1996 October 10, 1996 October 24, 1996 0.10
December 1996 January 2, 1997 January 16, 1997 0.10
March 27, 1997 April 10, 1997 April 24, 1997 0.10
June 26, 1997 July 10, 1997 July 24, 1997 0.10
September 25, 1997 October 9, 1997 October 23, 1997 0.10
The Bancorp has approximately 925 stockholders. This number includes persons or
entities who hold their stock in nominee or "street" name through various
brokerage firms.
The Bancorp's ability to pay dividends to stockholders is substantially
dependent upon the dividends it receives from the Savings Bank. Under current
regulations, the Savings Bank is not permitted to pay dividends if its
regulatory capital would thereby be reduced below (1) the amount then required
for the liquidation account established in connection with the Savings Bank's
conversion from mutual to stock form, or (2) the regulatory capital requirements
imposed by the Office of Thrift Supervision. Capital distributions are also
subject to certain limitations based on the Savings Bank's net income. See Note
1 of notes to consolidated financial statements. The Savings Bank's total
capital at September 30, 1997, exceeded the amounts of its liquidation account
and regulatory capital requirements.
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Mid Continent Bancshares, Inc.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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(Dollars in thousands)
GENERAL
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Mid Continent Bancshares, Inc. was formed to purchase all of the common stock of
Mid-Continent Federal Savings Bank in connection with the Saving Bank's
conversion from the mutual to the stock form of ownership in 1994. In addition,
the Bancorp made loans to the Savings Bank and to the Savings Bank's employee
stock ownership plan, from which it receives interest income. The loans bear
interest rates and have terms and conditions which prevailed in the market place
at the time they were originated.
The Bancorp's consolidated results of operations are primarily dependent on the
Savings Bank's net interest income, or the difference between the interest
income earned on its loan, mortgage-related securities and investment securities
portfolios, and the interest expense paid on its deposits and other borrowings.
Net interest income is affected not only by the difference between the yields
earned on interest-earning assets and the costs incurred on interest-bearing
liabilities, but also by the relative amounts of such interest-earning assets
and interest-bearing liabilities.
Mid-Continent Federal Savings Bank is a federally chartered stock savings bank
located in El Dorado, Kansas in Butler County, Kansas. Mid-Continent Federal
Savings Bank is primarily engaged in attracting deposits from the general public
and using those funds to originate and sell real estate loans on one-to-four
family residences and, to a less extent, to originate consumer and construction
loans for its portfolio. The Savings Bank purchases one-to-four family
residential loans through correspondents located in Kansas, Oklahoma, and in
Missouri. The Savings Bank also invests in mortgage-related securities, U.S.
government and agency obligations. These activities are funded with deposits
from the general public and borrowings from the Federal Home Loan Bank and Mid
Continent Bancshares, Inc. The Savings Bank offers its customers fixed-rate and
adjustable-rate mortgage loans, as well as FHA/VA loans and consumer loans,
including home equity and savings account loans. Adjustable-rate mortgage loans
generally are originated for retention in the Savings Bank's portfolio while
fixed-rate mortgage loans are generally sold into the secondary market. All
consumer loans are retained in the Savings Bank's portfolio.
The Savings Bank is actively engaged in the purchase and sale of certain
mortgage loans through a correspondent network. These purchased loans and loans
originated by the Savings Bank are sold, generally without recourse, into the
secondary market with the Savings Bank generally retaining the servicing rights.
The sale of loans in the secondary market is the source of a significant amount
of income in the form of gain on the sale of loans and fees generated from
servicing the loans.
Earnings of the Savings Bank are significantly affected by economic and
competitive conditions, particularly changes in interest rates, government
policies and regulations of regulatory authorities.
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Mid Continent Bancshares, Inc.
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On September 2, 1997, the Bancorp entered into a Reorganization and Merger
Agreement ("the agreement") to be acquired by Commercial Federal Corporation
("Commercial Federal"). Under the terms of the agreement, Commercial Federal
will acquire through a tax-free reorganization all of the outstanding shares of
the Bancorp's common stock in exchange for Commercial Federal's common stock.
The exchange ratio will be determined based upon the average closing price of
Commercial Federal's common stock during a twenty consecutive trading day period
prior to closing. Based on Commercial Federal's closing price on September 2,
1997, Mid Continent shareholders would receive .8693 shares of Commercial
Federal common stock for each share of Mid Continent Bancshares, Inc.
outstanding common stock. The acquisition is subject to regulatory approvals,
the Bancorp's shareholders' approval and other conditions and is expected to
close in the second fiscal quarter of 1998. Regardless of whether the proposed
acquisition is consummated, the following discussion addresses the financial
condition, results of operation, liquidity and capital resources and ongoing
strategy of the Bancorp and Savings Bank.
MANAGEMENT STRATEGY
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The Savings Bank's lending strategy has focused historically on the origination
of mortgage loans on one-to-four family residences pursuant to underwriting
standards. The Savings Bank generally retains ownership of the adjustable-rate
and short-term fixed-rate loans it originates and sells long-term fixed-rate
loans in the secondary market; accordingly, its lending strategy is designed to
reduce the risk of losses on its loan portfolio. However, the high concentration
of residential mortgage loans in its portfolio subjects the Savings Bank to
risks associated with potential declines in real estate values in its lending
area. This risk has been mitigated to some extent, however, through
diversification in its investment and mortgage-related securities portfolios.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Savings Bank has instituted certain
asset and liability management measures. This strategy includes the following
primary elements: (i) originating and purchasing long-term fixed-rate loans
primarily for sale in the secondary mortgage market, (ii) maintaining a high
percentage of total assets in short-term securities and other liquid assets,
(iii) increasing sources of other income, such as gain on sale of loans and loan
servicing fees, (iv) increasing its adjustable rate mortgage and short-term
fixed-rate loan portfolio and (v) building a loan servicing portfolio whose
market value floats inversely to the movement of interest rates. A loan
servicing portfolio becomes more valuable as the "turnover" in the mortgage
loans slows. Loan portfolios traditionally become more seasoned and experience
less turnover after interest rates rise. Therefore, after interest rates rise,
the value of a loan servicing portfolio generally increases (assuming credit
quality is maintained), causing the opposite effect to the value of the Savings
Bank's loans and investments.
CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1996
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TO SEPTEMBER 30, 1997
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Total assets increased $65,076, or 19.1% from $340,186 at September 30, 1996 to
$405,262 at September 30, 1997. The increase is attributable to increases of
$11,709 in cash, $62,153 in
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loans receivable, and $1,119 in mortgage servicing rights. Mortgage-related
securities decreased $6,259 and investments and Federal Home Loan Bank stock
decreased $4,497. Investment securities and FHLB stock decreased from $90,562 at
September 30, 1996 to $86,065 at September 30, 1997. At September 30, 1997 there
are callable securities with a carrying value of approximately $70,830 bearing
interest at various rates ranging from 4.98% to 7.87% with stated maturity dates
ranging from 1998 to 2011. The Savings Bank intends to hold these securities to
maturity, but the securities are subject to call at the option of the issuer.
Loans receivable increased from $171,158 at September 30, 1996 to $233,311 at
September 30, 1997. This increase is due primarily to increases in
adjustable-rate mortgages and short-term fixed-rate mortgage loans being held
for investment and to a lesser extent to increases in the construction and
consumer lending portfolio. First mortgage loans increased $59,669 and consumer
loans increased $1,029. The Bank expects to increase its residential
(one-to-four unit), first mortgage loans in fiscal 1998, but not to the extent
that these loans were increased in fiscal 1997.
Mortgage servicing rights increased $1,119 during fiscal 1997. During the fiscal
year the Savings Bank increased its servicing portfolio for others from
$1,229,153 to $1,291,331.
Deposit accounts increased $21,840. Savings certificate accounts increased
$12,401 and Demand and NOW deposit accounts increased $6,678. Demand and NOW
accounts which totaled $43,463 at September 30, 1997 provide a significant
amount of low interest-rate funds and a source of service fee income to the
Savings Bank.
Advances from the Federal Home Loan Bank increased $40,100 from $81,700 at
September 30, 1996 to $121,800 at September 30, 1997. The Savings Bank utilizes
advances from the Federal Home Loan Bank to meet its cash needs as they arise.
The Savings Bank has a $68,292 line of credit with the Federal Home Loan Bank,
subject to certain limitations, for the purpose of providing short-term
financing. At September 30, 1997, $7,300 was outstanding relative to this line
of credit.
Stockholders' equity increased $3,175, or 8.6%, from $36,807 to $39,982. Net
income for the year was $4,170.
Other significant transactions during the year included the acquisition of
58,500 shares of the Bancorp's common stock for treasury at a cost of $1,481 and
cash dividends paid or payable to common stockholders of $743. See the
accompanying Consolidated Statements of Stockholders' Equity for more detail.
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COMPARISON OF OPERATING RESULTS FOR YEARS
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ENDED SEPTEMBER 30, 1995 AND 1996
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GENERAL
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Net income decreased by $980, or 23.9%, from $4,106 for the year ended September
30, 1995 to $3,126 for the year ended September 30, 1996.
TOTAL INTEREST INCOME
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Total interest income increased $3,948, or 24.3%, to $20,173 during the year
ended September 30, 1996 from $16,225 for the year ended September 30, 1995.
Interest income on loans receivable and on investment securities increased
$1,413 and $2,669, respectively. The average yield on loans declined from 7.95%
in 1995 to 7.76% in 1996, but increases in the loan portfolio resulted in an
increase in loan interest in 1996 over 1995. The average yield of investment
securities increased from 6.92% in 1995 to 7.15% in 1996. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased $84
as mortgage-related securities were allowed to repay in the amount of $6,746.
The average yield on mortgage-related securities increased from 6.92% in 1995 to
7.36% in 1996, but as rates increased, increased repayments took place in
amounts sufficient to result in an overall decrease in interest from
mortgage-related securities. Other interest income decreased $50 due to reduced
average cash balances. The average rate of interest earned on interest-bearing
cash accounts decreased from 1995 to 1996, plus the demand for cash to fund
loans and investment securities, which paid higher yields, reduced the overall
interest yield from cash accounts.
NET INTEREST INCOME
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Net interest income increased $684, or 9.5%, from $7,221 for the year ended
September 30, 1995 to $7,905 for the year ended September 30, 1996. Total
average interest-earnings assets increased $52,867 from 1995 to 1996. Components
of the interest-earning assets are discussed above. Overall the average yield
remained unchanged, at 7.49% in 1995 and 1996. The major increase in interest
income was due to the increase in interest-earning assets with a lesser benefit
from individual rate increases, primarily on mortgage-related securities and
investment securities.
Average interest-bearing liabilities increased $53,614 from 1995 to 1996. Both
deposit accounts and borrowed money increased in 1996. Average rates on deposits
increased from 4.35% in 1995 to 4.63% in 1996. The average interest rate on
borrowed money, however, declined from 6.33% in 1995 to 6.21% in 1996. Overall
rates on interest-bearing liabilities increased from 4.59% in 1995 to 4.91% in
1996.
The ratio of average interest-bearing assets to interest-bearing liabilities
decreased from 110.4% at September 30, 1995 to 107.9% at September 30, 1996.
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans,
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Mid Continent Bancshares, Inc.
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estimated value of the underlying collateral and current and expected market
conditions. The allowance for loan losses was $423 and $421 at September 30,
1995 and 1996, respectively. The provision for losses on loans decreased $149
for the year ended September 30, 1996. The decrease in the provision resulted
from management's evaluation of the adequacy of the allowance for loan losses.
While the Savings Bank maintains its allowance for losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
OTHER INCOME
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Other income decreased $582, or 7.5%, during the year ended September 30, 1996,
as compared to the year ended September 30, 1995. During the year ended
September 30, 1995, the Bank realized gain on sale of servicing rights of
$1,961. There was no sales of servicing rights in the year ended September 30,
1996. All other significant sources of other income increased in 1996 compared
to 1995.
Loan servicing fees (net of amortization) increased by $26, or 0.8%, from $3,102
to $3,128 during the years ended September 30, 1995 and 1996, respectively. Loan
servicing fees increased $372, from $4,407 in 1995 to $4,779 in 1996.
Amortization of mortgage servicing rights increased $346, from $1,305 in 1995 to
$1,651 in 1996. The growth in gross servicing fees was 8.44%. Servicing fees
result primarily from service fees paid by investors and correlate closely with
the size of the loan servicing portfolio. The change in servicing fees during
the year ended September 30, 1996 is reflective of the increase in the amount of
loans serviced by Mid-Continent for others from $1,189,892 at September 30, 1995
to $1,229,153 at September 30, 1996. Amortization of mortgage servicing rights
are influenced by changes in the servicing portfolio, scheduled loan
amortization, anticipated and actual prepayments and changes in market interest
rates.
Service fees and other charges to customers increased by $693, or 37.5%, from
$1,846 to $2,539 during the years ended September 30, 1995 and 1996,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
program. The Bank also receives late charges related to loans serviced for the
Bank, as well as loans serviced for others.
Net gains on sale of loans increased by $661, or 93.6%, from $706 to $1,367
during the years ended September 30, 1995 and 1996, respectively. The gains on
the sale of loans are attributable to the Savings Bank's secondary market
activities and result from a combination of interest rates and management
strategies. Gains from the sale of loans are dependent on market and economic
conditions and, accordingly, there can be no assurance that the gains reported
in current periods can be achieved in the future or that there will not be
significant variations in the results from such activities.
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Mid Continent Bancshares, Inc.
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OTHER EXPENSE
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Other expense increased by $1,781, or 21.7%, from $8,202 to $9,983 during the
years ended September 30, 1995 and 1996, respectively. This increase is
primarily attributable to increases in salaries and related expenses, office
supplies and related expense, advertising, federal insurance premiums and
promotion.
Compensation and employee benefits increased $291, or 6.9%, in 1996 over 1995.
The increase is due to normal annual salary adjustments and employment of
personnel necessary to carry out the business activities of the Savings Bank.
Occupancy decreased $22 and office supplies expense increased $114, in 1996 over
1995. During 1996 the Savings Bank opened one new full service branch in
Wichita, Kansas.
Data processing costs increased $135 in support of additional branch operations
and in response to mortgage banking (including servicing) demands.
Advertising increased $34 in the fiscal year 1996 over fiscal 1995. Advertising
was increased primarily to promote the Savings Bank's checking account programs.
Federal insurance premiums increased from $351 for the year ended September 30,
1995 to $1,504 for the year ended September 30, 1996. On September 30, 1996 the
Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed into
law. The Act imposed a special assessment on Savings Association Insurance Fund
(SAIF) members to recapitalize the SAIF. The Bank's assessment was $1,053 which
was charged to expense immediately. The rate of deposit insurance assessment is
expected to materially decline in future periods.
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $227 in 1995 to $298 in 1996. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense increased $149 in 1996 over 1995. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. See footnote 19 to the consolidated
financial statements, Segment Information, for more information relative to the
operation of the mortgage banking segment (which includes loan servicing for
others) of the Savings Bank.
Operating expenses have increased in recent years due to the Savings Bank's
increased mortgage banking operations. For the year ended September 30, 1996,
operating expenses totaled 3.4% of average assets, a decrease from the 3.5% of
average assets recorded for the year ended September 30, 1995. The operating
expense ratios are attributable to loan production and loan servicing activities
(which incur operating expenses), and general inflationary pressures on the
Savings Bank's operations.
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Mid Continent Bancshares, Inc.
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INCOME TAX EXPENSE
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Income tax expense decreased $550, from $2,443 for the year ended September 30,
1995 to $1,893 for the year ended September 30, 1996. The primary reason for the
decrease was a $1,530 decrease in pre-tax income. The effective rate for the
year ended September 30, 1995 was 37.3% as compared to 37.7% for 1996.
13
Mid Continent Bancshares, Inc.
================================================================================
COMPARISON OF OPERATING RESULTS FOR YEARS
- -----------------------------------------
ENDED SEPTEMBER 30, 1996 AND 1997
- ------------------------ --------
GENERAL
- -------
Net income increased by $1,044, or 33.40% from $3,126 for the year ended
September 30, 1996 to $4,170 for the year ended September 30, 1997.
TOTAL INTEREST INCOME
- ---------------------
Total interest income increased $5,874, or 29.12%, to $26,047 during the year
ended September 30, 1997 from $20,173 for the year ended September 30, 1996.
Interest income on loans receivable and on investment securities increased
$4,268 and $2,048, respectively. The average yield on loans declined from 7.76%
in 1996 to 7.68% in 1997, but increases in the loan portfolio resulted in an
increase in loan interest in 1997 over 1996. The average yield of investment
securities increased from 7.15% in 1996 to 7.18% in 1997. The increase in rates
prompted more investment in securities and increased revenue resulted from both
volume and rate increases. Interest on mortgage-related securities decreased
$384 as mortgage-related securities repaid in the amount of $6,228. The average
yield on mortgage-related securities increased from 7.36% in 1996 to 7.42% in
1997, but as rates increased, increased repayments took place in amounts
sufficient to result in an overall decrease in interest from mortgage-related
securities. Other interest income decreased $58 due to reduced average cash
balances. The average rate of interest earned on interest-bearing cash accounts
increased from 1996 to 1997, but the demand for cash to fund loans and
investment securities, which paid higher yields, reduced the overall interest
income from cash accounts.
NET INTEREST INCOME
- -------------------
Net interest income increased $1,308, or 16.55%, from $7,905 during the year
ended September 30, 1996 to $9,213 for the year ended September 30, 1997. Total
average interest-earning assets increased $79,435 from 1996 to 1997. Components
of the interest-earning assets are discussed above. Overall the average yield
remained substantially unchanged for 1996 and 1997, at 7.49% and 7.47%,
respectively. The major increase in interest income was due to the increase in
interest-earning assets.
Average interest-bearing liabilities increased $81,076 from 1996 to 1997. Both
deposit accounts and borrowed money increased in 1997. Average rates on deposits
increased from 4.63% in 1996 to 4.71% in 1997. The average interest rate on
borrowed money, however, declined from 6.21% in 1996 to 5.98% in 1997. Overall
rates on interest-bearing liabilities increased from 4.91% in 1996 to 5.09% in
1997.
The ratio of average interest-bearing assets to interest-bearing liabilities
decreased from 107.9% at September 30, 1996 to 105.5% at September 30, 1997.
PROVISION FOR LOSSES ON LOANS
- -----------------------------
The Savings Bank currently maintains an allowance for loan losses based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, the Savings Bank's past loss experience, adverse situations that may
affect the borrowers' ability to repay loans,
14
Mid Continent Bancshares, Inc.
================================================================================
estimated value of the underlying collateral and current and expected market
conditions. The allowance for loan losses was $421 and $465 at September 30,
1996 and 1997, respectively. The provision for losses on loans increased $68 for
the year ended September 30, 1997. The increase in the provision resulted from
management's evaluation of the adequacy of the allowance for loan losses. While
the Savings Bank maintains its allowance for losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
OTHER INCOME
- ------------
Other income increased $347, or 4.84%, during the year ended September 30, 1997,
as compared to the year ended September 30, 1996.
Loan servicing fees (net of amortization) decreased by $29, or 0.93%, from
$3,128 to $3,099 during the years ended September 30, 1996 and 1997,
respectively. Loan servicing fees increased $62, from $4,779 in 1996 to $4,841
in 1997. Amortization of mortgage servicing rights increased $91, from $1,651 in
1996 to $1,742 in 1997. The growth in gross servicing fees was 1.30%. Servicing
fees result primarily from service fees paid by investors and correlate closely
with the size of the loan servicing portfolio. The change in servicing fees
during the year ended September 30, 1997, is reflective of the increase in the
amount of loans serviced by Mid-Continent for others from $1,229,153 at
September 30, 1996 to $1,291,331 at September 30, 1997. Amortization of mortgage
servicing rights are influenced by changes in the servicing portfolio, scheduled
loan amortization, anticipated and actual prepayments and changes in market
interest rates.
Service fees and other charges to customers increased by $528, or 20.8%, from
$2,539 to $3,067 during the years ended September 30, 1996 and 1997,
respectively. This source of income is primarily a function of the amount of
deposits and the fees for deposit-related services charged by the Savings Bank.
A primary source of this income is the Bank's high performance checking account
program. The Bank also receives late charges related to loans serviced for the
Bank, as well as serviced for others.
Net gains on sale of loans decreased by $173, or 12.66%, from $1,367 to $1,194
during the years ended September 30, 1996 and 1997, respectively. The gains on
the sale of loans are attributable to the Savings Bank's secondary market
activities and result from a combination of interest rates and management
strategies. Gains from the sale of loans are dependent on market and economic
conditions and, accordingly, there can be no assurance that the gains reported
in current periods can be achieved in the future or that there will not be
significant variations in the results from such activities.
OTHER EXPENSE
- -------------
Other expense decreased by $241, or 2.41%, from $9,983 to $9,742 during the
years ended September 30, 1996 and 1997, respectively. A decrease in federal
insurance premiums for the 1997 year more than offset increases in salaries and
related expenses, office supplies and related
15
Mid Continent Bancshares, Inc.
================================================================================
expense, advertising, data processing and promotion. Additionally, $187 of
expense has been incurred in the 1997 year related to the proposed merger with
Commercial Federal.
Compensation and employee benefits increased $533, or 11.75%, in 1997 over 1996.
In addition to increases due to normal annual salary adjustments and employment
of personnel necessary to carry out the business activities of the Savings Bank,
the Bank charged off the total remaining cost of its Management Stock Bonus
Plan, an additional expense of $348, which became 100% vested to plan
participants upon the signing of the proposed merger agreement with Commercial
Federal.
Occupancy increased $321 and office supplies expense increased $36, in 1997 over
1996. The Savings Bank opened two new full service branches in 1997.
Data processing costs increased $14 in support of additional branch operations
and in response to mortgage banking (including servicing) demands.
Advertising increased $52 in the fiscal year 1997 over fiscal 1996. Advertising
was increased primarily to promote the Savings Bank's checking account programs
and two branch openings.
Federal insurance premiums decreased from $1,504 for the year ended September
30, 1996 to $204 for the year ended September 30, 1997. On September 30, 1996
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 was signed
into law. The Act imposed a special assessment on SAIF members to recapitalize
the SAIF. The Bank's assessment was $1,053 which was immediately charged to
expense in 1996. The normal rate of deposit insurance premium assessment
materially declined in 1997 ($204 for 1997 compared to $451 for 1996).
Deposit account expense, related primarily to operation of the Savings Bank's
checking account programs, increased from $298 in 1996 to $340 in 1997. The
Savings Bank intends to expand its checking account and deposit account programs
in the future.
Miscellaneous loan servicing expense decreased $101 in 1997 over 1996. These
expenses are directly related to the servicing of loans for others, as well as
for the Savings Bank, and can be expected to rise as the Savings Bank grows and
expands its servicing portfolio for others. The decrease in this expense in 1997
is attributed to a decrease in the rate of prepayments of loans serviced for
others. See footnote 19 to the consolidated financial statements, Segment
Information, for more information relative to the operation of the mortgage
banking segment (which includes loan servicing for others) of the Savings Bank.
For the year ended September 30, 1997, operating expenses totaled 2.59% of
average assets, a decrease from the 3.4% of average assets recorded for the year
ended September 30, 1996. The operating expense ratios are attributable to loan
production and loan servicing activities (which incur operating expenses), and
general inflationary pressures on the Savings Bank's operations.
16
Mid Continent Bancshares, Inc.
================================================================================
INCOME TAX EXPENSE
- ------------------
Income tax expense increased $784 from $1,893 for the year ended September 30,
1996 to $2,677 for the year ended September 30, 1997. The primary reason for the
increase was a $1,828 increase in pre-tax income. The effective rate for the
year ended September 30, 1996 was 37.7% as compared to 39.1% for 1997.
Asset and Liability Management
Although the Savings Bank's dependence upon net interest income has been greatly
reduced during the past years as a result of the increase in sources of other
income obtained through its mortgage banking operation and purchases of mortgage
servicing rights ("MSR"), the income from retail operations and assets held in
portfolio still depends primarily upon it's net interest income. The ability to
maximize net interest income is largely dependent upon the achievement of a
positive interest rate spread that can be sustained during fluctuations in
prevailing interest rates. Interest rate sensitivity is a measure of the
difference between amounts of interest-earning assets and interest-bearing
liabilities which either reprice or mature within a given period of time. The
difference, or the interest rate repricing "gap", provides an indication of the
extent to which an institution's interest rate spread will be affected by
changes in interest rates over a period of time. A gap is considered positive
when the amount of interest-rate sensitive assets maturing or repricing over a
specified period of time exceeds the amount of interest-rate sensitive
liabilities maturing or repricing within that period and is considered negative
when the amount of interest-rate sensitive liabilities maturing or repricing
over a specified period of time exceeds the amount of interest-rate sensitive
assets maturing or repricing within that period. Generally, during a period of
rising interest rates, a negative gap within a given period of time would
adversely affect net interest income, while a positive gap within a given period
of time would result in an increase in net interest income; during a period of
falling interest rates, a negative gap within a given period of time would
result in an increase in net interest income while a positive gap within a given
period of time would have the opposite effect. At September 30, 1997, the
Savings Bank's one year and three year cumulative interest sensitivity gap as a
percentage of total assets was a negative 12.4% and a negative 7.0%,
respectively.
In an effort to reduce interest rate risk and protect it from the negative
effect of increases in interest rates, the Savings Bank has instituted certain
asset and liability management measures. This strategy includes the following
primary elements: (i) originating and purchasing long-term fixed-rate loans only
for sale in the secondary mortgage market, (ii) maintaining a high percentage of
total assets in short-term securities and other liquid assets, (iii) increasing
sources of other income, such as gain on sale of loans and loan servicing fees,
(iv) increasing its ARM and short-term fixed rate loan portfolio and (v)
building a loan servicing portfolio whose market value floats inversely to the
movement of interest rates. A loan servicing portfolio becomes more valuable as
the "turnover" in the mortgage loans slows. Mortgage loans traditionally become
more seasoned and turnover less as interest rates rise. Therefore, after
interest rates rise, the value of a loan servicing portfolio generally increases
(assuming credit quality is maintained), causing the opposite effect to the
value of the Savings Bank's loans and investments.
17
Mid Continent Bancshares, Inc.
================================================================================
Certain risks are inherent in the business of mortgage banking. There is a risk
that the Savings Bank will not be able to sell all the loans that it originates
or purchases or, conversely, that the Savings Bank will be unable to fulfill its
contractual commitment to deliver loans. In addition, in periods of rising
interest rates, loans originated or purchased by the Savings Bank may decline in
value. Exposure to interest rate risk is significant during the period between
the time the interest rate on a customer's mortgage loan application is
established and the time the mortgage loan closes, and also during the period
between the time the interest rate is established and the time the Savings Bank
commits to sell the loan. If interest rates change in an unanticipated fashion,
the actual percentage of loans that close may differ from projected percentages.
The resultant mismatching of commitments to close loans and commitments to
deliver sold loans may have an adverse effect on the profitability of loan
originations in any such period. A sudden increase in interest rates can cause a
higher percentage of loans to close than projected. To the degree that this was
not anticipated, the Savings Bank will not have made commitments to sell these
additional loans and may incur significant mark to market losses, adversely
affecting results of operations. In order to minimize these risks, it is the
policy of the Savings Bank to cover approximately 75%-85% of the loans that it
has originated or purchased with sales contracts with third parties. A mortgage
banker that is unable to fulfill its commitments to deliver mortgage loans to
third parties will be subject to the payment of fees and monetary penalties as
well as the loss of business reputation. The risk associated with failing to
meet delivery commitments cannot be eliminated due to the variables created by
changes in market conditions and other factors. Commitments to sell loans are
considered when assessing the lower of cost or market valuation of the Savings
Bank's loans held for sale portfolio.
Gap Table
The following table sets forth the amount of the Savings Bank's interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1997 on an
unconsolidated basis, which are expected to reprice or mature in each of the
future time periods shown. The amount of assets or liabilities shown which
reprice or mature during a particular period were determined by the contractual
terms of the asset or liability. The table assumes prepayments and scheduled
principal amortization of fixed-rate loans and mortgage-related securities, and
assumes that adjustable rate mortgage loans will reprice at contractual
repricing intervals. No consideration has been provided for the impact of future
commitments and loans in process.
18
Mid Continent Bancshares, Inc.
================================================================================
Within Over 1-3 Over 3-5 Over
One Year Years Years 5 Years Total
Amount Amount Amount Amount Amount
------ ------ -------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans and MRS (1) $106,606 $106,269 $17,401 $37,766 $268,042
Other loans 2.588 2,554 967 1,189 7,298
Investment securities (2) 46,606 3,000 52,399 102,005
------ ----- ----- ------ -------
Total interest-earning assets 155,800 111,823 18,368 91,354 377,345
------- ------- ------ ------ -------
Interest-bearing liabilities:
Non-interest-bearing deposits 9,692 9,994 3,989 2,651 26,326
Demand and NOW accounts 9,826 2,781 1,837 2,993 17,437
Savings accounts 6,396 759 548 1,430 9,133
Money market deposit accounts 9,216 3,364 1,312 840 14,732
Certificates of deposit 97,076 63,201 7,687 1,068 169,032
FHLB advances 70,800 10,000 41,000 121,800
Other borrowings 3,059 3,059
----- ----- ----- ----- -----
Total interest-bearing liabilities 206,065 90,099 56,373 8,982 361,519
------- ------ ------ ----- -------
Interest sensitivity gap (50,265) 21,724 (38,005) 82,372 15,826
======== ====== ======== ====== ======
Cumulative interest sensitivity gap (50,265) (28,541) (66,546) 15,826 15,826
======== ======== ======== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 75.6% 124.1% 32.6% 1,017.1% 104.4%
===== ====== ===== ======== ======
Ratio of cumulative gap to total assets (12.4%) (7.0%) (16.4%) 3.9% 3.9%
======= ====== ======= ==== ====
(1) Includes loans held for sale. Mortgage-related securities are identified as
"MRS".
(2) Includes investment securities, FHLB stock and interest-earning deposits in
banks.
Certain shortcomings are inherent in the method of analysis presented in the
table above. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on a short-term basis
over the life of the asset. Further, in the event of a change in interest rates,
prepayment levels and decay rates on core deposits would likely deviate
significantly from those assumed in calculating the table.
The Savings Bank's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the repricing characteristics of deposits. The
Savings Bank has made the following assumptions in calculating the value on the
above-referenced table: adjustable-rate mortgage loans have prepayment rates
ranging from 10 to 31%; fixed-rate mortgage loans have a prepayment rate that is
constant through time but varies from 5% for lower contractual interest rate
loans to 44% for higher
19
Mid Continent Bancshares, Inc.
================================================================================
contractual interest rate loans; consumer loans have prepayment rates ranging
from 4 to 17%; core savings deposits have a decreasing decay rate through time
ranging from 100% almost immediately to 15% after one year; NOW checking
deposits have a decreasing decay rate through time ranging from 100% almost
immediately to 19% after one year; and money market deposits have a decreasing
decay rate through time ranging from 91% almost immediately to 38% after one
year. The interest-rate sensitivity of the Savings Bank's assets and liabilities
illustrated in the table could vary substantially if different assumptions were
used or if actual experience differs from the assumptions used.
As discussed above and as shown in the preceding gap table and the average
balance sheet and rate/volume analysis contained in the annual report, the
Bank's net interest rate risk consists of risks from the numerous time periods
for maturity or repricing of particular assets or liabilities and from the
numerous interest rates that vary over time and because of the maturity or
repricing of the underlying assets or liabilities. These risks necessarily
impact net interest income. One impact on net interest income results from the
interest rate margin (net yield on interest bearing assets).
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
- -------------------------------------------------------------------
The following table presents for the periods indicated the total dollar amounts
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on the average interest bearing
liabilities, expressed both in dollars and rates. Average balances are derived
from daily balances. The following table includes nonaccruing loans averaging
$278, $359 and $597, respectively, for the years ended September 30, 1995, 1996
and 1997 as interest-earning assets at a yield of zero percent. Interest income
for the years ended September 30, 1995, 1996 and 1997 includes loan fee
amortization of $371, $168 and $72, respectively.
20
Mid Continent Bancshares, Inc.
================================================================================
Year Ended September 30,
1995 1996 1997
-------------------------------- ------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------------------
Interest earning assets:
Loans receivable $129,687 $10,310 7.95% $151,078 $11,723 7.76% $208,205 $15,991 7.68%
Mortgage-related securities 43,430 3,006 6.92% 39,711 2,922 7.36% 34,194 2,538 7.42%
Investment securities 37,322 2,581 6.92% 73,431 5,250 7.15% 101,690 7,298 7.18%
Other interest-earning assets 6,042 328 5.43% 5,128 278 5.42% 4,694 220 4.69%
-------- ------- ------ -------- ------- ----- -------- ------- ------
Total interest-earning
assets 216,481 $16,225 7.49% 269,348 $20,173 7.49% $348,783 $26,047 7.47%
======= ====== ======= ===== ======= ======
Non-interest-earning assets 18,392 22,110 26,698
-------- -------- --------
Total assets $234,873 $291,458 $375,481
======== ======== ========
Interest-bearing liabilities:
Passbook savings deposits $8,710 $239 2.74% $8,634 $238 2.76% $8,783 $241 2.74%
NOW accounts and money
market demand deposits 40,131 565 1.41% 47,285 756 1.60% 52,936 1,015 1.92%
Certificates of deposit 123,444 6,697 5.43% 148,922 8,491 5.70% 170,056 9,662 5.68%
Other interest-bearing
liabilities 23,751 1,503 6.33% 44,809 2,783 6.21% 98,951 5,916 5.98%
-------- ------ ------ -------- ----- ------ ------ ----- ------
Total interest-bearing
liabilities 196,036 $9,004 4.59% 249,650 $12,268 4.91% 330,726 $16,834 5.09%
====== ====== ======= ====== ======= ======
Non-interest-bearing liabilities 4,216 5,201 6,677
-------- -------- --------
Total liabilities 200,252 254,851 337,403
Stockholders' equity 34,621 36,607 38,078
-------- -------- --------
Total liabilities and
stockholders' equity $234,873 $291,458 $375,481
======== ======== ========
Net interest income $7,221 $7,905 $9,213
====== ====== ======
Interest rate spread 2.90% 2.58% 2.38%
====== ====== =======
Net yield on interest-
bearing assets 3.34% 2.93% 2.64%
====== ====== =======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.43% 107.89% 105.46%
====== ====== =======
21
Mid Continent Bancshares, Inc.
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The following schedule presents the dollar amount of changes in interest income
and interest expense for the major components of interest-earning assets and
interest-bearing liabilities. For each category of interest earning assets and
interest-bearing liabilities, information is provided on changes attributed to
(i) changes in volume (changes in average volume multiplied by old rate); (ii)
changes in rates (changes in rate multiplied by old average volume); (iii)
changes in rate-volume (changes in rate multiplied by the change in average
volume).
1995 vs. 1996 1996 vs. 1997
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
Interest income:
Loans receivable $ 1,701 $ (247) $ (41) $ 1,413 $ 4,433 $ (119) $ (46) $ 4,268
Mortgage-related securities (258) 190 (16) (84) (406) 26 (4) (384)
Investment securities 2,497 87 85 2,669 2,020 20 8 2,048
Other interest-earning assets (50) 0 0 (50) (24) (38) 4 (58)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 3,890 $ 30 $ 28 $ 3,948 $ 6,023 $ (111) $ (38) $ 5,874
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Passbook savings deposits $ (2) $ 1 $ 0 ($ 1) $ 4 $ (1) $ 0 $ 3
NOW accounts and money market
demand deposits 100 77 14 191 90 151 18 259
Certificates of deposit 1,383 341 70 1,794 1,205 (30) (4) 1,171
Other interest-bearing liabilities 1,333 (28) (25) 1,280 3,363 (104) (126) 3,133
------- ------- ------- ------- ------- ------- ------- -------
Total interst-bearing liabilities $ 2,814 $ 391 $ 59 $ 3,264 $ 4,662 $ 16 $ (112) $ 4,566
======= ======= ======= ======= ======= ======= ======= =======
Net change in net interest income $ 1,076 $ (361) $ (31) $ 684 $ 1,361 $ (127) $ 74 $ 1,308
======= ======= ======= ======= ======= ======= ======= =======
22
Mid Continent Bancshares, Inc.
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MARKET RISK
- -----------
When used or incorporated by reference in disclosure documents, the words
"anticipate," "estimate," "expect," "project," "target," "goal" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Such forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including those set forth below. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, expected
or projected. These forward-looking statements speak only as of the date of the
document. The Bancorp expressly disclaims any obligation or undertaking to
publicly release any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Bancorp's expectation with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
The Savings Bank's Assets Liability Management Committee ("ALCO"), which
includes senior management representatives, monitors and considers methods of
managing the rate and sensitivity repricing characteristics of the balance sheet
components consistent with maintaining acceptable levels of changes in net
portfolio value ("NPV") and net interest income. A primary purpose of the
Savings Bank's asset and liability management is to manage interest rate risk to
effectively invest the Savings Bank's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Savings Bank's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Savings Bank's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Savings Bank
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base. Management has sought to decrease the average
maturity of its assets by emphasizing the origination of adjustable-rate
residential mortgage loans, consumer loans and adjustable-rate mortgage loans
for the acquisition, development, and construction of residential real estate,
all of which are retained by the Bank for its portfolio. In addition, long-term,
fixed-rate single-family residential mortgage loans are underwritten according
to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Housing Administration ("FHA"), Veterans Administration ("VA"), Guaranteed Rural
Housing Loans ("GRHL") and the Federal National Mortgage Association ("FNMA"),
and are either swapped with the FHLMC, FNMA, and GNMA ("Government National
Mortgage Association") in exchange for mortgage-related securities secured by
such loans which are then sold directly for cash in the secondary market.
23
Mid Continent Bancshares, Inc.
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Interest rate sensitivity analysis is used to measure the Savings Bank's
interest rate risk by computing estimated changes in NPV of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market risk sensitive instruments in the
event of a sudden and sustained one hundred to four hundred basis points
increase or decrease in the market interest rates. The Savings Bank's Board of
Directors has adopted an interest rate risk policy which establishes maximum
decreases in the NPV of 15%, 25%, 35% and 45% in the event of a sudden and
sustained one hundred to four hundred basis points increase or decrease in
market interest rates. The following table presents the Savings Bank's projected
change in NPV for the various rate shock levels of September 30, 1997. All
market risk sensitive instruments presented in this table are held to maturity
or available for sale. The Savings Bank has no trading securities.
Percent Change
Change in Market Value of Actual Board
Interest Rates Portfolio Equity Change Actual Limit
---------------- ------ ------ -----
(Dollars in Thousands)
----------------------
400 basis point rise $ 38,443 $ (25,503) (40) % (45) %
300 basis point rise 45,921 (18,025) (28) (35)
200 basis point rise 52,605 (11,341) (18) (25)
100 basis point rise 58,953 (4,993) (8) (15)
Base Scenario 63,946 -- -- --
100 basis point decline 65,307 1,361 2 15
200 basis point decline 63,243 (703) (1) 25
300 basis point decline 63,977 31 0 35
400 basis point decline 66,333 2,387 4 45
The preceding table indicates that at September 30, 1997, in the event of a
sudden and sustained increase in prevailing market interest rates, the Savings
Bank's NPV would normally decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Savings Bank's NPV
would normally increase. At September 30, 1997, the Savings Bank's estimated
changes in NPV were within the targets established by the Board of Directors.
NPV is calculated by the Savings Bank pursuant to guidelines established by the
OTS. The calculation is based on the net present value of estimated discounted
cash flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of
September 30, 1997, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the ALCO could undertake in response to changes in interest rates.
24
Mid Continent Bancshares, Inc.
================================================================================
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Savings Bank's primary loan products, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable-rate loans in the Savings Bank's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the NPV. Finally, the ability
of many borrowers to repay their adjustable-rate mortgage loans may decrease in
the event of interest rate increases.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Savings Bank is required to maintain minimum levels of "liquid assets", as
defined by the Office of Thrift Supervision ("OTS") regulations. This
requirement, which may be varied from time to time depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The required minimum ratio is currently 4 percent. The
Savings Bank's average liquidity ratio was 9.06% percent during September, 1997.
The Savings Bank manages its liquidity ratio to meet its funding needs,
including; deposit outflows; disbursement of payments collected from borrowers
for taxes and insurance; repayment of Federal Home Loan Bank advances and other
borrowings; and loan principal disbursements. The Savings Bank also monitors its
liquidity position in accordance with its asset/liability management objectives.
In addition to funds provided from operations, the Savings Bank's primary
sources of funds are: savings deposits; principal repayments on loans and
mortgage-related; and matured or called investment securities. The Savings Bank
also borrows funds from time to time from the Federal Home Loan Bank of Topeka
(the "FHLB").
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-related securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Savings Bank
strives to manage the pricing of its deposits to maintain a balanced stream of
cash flows commensurate with its loan commitments and other predictable funding
needs.
The Savings Bank usually maintains a portion of its cash on hand in
interest-bearing demand deposits with the FHLB to meet immediate loan commitment
and savings withdrawal funding requirements. When applicable, cash in excess of
immediate funding needs is invested into longer-term investment and
mortgage-related securities, some of which may also qualify as liquid
investments under current OTS regulations.
The Savings bank has a $68,292 line of credit with the FHLB which may be used to
provide funds necessary to cover cash shortages on a daily basis, and the
ability to obtain various other FHLB advances up to a total borrowing limit of
approximately $220,000, the amount of the
25
Mid Continent Bancshares, Inc.
================================================================================
Banks residential housing finance assets. At September 30, 1997, the Savings
Bank had total FHLB borrowings of $121,800.
Management believes the Savings Bank has sufficient resources available to meet
its foreseeable funding requirements. At September 30, 1997, the Savings Bank
had outstanding loan commitments of $87,584, and certificates of deposit
scheduled to mature within one year of $97,076.
As required by the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA"), the Savings Bank must meet or exceed three separate
standards of capital adequacy. OTS regulations require financial institutions to
have minimum tangible capital equal to 1.50 percent of total adjusted assets;
minimum core capital equal to 3.00 percent of total adjusted assets; and
risk-based capital equal to 8.00 percent of total risk-weighted assets.
The Savings Bank's capital requirements and actual capital under the OTS
regulations were as follows at September 30, 1997:
Percent of
Amount Adjusted
(Thousands) Assets
------------- ------------
Tangible capital
Actual amount $36,179 8.9%
Required amount 6,079 1.5%
----- ----
Excess $30,100 7.4%
======= ====
Core capital:
Actual amount $36,179 8.9%
Required amount 12,158 3.0%
------ ----
Excess $24,021 5.9%
======= ====
Risk-based capital:
Actual amount $36,633 22.6%
Required amount 12,954 8.0%
------ ----
Excess $23,679 14.6%
======= =====
OTHER MATTERS
- -------------
LEGAL PROCEEDINGS
- -----------------
Mid-Continent Federal Savings Bank, the wholly-owned subsidiary of Mid Continent
Bancshares, Inc., is pursuing its claim against the federal government to
recover funds lost as a result of the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"). In 1986, the Bank was
encouraged by the federal government to acquire an insolvent thrift institution
("Reserve Savings and Loan Association"). The federal government allowed the
Bank to count the insolvent thrift's losses as "goodwill" assets and to
double-count as "capital credit" federal government funds provided to help the
Bank take over the failing thrift. The Bank contends (among other things) in its
lawsuit that the federal government
26
Mid Continent Bancshares, Inc.
================================================================================
breached its contract with the Bank when FIRREA was enacted because FIRREA
prevented the Bank from counting such assets toward minimum capital
requirements. As a result of FIRREA, the Bank was forced to write off
approximately $7,500,000 in supervisory goodwill. This write off reduced the
Bank's regulatory capital.
On July 1, 1996, the United States Supreme Court affirmed decisions by a federal
appellate court that the government had breached express contracts with three
thrifts (U.S. v. Winstar Corp, et al.) and therefore was liable for damages.
Those lawsuits stemmed from circumstances that are similar to those of the Bank;
in order to persuade those thrifts to acquire certain insolvent thrift
institutions, the federal government promised accounting treatment similar to
that promised to the Bank.
While the Supreme Court's ruling in U.S. v. Winstar Corp, et al., serves to
support the Bank's legal claims in its pending lawsuit against the federal
government, it is not possible at this time to predict what effect the Supreme
Court's ruling, and subsequent rulings of a lower court concerning damages, will
have on the outcome of the Bank's lawsuit. Notwithstanding the Supreme Court's
ruling, there can be no assurance that the Bank will be able to recover any
funds arising out of its claim and, if any recovery is made, the amount of such
recovery.
Possible Year 2000 Computer Program Problems
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operation of the Savings Bank.
Data processing is also essential to most other financial institutions and many
other companies.
All of the material computer programs of the Savings Bank that could be affected
by this problem are provided by third party vendors. The third party vendors of
the Savings Bank have advised the Savings Bank that they expect to resolve this
potential problem before the year 2000. However, if the third party vendors are
unable to resolve this potential problem in time, the Savings Bank would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Savings Bank.
27
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 29
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1996 and 1997 30-31
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997 32
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1995, 1996 and 1997 33
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997 34-35
Notes to Consolidated Financial Statements for the Years Ended
September 30, 1995, 1996 and 1997 36-68
28
[Deloitte & Touche LLP Letterhead, Kansas City, Missouri]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid Continent Bancshares, Inc.
El Dorado, Kansas
We have audited the accompanying consolidated balance sheets of Mid Continent
Bancshares, Inc. and subsidiary (the "Company") as of September 30, 1996 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 30,
1996 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, on September 2,
1997, the Company entered into a reorganization and merger agreement to be
acquired by another financial institution.
/s/ Deloitte & Touche LLP
November 14, 1997
29
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS 1996 1997
CASH AND CASH EQUIVALENTS:
Cash and amounts due from depository institutions $ 1,694 $ 1,387
Interest bearing deposits in other banks 3,924 15,940
-------- --------
Total cash and cash equivalents 5,618 17,327
INVESTMENT SECURITIES, At cost (Market value of $83,827
and $79,220) 86,235 79,390
CAPITAL STOCK OF FEDERAL HOME LOAN BANK, At cost 4,327 6,675
MORTGAGE-RELATED SECURITIES, At cost (Market value of
$34,366 and $28,556) 34,383 28,124
LOANS HELD FOR SALE (Market value of $13,816 and $14,078) 13,718 13,894
LOANS RECEIVABLE, Net (Less allowance for loan losses
of $421 and $465) 171,158 233,311
PREMISES AND EQUIPMENT, Net 6,271 7,222
REAL ESTATE OWNED (Less allowance for losses of
$34 and $19) 28 41
ACCRUED INTEREST RECEIVABLE:
Loans receivable 1,285 1,594
Mortgage-related securities 262 224
Investment securities 1,197 1,053
-------- --------
Total accrued interest receivable 2,744 2,871
MORTGAGE SERVICING RIGHTS, Net 12,496 13,615
OTHER ASSETS 3,208 2,792
-------- --------
TOTAL ASSETS $340,186 $405,262
======== ========
(Continued)
30
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
DEPOSITS $ 214,493 $ 236,333
ADVANCE PAYMENTS BY BORROWERS FOR TAXES
AND INSURANCE 1,805 2,066
DEFERRED INCOME TAXES 698 1,042
ACCRUED AND OTHER LIABILITIES 4,683 4,039
ADVANCES FROM FEDERAL HOME LOAN BANK 81,700 121,800
--------- ---------
Total liabilities 303,379 365,280
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000 shares authorized,
no shares issued or outstanding
Common stock, $.10 par value, 20,000,000 shares authorized,
2,248,250 and 2,251,953 shares issued 225 225
Additional paid-in capital 21,663 22,209
Unearned compensation - Employee Stock Ownership Plan (1,054) (918)
Unearned compensation - Management Stock Bonus Plan (547)
Retained earnings, substantially restricted 20,424 23,851
--------- ---------
40,711 45,367
Treasury stock, 231,500 and 290,000 shares, at cost (3,904) (5,385)
--------- ---------
Total stockholders' equity 36,807 39,982
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,186 $ 405,262
========= =========
See notes to consolidated financial statements. (Concluded)
31
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
1995 1996 1997
INTEREST INCOME:
Loans receivable $ 10,310 $ 11,723 $ 15,991
Mortgage-related securities 3,006 2,922 2,538
Investment securities 2,581 5,250 7,298
Other interest - cash and cash equivalents 328 278 220
-------- -------- --------
Total interest income 16,225 20,173 26,047
-------- -------- --------
INTEREST EXPENSE:
Deposits 7,501 9,485 10,918
Advances from Federal Home Loan Bank 1,503 2,783 5,916
-------- -------- --------
Total interest expense 9,004 12,268 16,834
-------- -------- --------
NET INTEREST INCOME 7,221 7,905 9,213
PROVISION FOR LOAN LOSSES 224 75 143
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,997 7,830 9,070
-------- -------- --------
OTHER INCOME:
Loan servicing fees 4,407 4,779 4,841
Amortization of mortgage servicing rights (1,305) (1,651) (1,742)
Gain on sale of mortgage servicing rights 1,961
Service fees and other charges to customers 1,846 2,539 3,067
Gain on sale of loans held for sale, net 706 1,367 1,194
Insurance commissions 100 54 73
Other 39 84 86
-------- -------- --------
Total other income 7,754 7,172 7,519
-------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 4,245 4,536 5,069
Occupancy of premises 866 844 1,165
Office supplies and related expenses 529 643 679
Data processing 455 590 604
Advertising and promotions 414 448 500
Federal insurance premiums 351 1,504 204
Professional services 313 272 244
Provision for losses on real estate owned 81 18 10
Amortization of excess cost over fair value of assets acquired 78 60 22
Deposit accounts 227 298 340
Loan servicing 193 342 241
Other 450 428 664
-------- -------- --------
Total other expenses 8,202 9,983 9,742
-------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 6,549 5,019 6,847
INCOME TAX EXPENSE 2,443 1,893 2,677
-------- -------- --------
NET INCOME $ 4,106 $ 3,126 $ 4,170
======== ======== ========
EARNINGS PER SHARE $ 1.97 $ 1.59 $ 2.15
======== ======== ========
See notes to consolidated financial statements.
32
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
Unearned Unearned
Compensation - Compensation -
Employee Management Retained
Additional Stock Stock Earnings, Total
Common Stock Paid-In Ownership Bonus Substantially Treasury Stock Stockholders'
Shares Amount Capital Plan Plan Restricted Shares Amount Equity
BALANCE, October 1, 1994 2,248,250 $ 225 $ 21,504 $ (1,312) $ 14,792 $35,209
Acquisition of common
stock for Management
Stock Bonus Plan $ (995) (995)
Acquisition of Treasury
Stock 80,000 $ (1,174) (1,174)
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 122 122
Increase in fair market
value of Employee Stock
Ownership Plan shares
committed to be released
for allocation 49 49
Amortization of unearned
compensation - Management
Stock Bonus Plan 249 249
Dividends on common
stock to stockholders (831) (831)
Net income 4,106 4,106
--------- ----- -------- -------- ------ -------- ------- -------- ------
BALANCE, September 30, 1995 2,248,250 225 21,553 (1,190) (746) 18,067 80,000 (1,174) 36,735
Acquisition of Treasury
Stock 151,500 (2,730) (2,730)
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 136 136
Increase in fair market
value of Employee
Stock Ownership Plan
shares committed to be
released for allocation 110 110
Amortization of unearned
compensation -
Management Stock
Bonus Plan 199 199
Dividends on common
stock to stockholders (769) (769)
Net income 3,126 3,126
--------- ----- -------- -------- ------ -------- ------- -------- ------
BALANCE, September 30, 1996 2,248,250 225 21,663 (1,054) (547) 20,424 231,500 (3,904) 36,807
Acquisition of Treasury
Stock 58,500 (1,481) (1,481)
Exercise of stock
options 3,703 43 43
Common stock committed
to be released for
allocation - Employee
Stock Ownership Plan 136 136
Increase in fair market
value of Employee Stock
Ownership Plan shares
committed to be released
for allocation 225 225
Amortization of unearned
compensation - Management
Stock Bonus Plan 547 547
Income tax benefit upon
vesting of Management
Stock Bonus Plan 278 278
Dividends on common stock to
stockholders (743) (743)
Net income 4,170 4,170
--------- ----- -------- -------- ------ -------- ------- -------- -------
BALANCE, September 30, 1997 2,251,953 $ 225 $ 22,209 $ (918) $ $ 23,851 290,000 (5,385) $39,982
========= ===== ======== ====== ====== ======== ======= ======== =======
See notes to consolidated financial statements.
33
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,106 $ 3,126 $ 4,170
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Common stock committed to be released for allocation -
Employee Stock Ownership Plan 122 136 136
Increase in fair market value of Employee Stock Ownership
Plan shares committed to be released for allocation 49 110 225
Amortization of unearned compensation - Management
Stock Bonus Plan 249 199 547
Stock dividend on capital stock of Federal Home Loan Bank (172) (365)
Accretion of premiums and discounts on mortgage-
related securities and investment securities, net (134) (155) (147)
Provision for loan losses 224 75 143
Provision for losses on real estate owned 81 18 10
Net loan origination fees capitalized 380 1,602 899
Amortization of net deferred loan origination fees (371) (168) (72)
Amortization of mortgage servicing rights 1,305 1,651 1,742
Impairment of mortgage servicing rights 10
Amortization of excess of cost over fair value of assets acquired 78 60 22
Gain on sale of real estate owned, net (7) (34) (34)
Depreciation and amortization on premises and equipment 393 344 516
Gain on sale of premises and equipment (12)
Gain on sale of loans held for sale, net (706) (1,367) (1,194)
Origination/purchase of loans held for sale (107,341) (195,873) (214,177)
Proceeds from sale of loans held for sale 91,466 205,630 215,195
Gain on sale of mortgage servicing rights (1,961)
Provision (benefit) for deferred income taxes (225) 530 344
Changes in:
Accrued interest receivable (935) (525) (127)
Other assets (27) (698) 394
Income taxes payable 607 (77)
Accrued and other liabilities 1,091 2,028 (638)
--------- --------- ---------
Net cash provided by (used in) operating activities (11,568) 16,440 7,599
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities or call of investment securities 10,100 29,000 48,860
Purchases of investment securities (42,000) (62,753) (43,820)
Principal collected on mortgage-related securities 4,985 6,746 6,228
Purchases of mortgage-related securities (1,158)
Loan originations net of principal collected on loans receivable (23,171) (48,069) (63,420)
Proceeds from sales of premises and equipment 117
Acquisitions of mortgage servicing rights, net (8,423) (2,522) (2,871)
Proceeds from sales of mortgage servicing rights 3,766
Purchases of premises and equipment (1,416) (1,858) (1,468)
Proceeds from sales of real estate owned 170 374 308
--------- --------- ---------
Net cash used in investing activities (55,872) (80,240) (56,183)
--------- --------- ---------
(Continued)
34
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts for deposits, net $ 40,952 $ 18,779 $ 21,839
Increase (decrease) in advance payments
by borrowers for taxes and insurance, net 126 (225) 261
Proceeds from advances from Federal Home Loan Bank 96,600 199,500 325,680
Repayments on advances from Federal Home Loan Bank (72,600) (150,800) (285,580)
Acquisition of common stock for Management Stock Bonus Plan (995)
Acquisition of treasury stock (1,174) (2,730) (1,481)
Cash dividends on common stock to stockholders (615) (783) (747)
Issuance of common stock for exercise of stock options 43
Income tax benefit upon vesting of Management Stock Bonus Plan 278
--------- --------- ---------
Net cash provided by financing activities 62,294 63,741 60,293
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,146) (59) 11,709
CASH AND CASH EQUIVALENTS:
Beginning of year 10,823 5,677 5,618
--------- --------- ---------
End of year $ 5,677 $ 5,618 $ 17,327
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income tax payments, net of refunds $ 1,708 $ 2,424 $ 2,029
========= ========= =========
Interest payments, including interest credited to deposits
of approximately $7,218, $9,434 and $9,969 $ 8,758 $ 12,287 $ 16,443
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Loans transferred to real estate owned $ 386 $ 238 $ 296
========= ========= =========
Loans made upon the sale of real estate owned $ 40
=========
Accrued dividends on common stock $ 204 $ 190 $ 186
========= ========= =========
See notes to consolidated financial statements. (Concluded)
35
MID CONTINENT BANCSHARES, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands, except share amounts)
- --------------------------------------------------------------------------------
1. STOCK CONVERSION
On November 23, 1993, the Board of Directors of Mid-Continent Federal
Savings and Loan Association of El Dorado unanimously adopted a Plan of
Conversion to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank to be known as
Mid-Continent Federal Savings Bank (the "Savings Bank") and to form Mid
Continent Bancshares, Inc., (the "Company"), a Kansas corporation, to
act as the holding company of the Savings Bank. At the date of
conversion, June 27, 1994, the Company completed the sale of 2,248,250
shares of common stock, $.10 par value, through concurrent Subscription
and Community Offerings at $10.00 per share. Included in the total
shares sold are 136,000 shares which were purchased by the Employees
Stock Ownership Plan ("ESOP") at $10.00 per share. Net proceeds from the
conversion, after recognizing conversion expenses and underwriting costs
of $754 were $21,729. From the net proceeds, the Company used $11,241 to
purchase all of the capital stock of the Savings Bank and $1,360 to fund
the purchase of 136,000 shares of the Company stock by the ESOP. The
Company owns 100% of the Savings Bank's common stock.
At the time of conversion, the Savings Bank segregated and restricted
$13,434 of retained earnings, which was the amount of its regulatory
capital as of December 31, 1993, in a liquidation account for the
benefit of eligible account holders who continue to maintain their
deposit accounts in the Savings Bank after conversion. In the event of a
complete liquidation of the Savings Bank (and only in such an event),
eligible depositors who continue to maintain accounts shall be entitled
to received a distribution from the liquidation account in an amount
proportionate to the current adjusted balances of all qualifying
deposits then held. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their qualifying
deposits.
The Company or the Savings Bank may not declare or pay a cash dividend
on any of its shares of common stock if the effect would reduce
stockholders' equity below either the amount required for the
liquidation account discussed above or the applicable regulatory capital
requirements or if such declaration and payment would otherwise violate
regulatory requirements. At September 30, 1997 approximately $8,949,000
of the equity of the Savings Bank was available for distribution as
dividends to the parent company without reducing regulatory capital
below required levels.
2. REORGANIZATION AND MERGER AGREEMENT
On September 2, 1997, the Company entered into a Reorganization and
Merger Agreement ("the agreement") to be acquired by Commercial Federal
Corporation ("Commercial Federal"). Under the terms of the agreement,
Commercial Federal will acquire through a tax-free reorganization all of
the outstanding shares of the Company's common stock in exchange for
Commercial Federal's common stock. The exchange ratio will be determined
based upon the average closing price of Commercial
36
Federal's common stock during a twenty consecutive trading day period
prior to closing. Based on Commercial Federal's closing price on
September 2, 1997, the Company's shareholders would receive 1.30395
shares of Commercial Federal's common stock for each share of the
Company's outstanding common stock. The acquisition is subject to
regulatory approvals, the Company's shareholders' approval and other
conditions and is expected to close in the second fiscal quarter of
1998. The accompanying financial statements do not include any
adjustments giving effect to the agreement.
3. ACCOUNTING POLICIES AND PROCEDURES
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, and its wholly owned subsidiary,
Mid-Continent Federal Savings Bank. The Savings Bank grants mortgage and
consumer loans primarily to customers within the state of Kansas. The
Savings Bank has a wholly owned subsidiary, Laredo Investment, Inc.,
that is engaged in promoting the sale of tax deferred annuities and
receives related commissions. Significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from depository institutions, treasury bills and
interest bearing deposits in other banks purchased with an original
maturity of three months or less.
The Savings Bank is required by regulation to maintain liquid assets in
the form of cash and securities approved by federal regulations, at a
monthly average of not less than 5% of customer deposits and short-term
borrowings.
Investment Securities - Investment securities include securities of the
United States Government and its agencies and are recorded at amortized
cost. Related premiums and discounts are accreted or amortized into
income over the lives of the securities using the level-yield method.
Securities are not adjusted to market value because management has both
the ability and intent to hold these securities to maturity.
Capital Stock of Federal Home Loan Bank - Capital stock of Federal Home
Loan Bank is carried at cost. Dividends received on such stock are
reflected as interest income on investment securities in the
consolidated statements of income.
Mortgage-Related Securities - Mortgage-related securities are recorded
at amortized cost. The related premiums and discounts are accreted or
amortized over the estimated lives of the underlying securities using
the level-yield method. These securities are not adjusted to market
value because management has both the ability and intent to hold these
securities to maturity.
Loans Held for Sale - The Savings Bank's management designates certain
loans receivable at the date of origination or purchase as held for sale
as management does not intend to hold such loans to maturity.
Accordingly, such loans are carried at the lower of cost (outstanding
principal adjusted for net unearned fees and costs) or market value
(determined on an aggregate basis with consideration given to forward
delivery commitments). Such loans are originated or purchased and
intended for sale in the secondary market and are generally sold with
servicing retained by the Savings Bank. Gains or losses on such sales
are recognized utilizing the specific identification method for
financial reporting and income tax purposes at the time of sale. Loan
fees, net discounts, premiums and other related costs are
37
recognized at the time the related loans are sold to third-party
investors. Interest on these loans is included in interest income on
loans receivable.
Loans Receivable - Loans are stated at the amount of unpaid principal
less an allowance for loan losses, undisbursed loan funds and unearned
discounts and loan fees, net of certain direct loan origination costs.
Interest on loans is credited to income as earned and accrued only if
deemed collectible. Loans are placed on nonaccrual status when, in the
opinion of management, the full timely collection of principal or
interest is in doubt. As a general rule, the accrual of interest is
discontinued when principal or interest payments become 90 days past due
or earlier if conditions warrant. When a loan is placed on nonaccrual
status, previously accrued but unpaid interest is reversed against
current income. Subsequent collections of cash may be applied as
reductions to the principal balance, interest in arrears or recorded as
income, depending on management's assessment of the ultimate
collectibility of the loan. Nonaccrual loans may be restored to accrual
status when principal and interest become current and full payment of
principal and interest is expected.
Net loan origination and commitment fees are amortized as a yield
adjustment to interest income using the level-yield method over the
contractual lives of the related loans.
Provision for Loan Losses - SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan," requires the Savings Bank to measure impaired
loans based on the present value of the estimated future cash flows
discounted at the loan's effective rate or based on the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. One to four family residential loans and
consumer loans are collectively evaluated for impairment. Loans on
residential properties with greater than four units and loans on
business properties are evaluated for impairment on a loan by loan
basis. The provision for loan losses also includes an amount which,
based on management's estimate, is necessary to establish a general
valuation allowance sufficient to absorb possible credit losses within
the Savings Bank's loan portfolio. These provisions are made based on
the results of continuing reviews by management of the loan portfolio,
which includes analysis of borrower's financial data and assessment of a
borrower's ability to continue to meet its obligations. These estimates
are susceptible to changes that could result in a material adjustment to
operations. Recovery of the carrying value of such loans is dependent to
a great extent upon economic, operating and other conditions that may be
beyond the Savings Bank's control.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are computed primarily on the straight-line method over the estimated
useful lives of the related assets. The following represents a summary
of estimated useful lives:
Years
Building and improvements 40
Furniture, fixtures and equipment 5-10
Automobiles 3
38
Real Estate Owned - Real estate owned represents foreclosed assets held
for sale and is recorded at fair value as of the date of foreclosure or
transfer less estimated disposal costs (the new basis) and is
subsequently carried at the lower of the new basis or fair value less
selling costs on the current measurement date. Subsequently, properties
are evaluated and any additional declines which reduce the fair value to
less than carrying value are provided for as a provision for losses on
real estate owned. Costs and expenses related to major additions and
improvements are capitalized while maintenance and repairs which do not
improve or extend the lives of the assets are expensed currently. Gains
on the sale of real estate owned for which the Savings Bank grants a
loan are recognized upon disposition of the property to the extent
allowable considering certain down payments and other requirements.
Other Assets - Included in other assets is the excess of cost over fair
value of assets acquired, which is amortized using a straight line
method over the estimated remaining life of the long-term
interest-bearing assets acquired. The excess of cost over fair value of
assets acquired is $22 as of September 30, 1996 and has been fully
amortized as of September 30, 1997.
Mortgage Servicing Rights - The Savings Bank adopted Statement of
Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, effective for the year ended September 30, 1997. For each
servicing contract in existence before January 1, 1997, previously
recognized originated and purchased servicing rights and "excess
servicing" receivables are combined, net of any previously recognized
servicing obligations under that contract, as a servicing asset or
liability. The Statement provides that servicing assets and other
retained interests in transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interest, if any, based on their relative fair values at the date of the
transfer, and servicing assets and liabilities be subsequently measured
by (1) amortization in proportion to and over the period of estimated
net servicing income or loss, and (2) assessment for asset impairment or
increased obligation based on their fair values. The implementation of
this Statement did not have a material impact on the consolidated
financial statements.
Originated mortgage servicing rights are recorded at cost based upon the
relative fair values of the loans and the servicing rights. Servicing
release fees paid on comparable loans and discounted cash flows are used
to determine estimates of fair values. Purchased mortgage servicing
rights are acquired from independent third-party originators and are
recorded at the lower of cost or fair value. These rights are amortized
in proportion to and over the period of expected net servicing income.
Impairment Evaluation - The Savings Bank evaluates the carrying value of
capitalized mortgage servicing rights on a periodic basis based on their
estimated fair value. For purposes of evaluating and measuring
impairment of capitalized servicing rights, in accordance with SFAS No
125, the Savings Bank stratifies the rights based on their predominant
risk characteristics. The significant risk characteristics considered by
the Savings Bank are loan type, period of origination and stated
interest rate. If the fair value estimated, using a discounted cash flow
methodology, is less than the carrying amount of the portfolio, the
portfolio is written down to the amount of the discounted expected cash
flows utilizing a valuation allowance. The Savings Bank utilizes
consensus market prepayment assumptions and discount rates to evaluate
its capitalized servicing rights which considers the risk
characteristics of the underlying servicing rights. For the years ended
1995 and 1996, there were no write downs or valuation allowances
established for capitalized servicing. A write down and valuation
allowance of $10 was established at September 30, 1997.
39
Sale of Mortgage Servicing Rights - The Savings Bank recognizes gains on
sales of mortgage servicing rights when a legal closing of the sale
occurs with title passing to the buyer, all significant risks and
rewards of ownership have transferred to the buyer, including risks
related to default prepayment (including no uncapped risks related to
defaults or prepayments) and there are no significant unresolved
contingencies. The Savings Bank defers the gain on sale of servicing
until these conditions are met.
Income Taxes - The Company, the Savings Bank and its subsidiary file a
consolidated Federal income tax return. State income tax returns are
individually filed for each of the entities.
In years prior to September 30, 1997, thrift institutions were permitted
under the Internal Revenue Code to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. This addition differs from the bad debt experience used for
financial accounting purposes. Bad debt deductions for income tax
purposes are included in taxable income of later years only if the bad
debt reserve is used subsequently for purposes other than to absorb bad
debt losses. Under SFAS No. 109, a deferred tax liability is provided
only to the extent the tax bad debt reserve exceeds the base year
reserve. The base year reserve is the tax bad debt reserve as of
September 30, 1988. Retained earnings as of September 30, 1997 includes
approximately $2,071 representing such bad debt reserve as of the base
year for which no deferred income taxes have been provided.
The Small Business Job Protection Act of 1996 (the "Act") repeals the
special bad debt reserve method for thrift institutions. The Act
requires thrifts to recapture any reserves accumulated after 1987 but
forgives taxes owed on reserves accumulated prior to 1988. Thrift
institutions will be given six years to account for the recaptured
excess reserves. The Savings Bank must recapture excess reserves
beginning with the year ended September 30, 1997. Thrift institutions
will be permitted to delay the timing of this recapture for up to two
years depending upon whether they meet certain residential loan tests. A
deferred tax liability has been provided on the amount of bad debt
reserve that exceeds the base year reserve.
Revenue Recognition - Servicing fees, interest income, late fees, and
other ancillary income related to the Savings Bank's servicing and
lending activities are accrued as earned.
Earnings Per Share - Common equivalent shares include shares issuable
upon exercise of dilutive options outstanding determined under the
treasury stock method. The Company accounts for the shares acquired by
its ESOP in accordance with the American Institute of Certified Public
Accountants' (AICPA) Statement of Position 93-6 and the shares acquired
for its Management Stock Bonus Plan (MSBP) in a manner similar to the
ESOP shares; shares acquired by the ESOP and MSBP are not considered in
the weighted average shares outstanding until the shares are committed
for allocation or vested to an employee's individual account. The
weighted average number of common and common equivalent shares
outstanding are 2,087,668; 1,962,849 and 1,938,765 as of September 30,
1995, 1996 and 1997.
Regulatory Compliance - The Savings Bank is subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Savings
Bank must meet specific capital guidelines that involve quantitative
measures of the Savings Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The
40
Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures that have been established by regulation to ensure
capital adequacy require the Savings Bank to maintain minimum capital
amounts and ratios (set forth in the table below). The Savings Bank's
primary regulatory agency, the OTS, requires that the Savings Bank
maintain minimum ratios of tangible capital (as defined in the
regulations) of 1.5%, core capital (as defined) of 3%, and total
risk-based capital (as defined) of 8%. The Savings Bank is also subject
to prompt corrective action capital requirement regulations set forth by
the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires
the Savings Bank to maintain a minimum of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of September 30, 1997, that the Savings Bank meets all
capital adequacy requirements to which it is subject.
As of September 30, 1997 and 1996, the most recent notification from the
OTS categorized the Savings Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as
"well capitalized" the Savings Bank must maintain minimum total
risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
To Be Categorized as
"Well Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ ----------- ------- ---------- ----------
As of September 30, 1997:
Tangible capital
(to total assets) $36,179 8.9 % $ 6,079 1.5 % N/A N/A
Core capital
(to total assets) 36,179 8.9 % 12,158 3.0 % N/A N/A
Total risk-based capital
(to risk weighted assets) 36,633 22.6 % 12,954 8.0 % 22,480 10.0 %
Tier I risk-based capital
(to risk weighted assets) 36,179 16.1 % N/A N/A 13,488 6.0 %
Tier I leverage capital
(to average assets) 36,179 9.6 % N/A N/A 18,774 5.0 %
41
To Be Categorized as
"Well Capitalized"
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ---------- ------- --------- ---------
As of September 30, 1996:
Tangible capital
(to total assets) $31,827 9.3 % $ 5,122 1.5 % N/A N/A
Core capital
(to total assets) 31,827 9.3 % 10,244 3.0 % N/A N/A
Total risk-based capital
(to risk weighted assets) 32,281 24.5 % 10,551 8.0 % 17,703 10.0 %
Tier I risk-based capital
(to risk weighted assets) 31,827 24.1 % N/A N/A 10,622 6.0 %
Tier I leverage capital
(to average assets) 31,827 10.9 % N/A N/A 14,573 5.0 %
A reconciliation of the Savings Bank's stockholders' equity under
generally accepted accounting principles to regulatory capital amounts
as of September 30, 1997 is as follows:
Stockholders' equity, core and tangible capital - as reported by the Savings Bank $36,179
General loan loss reserves 454
-------
Risk-based capital $36,633
=======
Estimates - The preparation of these financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of September 30, 1995, 1996 and 1997 and the reported
amounts of revenues and expenses during the years then ended.
Significant estimates include loan loss and real estate owned reserves,
valuation of mortgage servicing rights and fair value of financial
instruments. Actual results could differ from those estimates.
New Statements of Financial Accounting Standards - In February 1997, the
FASB issued SFAS No. 128, Earnings per Share. The Statement establishes
standards for computing and presenting earnings per share ("EPS"). It
replaces the presentation of primary EPS with a presentation of basic
EPS. The Statement is effective for the Company's financial statements
as of September 30, 1998. The Company's earnings per share under the new
standard are not materially different from that reported.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure. The Statement establishes standards
for disclosing information about an entity's capital structure. The
Statement is effective for the Company's financial statements as of
September 30, 1998. The Company does not anticipate that the
implementation of this Statement will have a material impact on the
consolidated financial statements.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income.
The Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This
Statement requires
42
that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement requires that the Company (a)
classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position. The Statement is effective for the Company's financial
statements as of September 30, 1999. The Company does not anticipate
that the implementation of this Statement will have a material impact on
the consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective for
the Company's financial statements as of September 30, 1999. The Company
anticipates that the implementation of this Statement may require
additional disclosures.
Reclassifications - Certain reclassifications have been made to the 1995
and 1996 consolidated financial statements in order to conform with the
1997 presentation.
4. INVESTMENT SECURITIES
September 30, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
United States Treasury and other U.S.
Government agencies:
Securities maturing within one year $ 2,000 $ 25 $ 1,975
Securities maturing after one year
through five years 13,332 606 12,726
Securities maturing after five years
through ten years 17,500 $ 16 441 17,075
Securities maturing after ten years 53,403 111 1,463 52,051
------- ------- ------- -------
$86,235 $ 127 $ 2,535 $83,827
======= ======= ======= =======
43
September 30, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
United States Treasury and other U.S.
Government agencies:
Securities maturing within one year $ 8,455 $ 5 $ 161 $ 8,299
Securities maturing after one year
through five years 4,996 87 4,909
Securities maturing after five years
through ten years 27,605 173 83 27,695
Securities maturing after ten years 38,334 30 47 38,317
------- ------- ------- -------
$79,390 $ 208 $ 378 $79,220
======= ======= ======= =======
As of September 30, 1996 and 1997, the Savings Bank held callable
securities with aggregate carrying values of $76,801 and $70,830,
respectively. The securities bear interest at rates ranging from 4.98%
to 8.5% with stated maturity dates ranging from 1997 to 2011.
Certain investment securities have been pledged as collateral for
deposits and advances from the Federal Home Loan Bank (See Notes 12 and
14).
5. MORTGAGE-RELATED SECURITIES
September 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Pass-through certificates - fixed rate:
Government National Mortgage Association $ 6,151 $ 224 $ 6,375
Federal National Mortgage Association 365 12 377
Federal Home Loan Mortgage Corporation 11,853 138 $ 176 11,815
Mortgage Guarantee Insurance Corporation 59 3 62
Pass-through certificates - adjustable rate:
Government National Mortgage Association 5,043 24 5,019
Federal National Mortgage Association 2,616 70 2,546
Federal Home Loan Mortgage Corporation 6,219 119 6,100
Mortgage Guarantee Insurance Corporation 2,077 5 2,072
-------- ------ ------- -------
$ 34,383 $ 377 $ 394 $34,366
======== ====== ======= =======
44
September 30, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Pass-through certificates - fixed rate:
Government National Mortgage Association $ 5,569 $ 303 $ 5,872
Federal National Mortgage Association 345 18 $ 1 362
Federal Home Loan Mortgage Corporation 7,742 172 18 7,896
Mortgage Guarantee Insurance Corporation 12 1 13
Pass-through certificates - adjustable rate:
Government National Mortgage Association 4,302 77 4,379
Federal National Mortgage Association 2,352 54 2,298
Federal Home Loan Mortgage Corporation 5,865 62 5,803
Mortgage Guarantee Insurance Corporation 1,937 4 1,933
------- ------- ------- -------
$28,124 $ 571 $ 139 $28,556
======= ======= ======= =======
Certain mortgage-related securities have been pledged as collateral for
deposits and advances from the Federal Home Loan Bank (See Notes 12 and
14).
6. LOANS RECEIVABLE
1996 1997
First mortgage loans:
Residential - one-to-four units $ 157,494 $ 217,152
Secured by other properties 1,013 857
Construction loans 17,367 17,534
--------- ---------
Total first mortgage loans 175,874 235,543
--------- ---------
Other installment loans:
Property improvements, auto and other 5,195 6,375
Mobile home 305 128
Deposits 769 795
--------- ---------
Total installment loans 6,269 7,298
--------- ---------
Total loans 182,143 242,841
Less:
Unearned loan fees and deferred costs 511 255
Unamortized premiums on loans purchased (354) (737)
Undisbursed loan funds 10,407 9,547
Allowance for loan losses 421 465
--------- ---------
$ 171,158 $ 233,311
========= =========
45
There were no commercial real estate or business loans purchased or
originated during 1995, 1996 or 1997. The Savings Bank has lending
activities primarily in the State of Kansas.
The Savings Bank originates and purchases both adjustable and fixed rate
loans. The approximate composition of these loans is as follows:
September 30, 1996
--------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
----------------------------------------- ---------------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
1 mo. - 1 yr. $ 18,246 1 mo. - 1 yr. $ 50,379
1 yr. - 3 yrs. 2,009 1 yr. - 3 yrs. 48,341
3 yrs. - 5 yrs. 2,219 3 yrs. - 5 yrs. 9,419
5 yrs. - 10 yrs. 5,422 5 yrs - 10 yrs. 1,170
10 yrs. - 20 yrs. 28,615
Over 20 years 16,323
-------- ---------
$ 72,834 $ 109,309
======== =========
September 30, 1997
----------------------------------------------------------------------------------------------------------
Fixed Rate Adjustable Rate
----------------------------------------------- ------------------------------------------
Term to Term to Rate
Maturity Book Value Adjustment Book Value
1 mo. - 1 yr. $ 18,296 1 mo. - 1 yr. $ 55,765
1 yr. - 3 yrs. 2,119 1 yr. - 3 yrs. 66,989
3 yrs. - 5 yrs. 2,994 3 yrs. - 5 yrs. 21,098
5 yrs. - 10 yrs. 5,843 5 yrs - 10 yrs. 1,091
10 yrs. - 20 yrs. 49,450
Over 20 years 19,196
-------- ---------
$ 97,898 $ 144,943
======== =========
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed to the weekly average yield on United States
Treasury securities adjusted to a constant maturity of 1 year.
The Savings Bank is subject to numerous lending-related regulations.
Under FIRREA, the Savings Bank may not make real estate loans to one
borrower in excess of the greater of 15% of its unimpaired capital and
surplus or $500, whichever is greater. As of September 30, 1997, the
Savings Bank is in compliance with this limitation.
46
A summary of the activity in the allowance for loan losses is as
follows:
1995 1996 1997
Balance, beginning of year $ 275 $ 423 $ 421
Provision charged to expense 224 75 143
Losses charged against the allowance (80) (90) (117)
Recoveries 4 13 18
----- ----- -----
Balance, end of year $ 423 $ 421 $ 465
===== ===== =====
During 1995, the Savings Bank restructured loans with a carrying value
of approximately $3,039. No provision for loss was considered necessary
based on the restructured terms and the cash flows expected to be
generated by the underlying collateral. The Savings Bank did not engage
in any troubled debt restructurings during the years ended September 30,
1995, 1996 and 1997. No loans were considered impaired under SFAS No.
114 during the years ended September 30, 1995, 1996 and 1997.
Aggregate loans to executive officers, directors and their associates,
including companies in which they have partial ownership interest did
not exceed 5% of stockholders' equity as of September 30, 1996 and 1997.
Management believes such loans were made under terms and conditions
substantially the same as loans made to parties not affiliated with the
Savings Bank.
As of September 30, 1996 and 1997, loans totaling approximately $484 and
$932, respectively, were on nonaccrual status. Gross interest income
would have increased by $45 and $79 for the year ended September 30,
1996 and 1997, respectively, for nonaccrual status loans
7. MORTGAGE LOANS SERVICED
The Savings Bank services primarily single family residential loans for
others which are not included in the accompanying consolidated balance
sheets. The approximate unpaid principal balances of these loans are
summarized as follows:
1995 1996 1997
Government National
Mortgage Association $ 902,977 $ 875,381 $ 854,467
Federal National
Mortgage Association 132,209 115,492 100,778
Federal Home
Loan Mortgage Corporation 146,624 231,515 330,225
Other investors 8,082 6,765 5,861
---------- ---------- ----------
$1,189,892 $1,229,153 $1,291,331
========== ========== ==========
47
The Savings Bank services loans in 16 states. The five largest state
concentrations, based on unpaid principal balances, are as follows:
Kansas (53.0%), Oklahoma (23.1%), Louisiana (8.0%), Michigan (8.3%), and
Illinois (3.5%), aggregating approximately 95.9% of the portfolio. The
risk inherent in such concentrations is dependent not only upon regional
and general economic stability which affects property values, but also
the financial well-being and creditworthiness of the borrower.
Mortgage loans and their related servicing rights are sold under
agreements that define certain criteria for the mortgage loan. If the
criteria is not met, the Savings Bank may be required to repurchase the
mortgage loan. Conforming conventional loans serviced by the Savings
Bank are securitized through FNMA or FHLMC programs on a non-recourse
basis, whereby foreclosure losses are generally the responsibility of
FNMA or FHLMC and not the Savings Bank. Similarly, the government loans
serviced by the Savings Bank are securitized through GNMA programs,
whereby the Savings Bank is insured against loss by the Federal Housing
Administration ("FHA") or partially guaranteed against loss by the
Veterans Administration ("VA"). With respect to sales of loans, under
certain circumstances, the Savings Bank may become liable for the unpaid
principal and interest on defaulted loans or other loans if there has
been a breach of representations or warranties. In the opinion of
management, adequate reserves have been established for losses that may
be incurred as a result of obligations to repurchase mortgage loans.
The servicing of loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to
investors and foreclosure processing. Loan servicing income includes
servicing fees from investors and certain charges collected from
borrowers, such as late payment fees. The Savings Bank held borrowers'
escrow balances and principal and interest payments related to loans
serviced for others of $19,169, $16,917 and $19,870 as of September 30,
1995, 1996 and 1997, respectively. These balances are segregated in
special bank accounts which are included in deposits in the accompanying
consolidated balance sheets.
In connection with its fiduciary responsibilities, the Savings Bank
advances funds relative to the foreclosure of serviced loans, which are
repaid from sale proceeds by way of reimbursement from investors or
through claims submitted to private mortgage insurance companies, the
FHA and/or the VA. These advances totaled $1,995 and $1,741 as of
September 30, 1996 and 1997, respectively, and are included in other
assets in the accompanying consolidated balance sheets.
8. LOANS HELD FOR SALE
A summary of gross realized gains (losses) on sales of loans held for
sale is as follows:
1996 1997
Loans held for sale $ 13,787 $ 13,964
Deferred net discounts, premiums and
other related costs (69) (70)
-------- --------
Loans held for sale, net $ 13,718 $ 13,894
======== ========
48
A summary of gross unrealized gains (losses) on sales of loans held for
sale is as follows:
1995 1996 1997
Gross realized gains $ 794 $ 1,651 $ 1,232
Gross realized losses (88) (284) (38)
------- ------- -------
Gains on sale of loans, net $ 706 $ 1,367 $ 1,194
======= ======= =======
9. PREMISES AND EQUIPMENT
1996 1997
Land $ 2,099 $ 2,099
Building and improvements 4,555 5,622
Furniture, fixtures and equipment 2,980 3,219
Automobiles 38 38
------- -------
9,672 10,978
Less accumulated depreciation (3,401) (3,756)
------- -------
$ 6,271 $ 7,222
======= =======
10. REAL ESTATE OWNED
1996 1997
Real estate owned (acquired by foreclosure or
by deed in lieu of foreclosure) $ 62 $ 60
Less allowance for losses (34) (19)
---- ----
$ 28 $ 41
==== ====
A summary of the activity in the allowance for losses on real estate
owned is as follows:
1995 1996 1997
Balance, beginning of year $ 16 $ 51 $ 34
Provision charged to expense 81 18 10
Losses charged against the allowance (47) (35) (25)
Recoveries 1
---- ---- ----
Balance, end of year $ 51 $ 34 $ 19
==== ==== ====
49
11. MORTGAGE SERVICING RIGHTS
The following is an analysis of the changes in mortgage servicing
rights:
1995 1996 1997
Balance, beginning of year $ 6,312 $11,625 $12,496
Additions:
Purchased mortgage servicing rights 8,107 1,970 2,235
Originated mortgage servicing rights 322 589 661
------- ------- -------
8,429 2,559 2,896
Reductions:
Amortization 1,305 1,651 1,742
Bulk sales 1,805
Servicing released sales 6 37 25
Impairment loss 10
------- ------- -------
3,116 1,688 1,777
------- ------- -------
Balance, end of year $11,625 $12,496 $13,615
======= ======= =======
During 1995, the Savings Bank sold (in bulk) the mortgage servicing
rights to loans with a principal balance of approximately $304,000
resulting in a gain of $1,961. No such sales occurred in 1996 or 1997.
50
12. DEPOSITS
1996 1997
------------------------- -----------------------
Amount Percent Amount Percent
Passbook and checking accounts:
Demand and NOW accounts, including
noninterest bearing deposits of
approximately $22,384 and
$26,326 as of September 30,
1996 and 1997 (rate, excluding
noninterest bearing deposits, of 2.6%
as of September 30, 1996 and 1997) $ 36,785 17.1% $ 43,463 18.4%
Money market accounts (rate of 2.65%
as of September 30, 1996 and 1997) 12,387 5.8 14,732 6.2
Passbook savings accounts (rate of 2.75%
as of September 30, 1996 and 1997) 8,690 4.1 9,106 3.9
--------- ---- -------- ----
Total passbook and checking accounts 57,862 27.0 67,301 28.5
--------- ---- -------- ----
Certificate accounts:
2.00% to 3.00% 12 4
3.01% to 4.00%
4.01% to 5.00% 6,134 2.9 2,278 1.0
5.01% to 6.00% 106,577 49.7 142,341 60.2
6.01% to 7.00% 43,526 20.3 24,144 10.2
7.01% to 8.00% 275 0.1 265 0.1
8.01% to 9.00% 107
--------- ---- -------- ----
Total certificate accounts 156,631 73.0 169,032 71.5
--------- ---- -------- ----
$ 214,493 100% $236,333 100%
========= ==== ======== ====
Weighted average interest rate on deposits
during year 4.63% 4.75%
==== ====
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100 as of September 30, 1996 and 1997 was $57,151 and
$52,447, respectively.
Certain savings deposits of public institutions were collateralized by
investment and mortgage-related securities with aggregate amortized cost
of $41,371 and aggregate market value of $40,281 as of September 30,
1996, and aggregate amortized cost of $50,849 and aggregate market value
of $51,168 as of September 30, 1997.
51
At September 30, 1997, certificate accounts mature as follows:
1998 $ 97,076
1999 55,006
2000 8,195
2001 2,113
2002 5,574
Thereafter 1,068
--------
$169,032
========
A summary of interest expense by deposit type is as follows:
1995 1996 1997
Passbook savings deposits $ 239 $ 238 $ 241
NOW accounts and money market
demand deposits 565 756 1,015
Certificate accounts 6,697 8,491 9,662
------ ------ --------
$7,501 $9,485 $ 10,918
====== ====== ========
13. INCOME TAXES
1995 1996 1997
Current $ 2,668 $ 1,363 $ 2,333
Deferred (225) 530 344
------- ------- -------
$ 2,443 $ 1,893 $ 2,677
======= ======= =======
Income tax expense has been provided at effective rates of 37.3%, 37.7%
and 39.1% for the years ended September 30, 1995, 1996 and 1997,
respectively. The differences between such effective rates and the
statutory Federal income tax rate computed on income before income tax
expense result from the following:
1995 1996 1997
Amount % Amount % Amount %
Federal income tax expense
computed at statutory
rate $ 2,227 34.0 $ 1,706 34.0 $ 2,328 34.0
Increases (decreases) in
taxes resulting from:
State income taxes 304 4.6 181 3.6 303 4.4
Merger related costs 63 0.9
Amortization of cost over
fair value of assets
acquired 26 0.4 21 0.4 8 0.1
Other (114) (1.7) (15)(0.3) (25) (0.3)
------- ---- ------- ---- ------- ----
$ 2,443 37.3 $ 1,893 37.7 $ 2,677 39.1
======= ==== ======= ==== ======= ====
52
Deferred tax expense results from timing differences in the recognition
of revenue and expense for tax and financial statement purposes. The
sources of these differences and the tax effect of each were as follows:
1995 1996 1997
Market adjustment on loans held for sale $(134) $(125) $ 67
Bad debt reserves 2 164 (10)
Depreciation (7) 49 (4)
Deferred loan fees and costs 12 402 113
Excess amortization of mortgage
servicing rights (72) (28) (38)
Outside Directors' Retirement Plan accrual (52) (1) (1)
Management Stock Bonus Plan accrual (19) 19
Federal Home Loan Bank stock dividends 66 138
Other 45 3 60
----- ----- -----
$(225) $ 530 $ 344
===== ===== =====
The components of net deferred tax liabilities as of September 30, 1996
and 1997 are as follows:
1996 1997
Deferred tax assets:
Allowance for loan losses $ 173 $ 183
Excess amortization of mortgage servicing rights 100 138
Outside Directors' Retirement Plan accrual 53 54
Management Stock Bonus Plan accrual 19
Market adjustment on loans held for sale 94 27
Other 72 7
------ ------
511 409
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 396 534
Bad debt reserves 402 402
Prepaid expenses 90 98
Fixed assets - depreciation 70 66
Deferred loan fees 238 351
Other 13
------ ------
1,209 1,451
------ ------
Net deferred tax liabilities $ 698 $1,042
====== ======
53
14. ADVANCES FROM FEDERAL HOME LOAN BANK
1996 1997
----------------------------------------- --------------------------------------------
Weighted Weighted
Fiscal Average Fiscal Average
Year Interest Year Interest
Maturity Amount Rate Maturity Amount Rate
1997 $ 63,200 5.98 % 1998 $ 80,800 6.03 %
1998 18,500 6.43 2001 10,000 5.85
2002 31,000 5.72
---------
$ 81,700 6.08 % $ 121,800 5.94 %
======== =========
The advances are collateralized as of September 30, 1997 by a blanket
pledge agreement, including all Capital Stock of Federal Home Loan Bank,
qualifying first mortgage loans, certain mortgage-related securities and
other investment securities.
The Savings Bank has entered into a line-of-credit agreement with the
Federal Home Loan Bank wherein the Savings Bank can borrow up to
approximately $68,292, subject to certain limitations. As of September
30, 1997, there was $7,300 outstanding relative to this agreement. The
agreement expires December 26, 1997.
15. EMPLOYEE BENEFIT PLANS
Pension Plan - The Savings Bank has a noncontributory defined-benefit
pension plan covering substantially all employees completing one year of
employment and 1,000 hours of service. Plan benefits are based upon
years of service and compensation. The Savings Bank funding policy is,
acting under the advice of the actuary for the plan, that the Savings
Bank intends to make contributions to the trust in such amounts and at
such times as they are required to maintain the plan and trust for its
employees in compliance with ERISA and Section 412 of the Internal
Revenue Code.
54
The following table sets forth the funded status of the plan:
September 30,
1996 1997
Projected benefit obligation:
Vested benefits $ 1,111 $ 1,276
Nonvested benefits 49 66
------- -------
Accumulated benefit obligation 1,160 1,342
Effect of projected future compensation levels 453 581
------- -------
Projected benefit obligation 1,613 1,923
Fair value of plan assets 1,162 1,314
------- -------
Projected benefit obligation in excess of fair value of plan assets 451 609
Unrecognized net obligation existing at initial
application of SFAS No. 87 (141) (131)
Unrecognized net loss (52) (144)
------- -------
Accrued pension cost $ 258 $ 334
======= =======
The assets of the plan consist primarily of certificates of deposit
which are included in the Savings Bank's deposits.
Net periodic pension cost includes the following:
September 30,
1995 1996 1997
Service cost $ 172 $ 181 $ 214
Interest cost 83 101 110
Actual return on assets (63) (87) (104)
Net amortization and deferral 7 19 20
----- -------- -------
Net periodic pension cost $ 199 $ 214 $ 240
===== ======== =======
For each of the plan years ending September 30, 1995, 1996 and 1997, the
weighted average discount rate used in determining the actuarial present
value of the projected obligation was 7.0%, the expected rate of
increase in future salary levels for plan beneficiaries was 4.0% and the
expected long-term rate of return on plan assets was 7.5%.
Upon execution of the Reorganization and Merger Agreement (Note 2), the
pension plan will be merged with Commercial Federal's existing plan.
Employee Stock Ownership Plan - The Company has an ESOP for the benefit
of Savings Bank employees who meet the eligibility requirement which
includes having completed 1,000 hours of service within a 12 month
period with the Company. The ESOP Trust acquired 136,000 shares of
55
common stock in the Company's initial public offering with proceeds from
a loan from the Company. The Savings Bank makes cash contributions to
the ESOP on a quarterly basis sufficient to enable the ESOP to make the
required loan payments to the Company.
The note payable referred to above bears interest at prime rate
adjustable quarterly with interest payable quarterly and future
principal payable in nine installments of $136 beginning December 31,
1995 and annually thereafter and one installment of $68 payable on June
26, 2004. The loan is secured by the shares of the stock purchased.
As the debt is repaid, shares are released from collateral and allocated
to qualified employees based on the proportion of debt service paid in
the year. The Company accounts for its ESOP in accordance with AICPA
Statement of Position 93-6. Accordingly, the shares pledged as
collateral are reported as a reduction of stockholders' equity in the
consolidated balance sheet. As shares are released from collateral, the
Company reports compensation expense equal to the current market price
of the shares, and the shares become outstanding for earnings per share
computations. Dividends on allocated ESOP shares are recorded as a
reduction of retained earnings.
Compensation expense related to the ESOP was $172, $246 and $361 for the
years ended September 30, 1995, 1996 and 1997, respectively. Following
is a summary of shares held in the ESOP Trust as of September 30, 1997:
Allocated shares 32,910
Shares released for allocation or committed to be released 10,200
Unreleased shares 90,719
--------
Total ESOP shares 133,829
========
Fair value of unreleased shares at September 30, 1997 $ 3,470
========
The ESOP will terminate, as of the date of acquisition by Commercial
Federal Corporation (Note 2) and the ESOP will allocate and distribute
Plan assets to Plan participants and beneficiaries in accordance with
the terms of the Plan.
Management Stock Bonus Plan - The Savings Bank adopted a Management
Stock Bonus Plan ("MSBP"), the objective of which is to enable the
Savings Bank to retain personnel of experience and ability in key
positions of responsibility. Employees of the Savings Bank are eligible
to receive benefits under the MSBP at the sole discretion of a committee
appointed by the Board of Directors of the Savings Bank.
The MSBP is managed by trustees who are non-employee directors of the
Savings Bank. The MSBP purchased 74,833 shares of the Company's stock
for $995 during 1995. These shares were granted in the form of
restricted stock payable 20% upon date of award (June 27, 1995) and the
remaining equally over a four year period beginning June 27, 1996.
Compensation expense in the amount of the fair market value of the
common stock at the date of the grant to the employee will be recognized
over the period during which the shares are payable. A recipient of such
restricted stock will be entitled to all voting and other stockholder
rights (including the right to receive dividends on vested and nonvested
shares), except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in escrow.
If a holder of such restricted stock terminates
56
employment for reasons other than death, disability or retirement, the
employee forfeits all rights to the allocated shares under restriction.
If the participant's service terminates as a result of death,
disability, retirement or a change in control of the Savings Bank, all
restrictions expire and all shares allocated become unrestricted.
Upon entering into the Reorganization and Merger Agreement (Note 2) all
plan shares subject to restrictions were immediately 100% earned and
non-forfeitable and subject to distribution to Plan participants. As a
result, the Company recognized the remaining unearned compensation of
$547 related to the Plan as of September 30, 1997.
Stock Option Plan - In connection with the stock conversion, the
Company's Board of Directors adopted the 1994 Stock Option Plan (the
"Option Plan"). Pursuant to the Option Plan, 224,825 shares of common
stock are reserved for issuance by the Company upon exercise of stock
options granted to officers, directors and employees of the Company from
time to time under the Option Plan. The purpose of the Option Plan is to
provide additional incentive to certain officers, directors and key
employees by facilitating their purchase of a stock interest in the
Company.
The Option Plan provides for a term of ten years, after which no awards
may be made, unless earlier terminated by the Board of Directors
pursuant to the Option Plan. The Option Plan is administered by a
committee of at least three non-employee directors designated by the
Board of Directors (the "Option Committee"). The Option Committee
selects the employees to whom options are to be granted and the number
of shares to be granted. The option price may not be less than 100% of
the fair market value of the shares on the date of the grant, and no
option shall be exercisable after the expiration of ten years from the
grant date. In the case of any employee who owns more than 10% of the
outstanding common stock at the time the option is granted, the option
price may not be less than 110% of the fair market value of the shares
on the date of the grant, and the option shall not be exercisable after
the expiration of five years from the grant date. The exercise price may
be paid in cash, shares of the common stock, or a combination of both.
On January 27, 1995 the Option Committee granted options for 165,476
shares of common stock, at an exercise price of $11.75 (market value at
date of grant) per share. All such options are exercisable immediately
(for nonemployee directors) or otherwise generally at the rate of
one-third following one year after the date of the grant and one-third
annually thereafter. Options on 161,773 shares are exercisable and
outstanding at September 30, 1997. Options on 3,703 shares were
exercised during the year ended September 30, 1997.
The stock option plan is accounted for under Accounting Principles Board
("APB") Opinion No. 25. The disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, are not required as all of the
stock options were granted prior to the date of disclosure requirements
of SFAS No. 123.
Upon entering into the Reorganization and Merger Agreement (Note 2), all
outstanding stock option awards became immediately exercisable. If the
merger is treated as a pooling of interests for accounting purposes,
each outstanding option to purchase Company Common Stock will be
converted to an economically equivalent number of Commercial Federal
Corporation Common Stock shares. However, if the merger is not treated
as a pooling of interests for accounting purposes, then the Option Plan
will be terminated and each holder of options will receive a cash
payment in the amount of the per share
57
value of the optioned shares, less the exercise price of such options,
net of any cash which must be withheld under federal and state income
tax requirements.
16. OUTSIDE DIRECTORS' RETIREMENT PLAN
The Savings Bank has a consultation and retirement plan for outside
directors which became effective January 1, 1995. The plan provides
retirement benefits for outside directors after they have completed ten
years of service to the Savings Bank and reached age 65. The benefits
include $300 per month payment for 120 months beginning at age 75. In
the event of death, disability or retirement of a director on or after
age 65 or in the event of a change in control of the Company or the
Savings Bank, such payments will commence to the director or their
beneficiary as if age 75 was attained. Management estimates
approximately $114 relate to severance benefits payable upon
consummation of the Reorganization and Merger (Note 2). Expense related
to the retirement plan is amortized ratably over the service period
which is also the vesting period. Total expense related to this plan was
$141, $10 and $10 for the years ended September 30, 1995, 1996 and 1997,
respectively. The plan is unfunded.
17. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1996, the Savings Bank had commitments to originate
loans approximating $63,743 of which approximately $39,491 were
fixed-rate (interest rates ranging from 6.00% to 9.00%) and $24,252 were
floating rate commitments. As of September 30, 1997, the Savings Bank
had commitments to originate loans approximating $87,584 of which
approximately $49,481 were fixed-rate (interest rates ranging from 4.75%
to 8.5%) and $38,103 were floating rate commitments. These commitments
are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. Certain of the commitments are expected to expire
without being fully drawn upon; the total commitments amount disclosed
above does not necessarily represent future cash requirements due to
normal fallout experience. The Savings Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained if considered necessary by the Savings Bank upon extension of
credit is based on management's credit evaluation of the borrower.
As of September 30, 1996 and 1997, the Savings Bank has approximately
$28,345 and $34,191 of commitments to sell loans to third parties, which
includes $28,345 and $32,246 of forward commitments to sell
mortgage-related securities, respectively. These instruments contain an
element of risk in the event the counterparties may be unable to meet
the terms of such agreements. In the event the parties to delivery
commitments were unable to fulfill their obligations, the Savings Bank
would be required to sell its product to other parties and would be
exposed to market fluctuations. The Savings Bank minimizes its risk
exposure by limiting the counterparties to those that meet established
credit and capital guidelines. Management does not expect any
counterparty to default on its obligations and, therefore, does not
expect to incur any cost due to counterparty default. The Savings Bank
does not require nor place collateral for any delivery commitments. Any
unrealized gain or loss on these commitment obligations are considered
in conjunction with the Savings Bank's lower of cost or market valuation
of its loans held for sale.
The Savings Bank is contingently liable on loans sold with recourse. The
principal balance of these loans is $207 as of September 30, 1997.
58
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts have been determined by the Company using
available market information and a selection from a variety of valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of
the amount the Company could realize in a current market exchange. The
use of different market assumptions and estimation methodologies may
have a material effect on the estimated fair value amounts.
The estimated fair value of the Company's financial instruments as of
September 30, 1996 and 1997 are as follows:
1996 1997
--------------------- --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 5,618 $ 5,618 $ 17,327 $ 17,327
Investment securities 86,235 83,827 79,390 79,220
Capital stock of Federal Home
Loan Bank 4,327 4,327 6,675 6,675
Mortgage-related securities 34,383 34,366 28,124 28,556
Loans held for sale 13,718 13,816 13,894 14,078
Loans receivable 171,158 173,295 233,311 236,697
Mortgage servicing rights 12,496 18,326 13,615 19,508
Liabilities:
Deposits 214,493 215,016 236,333 237,311
Advances from Federal Home
Loan Bank 81,700 81,857 121,800 121,549
Accrued and other liabilities 4,683 4,683 4,039 4,039
1996 1997
-------------------- --------------------
Contract Estimated Contract Estimated
or Unrealized or Unrealized
Notional Gain Notional Gain
Amount (Loss) Amount (Loss)
Off-balance sheet financial instruments:
Lending commitments - fixed rate, net $ 39,491 $ 117 $ 49,481 $ 235
Lending commitments - floating rate 24,252 38,103
Commitments to sell loans 28,345 (64) 34,191 150
The following methods and assumptions were used to estimate the fair
value of the financial instruments.
Cash and Cash Equivalents and Accrued and Other Liabilities - The
carrying amounts of cash and cash equivalents and accrued and other
liabilities are a reasonable estimate of their fair value.
59
Investment Securities, Mortgage-Related Securities and Loans Held for
Sale - Estimated fair values of investment securities, mortgage-related
securities and loans held for sale are based on quoted market prices
where available. If quoted market prices are not available, fair values
are estimated using quoted market prices for similar instruments.
Capital Stock of Federal Home Loan Bank - The carrying value of capital
stock of Federal Home Loan Bank approximates its fair value.
Mortgage Servicing Rights - Fair values are determined by discounting
the estimated future net cash flows using consensus market prepayment
assumptions and discount rates which consider the risk characteristics
of the underlying servicing rights. The significant risk characteristics
considered by the Company are loan type, period of origination and
interest rate.
Loans Receivable - Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as single
family residential mortgages, multi-family residential mortgages,
nonresidential and installment loans. Each loan category is further
segmented into fixed and variable interest rate categories. Future cash
flows of these loans are discounted using the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits - The estimated fair value of demand deposits and savings
accounts is the amount payable on demand at the reporting date. The
estimated fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank - The estimated fair value of
advances from Federal Home Loan Bank is determined by discounting the
future cash flows of existing advances using rates currently available
on advances from Federal Home Loan Bank having similar characteristics.
Lending Commitments - Fixed Rate - The estimated fair value of
commitments to originate fixed-rate loans is determined based on the
difference between current levels of interest rates and the committed
rates. The notional amount of lending commitments - fixed rate
represents the amount which the Savings Bank expects to fund. The
Savings Bank's estimate of unrealized gains and losses, based on
experience, is that 25% of its lending commitments - fixed rate will not
close.
Lending Commitments - Floating Rate - There is no estimated unrealized
gain (loss) attributable to floating rate lending commitments due to
their floating interest rate nature.
Commitments to Sell Loans - The estimated unrealized gain (loss)
associated with commitments to sell loans is based on current market
prices that the buyer will pay or demand for assuming such commitments.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1996 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since that date. Therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
60
19. SEGMENT INFORMATION
The Savings Bank's operations include two reportable segments: savings
and loan and mortgage banking. The savings and loan segment is composed
of those operations involved in originating mortgage loans held for
investment, primarily on single family residences; investing in
mortgage-related securities, United States Treasury and other U.S.
Government agencies' securities and receiving deposits from customers.
The mortgage banking segment is composed of those operations involved in
originating and purchasing residential mortgage loans for resale in the
secondary mortgage market and in servicing loans for others.
Intersegment interest income and expense represent interest on loans and
advances from the savings and loan segment to the mortgage banking
segment computed at the prime rate of interest.
1995
---------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
Unaffiliated customers $ 14,499 $ 1,726 $ 16,225
Intersegment 1,937 $ (1,937)
--------- --------- --------- ---------
Total interest income 16,436 1,726 (1,937) 16,225
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 9,004 9,004
Intersegment 1,937 (1,937)
--------- --------- --------- ---------
Total interest expense 9,004 1,937 (1,937) 9,004
--------- --------- --------- ---------
Net interest income (expense) 7,432 (211) $ 7,221
=========
Provision for loan losses (224) (224)
Other income 1,580 6,174 7,754
Other expense (5,431) (2,771) (8,202)
--------- --------- ---------
Income before income taxes $ 3,357 $ 3,192 $ 6,549
========= ========= =========
Identifiable assets $ 214,649 $ 56,274 $ 270,923
========= ========= =========
Depreciation and amortization expense $ 338 $ 55 $ 393
========= ========= =========
Capital expenditures $ 1,014 $ 403 $ 1,417
========= ========= =========
61
1996
-------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
Unaffiliated customers $ 17,859 $ 2,314 $ 20,173
Intersegment 2,723 $ (2,723)
--------- --------- -------- ---------
Total interest income 20,582 2,314 (2,723) 20,173
--------- --------- -------- ---------
Interest expense:
Unaffiliated customers 12,268 12,268
Intersegment 2,723 (2,723)
--------- --------- -------- ---------
Total interest expense 12,268 2,723 (2,723) 12,268
--------- --------- -------- ---------
Net interest income (expense) 8,314 (409) $ 7,905
=========
Provision for loan losses (75) (75)
Other income 2,121 5,051 7,172
Other expense (6,962) (3,021) (9,983)
--------- --------- ---------
Income before income taxes $ 3,398 $ 1,621 $ 5,019
========= ========= =========
Identifiable assets $ 293,415 $ 46,771 $ 340,186
========= ========= =========
Depreciation expense $ 257 $ 87 $ 344
========= ========= =========
Capital expenditures $ 1,489 $ 369 $ 1,858
========= ========= =========
62
1997
-------------------------------------------------------
Savings Mortgage
Bank Banking Eliminations Consolidated
Interest income:
Unaffiliated customers $ 23,994 $ 2,053 $ 26,047
Intersegment 2,624 $ (2,624)
--------- --------- --------- ---------
Total interest income 26,618 2,053 (2,624) 26,047
--------- --------- --------- ---------
Interest expense:
Unaffiliated customers 16,834 16,834
Intersegment 2,624 (2,624)
--------- --------- --------- ---------
Total interest expense 16,834 2,624 (2,624) 16,834
--------- --------- --------- ---------
Net interest income (expense) 9,784 (571) $ 9,213
=========
Provision for loan losses (143) (143)
Other income 2,575 4,944 7,519
Other expense (7,200) (2,542) (9,742)
--------- --------- ---------
Income before income taxes 5,016 1,831 $ 6,847
========= ========= =========
Identifiable assets $ 354,504 $ 50,758 $ 405,262
========= ========= =========
Depreciation expense $ 425 $ 91 $ 516
========= ========= =========
Capital expenditures $ 1,319 $ 149 $ 1,468
========= ========= =========
63
20. PARENT COMPANY FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Mid Continent Bancshares, Inc. was organized to serve as the holding
company for Mid-Continent Federal Savings Bank and began operations on
June 27, 1994 in conjunction with the Savings Bank's mutual-to-stock
conversion and the Company's initial public offering of common stock.
The Company's (Parent company only) balance sheets as of September 30,
1996 and 1997 and related statements of income and cash flows for the
periods then ended are as follows:
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997
(Dollars in thousands, except share amounts)
- ---------------------------------------------------------------------------------------
ASSETS 1996 1997
CASH AND CASH EQUIVALENTS $ 287 $ 192
NOTES RECEIVABLE FROM MID-CONTINENT
FEDERAL SAVINGS BANK 4,951 3,059
INVESTMENT IN AND ADVANCES TO
MID-CONTINENT FEDERAL SAVINGS BANK 31,827 36,179
OTHER ASSETS 76 764
-------- --------
TOTAL ASSETS $ 37,141 $ 40,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES -
Income taxes payable $ 112
Accrued and other liabilities 222 $ 212
-------- --------
Total liabilities 334 212
-------- --------
STOCKHOLDERS' EQUITY
Common stock $.10 par value, 20,000,000
authorized, 2,248,250 and 2,251,953 shares issued 225 225
Additional paid-in capital 21,663 22,209
Unearned compensation - Employee Stock Ownership Plan (1,054) (918)
Unearned compensation - Management Stock Bonus Plan (547)
Retained earnings, substantially restricted 20,424 23,851
-------- --------
40,711 45,367
Treasury stock, 231,500 and 290,000 shares, at cost (3,904) (5,385)
-------- --------
Total stockholders' equity 36,807 39,982
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,141 $ 40,194
======== ========
64
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands)
- ------------------------------------------------------------------------------------
1995 1996 1997
INTEREST INCOME $ 575 $ 361 $ 243
OTHER EXPENSES:
Professional fees 82 44 40
Merger and acquisition expenses 187
Other 105 94 91
------- ------- -------
Total other expense 187 138 318
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
AND EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 388 223 (75)
INCOME TAX EXPENSE (BENEFIT) 140 85 (29)
------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARY 248 138 (46)
EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 3,858 2,988 4,216
------- ------- -------
NET INCOME $ 4,106 $ 3,126 $ 4,170
======= ======= =======
65
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,106 $ 3,126 $ 4,170
Adjustment to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,858) (2,988) (4,216)
Changes in:
Other assets (39) 6 (330)
Accrued and other liabilities 24 100 219
Income taxes payable 94 (14) 156
------- ------- -------
Net cash flows provided by (used in)
operating activities 327 230 (1)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable from
Mid-Continent Federal Savings Bank 2,968 2,342 1,892
------- ------- -------
Net cash flows provided by investing activities 2,968 2,342 1,892
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for exercise of stock options (995) 43
Receipt of funds for Management Stock Bonus Plan stock 199 199 199
Acquisition of treasury stock (1,174) (2,730) (1,481)
Cash dividends on common stock to stockholders (615) (783) (747)
------- ------- -------
Net cash flows used in financing activities (2,585) (3,314) (1,986)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 710 (742) (95)
CASH AND CASH EQUIVALENTS:
Beginning of year 319 1,029 287
------- ------- -------
End of year $ 1,029 $ 287 $ 192
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Accrued dividends on common stock $ 205 $ 190 $ 186
======= ======= =======
These statements should be read in conjunction with the other notes
related to the consolidated financial statements.
66
21. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended
(In thousands, except earnings per share)
------------------------------------------------------
December 31, March 31, June 30, September 30,
1995 1996 1996 1996
Interest income $4,726 $4,707 $5,089 $5,651
Interest expense 2,806 2,913 3,051 3,498
Net interest income 1,920 1,794 2,038 2,153
Net income 951 820 896 459 (l)
Earnings per share -
Net income 0.48 0.42 0.46 0.23
(1) Reflects a fourth quarter charge for the one-time assessment of
federal insurance premiums (See Note 23).
Quarter Ended
(In thousands, except earnings per share)
--------------------------------------------------------
December 31, March 31, June 30, September 30,
1996 1997 1997 1997
Interest income $6,122 $6,164 $6,672 $7,089
Interest expense 3,907 4,076 4,294 4,557
Net interest income 2,215 2,088 2,378 2,532
Net income 1,098 968 1,127 977 (2)
Earnings per share -
Net income 0.56 0.50 0.59 0.50
(2) Reflects a fourth quarter charge for merger expenses of $187 and the
immediate vesting of all remaining Management Stock Bonus Plan
shares (See Note 15).
22. INTEREST RATE RISK
The Company is engaged principally in providing first mortgage loans to
individuals. For the year ending September 30, 1997, the Company had
average interest earnings assets of approximately $348,783 having a
weighted average effective yield of 7.47% and average interest bearing
liabilities of approximately $330,726 having a weighted average
effective interest rate of 5.09%. The average maturity or repricing of
interest earning assets is generally longer than that of the
liabilities. The shorter duration of interest sensitive liabilities
indicates that the Company is exposed to interest rate risk because, in
a rising rate environment, liabilities will be repricing upwards more
rapidly than the Company's interest sensitive assets, thereby reducing
net interest income.
67
23. FEDERAL LEGISLATION
In September 1996, legislation was enacted which included a
comprehensive reform of the banking and thrift industries. The
legislation imposed a one-time assessment on qualifying thrift deposits
to recapitalize the Savings Association Insurance Fund ("SAIF"), the
fund which insures thrift deposits, and ultimately merged the Bank
Insurance Fund ("BIF") and the SAIF, at which time banks and thrifts now
pay the same deposit insurance premiums. The amount of the one-time
assessment was .657% on qualifying thrift deposits as of March 31, 1995.
This one-time assessment of $1,053 is included in federal insurance
premiums for the year ended September 30, 1996. For GNMA report only
******
68
Mid Continent Bancshares, Inc.
================================================================================
Directors of Directors of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
Richard T. Pottorff - Chairman Richard T. Pottorff - Chairman
Officer - Mid-Continent Federal Savings Bank Dr. Ken Dellett
Dr. Ken Dellett - Vice Chairman Thomas C. Hand
Retired - Physician Ron McGraw
Thomas C. Hand Don Adlesperger
President - Hand Realty Co. Larry R. Goddard
Ron McGraw Robert Lasater *
President - Sunflower Roofing, Inc. Clem Silvers *
Don Adlesperger * Advisory Directors
President - Triple A Builders Supply
Larry R. Goddard
Officer - Mid-Continent Federal Savings Bank
Officers of Officers of
Mid Continent Bancshares, Inc. Mid-Continent Federal Savings Bank
- ------------------------------ ----------------------------------
Richard T. Pottorff Richard T. Pottorff
Chairman, President & CEO Chairman, President & CEO
Larry R. Goddard Larry R. Goddard
Executive Vice President, CFO & COO Executive Vice President, CFO & COO
Harold Siemens Harold Siemens
Senior Vice President Senior Vice President
Cheryl A. Wilkerson Cheryl A. Wilkerson
Vice President/Secretary Vice President/Secretary
David L. Walter David L. Walter
Vice President Vice President/Treasurer
Richard O. Nelson Craig Yaryan
Vice President Vice President
William Cole
Vice President
Diane Griffin
Vice President
Larry Haury
Vice President
Jill Norman
Vice President
Tim Wooding
Vice President
Richard O. Nelson
Vice President
69
Mid Continent Bancshares, Inc.
================================================================================
LEGAL COUNSEL
General Counsel Special Counsel
Adams, Jones, Robinson and Malone Malizia, Spidi, Sloane & Fisch, P.C.
155 N. Market One Franklin Square
Wichita, KS 67202 1301 K Street, NW - Suite 700 East
Washington, DC 20005
AUDITORS TRANSFER AGENT
Deloitte & Touche LLP American Securities Transfer & Trust, Inc.
Suite 400 938 Quail St. Suite 101
1010 Grand Avenue Lakewood, CO 80215
Kansas City, MO 64106 Phone: (303) 234-5300
OFFICE LOCATIONS
Executive and Administrative Office
124 W. Central
El Dorado, Kansas 67042
(316) 321-2700
El Dorado Wichita
405 N. Main 255 N. Main
El Dorado, KS 67042 Wichita, KS 67202
(316) 321-2700 (316) 264-4133
Augusta
1420 N. Ohio 762 N. West St.
Augusta, KS 67010 Wichita, KS 67203
(316) 775-2208 (316) 946-0202
Winfield
1113 S. Main 2123 N. Maize Road
Winfield, KS 67156 Wichita, KS 67212
(316) 221-3830 (316) 729-7999
2310 S. Main 3055 N. Rock Road
Winfield, KS 67156 Wichita, KS 67226
(316) 221-0158 (316) 634-3800
Newton Derby
100 W. 12th 300 N. Rock Road
Newton, KS 67114 Derby, KS 67037
(316) 283-7310 (316) 788-9800
70