UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 1-11515
COMMERCIAL FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
NEBRASKA 47-0658852
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on September 18, 1997, was
$960,207,923. As of September 18, 1997, there were issued and outstanding
21,575,637 shares of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 1997 - Parts I, II and IV.
2. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
- Part III.
1
PART I
ITEM 1. BUSINESS
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GENERAL
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Commercial Federal Corporation (the "Corporation") was incorporated in the state
of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan
holding company. The purpose of the Corporation was to acquire all of the
capital stock of Commercial Federal Bank, a Federal Savings Bank (the "Bank") in
connection with the Bank's 1984 conversion from mutual to stock ownership and to
provide the structure to expand and diversify its financial services to
activities allowed by regulation to a unitary savings and loan holding company.
The general offices of the Corporation are located at 2120 South 72nd Street,
Omaha, Nebraska 68124.
The primary subsidiary of the Corporation is the Bank. The Bank was originally
chartered in 1887 and converted to a federally chartered mutual savings and loan
association in 1972. On December 31, 1984, the Bank completed its conversion
from mutual to stock ownership and became a wholly-owned subsidiary of the
Corporation. Effective August 27, 1990, the Bank's federal charter was amended
from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially consist
of all of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. The Corporation incurs
interest expense on $50.0 million of subordinated extendible notes, $46.4
million of junior subordinated deferrable interest debentures and an unsecured
$26.0 million promissory term note. Such interest is payable monthly on the
subordinated extendible notes and quarterly on the junior subordinated
deferrable interest debentures and the promissory term note. The Corporation
also pays scheduled quarterly principal payments on the promissory term note.
See " Repurchase of Common Stock," "Subordinated Extendible Notes Offering" and
"Cumulative Trust Preferred Securities Offering" under the section captioned
"Recent Developments" of this report for additional information. The Corporation
also pays operating expenses primarily for shareholder and stock related
expenditures such as the annual report, proxy, corporate filing fees and
assessments and certain costs directly attributable to the holding company. In
addition, common stock cash dividends totaling $5.9 million, or $.277 per common
share, were declared and paid during fiscal year 1997.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt and for the common stock cash dividends paid to the Corporation's
shareholders. During fiscal year 1997 the Corporation received, in cash
dividends totaling $34.7 million from the Bank which were made primarily to
cover (i) the interest payments on the Corporation's debt which amount totaled
$6.2 million in the aggregate, (ii) principal payments of $1.0 million on the
Corporation's promissory term note, (iii) the common stock cash dividends of
$5.9 million paid by the Corporation to its shareholders through June 30, 1997,
(iv) the payment of $3.6 million to acquire Heritage Financial, Ltd. on October
1, 1996, and (v) the payment totaling $18.0 million to assist in the finance of
the repurchase of 1,875,150 shares of the Corporation's common stock on August
21, 1996. During fiscal year 1997, the Corporation distributed $17.2 million to
the Bank for its purchase of a support operations facility and the cash portion
of the Corporation's two fiscal year 1997 acquisitions.
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is a consumer-oriented
financial institution that emphasizes single-family and construction residential
real estate lending, consumer lending and commercial real estate lending, retail
deposit activities and mortgage banking. All loan origination activities are
conducted through the Bank's branch office network, through the loan offices of
Commercial Federal Mortgage Corporation ("CFMC"), its wholly-owned mortgage
banking subsidiary, and through a nationwide correspondent network numbering
398. The Corporation also provides insurance and securities brokerage and other
retail financial services.
2
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System
("FRB") and the FDIC. Deposit flows and costs of funds are influenced by
interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for mortgage financing, consumer
loans and other types of loans, which, in turn, are affected by the interest
rates at which such financings may be offered, the availability of funds, and
other factors, such as the supply of housing for mortgage loans.
At June 30, 1997, the Corporation had assets of $7.1 billion and stockholders'
equity of $426.1 million, and through the Bank operated 34 branches in Nebraska,
27 branches in Kansas, 20 branches in greater metropolitan Denver, Colorado, 19
branches in Oklahoma, and seven branches in Iowa. The increase in branches over
fiscal year 1996 was the result of two acquisitions during fiscal year 1997. On
October 1, 1996, the Corporation consummated its acquisition of Heritage
Financial, Ltd., ("Heritage") of Boone, Iowa (six branches and total assets of
approximately $182.9 million at acquisition). On May 1, 1997, the Corporation
acquired Investors Federal Savings ("Investors") of Kinsley, Kansas (three
branches, one of which was closed as part of the acquisition consolidation
process, and total assets of approximately $30.7 million at acquisition). The
Bank is one of the largest retail financial institutions in the Midwest, and,
based upon total assets at June 30, 1997, the Corporation was the 13th largest
publicly-held thrift institution holding company in the United States. In
addition, CFMC serviced a loan portfolio totaling $10.1 billion at June 30,
1997, with $5.952 billion in loans serviced for third parties and $4.181 billion
in loans serviced for the Bank. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" in the Corporation's
1997 Annual Report to Stockholders (the "Annual Report") which is incorporated
herein by reference.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans), community
banking and providing customers with a full array of financial products and a
high level of customer service. As part of its long-term strategic plan, the
Corporation intends to expand its operations within its market areas either
through direct marketing efforts aimed at increasing market share, branch
expansions, or opening additional branches. The Corporation's retail strategy
will continue to be centered on attracting new customers and selling both new
and existing customers multiple products and services. Additionally, the
Corporation will continue to build and leverage an infrastructure designed to
increase fee and other income. Complementing its strategy of internal growth,
the Corporation continues to grow its present five-state franchise through an
ongoing program of selective acquisitions of other financial institutions. As
mentioned, during fiscal year 1997, the Corporation consummated the acquisitions
of two financial institutions. See "Acquisitions During Fiscal Year 1997" of
this report. Subsequent to June 30, 1997, the Corporation entered into
definitive agreements to acquire three financial institutions. These pending
acquisitions will add 59 branches to the Corporation's existing network and
approximately $1.2 billion in total assets, $912.0 million in deposits and
approximately $1.3 billion in loans serviced for others. See "Subsequent Events-
Pending Acquisitions" of this report. Future acquisition candidates will be
selected based on the extent to which the candidates can enhance the
Corporation's retail presence in new or underserved markets and complement the
Corporation's existing retail network.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which is
one of the 12 regional banks for federally insured savings institutions
comprising the FHLB System. The Bank is further subject to regulations of the
Federal Reserve Board, which governs reserves required to be maintained against
deposits and certain other matters.
As a federally chartered savings bank, the Bank is subject to numerous
restrictions on operations and investments imposed by applicable statutes and
regulations. See "Regulation."
3
RECENT DEVELOPMENTS
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SUBSEQUENT EVENTS - PENDING ACQUISITIONS.
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LIBERTY. On August 18, 1997, the Corporation entered into a reorganization and
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merger agreement with Liberty Financial Corporation ("Liberty"), a privately
held commercial bank and thrift holding company. Under the terms of the merger
agreement, the Corporation will acquire in a tax-free reorganization all
8,748,500 outstanding shares of Liberty's common stock. As defined in the
merger agreement, Liberty's common stock will be exchanged for a pro-rata amount
of the Corporation's common stock based on the average closing price of such
stock for the twenty-fifth through the sixth trading days preceding the
effective date of the proposed merger. Based on the Corporation's closing
stock price on September 11, 1997, of $44.4375, each share of Liberty common
stock would be exchanged for .306 shares of the Corporation's common stock,
resulting in the exchange of approximately 2,677,041 shares of the Corporation's
common stock with an aggregate value of approximately $119.0 million. At June
30, 1997, Liberty had assets of approximately $620.5 million, deposits of
approximately $533.2 million and stockholders' equity of approximately $41.1
million. Liberty operates 36 branches in Iowa and six in the metropolitan area
of Tucson, Arizona. This pending acquisition, which is subject to regulatory
approvals and other conditions, is expected to be completed by March 31, 1998.
MID CONTINENT. On September 2, 1997, the Corporation entered into a
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reorganization and merger agreement with Mid Continent Bancshares, Inc. ("Mid
Continent"), parent company of Mid-Continent Federal Savings Bank. Under the
terms of the merger agreement, the Corporation will acquire in a tax-free
reorganization all 1,958,250 of the outstanding shares of Mid Continent's common
stock. As defined in the merger agreement, Mid Continent's common stock will be
exchanged for a pro-rata amount of the Corporation's common stock based upon the
average closing price of the Corporation's common stock during a twenty
consecutive trading day period prior to closing. Based on the Corporation's
closing stock price on September 11, 1997, of $44.4375, each share of Mid
Continent common stock would be exchanged for .8693 shares of the Corporation's
common stock, resulting in the exchange of approximately 1,702,306 shares of the
Corporation's common stock with an aggregate value of approximately $75.6
million. At June 30, 1997, Mid Continent had total assets of approximately
$408.6 million, deposits of approximately $247.0 million and stockholders'
equity of approximately $38.4 million. Mid Continent operates ten branches
located in Kansas. This pending acquisition, which is subject to receipt of
regulatory approvals, Mid Continent shareholders' approval and other conditions,
is expected to close by March 31, 1998.
FIRST NATIONAL. On September 11, 1997, the Corporation entered into a
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reorganization and merger agreement with First National Bank Shares, LTD ("First
National"), parent company of First United Bank and Trust Company. Under the
terms of the merger agreement, the Corporation will acquire all of the
outstanding shares of First National's common stock. As defined in the merger
agreement, First National's common stock will be exchanged for a pro-rata amount
of the Corporation's common stock based upon the average closing price of the
Corporation's common stock during a twenty consecutive trading day period prior
to closing. Based on the Corporation's closing stock price on September 11,
1997, of $44.4375, such transaction would result in the exchange of
approximately 661,905 shares of the Corporation's common stock with a total
aggregate value approximating $29.4 million. At August 31, 1997, First National
had assets approximating $153.8 million, deposits of approximately $132.1
million and stockholder's equity of approximately $10.6 million. First National
operates seven branches located in Kansas. This pending acquisition, which is
subject to receipt of regulatory approvals, First National shareholders'
approval and other conditions, is expected to close during the quarter ending
March 31, 1998.
REPURCHASE OF COMMON STOCK.
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On August 21, 1996, the Corporation consummated the repurchase of 1,875,150
shares of its common stock, $.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately $48.9
million, excluding $414,000 in transaction costs. The purchase price, excluding
transaction costs incurred by the Corporation for this repurchase, consisted of
cash consideration of approximately $28.2 million and surrender of a warrant
(valued at approximately $20.7 million) which would have enabled the Corporation
to purchase 99 shares of non-voting common stock of CAI Corporation. The
repurchased shares represented 8.3% of the outstanding shares of the
Corporation's common stock prior to the repurchase. The cash portion of the
repurchase was financed in part by
4
a $28.0 million short-term promissory note which was refinanced on December 13,
1996, on a long-term basis contractually due December 31, 2001. Pursuant to
Nebraska corporate law, the 1,875,150 shares of repurchased common stock were
canceled. The Corporation also reimbursed CAI Corporation for certain expenses
totaling $2.2 million incurred in connection with its ownership of the 1,875,150
shares, including costs and expenses incurred in connection with the
Corporation's 1995 proxy contest, and paid CAI Corporation cash totaling $62,500
in lieu of the pro rata portion of any dividend CAI Corporation otherwise would
have received for the quarter ended September 30, 1996. These nonrecurring
expenses paid to CAI Corporation are included in other operating expenses for
fiscal year 1997. Concurrent with the close of the repurchase, two directors of
the Corporation, who also serve as executive officers of CAI Corporation,
resigned from the Corporation's Board of Directors. In addition, CAI Corporation
and each of its shareholders agreed to a standstill agreement for a period of 60
months beginning August 21, 1996. CAI Corporation and the Corporation have each
agreed to waive and release all claims against the other and the Corporation has
agreed to indemnify CAI Corporation and its directors, officers and affiliates
against certain derivative claims.
As mentioned, on December 13, 1996, the Corporation refinanced the $28.0 million
short-term promissory note due January 31, 1997, obtained in the financing of
the repurchase of 1,875,150 shares of the Corporation's common stock, with a
five-year term note for $28.0 million due December 31, 2001. This term note,
with an outstanding principal balance of $26.0 million at June 30, 1997, bears a
monthly adjustable interest rate which was 8.00% at June 30, 1997, and is priced
at 50 basis points below the quoted national base prime rate. This term note
has a seven year amortization, with scheduled principal payments of $1.0 million
payable quarterly with accrued interest, and a balloon of $8.0 million due
December 31, 2001. The term note is unsecured but subject to certain covenants.
In addition, the Corporation also has a $2.0 million line of credit available
with the same financial institution which, at June 30, 1997, had not been drawn
on. Both the term note and the revolving credit promissory note may be prepaid,
in whole or in part, without penalty, upon proper written notice. On August 11,
1997, the Corporation paid down this term note by $21.0 million and, under the
payment terms of the note agreement, results in the remaining balance of $5.0
million payable in $1.0 million installments over the next five calendar
quarters with the final payment due September 30, 1998. Also, on August 11,
1997, the line of credit was increased to $6.0 million with no change to the due
date or other terms.
FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT.
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Effective September 30, 1996, the Corporation incurred an after-tax charge of
$17.3 million ($27.1 million pre-tax) as a result of the imposition of a special
assessment by the FDIC to recapitalize the SAIF. The FDIC operates two deposit
insurance funds: the Bank Insurance Fund ("BIF") which generally insures
deposits of commercial banks and the SAIF which generally insures the deposits
of savings associations such as the Bank. Because the reserves of the SAIF were
below statutorily required minimums, institutions with SAIF-assessable deposits,
like the Bank, were required to pay substantially higher deposit insurance
premiums than institutions with deposits insured by the BIF since September 30,
1995. In order to recapitalize the SAIF and address this premium disparity, the
Deposit Insurance Funds Act of 1996, effective September 30, 1996, authorized
the FDIC to impose a one-time special assessment on institutions with SAIF-
assessable deposits in order to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits as of October 1, 1996.
Institutions were assessed at the rate of .657% based on the amount of their
SAIF-assessable deposits as of March 31, 1995. This nonrecurring special
assessment totaling $27.1 million before income taxes is recorded in the general
and administrative expense section of the Consolidated Statement of Operations
under a separate line item captioned "Federal deposit insurance special
assessment."
The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant
to which the assessment rate for well-capitalized institutions with the highest
supervisory ratings would be reduced to zero and institutions in the lower risk
assessment classification will be assessed at the rate of .27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of .064% of insured deposits
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be assessed
for FICO obligations at the rate of .013% of insured deposits. After December
31, 1999, both BIF and SAIF members will be assessed at the same rate for FICO
payments. The Corporation's annual deposit insurance rate in effect prior to
this recapitalization was .23% of insured deposits, declining to .18% of insured
deposits for the quarter ended December 31, 1996, and reduced to .064% of
insured deposits effective January 1, 1997.
5
The Deposit Insurance Funds Act of 1996 provides that the BIF and SAIF will be
merged into a single deposit insurance fund effective December 31, 1999, but
only if there are no insured savings associations on that date. Legislation
currently under consideration by Congress would repeal the federal thrift
charter and require federal associations like the Bank to convert to national
banks two years after the enactment of the bill. The bill, in its current form,
would permit federal thrifts that converted to national banks to exercise any
authority which they were legally entitled to exercise immediately prior to such
conversion and would not be required to divest any branches. Further, these
institutions could continue to branch in any state in which they were located to
the same extent as national banks. Unitary savings and loan holding companies,
like the Corporation, could continue to exercise any powers they had prior to
their subsidiary becoming a bank by operation of law as long as they did not
acquire another bank. Powers of those unitary savings and loan companies that
were grandfathered, however, could not be transferred to another company which
acquires control of the unitary holding company after the effective date of the
law. There can be no assurance that this legislation will be passed in its
current form. At this time, the Corporation is unable to predict whether such
legislation would significantly impact its operations.
THREE-FOR-TWO STOCK SPLIT.
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On November 18, 1996, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of 50 percent stock dividend to
stockholders of record on December 31, 1996. Par value of the common stock
remained at $.01 per share. The stock dividend, distributed on January 14,
1997, totaled 7,163,476 shares of common stock. Fractional shares resulting
from the stock split were paid in cash totaling $17,792 based on the closing
price on the record date. All references to the number of shares, per share
amount and stock price for all periods presented have been adjusted on a
retroactive basis to reflect the effect of the stock split. The Board of
Directors also increased its quarterly cash dividend from $.0667 per common
share after adjusting for the three-for-two stock split to $.07 per common share
representing an increase of five percent. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Stock Prices and
Dividends" in the Annual Report.
ACQUISITIONS DURING FISCAL YEAR 1997.
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Heritage. On October 1, 1996, the Corporation consummated its acquisition of
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Heritage Financial, Ltd., parent company of Hawkeye Federal Savings
headquartered in Boone, Iowa. The Corporation acquired all 180,762 outstanding
shares of Heritage's common stock. Each share of Heritage's common stock was
exchanged for $18.73 in cash and 3.74775 shares of the Corporation's common
stock (total issuance of 677,449 shares). Based on the Corporation's closing
stock price of $28.667 at October 1, 1996, the total consideration for this
acquisition, excluding cash paid for fractional shares, approximated $22.8
million. Before purchase accounting adjustments, Heritage had assets of
approximately $182.9 million, deposits of approximately $158.2 million and
stockholders' equity of approximately $10.3 million. Heritage operated six
branches located in west-central Iowa with core value of deposits and goodwill
resulting from this transaction totaling $16.3 million.
INVESTORS. On May 1, 1997, the Corporation consummated its acquisition of
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Investors Federal Savings headquartered in Kinsley, Kansas. The Corporation
acquired all 232,465 of the outstanding shares of Investors' common stock for
$23.00 in cash for a total consideration of approximately $5.3 million. Before
purchase accounting adjustments, Investors had assets of approximately $30.7
million, deposits of approximately $26.1 million and stockholders' equity of
approximately $4.4 million. Investors operated three branches in southwest
Kansas and, as part of the acquisition consolidation process, one branch was
closed on May 24, 1997. This acquisition was accounted for as a purchase.
SUBORDINATED EXTENDIBLE NOTES OFFERING.
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On December 2, 1996, the Corporation completed the issuance of $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the
"Notes"). Such offering resulted in the Corporation receiving $48.5 million,
net of an underwriting discount of $1.5 million. With the proceeds from the
issuance of the Notes, the Corporation redeemed on December 27, 1996, its $40.25
million 10.25% subordinated debt due December 15, 1999, and its $6.9 million
10.0% senior notes due January 31, 1999. Total expenses associated with this
offering
6
approximated $1.9 million which are being deferred and amortized over the life
of the Notes resulting in an effective interest rate of 8.52%. Contractual
interest on the Notes is set at 7.95% until December 1, 2001, and is paid
monthly. The interest rate for the Notes will reset at the Corporation's option,
on December 1, 2001, to a rate and for a term of one, two, three or five years
determined by the Corporation and will reset thereafter, at its option, upon the
date of expiration of each new interest period prior to maturity. Any new
interest rate shall not be less than 105% of the effective interest rate on
comparable maturity U.S. Treasury obligations. There is no sinking fund. The
Notes may not be redeemed prior to December 1, 2001, and thereafter, the
Corporation may elect to redeem the Notes in whole on December 1, 2001, and on
any subsequent interest reset date at par plus accrued interest to the date
fixed for redemption. The Notes are unsecured general obligations of the
Corporation and are subordinated to all existing and future senior indebtedness
of the Corporation. There are no restrictions in the Indenture on the creation
of additional senior indebtedness. The Indenture, among other provisions, limits
the ability of the Corporation to pay cash dividends or make other capital
distributions under certain circumstances.
CUMULATIVE TRUST PREFERRED SECURITIES OFFERING.
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Effective May 14, 1997, CFC Preferred Trust, a special-purpose wholly-owned
Delaware trust subsidiary of the Corporation, completed an offering of 1,800,000
shares (issue price of $25.00 per share) totaling $45.0 million of fixed-rate
9.375% cumulative trust preferred securities ("Capital Securities"), which are
fully and unconditionally guaranteed by the Corporation. Also affective May 14,
1997, the Corporation purchased all of the common securities ("Common
Securities") of CFC Preferred Trust for approximately $1.4 million. CFC
Preferred Trust invested the total proceeds of $46.4 million it received in
9.375% junior subordinated deferrable interest debentures ("Debentures") issued
by the Corporation. Interest paid on the Debentures will be distributed to the
holders of the Capital Securities and to the Corporation as holder of the Common
Securities. As a result, under current tax law, distributions to the holders of
the Capital Securities will be tax deductible for the Corporation. These
Debentures are unsecured and rank junior and are subordinate in right of payment
to all senior debt issued by the Corporation.
The Capital Securities issued by the CFC Preferred Trust rank senior to the
Common Securities. Concurrent with the issuance of the Capital Securities, the
Corporation issued guarantees for the benefit of the security holders. The
obligations of the Corporation under the Debentures, the indenture, the relevant
trust agreement and the guarantees, in the aggregate, constitute a full and
unconditional guarantee by the Corporation of the obligations of the trust under
the trust preferred securities and rank subordinate and junior in right of
payment to all liabilities of the Corporation.
The distribution rate payable on the Capital Securities is cumulative and
payable quarterly in arrears commencing on September 30, 1997. The Corporation
has the right, subject to events of default, to defer payments of interest on
the Debentures at any time by extending the interest payment period for a period
not exceeding 20 consecutive quarters with respect to each deferral period,
provided that no extension period may extend beyond the redemption or maturity
date of the Debentures. The Capital Securities are subject to mandatory
redemption upon repayment of the Debentures. The Debentures mature on May 15,
2027, which may be shortened to not earlier than May 15, 2002, if certain
conditions are met. The Debentures are redeemable at the option of the
Corporation on or after May 15, 2002, or at any time upon the occurrence and
continuation of certain changes in either the tax treatment or the capital
treatment of the CFC Preferred Trust, the Debentures or the Capital Securities.
The Corporation has the right at any time to terminate the CFC Preferred Trust
and cause the Debentures to be distributed to the holders of the Capital
Securities in liquidation of such trust, all subject to the Corporation having
received prior approval of the Federal Reserve to do so if then required under
applicable capital guidelines or policies of the Federal Reserve.
The Capital Securities would qualify as Tier 1 capital of the Corporation should
the Corporation become subject to the Federal Reserve capital requirements for
bank holding companies. As a savings and loan holding company, the Corporation
is currently not subject to Federal Reserve capital requirements for bank
holding companies.
Since all of the proceeds of the sale of the Capital Securities were invested by
the CFC Preferred Trust in the Debentures, the Corporation paid the underwriting
commission and other expenses associated with the offering which totaled $1.8
million and are being amortized over the life of the Debentures resulting in an
effective interest rate of 9.78%. Proceeds from the sale of the Debentures will
be used for general corporate purposes including, without limitation, possible
future acquisitions, funding investments in, or extensions of credit to, the
Corporation's subsidiaries, repayment of obligations and redemption of
securities.
7
On June 30, 1997, the Corporation distributed $8.2 million to the Bank for its
purchase of a facility in which to consolidate certain support operations, and
on August 11, 1997, paid $21.0 million down on a $26.0 million term note
originally due December 31, 2001.
EXTRAORDINARY ITEMS.
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In December 1996, the Corporation recognized extraordinary losses of $583,000
(net of income tax benefits totaling $316,000) or $.03 loss per share, primarily
as a result of the early retirement of its $40.25 million 10.25% subordinated
debt due December 15, 1999, and its $6.9 million 10.0% senior notes due January
31, 1999. The extraordinary losses consisted primarily of the write-off of the
related premiums and costs associated with the issuance and redemption of such
debt which was retired on December 27, 1996, with the proceeds from the $50.0
million subordinated extendible notes offering completed December 2, 1996.
REPEAL OF THRIFT BAD DEBT RESERVES FOR TAX PURPOSES.
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In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) required recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These tax law
changes resulted in the recognition to income tax expense of additional deferred
tax liabilities of approximately $103,000 in the first quarter of fiscal year
1997. The remaining unrecognized deferred tax liability totaling $29.9 million
could be recognized in the future, in whole or in part, if (i) there is a change
in federal tax law, (ii) the Bank fails to meet certain definitional tests and
other conditions in the federal tax law, (iii) certain distributions are made
with respect to the stock of the Bank or (iv) the bad debt reserves are used for
any purpose other than absorbing bad debt losses.
SUPERVISORY GOODWILL LAWSUIT.
- -----------------------------
On September 13, 1994, the Bank commenced litigation against the United States
in the United States Court of Federal Claims seeking to recover monetary relief
for the government's refusal to honor certain contracts between the Bank and the
Federal Savings and Loan Insurance Corporation. The suit alleges that such
governmental action constitutes breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome, and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing, and the dollar amount of damages
which may be awarded to the Bank if it finally prevails in this litigation.
REGULATORY CAPITAL COMPLIANCE.
- ------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios as set forth in the following tables of
tangible, core and total risk-based capital. Prompt Corrective Action
provisions contained in the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") require specific supervisory actions as capital levels
decrease. To be considered well-capitalized under the regulatory framework for
Prompt Corrective Action under FDICIA, the Bank must maintain minimum Tier 1
leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in
the following tables. At June 30, 1997, the Bank exceeded the minimum
requirements for the well-capitalized category. As of June
8
30, 1997, the most recent notification from the OTS categorized the Bank as
"well-capitalized" under the regulatory framework for Prompt Corrective Action
provisions under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's classification.
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements as of June 30, 1997:
- --------------------------------------------------------------------------------
Actual Capital Required Capital
------------------------ -----------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ---------------------- ----------- ----------- ----------- -----------
OTS Capital Adequacy:
Tangible capital $ 446,291 6.31% $ 106,079 1.5%
Core capital 458,087 6.47 212,511 3.0
Risk-based capital 494,760 13.81 286,597 8.0
FDICIA Regulations to be Classified Well-Capitalized:
Tier 1 leverage capital 458,087 6.47 354,185 5.0
Tier 1 risk-based capital 458,087 12.79 214,948 6.0
Total risk-based capital 494,760 13.81 358,246 10.0
- --------------------------------------------------------------------------------
See "Regulation -- Regulatory Capital Requirements" and Note 19 of Notes to
Consolidated Financial Statements in the Annual Report for additional
information.
EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS.
- -----------------------------------------
During fiscal year 1997, the Corporation adopted the provisions of the following
accounting pronouncements: Statement No. 123 entitled "Accounting for Stock-
Based Compensation" and Statement No. 125 entitled "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." See Note 1
to the Consolidated Financial Statements in the Annual Report for a discussion
of these new accounting pronouncements and their effect on the Corporation.
OTHER INFORMATION.
- ------------------
Additional information concerning the general development of the business of the
Corporation during fiscal year 1997 is included in the Annual Report under the
captions: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference. Additional information concerning the Bank's
regulatory capital requirements and other regulations which affect the
Corporation is included in the "Regulation" section of this report.
9
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 Corporation 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 Corporation's expectation with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
The Corporation's Assets Liability Management Committee ("ALCO"), which includes
senior management representatives, monitors and considers methods of managing
the rate and sensitivity repricing characteristics of the balance sheet
components consistent with maintaining acceptable levels of changes in net
portfolio value ("NPV") and net interest income. A primary purpose of the
Corporation's asset and liability management is to manage interest rate risk to
effectively invest the Corporation's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The Corporation's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Corporation's change in NPV in the event of hypothetical changes in interest
rates and interest rate sensitivity gap analysis is used to determine the
repricing characteristics of the Bank's assets and liabilities. If estimated
changes to NPV and net interest income are not within the limits established by
the Board, the Board may direct management to adjust its asset and liability mix
to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base. Management has sought to decrease the average
maturity of its assets by emphasizing the origination of adjustable-rate
residential mortgage loans, consumer loans and adjustable-rate mortgage loans
for the acquisition, development, and construction of residential and commercial
real estate, all of which are retained by the Bank for its portfolio. In
addition, long-term, fixed-rate single-family residential mortgage loans are
underwritten according to guidelines of the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA") and the
Federal National Mortgage Association ("FNMA"), and are either swapped with the
FHLMC, GNMA and the FNMA in exchange for mortgage-backed securities secured by
such loans which are then sold or sold directly for cash in the secondary
market, or are retained for the Corporation's loan portfolio if such loans have
characteristics which are consistent with the Corporation's asset and liability
goals and long-term interest rate yield requirements.
Interest rate sensitivity analysis is used to measure the Corporation's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet 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 Corporation's Board of Directors has
adopted an interest rate risk policy which establishes maximum decreases in the
NPV of 10%, 20%, 30% and 40% in the event of a sudden and sustained one hundred
to four hundred basis points increase or decrease in market interest rates. The
following table presents the Corporation's projected change in NPV for the
various rate shock levels of June 30, 1997. All market risk sensitive
instruments presented in this table are held to maturity or available for sale.
The Corporation has no trading securities.
10
- ------------------------------------------------------------------------------------------------------------
Percent Change
--------------------------------
Change in Market Value of Actual Board
Interest Rates Portfolio Equity Change Actual Limit
- -------------- ---------------- ---------------- ---------------- --------------
(Dollars in Thousands)
400 basis point rise $ 407,038 $ (209,934) (34)% (40)%
300 basis point rise 460,243 (156,729) (25) (30)
200 basis point rise 514,987 (101,985) (17) (20)
100 basis point rise 574,387 (42,585) (7) (10)
Base Scenario 616,972 -- -- --
100 basis point decline 634,264 17,292 3 10
200 basis point decline 653,519 36,547 6 20
300 basis point decline 685,388 68,416 11 30
400 basis point decline 732,160 115,188 19 40
- ------------------------------------------------------------------------------------------------------------
The preceding table indicates that at June 30, 1997, in the event of a sudden
and sustained increase in prevailing market interest rates, the Corporation's
NPV would be expected to decrease, and that in the event of a sudden and
sustained decrease in prevailing market interest rates, the Corporation's NPV
would be expected to increase. At June 30, 1997, the Corporation's estimated
changes in NPV were within the targets established by the Board of Directors.
NPV is calculated by the Corporation 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 June
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.
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented,
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Corporation's primary loan products, have features which restrict changes in
interest rates on a short-term basis and over the life of the assets. In
addition, the proportion of adjustable-rate loans in the Corporation's portfolio
could decrease in future periods if market interest rates remain at or decrease
below current levels due to refinance activity. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in the NPV. Finally, the ability of
many borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of interest rate increases.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive
liabilities, and is considered negative when the amount of interest-rate-
sensitive liabilities exceeds the amount of interest-rate-sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap would result in an increase in net interest income, while
a positive gap would negatively affect net interest income. Management's goal is
to maintain a reasonable balance between exposure to interest rate fluctuations
and earnings. The Bank's one-year cumulative gap is a negative $664.7 million,
or 9.37% of the Bank's total assets of $7.092 billion at June 30, 1997. The
interest rate risk policy of the Bank authorizes a liability sensitive one-year
cumulative gap not to exceed 10.0%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Annual Report.
11
LENDING ACTIVITIES
- ------------------
GENERAL. The Corporation concentrates its lending activities primarily on the
- --------
origination of first mortgage loans for the purpose of financing or refinancing
single-family residential properties, single-family residential construction
loans, commercial real estate loans, consumer and home improvement loans. As a
result of increased emphasis on consumer-oriented lending activities, the
origination of consumer loans during fiscal year 1997 increased substantially
over fiscal years 1996 and 1995. Residential loan origination activity,
including activity through correspondents, was slightly higher for fiscal year
1997 compared to fiscal years 1996 and 1995. See "Loan Originations."
The functions of processing and servicing real estate loans, including
responsibility for servicing the Corporation's loan portfolio, is conducted by
CFMC, the Bank's wholly-owned mortgage banking subsidiary. The Corporation
conducts loan origination activities primarily through its 107 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's various loan offices
located in its existing market areas, loan offices of CFMC and through its
nationwide correspondent network.
At June 30, 1997, the Corporation's total loan and mortgage-backed securities
portfolio was $6.3 billion, representing over 88.6% of its $7.1 billion of total
assets at that date. Mortgage-backed securities totaled $1.0 billion at June
30, 1997, representing 16.3% of the Corporation's total loan and mortgage-
backed securities portfolio at such date. Approximately 92.7% of the
Corporation's total gross loan and mortgage-backed securities portfolio was
secured by real estate at June 30, 1997, compared to 94.2% at June 30, 1996.
Commercial real estate and land loans (collectively referred to as "income
property loans") totaled $278.6 million or 4.4% of the total loan and mortgage-
backed securities portfolio at June 30, 1997, compared to $284.2 million or 4.7%
of such total portfolio at June 30, 1996. These loans are secured by various
types of commercial properties including office buildings, shopping centers,
warehouses and other income producing properties. Single-family residential
construction loans totaled $182.4 million or 2.9% of the total loan and
mortgage-backed securities portfolio at June 30, 1997, compared to $185.3
million or 3.0% of such portfolio at June 30, 1996. The Corporation's single-
family residential construction lending activity is primarily attributable to
operations in Las Vegas, Nevada and in its primary five-state market area. At
June 30, 1997, multi-family residential loans consisting of loans secured by
various types of properties, including townhomes, condominiums and apartment
projects with more than four dwelling units, totaled $48.3 million, or .8% of
the total loan portfolio, compared to $40.3 million or .7% at June 30, 1996.
The Bank presently does not originate a significant amount of multi-family
residential loans, and expects to originate such loans primarily for purposes of
resolving certain nonperforming assets.
The Corporation's primary emphasis continues to be on the origination of loans
secured by existing single-family residences. Adjustable-rate single-family
residential loans are originated primarily for retention in the Corporation's
loan portfolio to match more closely the repricing of the Corporation's
interest-bearing liabilities as a result of changes in interest rates.
Fixed-rate single-family residential loans are originated using underwriting
guidelines, appraisals and documentation which are acceptable to the FHLMC, GNMA
and the FNMA to facilitate the sale of such loans to such agencies in the
secondary market. The Corporation also originates fixed-rate single-family
residential loans using internal lending policies in accordance with what
management believes are prudent underwriting standards but which may not
strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family
residential loans are originated or purchased for the Corporation's loan
portfolio if such loans have characteristics which are consistent with the
Corporation's asset and liability goals and long-term interest rate yield
requirements. At June 30, 1997, fixed-rate single-family residential loans were
retained for the Corporation's portfolio as such balance increased $188.6
million over last fiscal year to $2.369 billion compared to $2.180 billion at
June 30, 1996. The adjustable-rate portfolio increased to $2.033 billion at June
30, 1997 compared to $1.906 billion at June 30, 1996. Such balances are before
unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowances for loan losses.
12
In past years, the Corporation has not originated any significant amounts of
commercial real estate loans or multi-family residential loans with the
exception of loans primarily to resolve nonperforming assets. However, the
Corporation has initiated commercial and multi-family real estate lending, on a
limited basis, with such loans secured by properties located within the
Corporation's primary market areas. Such loans, which are subject to prudent
credit review and other underwriting standards and collection procedures, are
not expected to constitute a significant portion of the Corporation's lending
business in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, savings account and commercial business loans (collectively,
"consumer loans") through the Corporation's branch network and direct mail
solicitation. Management intends to increase its consumer loan origination
activity with strict adherence to prudent underwriting and credit review
procedures along with improved collection efforts implemented during fiscal year
1997. However, the Corporation presently does not originate commercial business
loans, except for loans to resolve nonperforming assets.
Regulatory guidelines generally subject savings institutions to the same loans
to one borrower limitations that are applicable to national banks. At June 30,
1997, all loans to one borrower were within the Corporation's limitation of
$124.7 million. See "Regulation -- Limitations on Loans to One Borrower."
13
COMPOSITION OF LOAN PORTFOLIO. The following table sets forth the composition of
- ------------------------------
the Corporation's loan and mortgage-backed securities portfolios (including
loans held for sale and mortgage-backed securities available for sale) as of the
dates indicated:
June 30,
----------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- --------- ------- -------- -------- -------
(Dollars in Thousands)
LOAN PORTFOLIO
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $4,024,811 62.9% $3,739,191 61.1% $3,603,379 59.8%
Multi-family residential 42,994 0.7 37,322 0.6 33,338 0.5
Land 19,988 0.3 14,582 0.2 7,257 0.1
Commercial real estate 249,783 3.9 258,933 4.2 210,676 3.5
---------- ----- ---------- ----- ---------- -----
Total 4,337,576 67.8 4,050,028 66.1 3,854,650 63.9
Construction loans -
Single-family residential 182,387 2.9 185,327 3.0 177,539 3.0
Multi-family residential 5,348 0.1 3,027 0.1 380 --
Land -- -- -- -- 1,600 --
Commercial real estate 8,795 0.1 10,734 0.2 7,195 0.1
---------- ----- ---------- ----- ---------- -----
Total 196,530 3.1 199,088 3.3 186,714 3.1
FHA and VA loans 377,349 5.9 347,569 5.7 392,463 6.5
Mortgage-backed securities 1,017,982 15.9 1,171,256 19.1 1,354,142 22.5
---------- ----- ---------- ----- ---------- -----
Total real estate loans 5,929,437 92.7 5,767,941 94.2 5,787,969 96.0
Consumer and other loans -
Home improvement and other
consumer loans 451,603 7.1 344,129 5.6 231,818 3.8
Savings account loans 13,319 0.2 11,648 0.2 10,026 0.2
Other loans 939 -- 2,113 -- 853 --
---------- ----- ---------- ----- ---------- -----
Total consumer and other loans 465,861 7.3 357,890 5.8 242,697 4.0
---------- ----- ---------- ----- ---------- -----
Total loans $6,395,298 100.0% $6,125,831 100.0% $6,030,666 100.0%
---------- ===== ---------- ===== ---------- =====
June 30,
------------------------------------------
1994 1993
------------------- -------------------
Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in Thousands)
LOAN PORTFOLIO
- --------------
Conventional real estate mortgage loans:
Loans on existing properties -
Single-family residential $3,125,477 58.0% $2,784,073 59.5%
Multi-family residential 43,379 0.8 60,935 1.3
Land 9,080 0.2 9,322 0.2
Commercial real estate 203,840 3.8 254,281 5.4
---------- ----- ---------- -----
Total 3,381,776 62.8 3,108,611 66.4
Construction loans -
Single-family residential 50,870 1.0 20,851 0.5
Multi-family residential -- -- -- --
Land 1,640 -- -- --
Commercial real estate 871 -- -- --
---------- ----- ---------- -----
Total 53,381 1.0 20,851 0.5
FHA and VA Loans 415,866 7.7 461,066 9.8
Mortgage-backed securities 1,338,775 24.8 947,919 20.2
---------- ----- ---------- -----
Total real estate loans 5,189,798 96.3 4,538,447 96.9
Consumer and other loans -
Home improvement and other
consumer loans 188,756 3.5 131,432 2.8
Savings account loans 9,136 0.2 8,713 0.2
Other loans 1,322 -- 3,696 0.1
---------- ----- ---------- -----
Total consumer and other loans 199,214 3.7 143,841 3.1
---------- ----- ---------- -----
Total loans $5,389,012 100.0% $4,682,288 100.0%
---------- ===== ---------- =====
(Continued on next page)
COMPOSITION OF LOAN PORTFOLIO (CONTINUED):
- -----------------------------------------
June 30,
----------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------------- -------- ------------- -------- ------------ ---------
(Dollars in Thousands)
Balance forward of total loans $6,395,298 100.0% $6,125,831 100.0% $6,030,666 100.0%
===== ===== =====
Add (subtract):
Unamortized premiums, net
of discounts 13,777 12,335 6,884
Deferred loan fees, net (532) (3,673) (1,362)
Loans in process (75,077) (91,262) (80,211)
Allowance for loan losses (48,467) (49,278) (48,541)
Allowance for losses on
mortgage-backed securities (498) (742) (1,837)
---------- ---------- ----------
Loan portfolio $6,284,501 $5,993,211 $5,905,599
========== ========== ==========
June 30,
---------------------------------------------
1994 1993
---------------------- ----------------------
Amount Percent Amount Percent
------------- -------- ------------- --------
(Dollars in Thousands)
Balance forward of total loans $5,389,012 100.0% $4,682,288 100.0%
Add (subtract): ===== =====
Unamortized discounts, net
of premiums 11,938 (4,941)
Deferred loan fees, net (1,126) (7,365)
Loans in process (32,085) (12,905)
Allowance for loan losses (44,851) (46,908)
Allowance for losses on
mortgage-backed securities (1,860) (1,890)
---------- ----------
Loan portfolio $5,321,028 $4,608,279
========== ==========
- --------------------------------------------------------------------------------
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes 4, 5 and 6 to the Consolidated Financial
Statement in the Annual Report.
15
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities and
before any reduction for unamortized premiums (net of discounts), undisbursed
loan proceeds, deferred loan fees and allowance for loan losses) as of the dates
indicated:
June 30,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------
Nebraska $936,901 19.1% $929,982 20.2% $836,054 18.9% $767,988 19.9% $654,850 18.2%
Colorado 824,527 16.8 843,670 18.3 909,363 20.5 797,141 20.7 814,384 22.7
Kansas 364,590 7.4 350,248 7.6 317,109 7.2 282,238 7.3 271,892 7.6
Georgia 235,462 4.8 217,957 4.7 202,331 4.6 210,299 5.5 241,286 6.7
Oklahoma 232,240 4.7 212,468 4.6 198,480 4.5 135,893 3.5 91,302 2.5
Texas 186,791 3.8 204,002 4.4 225,866 5.1 181,547 4.7 190,605 5.3
Missouri 156,624 3.2 170,032 3.7 180,144 4.1 158,291 4.1 197,978 5.5
Virginia 140,498 2.9 123,806 2.7 111,081 2.5 81,290 2.1 67,821 1.9
Maryland 138,879 2.8 112,152 2.4 100,762 2.3 76,365 2.0 69,769 1.9
Iowa 137,591 2.8 80,820 1.8 70,515 1.6 65,365 1.7 65,512 1.8
California 128,250 2.6 151,412 3.3 154,803 3.5 172,767 4.5 127,260 3.5
Florida 116,835 2.4 111,692 2.4 100,471 2.3 92,531 2.4 97,116 2.7
Nevada 109,405 2.2 80,624 1.8 51,817 1.2 -- -- -- --
New Jersey 107,022 2.2 113,824 2.5 119,223 2.7 110,267 2.9 38,064 1.1
Illinois 92,269 1.9 79,570 1.7 78,043 1.7 57,378 1.5 69,596 1.9
Washington 90,975 1.9 64,796 1.4 55,812 1.3 40,558 1.1 37,294 1.0
Arizona 86,700 1.8 68,637 1.5 63,467 1.4 60,995 1.6 77,448 2.2
Ohio 75,950 1.6 47,396 1.0 47,851 1.1 37,603 1.0 15,192 0.4
Connecticut 72,154 1.5 75,946 1.7 81,418 1.8 83,002 2.2 85,204 2.4
North Carolina 69,465 1.4 31,601 0.7 23,260 0.5 19,683 0.5 20,404 0.6
Pennsylvania 68,728 1.4 59,859 1.3 53,355 1.2 43,223 1.1 30,372 0.8
Massachusetts 68,061 1.4 44,300 1.0 45,233 1.0 17,658 0.5 6,371 0.2
Minnesota 63,885 1.3 42,144 0.9 32,866 0.7 23,347 0.6 30,880 0.9
New York 48,395 1.0 38,794 0.8 40,532 0.9 27,700 0.7 13,014 0.4
Michigan 46,661 0.9 46,548 1.0 45,784 1.0 46,239 1.2 10,391 0.3
Alabama 37,624 0.8 39,514 0.9 38,147 0.8 38,604 1.0 43,126 1.2
South Carolina 36,372 0.7 40,674 0.9 26,402 0.6 27,163 0.7 13,792 0.4
Indiana 34,689 0.7 27,191 0.6 25,048 0.5 13,652 0.3 7,556 0.2
Maine 23,039 0.5 9,316 0.2 11,023 0.2 1,208 -- 290 --
Other States 180,873 3.5 177,710 4.0 187,567 4.3 181,028 4.7 201,759 5.7
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$4,911,455 100.0% $4,596,685 100.0% $4,433,827 100.0% $3,851,023 100.0% $3,590,528 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
16
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities and before any reduction
for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred
loan fees and allowace for loan proceeds, deferred loan fees and allowance for
loan losses) by state and property type at June 30, 1997:
- --------------------------------------------------------------------------------------------------------
Residential Multi- Land Sub Commercial % of
State 1-4 Units Family Loans FHA/VA Total Loans Total Total
- ---------- ----------- -------- ------- -------- ---------- ---------- ---------- -----
(Dollars in Thousands)
Nebraska $ 770,077 $ 14,580 $ 2,739 $ 79,405 $ 866,801 $ 70,100 $ 936,901 19.1%
Colorado 689,411 14,634 1,950 17,999 723,994 100,533 824,527 16.8
Kansas 289,606 -- 15 51,904 341,525 23,065 364,590 7.4
Georgia 223,594 -- -- 9,800 233,394 2,068 235,462 4.8
Oklahoma 210,431 -- -- 21,794 232,225 15 232,240 4.7
Texas 155,271 9,360 -- 18,796 183,427 3,364 186,791 3.8
Missouri 133,368 519 -- 19,894 153,781 2,843 156,624 3.2
Virginia 125,692 -- -- 14,806 140,498 -- 140,498 2.9
Maryland 112,396 -- -- 26,483 138,879 -- 138,879 2.8
Iowa 114,593 2,934 -- 13,000 130,527 7,064 137,591 2.8
California 113,377 -- -- 11,301 124,678 3,572 128,250 2.6
Florida 94,407 -- -- 11,161 105,568 11,267 116,835 2.4
Nevada 83,293 -- 15,284 4,672 103,249 6,156 109,405 2.2
New Jersey 106,038 -- -- 984 107,022 -- 107,022 2.2
Illinois 81,743 -- -- 10,526 92,269 -- 92,269 1.9
Washington 83,358 -- -- 7,617 90,975 -- 90,975 1.9
Arizona 70,542 -- -- 9,532 80,074 6,626 86,700 1.8
Ohio 69,384 -- -- 6,566 75,950 -- 75,950 1.6
Connecticut 72,043 -- -- 111 72,154 -- 72,154 1.5
North Carolina 46,622 6,267 -- 3,835 56,724 12,741 69,465 1.4
Pennsylvania 67,404 -- -- 1,324 68,728 -- 68,728 1.4
Massachusetts 67,878 -- -- 183 68,061 -- 68,061 1.4
Minnesota 59,862 48 -- 3,975 63,885 -- 63,885 1.3
New York 47,616 -- -- 436 48,052 343 48,395 1.0
Michigan 43,950 -- -- 2,711 46,661 -- 46,661 0.9
Alabama 32,265 -- -- 5,359 37,624 -- 37,624 0.8
South Carolina 33,953 -- -- 2,419 36,372 -- 36,372 0.7
Indiana 29,419 -- -- 5,270 34,689 -- 34,689 0.7
Maine 23,039 -- -- -- 23,039 -- 23,039 0.5
Other States 156,566 -- -- 15,486 172,052 8,821 180,873 3.5
---------- ------- ------- -------- ---------- -------- ---------- ------
Total $4,207,198 $ 48,342 $19,988 $377,349 $4,652,877 $258,578 $4,911,455 100.0%
========== ======= ======= ======== ========== ======== ========== ======
% of Total 85.7% 1.0% 0.4% 7.7% 94.8% 5.2% 100.0%
========== ======= ======= ======== ========== ======== ==========
17
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
- ---------------------------------
information at June 30, 1997, regarding the dollar amount of all loans and
mortgage-backed securities maturing in the Corporation's portfolio based on
contractual terms to maturity but does not include scheduled payments or an
estimate of possible prepayments. Demand loans (loans having no stated schedule
of repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of
mortgage loans and mortgage-backed securities, management believes that the
following table will bear little resemblance to what will be the actual
repayments of the loan and mortgage-backed securities portfolios. Loan balances
have not been reduced for (i) unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(ii) nonperforming loans.
- ----------------------------------------------------------------------------------------------------
Due During the Year Ended June 30,
------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
1999- After
1998 2002 2002 Total
------------ -------------- -------------- --------------
PRINCIPAL REPAYMENTS (In Thousands)
- --------------------
REAL ESTATE LOANS:
Single-family residential (1)
Fixed-rate $ 77,825 $ 556,061 $ 1,735,165 $ 2,369,051
Adjustable-rate 30,231 147,014 1,855,864 2,033,109
Multi-family residential, land
and commercial real estate
Fixed-rate 19,228 45,808 49,182 114,218
Adjustable-rate 10,379 58,552 129,616 198,547
------------ -------------- -------------- --------------
137,663 807,435 3,769,827 4,714,925
------------ -------------- -------------- --------------
CONSTRUCTION LOANS:
Fixed-rate 52,664 198 -- 52,862
Adjustable-rate 138,248 5,420 -- 143,668
------------ -------------- -------------- --------------
190,912 5,618 -- 196,530
------------ -------------- -------------- --------------
MORTGAGE-BACKED SECURITIES:
Fixed-rate 43,811 115,460 162,799 322,070
Adjustable-rate 11,001 51,168 633,743 695,912
------------ -------------- -------------- --------------
54,812 166,628 796,542 1,017,982
------------ -------------- -------------- --------------
CONSUMER AND OTHER LOANS:
Fixed-rate 100,379 347,023 -- 447,402
Adjustable-rate 3,609 14,850 -- 18,459
------------ -------------- -------------- --------------
103,988 361,873 -- 465,861
------------ -------------- -------------- --------------
PRINCIPAL REPAYMENTS $ 487,375 $ 1,341,554 $ 4,566,369 $ 6,395,298
============ ============== ============== ==============
- ----------------------------------------------------------------------------------------------------
(1) Includes conventional mortgage loans, FHA and VA loans.
18
Scheduled contractual principal repayments do not reflect the actual maturities
of such assets. The average maturity of loans is substantially less than their
average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Corporation the right to declare a loan immediately due and payable in the
event, among other things, that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans
tends to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Annual Report.
The following table sets forth the amount of all loans and mortgage-backed
securities due after June 30, 1998, (July 1, 1998 and thereafter), which have
fixed interest rates and those which have adjustable interest rates. Such loans
and mortgage-backed securities have not been reduced for (i) unamortized
premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and
allowance for loan losses or (ii) nonperforming loans.
- ---------------------------------------------------------------------------------------
Adjustable
Fixed-Rate Rate Total
------------- ------------- -------------
(Dollars In Thousands)
Real estate loans:
Single-family residential $ 2,291,226 $ 2,002,878 $ 4,294,104
Multi-family residential,
land and commercial 94,990 188,168 283,158
Construction loans 198 5,420 5,618
Mortgage-backed securities 278,259 684,911 963,170
Consumer and other loans 347,023 14,850 361,873
------------- ------------- -------------
Principal repayments due
after June 30, 1998 $ 3,011,696 $ 2,896,227 $ 5,907,923
============= ============= =============
- ---------------------------------------------------------------------------------------
LOAN ORIGINATIONS
- -----------------
RESIDENTIAL LOANS. The Corporation, through its 107 branch network and CFMC's
- ------------------
loan offices and nationwide correspondent network, originates and purchases both
fixed-rate and adjustable-rate mortgage loans secured by single-family units.
Such residential mortgage loans are either (i) conventional mortgage loans which
comply with the requirements for sale to, or conversion into securities issued
by, FNMA or FHLMC ("conventional conforming loans"), (ii) mortgage loans which
exceed the maximum loan amount allowed by FNMA or FHLMC, but which otherwise
generally comply with FNMA and FHLMC loan requirements ("conventional
nonconforming loans") or (iii) FHA/VA loans which qualify for sale in the form
of securities guaranteed by GNMA. The Corporation originates substantially all
conventional conforming loans or conventional nonconforming loans (collectively,
"conventional loans") with loan-to-value ratios at or below 80.0% unless the
borrower obtains private mortgage insurance (through the Corporation's mortgage
banking subsidiary, which premium the borrower pays with their mortgage payment)
for the Corporation's benefit covering that portion of the loan in excess of
80.0% of the appraised value. Occasional exceptions to the 80.0% loan-to-value
ratio for conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
19
Fixed-rate residential mortgage loans generally are originated with terms of 15
and 30 years and are amortized on a monthly basis with principal and interest
due each month. Adjustable-rate residential mortgage loans generally are also
originated with terms of 15 and 30 years. However, certain adjustable-rate
loans contain provisions which permit the borrower, at the borrower's option, to
convert at certain periodic intervals over the life of the loan to a long-term
fixed-rate loan. The adjustable-rate loans currently have interest rates which
are scheduled to adjust at six, 12, 24 or 36 month intervals based upon various
indices, including the Treasury Constant Maturity Index or the Eleventh District
Federal Home Loan Bank Board Cost of Funds Index. The amount of any such
interest rate increase is limited to one or two percentage points annually and
four to six percentage points over the life of the loan. Certain adjustable-rate
loans are also offered which have interest rates fixed over annual periods
ranging from two through seven years, and also ten year loans, with such loans
repricing annually after the fixed interest-rate term. Adjustable-rate loans are
primarily offered at the fully indexed contractual rate. The Corporation applies
its underwriting criteria to such loans based on the amount of the loan for
which the borrower could qualify at the indexed rate. At June 30, 1997,
approximately .81%, or $32.8 million, of the Corporation's residential real
estate loan portfolio was 90 days or more delinquent. See "Asset Quality"
herein.
RESIDENTIAL CONSTRUCTION LOANS. Prior to 1995, the Corporation was not actively
- ------------------------------
pursuing construction loans, but provided interim construction financing that
was tied to permanent real estate mortgage loans. Beginning in fiscal year 1995,
the Corporation's single-family residential construction lending activity has
increased primarily as a result of the construction lending operations conducted
by an institution the Corporation acquired in October 1995. During fiscal years
1997, 1996 and 1995, the Corporation originated $188.2 million, $206.4 million
and $216.2 million, respectively, of residential construction loans. The
Corporation conducts its single-family residential construction lending
operations predominantly in its primary five-state market area and Las Vegas,
Nevada. During fiscal year 1997, individual residential construction loan
originations over $1.0 million consisted of 10 loans totaling $16.6 million with
loan-to-value ratios ranging from 68.0% to 78.0% and interest rates ranging from
prime plus 1.25% to prime plus 2.00%. The residential construction lending
operations, which loans are subject to prudent credit review and other
underwriting standards and procedures, are expected to constitute the
approximate same portion of the Corporation's lending business in the future as
in fiscal year 1997. At June 30, 1997, approximately .82%, or $1.5 million, of
the Corporation's residential construction loan portfolio was 90 days or more
delinquent.
Construction financing is considered to involve a higher degree of risk of loss
than long-term financing on improved, occupied real estate. Risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at completion of construction and the estimated cost
(including interest) thereof. During the construction phase, a number of factors
could result in delays and cost overruns. If the estimate of construction costs
proves to be inaccurate, the Corporation may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value proves to be inaccurate, the Corporation may be confronted, at
or prior to the maturity of the loan, with a project having a value which is
insufficient to assure full repayment.
COMMERCIAL REAL ESTATE AND LAND LOANS. The Corporation originated commercial
- --------------------------------------
real estate loans totaling $55.5 million, $45.2 million and $29.4 million,
respectively, during fiscal years 1997, 1996 and 1995. Commercial real estate
lending may entail significant additional risks compared with residential real
estate lending. These additional risks are due to larger loan balances which
are more sensitive to economic conditions, business cycle downturns and
construction related risks. The payment of principal and interest due on the
Corporation's commercial real estate loans is substantially dependent upon the
performance of the projects securing such loans. As an example, to the extent
that the occupancy and rental rates are not high enough to generate the income
necessary to make such payments, the Corporation could experience an increased
rate of delinquency and could be required either to declare such loans in
default and foreclose upon such properties or to make concessions on the terms
of the repayment of such loans. During fiscal year 1997, individual commercial
real estate loan originations over $1.0 million consisted of eight loans
totaling $21.2 million with loan-to-value ratios ranging from 47.0% to 75.0% and
interest rates ranging from 8.25% to 10.0%. At June 30, 1997, approximately
.16%, or $424,000, of the Corporation's commercial real estate and land loans
were 90 days or more delinquent. See "Asset Quality" herein.
The aggregate amount of loans which a federal savings institution may make on
the security of liens on nonresidential real property may not exceed 400.0% of
the institution's total risk-based capital as determined under current
regulatory capital standards. Such limitation totaled approximately $1.979
billion at June 30, 1997, compared to $278.6 million of such loans outstanding
at June 30, 1997. This restriction has not and is not expected to materially
affect the Corporation's business.
CONSUMER LOANS. Federal regulations permit federal savings institutions to make
- ---------------
secured and unsecured consumer loans up to 30.0% of an institution's total
regulatory assets. In addition, a federal savings institution has lending
authority above the 30.0% category for certain consumer loans, such as home
equity loans, property improvement loans, mobile home loans and savings account
secured loans. During fiscal years 1997, 1996 and 1995, the Corporation
originated $333.2 million, $276.5 million and $164.5 million, respectively, of
consumer loans. Consumer loans originated by the Corporation are primarily
second mortgage loans, loans to depositors on the security of their savings
accounts and loans secured by automobiles. The Corporation has increased its
secured consumer lending activities in
20
order to meet its customer's financial needs and will continue to emphasize such
lending activities in the future in its primary market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans. Such loans may
also give rise to claims and defenses by a consumer loan borrower against an
assignee of such loans such as the Corporation, and a borrower may be able to
assert against such assignee claims and defenses which it has against the seller
of the underlying collateral. At June 30, 1997, approximately .45%, or $2.0
million, of the Corporation's consumer loans are 90 days or more delinquent. See
"Asset Quality" herein.
BULK LOAN PURCHASES. Between January 1991 and June 30, 1992, as part of its
- --------------------
balance sheet restructuring, the Corporation purchased 71 whole loan packages,
the majority of which was from the Resolution Trust Corporation ("RTC"),
comprised of 46,500 loans primarily collateralized by single-family residential
properties with principal balances aggregating $2.5 billion. These purchased
loans had a weighted average yield of 8.71%. At June 30, 1997, 1996 and 1995,
the aggregate principal balance of these bulk purchased loans associated with
such restructuring was $494.6 million, $574.4 million and $701.9 million,
respectively.
Based upon both a review and analysis of the information provided by the seller
with respect to each loan package and management's own due diligence review of a
certain percentage (usually 5.0% to 10.0%) of the loans within a loan package,
management established specific estimated allowance amounts which were allocated
from the discount amounts on the loan packages. At June 30, 1997, 1996 and 1995,
$10.8 million, $12.8 million and $15.3 million, respectively, of the discount
amount relating to these purchased loans was allocated to an estimated allowance
amount for potential credit risk associated with such bulk purchased loans.
These allowances are available to absorb losses associated with the respective
purchased loan packages and are not available to absorb losses from other loans.
At June 30, 1997, 1996 and 1995, $18.3 million, $17.8 million and $17.8,
respectively, of these purchased loans were past due 90 days or more.
To the extent opportunities to make similar bulk purchases of loans become
available, the Corporation will consider making such purchases in the future.
The Corporation also purchases loans from its correspondent network and will
continue to do so in the future. During fiscal years 1997, 1996 and 1995, the
Corporation purchased $300.2 million, $286.1 million and $461.3 million,
respectively, of other loan packages not associated with the aforementioned
restructuring efforts.
21
Loan Sales. In addition to originating loans for its portfolio, the
- -----------
Corporation, through its mortgage banking subsidiary, participates in secondary
mortgage market activities by selling whole and securitized loans to
institutional investors or other financial institutions with the Corporation
generally retaining the right to service such loans. Substantially all of the
Corporation's secondary mortgage market activity is with GNMA, FNMA and FHLMC.
Conventional conforming loans are either sold for cash as individual whole loans
to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC
which are then sold to investment banking firms.
FHA/VA loans are originated or purchased by the Corporation's mortgage banking
subsidiary and, either are retained for the Corporation's real estate loan
portfolio, or are pooled to form GNMA securities which are subsequently sold to
investment banking firms, or are sold to the Bank and retained in the
Corporation's mortgage-backed securities held for investment portfolio.
During fiscal years 1997, 1996 and 1995, the Corporation sold an aggregate of
$552.2 million, $667.7 million and $654.4 billion, respectively, in mortgage
loans resulting in net gains of $386,000 and $164,000, respectively, in fiscal
years 1997 and 1996, and a net loss of $1.7 million in fiscal year 1995. Of the
amount of mortgage loans sold during fiscal year 1997, $549.3 million were sold
in the secondary market, of which 64.3% were converted into GNMA securities,
31.2% were sold directly to FNMA or FHLMC for cash or were exchanged for
securities issued by FNMA or FHLMC, and the remaining were sold to other
institutional investors. At June 30, 1997, the carrying value of loans held for
sale totaled $68.7 million.
The net gains recorded in fiscal years 1997 and 1996 are attributable to the
relatively stable interest rate environments over the respective periods.
Effective January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125") on a
prospective basis as required. SFAS No. 125 supersedes the provisions of SFAS
No. 122. The adoption of SFAS No. 125 did not have a material effect on the
Corporation's financial position or results of operations. Both statements
require capitalization of internally originated mortgage servicing rights as
well as purchased mortgage servicing rights. At June 30, 1997, 1996 and 1995,
mortgage servicing rights totaled $47.8 million, $45.0 million and $36.2
million, respectively. SFAS No. 125 also requires that mortgage servicing rights
be reported at the lower of cost or fair value. Mortgage servicing rights are
stratified by loan type and interest rate for purposes of impairment
measurement. Impairment losses are recognized to the extent the unamortized
mortgage servicing right for each stratum exceeds the current market value, as
reductions in the carrying value of the asset, through the use of a valuation
allowance, with a corresponding reduction to loan servicing income. No valuation
allowance for capitalized servicing rights was necessary to be established as of
June 30, 1997 or 1996. The future effect of SFAS No. 125 is dependent, among
other items, upon the volume and type of loans originated, the general levels of
market interest rates and the rate of estimated loan prepayments.
Mortgage loans are generally sold in the secondary mortgage market without
recourse to the Corporation in the event of borrower default, subject to certain
limitations applicable to VA loans. Historical losses realized by the
Corporation as a result of limitations applicable to VA loans have been
immaterial on an annual basis. However, in connection with a 1987 acquisition
of a financial institution, the Bank assumed agreements providing for recourse
in the event of default on obligations transferred in connection with sales of
certain securities by such institution. At June 30, 1997, the remaining balance
of such loans sold with recourse totaled $28.3 million.
22
Set forth below is a table showing the Corporation's loan and mortgage-backed
securities activity for the three fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(In Thousands)
LOANS ORIGINATED:
Real estate loans-
Residential loans (1) $ 416,885 $ 593,488 $ 564,731
Construction loans 188,215 206,364 216,191
Commercial real estate and land loans 55,461 45,214 29,381
Consumer loans 333,188 276,507 164,499
----------- ----------- -----------
Loans originated $ 993,749 $ 1,121,573 $ 974,802
=========== =========== ===========
LOANS PURCHASED:
Conventional mortgage loans-
Residential loans $ 826,654 $ 607,878 $ 604,958
Bulk loan purchases (2) 300,212 286,066 461,299
Commercial loans -- -- 942
Mortgage-backed securities -- 50,197 11,504
----------- ----------- -----------
Loans purchased $ 1,126,866 $ 944,141 $ 1,078,703
=========== =========== ===========
LOANS SECURITIZED:
Conventional mortgage loans securitized
into mortgage-backed securities $ 46,165 $ 63,445 $ 189,031
=========== =========== ===========
ACQUISITIONS:
Residential real estate loans $ 83,413 $ 138,679 $ 101,067
Consumer loans 51,639 27,599 12,173
Mortgage-backed securities 36,194 82,580 42,648
----------- ----------- -----------
Loans from acquisitions $ 171,246 $ 248,858 $ 155,888
=========== =========== ===========
LOANS SOLD:
Conventional mortgage loans $ 552,233 $ 667,683 $ 654,439
Mortgage-backed securities 72,275 178,580 40,815
----------- ----------- -----------
Loans sold $ 624,508 $ 846,263 $ 695,254
=========== =========== ===========
- ------------------------------------------------------------------------------------------------------------
(1) Includes single-family and multi-family residential loans and FHA and VA
loans. In addition, includes loans refinanced of $97,413, $176,520 and
$32,564 for fiscal years 1997, 1996 and 1995, respectively.
(2) Includes commercial loans purchased of $4,938 for fiscal year 1997.
23
LOAN SERVICING. The Corporation, through its mortgage banking subsidiary,
- ---------------
services substantially all of the mortgage loans that it originates and
purchases (whether retained for the Bank's portfolio or sold in the secondary
market), thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At June 30, 1997, the Bank's
mortgage banking subsidiary was servicing approximately 107,900 loans and
participations for others with principal balances aggregating $5.952 billion,
compared to 107,800 loans with principal balances totaling $5.870 billion at
June 30, 1996. At June 30, 1997, adjustable-rate mortgage loans represented
18.1% of the aggregate dollar amount of loans in the servicing portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General," -- "Loan Servicing Fees" and -- "Note 23 - Segment
Information" in the Annual Report for information pertaining to revenue from
servicing loans for others.
Loan servicing includes collecting and remitting loan payments, accounting for
principal and interest, holding escrow (impound funds) for payment of taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event of
unremedied defaults and generally administering the loans for the investors to
whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others, ranging
generally from .25% to .50% per annum on the declining principal balances of the
loans. The average service fee collected by the Corporation was .41% and .42%,
respectively, for fiscal years 1997 and 1996. The Corporation's servicing
portfolio is subject to reduction primarily by reason of normal amortization and
prepayment of outstanding mortgage loans. In general, the value of the
Corporation's loan servicing portfolio may also be adversely affected as
mortgage interest rates decline and loan prepayments increase. It is expected
that income generated from the Corporation's loan servicing portfolio also will
decline in such an environment. This negative effect on the Corporation's
income may be offset somewhat by a rise in origination and servicing fee income
attributable to new loan originations, which historically have increased in
periods of low mortgage interest rates. The weighted average mortgage loan note
rate of the Corporation's servicing portfolio at June 30, 1997, was 7.89%
compared to 7.90% at June 30, 1996.
At June 30, 1997, 95.0% of the Corporation's mortgage servicing portfolio for
other institutions was covered by servicing agreements pursuant to the mortgage-
backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. During fiscal year 1997, the average amount of funds advanced by
the Corporation pursuant to servicing agreements was approximately $2.4 million.
INTEREST RATES AND LOAN FEES. Interest rates charged by the Corporation on its
- -----------------------------
loans are primarily determined by secondary market yield requirements and
competitive loan rates offered in its lending areas. Nebraska, Iowa and Oklahoma
law do not provide an interest rate limitation on loans secured by real estate,
however, such states do impose various limitations on the interest rate which
may be charged on installment and personal loans made to non-corporate
borrowers. Generally, interest rates on these loans are limited in Nebraska as
follows: (i) 19.0% for unsecured loans made for the purpose of property
alterations or repairs and for loans made in accordance with the provisions of
Titles I or II of the National Housing Act, and (ii) 16.0% for loans to
individuals providing such loans are not secured by real estate, total less than
$25,000 and are not home improvement loans. Oklahoma and Iowa laws generally
limit interest rates charged on installment and personal loans made to non-
corporate borrowers to 21.0%, although loans in excess of $45,000 and $25,000,
respectively, are not subject to any interest rate limitation. Colorado
statutory usury limitations prohibit the Corporation from contracting for
payment by the debtor of any loan finance charge in excess of a 45.0% annual
percentage rate when the loan is secured by a first lien against real estate or
is for a business or commercial purpose. Colorado usury limitations also
restrict the Corporation for all other loans, excluding business or commercial
purpose loans, from contracting for payment by the debtor of any loan finance
charge in excess of a 21.0% annual law imposes various interest rate limitations
on consumer loans of $25,000 or less which are generally limited to 18.0% per
annual percentage rate. Kansas law limits the interest rate on fixed-rate non-
business loans secured by real estate to an index based on FHLMC securities,
while interest rates imposed on variable rate mortgages are generally not
limited. In addition to interest earned on loans, the Corporation receives
loan
24
origination fees for originating certain loans. These fees are a percentage of
the principal amount of the mortgage loan and are charged to the borrower.
LOAN COMMITMENTS. At June 30, 1997, the Corporation had issued commitments of
- -----------------
$150.8 million, excluding undisbursed portion of loans in process, to fund and
purchase loans. These commitments are generally expected to settle within three
months following June 30, 1997. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" in the Annual Report.
COLLECTION PROCEDURES. If a borrower fails to make required payments on a loan,
- ----------------------
the Corporation generally will take immediate action to satisfy its claim
against the security for the loan. If a delinquency cannot otherwise be cured,
the Corporation records a notice of default and commences foreclosure
proceedings. When a trustee sale is held, the Corporation generally acquires
title to the property. The property may then be sold for cash or with financing
conforming to normal loan requirements, or it may be sold or financed with a
"loan to facilitate" involving terms more favorable to the borrower than those
permitted by applicable regulations for new loans.
ASSET QUALITY
- -------------
NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are placed on a
- ---------------------
nonaccruing status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on a nonaccruing status when
either principal or interest is 90 days or more past due. Interest accrued and
unpaid at the time a loan is placed on nonaccruing status is charged against
interest income. Subsequent payments are applied to the outstanding principal
balance until such time as the loan is removed from nonaccruing status.
Real estate acquired by the Corporation as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. Such property is stated at the lower of cost or fair value, minus
estimated costs to sell. Valuation allowances for estimated losses on real
estate are subsequently provided when the carrying value exceeds the fair value
minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when a
delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of ownership
would still be retained by the borrower. The evaluation of borrowers and
collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring. In
these circumstances, the Corporation would strive to ensure that the borrower's
continued participation in and management of the collateral does not put the
Corporation at further risk of loss. In situations in which the borrower is not
performing under the restructured terms, foreclosure proceedings are commenced
when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for reasons
related to the debtor's financial difficulties, grants a concession to the
debtor, such as a reduction in the loan's interest rate, a reduction in the face
amount of the debt, or an extension of the maturity date of the loan, that the
Corporation would not otherwise consider. A loan classified as a troubled debt
restructuring may be reclassified as current if such loan has returned to a
performing status at a market rate of interest for at least 8 to 12 months, the
loan-to-value ratio is 80.0% or less, the cash flows generated from the
collateralized property support the loan amount subject to minimum debt service
coverage as defined and overall applicable economic conditions are favorable.
Such loans have decreased steadily over the past five fiscal years to a balance
of $9.6 million at June 30, 1997, compared to $14.8 million and $17.9 million,
respectively, at June 30, 1996 and 1995. No materially significant loans
classified as troubled debt restructuring have been added to the Corporation's
nonperforming assets since fiscal year 1994.
The Corporation's nonperforming assets totaling $63.5 million decreased by $3.1
million, or 4.6%, at June 30, 1997, compared to June 30, 1996, primarily as a
result of net decreases of $5.2 million in troubled debt restructurings and $1.1
million in nonperforming loans offset by a net increase of $3.2 million in real
estate.
25
The following table sets forth information with respect to the Bank's
nonperforming assets at June 30 as follows:
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis: (1)
Real estate -
Residential $34,348 $34,660 $30,841 $27,470 $29,888
Commercial 424 2,357 773 5,613 1,377
Consumer 2,042 888 644 409 322
------- ------- ------- ------- --------
Total 36,814 37,905 32,258 33,492 31,587
------- ------- ------- ------- --------
Accruing loans which are contractually
past due 90 days or more - - - - -
------- ------- ------- ------- --------
Total nonperforming loans 36,814 37,905 32,258 33,492 31,587
------- ------- ------- ------- --------
Real estate: (2)
Commercial 8,417 8,850 8,795 16,869 23,808
Residential 8,599 4,986 3,784 4,566 6,519
------- ------- ------- ------- --------
Total 17,016 13,836 12,579 21,435 30,327
------- ------- ------- ------- --------
Troubled debt restructurings: (3)
Commercial 8,857 13,894 16,566 19,455 39,852
Residential 787 909 1,294 1,580 2,164
------- ------- ------- ------- --------
Total 9,644 14,803 17,860 21,035 42,016
------- ------- ------- ------- --------
Nonperforming assets $63,474 $66,544 $62,697 $75,962 $103,930
======= ======= ======= ======= ========
Nonperforming loans to total loans (4) 0.68% 0.77% 0.69% 0.83% 0.85%
Nonperforming assets to total assets 0.89% 1.01% 0.95% 1.27% 1.97%
- ---------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Other loans $37,658 $36,513 $33,261 $27,530 $24,637
Bulk purchased loans (5) 10,809 12,765 15,280 17,321 22,271
------- ------- ------- ------- --------
Total $48,467 $49,278 $48,541 $44,851 $46,908
======= ======= ======= ======= ========
Allowance for bulk purchased loan
losses to bulk purchased loans (5) 2.19% 2.22% 2.18% 2.00% 1.69%
Allowance for loan losses (other loans)
to total loans (less bulk purchased loans) 0.77% 0.83% 0.84% 0.87% 1.02%
Allowance for loan losses to total loans (4) 0.90% 0.99% 1.04% 1.11% 1.26%
Allowance for loan losses
to total nonperforming assets 76.36% 74.05% 77.42% 59.04% 45.13%
Allowance for loan losses (other loans)
to total nonperforming loans
(less nonperforming bulk purchased loans) (6) 203.19% 182.00% 230.10% 171.61% 183.16%
- ---------------------------------------------------------------------------------------------------------
(Continued on next page)
26
(1) During fiscal years 1997, 1996 and 1995, the Corporation did not record any
interest income on these nonaccruing loans. Had these loans been current in
accordance with their original terms and outstanding throughout this fiscal
year or since origination, the Corporation would have recorded gross
interest income on these loans of $2.4 million, $2.2 million and $1.9
million, respectively.
(2) Real estate as a component of nonperforming assets does not include
performing real estate held for investment, which totaled $2.7 million, $2.8
million and $4.2 million, respectively, at June 30, 1997, 1996 and 1995.
(3) During fiscal years 1997, 1996 and 1995, the Corporation recognized interest
income on these loans classified as troubled debt restructurings aggregating
$804,000, $1.3 million and $1.7 million, respectively, whereas under their
original terms the Corporation would have recognized interest income of
$985,000, $1.5 million and $1.9 million, respectively. At June 30, 1997,
the Corporation had no material commitments to lend additional funds to
borrowers whose loans were subject to troubled debt restructuring.
(4) Based on the total balance of loans receivable (before any reduction for
unamortized discounts net of premiums, undisbursed loan proceeds, deferred
loan fees and allowance for loan losses) at the respective dates.
(5) At June 30, 1997, 1996 and 1995, $10.8 million, $12.8 million and $15.3
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans is included in the total
allowance for loan losses to provide for the credit risk associated with
these bulk purchased loans, which had balances of $494.6 million, $574.4
million and $701.9 million, respectively, at June 30, 1997, 1996 and 1995.
These allowances are available only to absorb losses associated with the
respective bulk purchased loans and are not available to absorb losses from
other loans.
(6) Nonperforming bulk purchased loans approximating $18.3 million, $17.8
million and $17.8 million, respectively, at June 30, 1997, 1996 and 1995,
and the allowance for loan losses associated with the total bulk purchased
loans, have been excluded from this calculation since these allowances are
not available to absorb the losses associated with other loans in the
portfolio.
- --------------------------------------------------------------------------------
For a discussion of the major components of the $3.1 million decrease in
nonperforming assets during the fiscal year ended June 30, 1997, compared to
June 30, 1996, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Provision for Loan Losses and Real Estate
Operations" in the Annual Report.
27
The geographic concentration of nonperforming loans at June 30 was as follows:
- --------------------------------------------------------------------------------------
State 1997 1996 1995 1994 1993
- ----- --------- --------- --------- --------- ---------
(In Thousands)
Texas $ 3,274 $ 3,290 $ 3,601 $ 4,417 $ 3,377
California 2,977 4,624 3,758 3,966 2,802
Nebraska 2,629 2,352 2,037 1,551 2,237
Georgia 2,601 3,389 2,559 2,355 3,273
Missouri 2,402 2,018 1,864 1,720 2,334
Oklahoma 2,303 1,496 1,019 541 609
Kansas 2,041 2,012 469 1,022 1,407
Illinois 1,754 1,158 1,234 1,502 1,976
Maryland 1,623 1,548 743 613 --
Colorado 1,489 2,789 2,794 5,016 2,260
Florida 1,389 891 1,553 1,148 1,268
New Jersey 1,060 1,069 1,680 1,361 793
Connecticut 860 739 643 37 385
Pennsylvania 855 663 715 823 967
Virginia 656 880 446 790 552
Arizona 619 411 539 569 2,061
New York 606 447 855 407 366
Indiana 489 238 411 145 113
Washington 449 647 745 841 465
North Carolina 392 205 455 237 220
Other States 6,346 7,039 4,138 4,431 4,122
--------- --------- --------- --------- ---------
Nonperforming loans $ 36,814 $ 37,905 $ 32,258 $ 33,492 $ 31,587
========= ========= ========= ========= =========
- --------------------------------------------------------------------------------------
Nonperforming loans at June 30, 1997, consisted of 1,096 loans with an average
balance of $33,589. Nonperforming loans totaling $36.8 million at June 30,
1997, consisted of $424,000 (three loans) collateralized by commercial real
estate, $32.8 million (757 loans) collateralized by residential real estate,
$1.5 million (10 loans) collateralized by residential construction real estate
and $2.0 million (326 loans) of consumer loans.
28
The geographic concentration of nonperforming real estate at June 30 was as
follows:
- ----------------------------------------------------------------------------------------
State 1997 1996 1995 1994 1993
- ----- --------- --------- --------- --------- ---------
(In Thousands)
Nebraska $ 5,565 $ 5,356 $ 5,770 $ 6,868 $ 8,871
Colorado 5,161 6,011 6,823 4,027 8,241
California 1,191 187 109 64 8,772
Georgia 933 187 510 2,549 1,016
Kansas 832 36 47 138 551
Nevada 603 -- -- -- --
Missouri 522 125 262 219 --
Oklahoma 509 384 391 1,348 2,888
Florida 277 312 197 115 --
New Jersey 240 270 280 90 362
Texas 220 1,608 999 8,323 653
Iowa 106 108 129 248 1,664
Pennsylvania 102 116 326 351 --
Tennessee -- -- 119 -- 23
Other states 1,940 2,063 624 1,484 774
Unallocated reserves (1,185) (2,927) (4,007) (4,389) (3,488)
--------- --------- --------- --------- ---------
Nonperforming real estate $ 17,016 $ 13,836 $ 12,579 $ 21,435 $ 30,327
========= ========= ========= ========= =========
- -----------------------------------------------------------------------------------------
At June 30, 1997, total nonperforming commercial real estate amounted to $8.4
million (18 properties) or 49.5% of the $17.0 million in total nonperforming
real estate (consisting of 179 properties), and the remaining $8.6 million (161
properties) consisted of nonperforming residential real estate. The
Corporation's commercial real estate at June 30, 1997, is located primarily in
Colorado and Nebraska.
Under the Corporation's credit policies and practices, certain real estate loans
meet the definition of impaired loans under Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" and
Statement of Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." A loan is
considered impaired when it is probable that the Corporation, based upon current
information, will not collect amounts due, both principal and interest,
according to the contractual terms of the loan agreement. Certain loans are
exempt from the provisions of the aforementioned accounting statements,
including large groups of smaller-balance homogenous loans that are collectively
evaluated for impairment which, for the Corporation, include one-to-four family
first mortgage loans and consumer loans. Loan impairment is measured based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the observable market
price of the loan or the fair value of the collateral if the loan is collateral
dependent.
Loans reviewed for impairment by the Corporation are primarily limited to loans
modified in a troubled debt restructuring (after July 1, 1994) and commercial
real estate loans. The Corporation's impaired loan identification and
measurement processes are conducted in conjunction with the Corporation's review
of classified assets and adequacy of its allowance for possible loan losses.
Specific factors utilized in the impaired loan identification process include,
but are not limited to, delinquency status, loan-to-value ratio, debt coverage
and certain other conditions pursuant to the Corporation's classification
policy. At June 30, 1997, the Corporation had impaired loans totaling $7.4
million, net of specific reserves, of which $6.5 million are classified as
troubled debt restructurings. This balance of troubled debt restructurings is
included in the Corporation's $8.9 million balance as shown in the table for
nonperforming assets.
29
CLASSIFICATION OF ASSETS. Savings institutions are required to review their
- -------------------------
assets on a regular basis and, as warranted, classify them as "substandard,"
"doubtful," or "loss" as defined by OTS regulations. Adequate general valuation
allowances are required to be established for assets classified as substandard
or doubtful. If an asset is classified as a loss, the institution must either
establish a specific valuation allowance equal to the amount classified as loss
or charge off such amount. An asset which does not currently warrant
classification as substandard but which possesses credit deficiencies or
potential weaknesses deserving close attention is required to be designated as
"special mention." In addition, a savings institution is required to set aside
adequate valuation allowances to the extent that any affiliate possesses assets
which pose a risk to the savings institution. The OTS has the authority to
approve, disapprove or modify any asset classification or any amount established
as an allowance pursuant to such classification. Based on a review of the
Corporation's portfolio at June 30, 1997, pursuant to reporting on the quarterly
thrift financial report, the Corporation had $16.3 million in assets classified
as special mention, $60.9 million in assets classified as substandard, no assets
classified as doubtful or as loss. As required, specific valuation allowances
have been established in an amount equal to 100.0% of all assets classified as
loss. Substantially all nonperforming assets at June 30, 1997, are classified
as either substandard or loss pursuant to applicable asset classification
standards. Of the Corporation's loans which were not classified at June 30,
1997, there were no loans where known information about possible credit problems
of borrowers caused management to have serious doubts as to the ability of the
borrowers to comply with present loan repayment terms.
LOAN AND REAL ESTATE REVIEW POLICY. Management of the Corporation has the
- -----------------------------------
responsibility of establishing policies and procedures for the timely evaluation
of the credit risk in the Corporation's loan and real estate portfolios.
Management is also responsible for the determination of all specific and
general provisions for loan and real estate losses, taking into consideration a
number of factors, including changes in the composition of the Corporation's
loan portfolio and real estate balances, current economic conditions, including
real estate market conditions in the Corporation's lending areas, that may
affect the borrower's ability to make payments on loans, regular examinations by
the Corporation's credit review group of the quality of the overall loan and
real estate portfolios, and regular review of specific problem loans and real
estate. See "Nonperforming Assets" herein.
Management also has the responsibility of ensuring timely charge-offs of loan
and real estate balances, as appropriate, when general and economic conditions
warrant a change in the value of these loans and real estate. To ensure that
credit risk is properly and timely monitored, this responsibility has been
delegated to a credit review group which consists of key personnel of the
Corporation knowledgeable in the specific areas of loan and real estate
valuation.
The objectives of the credit review group are (i) to define the risk of
collectibility of the Corporation's loans and the likelihood of liquidation of
real estate and other assets and their book value, (ii) to identify problem
assets at the earliest possible time, (iii) to assure an adequate level of
allowances for possible losses to cover identified and anticipated credit risks,
(iv) to monitor the Corporation's compliance with established policies and
procedures, and (v) to provide the Corporation's management with information
obtained through the asset review process.
This credit review group analyzes all significant loans and real estate of the
Corporation for appropriate levels of reserves on these assets based on varying
degrees of loan or real estate value weakness. Accordingly, these types of
loans and real estate are assigned a credit risk rating ranging from one
(excellent) to six (loss). Loans and real estate with minimal credit risk (not
adversely classified or with a credit risk rating of one to four) generally have
general reserves established on the basis of the Corporation's historical loss
experience. Loans and real estate adversely classified (substandard, loss or
with a credit risk rating of five or six) generally have greater levels of
general reserves similarly established on the basis of the Corporation's
historical loss experience, as well as specific reserves established as
applicable to recognize permanent declines in the value of loans or real estate.
30
It is management's responsibility to maintain a reasonable allowance for loan
losses applicable to all categories of loans through periodic charges to
operations. The Corporation employs a systematic methodology to determine the
amount of general loan losses, in addition to specific valuation allowances, to
be recorded as a percentage of the respective loan balances as follows:
General
Loan Loss
Type of Loan and Status Percentage
----------------------- ----------
RESIDENTIAL REAL ESTATE LOANS:
Current .25%
90 days delinquent (or classified substandard) 7.50
RESIDENTIAL CONSTRUCTION LOANS:
Current 1.00
90 days delinquent 12.50
COMMERCIAL REAL ESTATE LOANS:
Current 1.00
Classified special mention 2.00
90 days delinquent (or classified substandard) 10.00
CONSUMER LOANS:
Current .50
Classified substandard and 90 days delinquent 20.00
120 days delinquent 100.00
( The unsecured balance of consumer loans over
120 days delinquent is generally written off )
As appropriate, management of the Corporation attempts to ensure that the
Corporation's reserves are in general compliance with previously established
regulatory examination guidelines.
ALLOWANCE FOR LOSSES ON LOANS. The allowance for loan losses is based upon
- ------------------------------
management's continuous evaluation of the collectibility of outstanding loans,
which takes into consideration such factors as changes in the composition of the
loan portfolio and economic conditions that may affect the borrower's ability to
pay, regular examinations by the Corporation's credit review group of specific
problem loans and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Provision for Loan
Losses and Real Estate Operations" in the Annual Report.
The Corporation's policy is to charge-off loans or portions thereof against the
allowance for loan losses in the period in which loans or portions thereof are
determined to be uncollectible. A majority of the Corporation's loans are
collateralized by residential or commercial real estate. Therefore, the
collectibility of such loans is susceptible to changes in prevailing real estate
market conditions and other factors which can cause the fair value of the
collateral to decline below the loan balance. When the Corporation records
charge-offs on these loans, it also begins the foreclosure process of taking
possession of the real estate which served as collateral for such loans.
Recoveries of loan charge-offs generally occur only when the loan deficiencies
are completely cured. Upon foreclosure and conversion of the loan into real
estate owned, the Corporation may realize a credit to real estate operations
through the disposition of such real estate when the sale proceeds exceed the
value of the real estate.
During fiscal year 1997 consumer loan charge-offs, net of recoveries, totaled
$7.0 million compared to $3.5 million and $1.3 million, respectively, during
fiscal years 1996 and 1995. Consumer loan balances increased to $451.6 million
at June 30, 1997, from $344.1 million and $231.8 million, respectively, at June
30, 1996 and 1995. Net consumer loan charge-offs of the Corporation reflect the
overall trend in consumer credit quality deterioration generally experienced by
the financial industry in the last 12 months. Management intends to increase
its consumer loan portfolio, however, with improved underwriting and credit
review procedures in place, along with improved collection efforts, implemented
during fiscal year 1997, management does not anticipate similar increases in the
loan loss provisions or in net charge-offs for consumer loans in fiscal 1998.
31
Although management believes that the Corporation's allowance for loan losses is
adequate to reflect the risk inherent in its portfolios, there can be no
assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults. In addition, regulatory
agencies review the adequacy of the allowance for losses on loans on a regular
basis as an integral part of their examination process. Such agencies may
require additions to the allowance based on their judgments of information
available to them at the time of their examinations.
32
The following table sets forth the activity in the Bank's allowance for loan
losses for the fiscal years ended June 30 as indicated:
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Allowance for losses on
loans at beginning of year $ 49,278 $ 48,541 $ 44,851 $ 46,908 $ 50,704
----------- ----------- ----------- ----------- -----------
Loans charged-off:
Single-family residential (2,083) (1,130) (1,171) (940) (1,475)
Multi-family residential
and commercial real estate -- (210) (842) (2,083) (1,264)
Consumer (9,116) (4,193) (1,758) (1,075) (1,043)
----------- ----------- ----------- ----------- -----------
Loans charged-off (11,199) (5,533) (3,771) (4,098) (3,782)
----------- ----------- ----------- ----------- -----------
Recoveries:
Single-family residential 3 20 64 147 --
Multi-family residential
and commercial real estate 175 46 815 164 857
Consumer 2,079 668 455 432 404
----------- ----------- ----------- ----------- -----------
Recoveries 2,257 734 1,334 743 1,261
----------- ----------- ----------- ----------- -----------
Net loans charged-off (8,942) (4,799) (2,437) (3,355) (2,521)
----------- ----------- ----------- ----------- -----------
Provision charged to operations 8,121 6,107 6,408 6,248 6,185
----------- ----------- ----------- ----------- -----------
Railroad activity for the six months
ended June 30, 1994, net -- -- (58) -- --
Allowances acquired in acquisitions 1,966 1,944 1,818 -- --
Estimated allowance added
for bulk purchased loans (1) -- -- -- 39 173
Change in estimate of allowance
for bulk purchased loans (1)(2) (1,878) (2,273) (1,705) (4,357) (5,334)
Charge off to allowance
for bulk purchased loans (1) (78) (242) (336) (632) (2,299)
----------- ----------- ----------- ----------- -----------
Allowances for losses on loans at end of year $ 48,467 $ 49,278 $ 48,541 $ 44,851 $ 46,908
=========== =========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net loans charged-off to average
loans outstanding during the year 0.18% 0.10% 0.06% 0.11% 0.13%
- --------------------------------------------------------------------------------------------------------------------------
(1) At June 30, 1997, 1996 and 1995, $10.8 million, $12.8 million and $15.3
million, respectively, of allowance for loan losses for bulk purchased
loans, which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans, was included in the total
allowance for loan losses. Such bulk purchased loans had balances of $494.6
million, $574.4 million and $701.9 million, respectively, at June 30, 1997,
1996 and 1995. These allowances are available only to absorb losses
associated with the respective bulk purchased loans and are not available
to absorb losses from other loans.
(2) Consists primarily of changes in estimates of allowance amounts for bulk
purchased loans resulting from the 100% payoff of such purchased loans or
from loan principal paydowns such that these reclassed allowance amounts
will be amortized into income as a yield adjustment over the respective
remaining lives of the related purchased loans.
33
INVESTMENT ACTIVITIES
- ---------------------
The Corporation is required by federal regulations to maintain average daily
balances of liquid assets (defined as U.S. Treasury and other governmental
agency obligations, cash, deposits maintained pursuant to Federal Reserve Board
requirements, time and savings deposits in certain institutions, obligations of
states and political subdivisions thereof, shares in mutual funds with certain
restricted investment policies, highly rated corporate debt, and mortgage loans
and mortgage related securities with less than one year to maturity or subject
to purchase within one year) equal to the monthly average of not less than a
specified percentage (currently 5.0%) of its net withdrawable savings deposits
plus short-term borrowings. The Corporation is also required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of net withdrawable savings accounts and
borrowings payable in one year or less.
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with these regulatory requirements. As of June 30, 1997,
the Corporation had total average liquid assets of $327.9 million, which
consisted of $34.6 million in cash, $1.9 million in federal funds and $291.4
million in agency-backed securities. The Corporation's liquidity and short-term
liquidity ratios were 5.77% and 1.48%, respectively, at June 30, 1997. See
"Regulation -- Liquidity Requirements." The Corporation's management objective
is to maintain liquidity at a level sufficient to assure adequate funds, taking
into account anticipated cash flows and available sources of credit, to allow
future flexibility to meet withdrawal requests, to fund loan commitments, to
maximize income while protecting against credit risks and to manage the
repricing characteristics of the Corporation's assets and liabilities. Such
liquid funds are managed in an effort to produce the highest yield consistent
with maintaining safety of principal and within regulations governing the thrift
industry. The relative size and mix of investment securities in the
Corporation's portfolio are based on management's judgment compared to the
yields and maturities available on other investment securities. The Corporation
emphasizes low credit risk in selecting investment options.
The following table sets forth the carrying value of the Corporation's
investment securities held to maturity and short-term cash investments at June
30:
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Treasury and other Government agency obligations $ 345,877 $ 213,800 $ 296,443
Obligations of states and political subdivisions 14,068 18,642 --
Other securities 19,182 10,703 1,050
---------- ---------- ----------
Total investment securities held to maturity 379,127 243,145 297,493
Interest earning cash on deposit (federal funds) -- 2,400 6,345
---------- ---------- ----------
Total Investments $ 379,127 $ 245,545 $ 303,838
========== ========== ==========
- ------------------------------------------------------------------------------------------------------
34
The following table sets forth the scheduled maturities, carrying values, market
values and weighted average yields for the Corporation's investment securities
held to maturity at June 30, 1997:
- ----------------------------------------------------------------------------------------------------------------------------------
One Year Over One Within Over Five Within
or Less Five Years Ten Years
------------------------- ------------------------- -------------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $ 45,224 5.38% $ 135,677 5.75% $ 65,000 7.29%
States and political subdivisions -- -- 2,696 6.75 11,001 6.28
Other debt securities -- -- 100 7.09 926 12.50
----------- ----------- ----------- ----------- ----------- -----------
Total $ 45,224 5.38% $ 138,473 5.77% $ 76,927 7.21%
=========== =========== =========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
More Than
Ten Years Total
------------------------- ---------------------------------------
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
Investment securities held to maturity:
- ---------------------------------------
U.S. Treasury and other
Government agency obligations $ 99,976 7.91% $ 345,877 $ 343,824 6.61%
States and political subdivisions 371 5.50 14,068 13,950 6.35
Other debt securities 18,156 7.21 19,182 19,322 7.47
----------- ----------- ----------- ----------- -----------
Total $ 118,503 7.80% $ 379,127 $ 377,096 6.65%
=========== =========== =========== =========== ===========
For further information regarding the Corporation's investment securities held
to maturity, see Note 3 to the Notes to Consolidated Financial Statements in the
Annual Report.
35
SOURCES OF FUNDS
- ----------------
GENERAL. Deposits have historically been the major source of the Corporation's
- --------
funds for lending and other investment purposes. In addition to deposits, the
Corporation derives funds from principal and interest repayments on loans and
mortgage-backed securities, sales of loans, FHLB advances, securities sold under
agreements to repurchase, prepayment and maturity of investment securities, and
other borrowings. At June 30, 1997, deposits made up 66.7% of total interest-
bearing liabilities compared to 70.6% at June 30, 1996. Deposit levels are
significantly influenced by general interest rates, economic conditions and
competition. Other borrowings, primarily FHLB advances, are utilized to
compensate for any decreases in the normal or expected inflow of deposits.
The Corporation anticipates that it will in the future continue to grow its
present five-state franchise through an ongoing program of selective
acquisitions of other financial institutions. During fiscal year 1997 the
Corporation consummated the acquisitions of Heritage and Investors. In
addition, subsequent to June 30, 1997, the Corporation entered into definitive
agreements to acquire three financial institutions: Liberty Financial
Corporation, Mid Continent Bancshares, Inc., and First National Bank Shares,
LTD. See Notes 2 and 29 to the Consolidated Financial Statements for additional
information on these completed and pending acquisitions. Such completed and
proposed acquisitions present the Corporation with the opportunity to further
expand its retail network over last fiscal year in the Iowa and Kansas markets
and to enter the Arizona market, as well as to increase its earnings potential
by increasing its mortgage and consumer loan volumes funded by deposits which
generally bear lower rates of interest than alternative sources of funds.
DEPOSITS. The Corporation's deposit strategy is to emphasize retail branch
- ---------
deposits through extensive marketing efforts and product promotion, such as by
offering a variety of checking accounts and deposit programs to satisfy customer
needs. As such, during fiscal year 1997, NOW accounts increased $49.8 million,
from $332.2 million at June 30, 1996, to $382.1 million at June 30, 1997. In
addition, during fiscal year 1997 passbook accounts increased $118.5 million,
from $623.5 million at June 30, 1996 to $742.0 million at June 30, 1997. Market
rate savings decreased at June 30, 1997, to $137.9 million compared to $159.7
million at June 30, 1996. Rates on deposits are priced based on investment
opportunities as the Corporation attempts to control the flow of funds in its
deposit accounts according to its business objectives and the cost of
alternative sources of funds.
Fixed-term, fixed-rate retail certificates are the primary sources of deposits
for the Corporation and at June 30, 1997, represented 71.2% (or $3.117 billion)
of the Bank's total deposits compared to 74.1% at June 30, 1996 (or $3.189
billion). The Corporation offers certificate accounts with terms ranging from
one month to 120 months.
Total deposits increased $74.3 million during fiscal year 1997 from $4.305
billion at June 30, 1996, to $4.379 billion at June 30, 1997. This increase is
primarily a result of the acquisitions of Heritage and Investors with acquired
deposits totaling $158.2 million and $26.1 million, respectively. For fiscal
year 1997, this increase was partially offset by decreases due mainly to
depositors leaving for higher interest rates.
36
The following table sets forth the balances and percentages of the various types
of deposits offered by the Corporation at the dates indicated and the change in
the dollar amount of deposits between such dates:
June 30, 1997 June 30, 1996 June 30, 1995
---------------------------------- ---------------------------------- ----------------------
% of Increase % of Increase % of
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits
---------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
Passbook accounts $ 741,994 16.9% $118,489 $ 623,505 14.5% $ 73,648 $ 549,857 13.7%
NOW accounts 382,076 8.7 49,843 332,233 7.7 35,681 296,552 7.4
Market rate savings 137,892 3.2 (21,780) 159,672 3.7 (31,322) 190,994 4.8
Certificates of deposit 3,116,957 71.2 (72,209) 3,189,166 74.1 215,246 2,973,920 74.1
---------- ------- ---------- ---------- ------- --------- ---------- -------
Total Deposits $4,378,919 100.0% $ 74,343 $4,304,576 100.0% $293,253 $4,011,323 100.0%
========== ======= ========== ========== ======= ========= ========== =======
37
The following table shows the composition of average deposit balances and
average rates for the fiscal years indicated:
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Passbook accounts $ 684,977 4.29% $ 582,706 4.24% $ 541,061 4.38%
NOW accounts 351,190 0.71 436,027 0.63 277,995 0.93
Market rate savings 149,641 3.48 170,886 3.34 218,646 3.36
Certificate of deposit 3,199,572 5.72 2,966,505 6.10 2,752,501 5.33
---------- ---------- ---------- ---------- ---------- ----------
Average deposit accounts $4,385,380 5.02% $4,156,124 5.15% $3,790,203 4.76%
---------- ---------- ---------- ---------- ---------- ----------
------------------------------------------------------------------------------
The following table sets forth the Corporation's certificates of deposit (fixed
maturities) classified by rates for the three fiscal years ended June 30 as
indicated:
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Rate
----
Less than 3.00% $ 6,708 $ 8,848 $ 11,846
3.00% - 3.99% 6,327 19,978 67,404
4.00% - 4.99% 200,708 285,083 518,061
5.00% - 5.99% 2,170,421 1,948,836 1,017,841
6.00% - 6.99% 604,337 606,704 1,026,035
7.00% - 7.99% 113,030 300,040 290,950
8.00% - 8.99% 10,844 15,090 34,798
9.00% and over 4,582 4,587 6,985
---------- ---------- ----------
Certificates of deposit $3,116,957 $3,189,166 $2,973,920
========== ========== ==========
The following table presents the outstanding amount of certificates of deposit
in amounts of $100,000 or more by time remaining until maturity for the three
fiscal years ended June 30 as indicated:
- ------------------------------------------------------------------------------------------------------------
Maturity Period
- -----------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
Three months or less $ 69,350 $ 98,128 $ 63,978
Over three through six months 29,531 43,718 37,346
Over six through twelve months 34,989 73,999 37,025
Over twelve months 48,426 62,994 64,728
---------- ---------- ----------
Total $ 182,296 $ 278,839 $ 203,077
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's deposits, see Note 12 to the
Notes to Consolidated Financial Statements in the Annual Report.
38
BORROWINGS. The Corporation has also relied upon other
- -----------
borrowings, primarily advances from the FHLB of Topeka, as additional sources of
funds. Advances from the FHLB of Topeka are typically secured by the
Corporation's stock in the FHLB and a portion of first mortgage real estate
loans. The maximum amount of FHLB advances which the FHLB will advance for
purposes other than meeting deposit withdrawals fluctuates from time to time in
accordance with federal regulatory policies. The Corporation is required to
maintain an investment in FHLB stock in an amount equal to the greater of 1.0%
of the aggregate unpaid loan principal of the Corporation's loans secured by
home mortgage loans, home purchase contracts and similar obligations, or 5.0% of
advances from the FHLB to the Corporation. The Corporation is also required to
pledge such stock as collateral for FHLB advances. In addition to this
collateral requirement, the Corporation is required to pledge additional
collateral which may be unencumbered whole residential first mortgages with an
aggregate unpaid principal amount equal to 158.0% of the Corporation's total
outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of
the market value of U.S. government or U.S. government agency guaranteed
securities, including mortgage-backed securities, as collateral for the
outstanding FHLB advances. Pursuant to this requirement, as of June 30, 1997,
the Corporation had pledged $2.8 billion of its real estate loans and held FHLB
stock of $72.5 million.
At June 30, 1997, the Corporation had advances totaling approximately $1.416
billion from the FHLB of Topeka at interest rates ranging from 5.06% to 7.90%
and at a weighted average rate of 5.94%. At June 30, 1996, such advances from
the FHLB totaled $1.350 billion at interest rates ranging from 4.61% to 9.43%
and at a weighted average rate of 5.66%.
The Corporation also borrows funds under repurchase agreements. During fiscal
years 1997 and 1996 the Corporation utilized securities sold under agreements to
repurchase primarily for liquidity and asset liability management purposes.
Under a repurchase agreement, the Corporation sells securities (generally,
government agency securities and GNMA, FNMA, FHLMC and AA rated privately issued
mortgage-backed securities) and agrees to buy such securities back at a
specified price at a subsequent date. Repurchase agreements are generally made
for terms ranging from one day to four years, are subject to renewal, and are
deemed to be borrowings collateralized by the securities sold. At June 30,
1997, the Corporation's repurchase agreements aggregated $639.3 million at an
average rate of 6.04%. The Corporation's repurchase agreements were
collateralized by $599.4 million and $73.8 million, respectively, of mortgage-
backed securities and investment securities at June 30, 1997. At June 30, 1997,
these repurchase agreements had maturities ranging from August 1997 to May 1999
with a weighted average maturity of 305 days.
Set forth below is certain information relating to the Corporation's securities
sold under agreements to repurchase at the dates and for the periods indicated:
- -----------------------------------------------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------
1997 1996 1995
----------- ---------- ----------
Balance at end of year $ 639,294 $ 380,755 $ 208,373
Maximum month-end balance $ 696,318 $ 380,755 $ 208,373
Average balance $ 591,288 $ 189,568 $ 103,223
Weighted average interest rate during the year 6.19% 7.14% 7.59%
Weighted average interest rate at the end of year 6.04% 6.51% 7.08%
- -----------------------------------------------------------------------------------------------------------------
For further information regarding the Corporation's FHLB advances and securities
sold under agreements to repurchase, see Notes 13 and 14 to the Notes to the
Consolidated Financial Statements in the Annual Report.
39
CUSTOMER SERVICES. The Corporation aggressively markets its various checking
- ------------------
and loan products as they are mass market entry points to target all consumers.
This enables it to attract and service customers to which it can cross-sell its
numerous services on a cost-effective, profitable basis with the goal of
providing them with 100% of their financial needs. Accordingly, management
continues to update data processing equipment in the Corporation's branch
operations in order to provide a cost-effective and efficient delivery of
services to its customers. The Corporation also has been proactive in the
implementation of new consumer-oriented technologies, offering home banking
services by providing Microsoft's Money, Intuit's Quicken, and America Online's
BankNow financial software to its customer base. The Corporation continues to
strive to meet the customer's financial needs. This is exemplified by the
availability of home banking via personal computers, extended evening and
weekend branch hours, extended hour customer service lines, and 24-hour
telephone bill paying services. Additional information about the Corporation and
its competitive products also can be accessed through the Corporation's "web
site" at http://www.comfedbank.com. At June 30, 1997, there were 107
strategically located proprietary automatic teller machines ("ATMs") in use.
These ATMs are also linked with a series of regional, national and international
ATM services, including CASHBOX, CIRRUS, NETS, and MINIBANK. As a result of the
Corporation's participation in these ATM services, electronic banking machines
are currently available worldwide for the convenience of the Corporation's
customers.
SUBSIDIARIES
- ------------
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to 1.0% of its consolidated regulatory
assets when such additional investment is used for community development
purposes. In addition, federal savings institutions meeting regulatory capital
requirements and certain other tests may invest up to 50.0% of their regulatory
core capital in conforming first mortgage loans to service corporations. Under
such limitations, at June 30, 1997, the Bank was authorized to invest up to
$212.5 million in the stock of, or loans to, service corporations (based upon
the 3.0% limitation). As of June 30, 1997, the Bank's investment in capital
stock in its service corporations and their wholly-owned subsidiaries was $19.0
million less unsecured loans including conforming loans from those entities
totaling $5.4 million for a net investment of $13.6 million.
Regulatory capital standards also contain a provision requiring that in
determining capital compliance all savings associations must deduct from capital
the amount of all post April 12, 1989, investments in and extensions of credit
to subsidiaries engaged in activities not permissible for national banks.
Currently, the Bank has one subsidiary, Commercial Federal Service Corporation,
engaged in activities not permissible for national banks. Investments in such
subsidiary must be 100% deducted from capital. See "Regulation -- Regulatory
Capital Requirements." At June 30, 1997, the total investment in such
subsidiary was $3.8 million which was deducted from capital. Capital deductions
are not required for investment in subsidiaries engaged in non-national bank
activities as agent for customers rather than as principal, subsidiaries engaged
solely in mortgage banking activities, and certain other exempted subsidiaries.
The Bank is also required to give the FDIC and the Director of OTS 30 days prior
notice before establishing or acquiring a new subsidiary, or commencing any new
activity through an existing subsidiary. Both the FDIC and the Director of OTS
have authority to order termination of subsidiary activities determined to pose
a risk to the safety or soundness of the institution.
At June 30, 1997, the Bank had eleven wholly-owned subsidiaries, two of which
own and operate certain real estate properties of the Bank. As such, these
subsidiaries are considered engaged in permissible activities and do not require
deductions from capital as discussed above. In 1994, CFMC was approved by the
OTS to be classified as an "operating subsidiary" and as such, CFMC ceased to
be subject to the regulatory investment in service corporation limitations as of
June 30, 1994. The remaining wholly-owned subsidiaries, exclusive of CFMC, are
classified as service corporations. The principal active subsidiaries of the
Bank are described below.
COMMERCIAL FEDERAL MORTGAGE CORPORATION ("CFMC"). CFMC is a full-service
- -------------------------------------------------
mortgage banking company. The Corporation's real estate lending, secondary
marketing, mortgage servicing and foreclosure activities are conducted
primarily through CFMC. At June 30, 1997, CFMC serviced 63,000 loans for the
Bank and 107,900 loans for others. See "Loan Originations -- Loan Servicing."
40
CFC Preferred Trust ("CFCPT"). CFCPT is a statutory business trust created under
- -----------------------------
Delaware law pursuant to a trust agreement executed, in part, by the Corporation
and the filing of a certificate of trust with Delaware on January 30, 1997.
CFCPT exists for the exclusive purposes of (i) issuing and selling its trust
securities, (ii) using the proceeds from the sale of such trust securities to
acquire Debentures issued by the Corporation, and (iii) engaging in only those
other activities necessary, convenient or incidental thereto. See, "General -
Cumulative Trust Preferred Securities Offering."
COMMERCIAL FEDERAL INVESTMENT SERVICES, INC. ("CFIS"). CFIS offers customers
- ------------------------------------------------------
discount brokerage services through INVEST, a service of INVEST Financial
Corporation ("IFC"), in 30 of the Corporation's branch offices. INVEST provides
investment advice and access to all major stock, bond, mutual fund, and option
markets. IFC, the registered broker-dealer, provides all support functions
either independently or through affiliates. INVEST affects transactions only on
behalf of its customers and does not buy or sell for its own account nor does it
underwrite securities.
COMMERCIAL FEDERAL INSURANCE CORPORATION ("CFIC"). CFIC was formed in
- -------------------------------------------------
November 1983 and serves as a full-service independent insurance agency,
offering a full line of homeowners, commercial, health, auto and life insurance
products. Additionally, a wholly-owned subsidiary of CFIC provides reinsurance
on credit life and disability policies written by an unaffiliated carrier for
consumer loan borrowers of the Corporation.
COMMERCIAL FEDERAL SERVICE CORPORATION ("CFSC"). CFSC was formed primarily to
- ------------------------------------------------
develop and manage real estate, principally apartment complexes located in
eastern Nebraska, directly and through a number of limited partnerships.
Subsidiaries of CFSC act as general partner and syndicator in many of the
limited partnerships. Under the capital regulations discussed above, the Bank's
investments in and loans to CFSC are fully excluded from regulatory capital.
See "Regulation -- Regulatory Capital Requirements."
EMPLOYEES
- ---------
At June 30, 1997, the Corporation and its wholly-owned subsidiaries had 1,541
full-time equivalent employees. The Corporation provides its employees with a
comprehensive benefit program, including basic and major medical insurance,
dental plan, a deferred compensation 401(k) plan, life insurance, accident
insurance, short and long-term disability coverage and sick leave. The
Corporation also offers loans with below market rates to its employees who
qualify based on term of employment (except that no preferential rates or terms
are offered to executive officers and senior management). The Corporation
considers its employee relations to be good.
EXECUTIVE OFFICERS
- ------------------
For certain information concerning the Registrant's directors and executive
officers as of June 30, 1997, refer to Part III -- Item 10. "Directors and
Executive Officers of the Registrant" of this report.
COMPETITION
- -----------
The Corporation faces strong competition in the attraction of deposits and in
the origination of real estate loans. Its most direct competition for savings
deposits has come historically from commercial banks and from thrift
institutions located in its primary market areas. The Corporation's primary
market area for savings deposits includes Nebraska, Colorado, Kansas, Oklahoma
and Iowa and, for loan originations, includes Nebraska, Colorado, Kansas,
Oklahoma, Iowa and Las Vegas, Nevada (residential construction lending).
Management believes that the Corporation's extensive branch network has enabled
the Corporation to compete effectively for deposits and loans against commercial
banks and other financial institutions. The Corporation has been able to attract
savings deposits primarily by offering depositors a wide variety of deposit
accounts, convenient branch locations, a full range of financial services and
competitive rates of interest.
The Corporation's competition for real estate loans comes principally from other
thrift institutions, mortgage banking companies, commercial banks, insurance
companies and other institutional lenders. The Corporation competes for loans
principally through the efficiency and quality of the service provided to
borrowers and the interest rates and loan fees charged.
41
REGULATION
----------
GENERAL
- -------
As a federal savings bank, the Bank is subject to extensive regulation by the
OTS. The lending and deposit taking activities and other investments of the Bank
must comply with various regulatory requirements. The OTS periodically examines
the Bank for compliance with various regulatory requirements and the FDIC also
has the authority to conduct special examinations of the Bank because its
deposits are insured by the SAIF. The Bank must file reports with the OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. As a savings and loan holding company, the Corporation is subject
to the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to below or appear
elsewhere herein.
The laws and regulations governing savings institutions have been through at
least two major revisions in recent years. First, the Riegel-Neal Interstate
Banking and Efficiency Act of 1994, effective on June 1, 1997, permits
commercial banks interstate branching which could result in more intense
competition from out of state banks. Second, on September 30, 1996, the
Regulatory Paperwork Reduction Act was signed into law. Among other things, this
legislation substantially eliminated the premium differential between SAIF
insured institutions and BIF insured institutions. The new legislation also
provides for the merger of SAIF and BIF if certain conditions are met by January
1, 1999.
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
At June 30, 1997, the Bank exceeded all minimum regulatory capital requirements
mandated by the OTS. The following table sets forth information relating to the
Bank's regulatory capital compliance at June 30, 1997:
- -----------------------------------------------------------------------------------------------------------------------------
Dollars in Thousands Actual Requirement Excess
- -----------------------------------------------------------------------------------------------------------------------------
Bank's stockholder's equity $497,882
Add unrealized holding loss on securities
available for sale, net 417
Less intangible assets (48,178)
Less investments in non-includable subsidiaries (3,830)
- -----------------------------------------------------------------------------------------------------------------------------
Tangible capital $446,291 $106,079 $340,212
- -----------------------------------------------------------------------------------------------------------------------------
Tangible capital to adjusted assets(1) 6.31% 1.50% 4.81%
- -----------------------------------------------------------------------------------------------------------------------------
Tangible capital $446,291
Plus certain restricted amounts of other intangible assets 11,796
- -----------------------------------------------------------------------------------------------------------------------------
Core capital (Tier 1 capital) $458,087 $212,511 $254,576
- -----------------------------------------------------------------------------------------------------------------------------
Core capital to adjusted assets(2) 6.47% 3.00% 3.47%
- -----------------------------------------------------------------------------------------------------------------------------
Core Capital $458,087
Plus general loan loss allowances 36,846
Less amount of land loans and non-residential
construction loans in excess of an 80.0% loan-to-value ratio (173)
- -----------------------------------------------------------------------------------------------------------------------------
Risk-based capital (Total capital) $494,760 $286,597 $208,163
- -----------------------------------------------------------------------------------------------------------------------------
Risk-based capital to risk-weighted assets(3) 13.81% 8.00% 5.81%
- -----------------------------------------------------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $7,071,906
(2) Based on adjusted total assets totaling $7,083,702
(3) Based on risk-weighted assets totaling $3,582,459
- -----------------------------------------------------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five regulatory capital categories: well-capitalized, adequately-
capitalized, undercapitalized, significantly undercapitalized and critically
42
undercapitalized; and authorized banking regulatory agencies to take prompt
corrective action with respect to institutions in the three undercapitalized
categories. These corrective actions become increasingly more stringent as an
institution's regulatory capital declines. In addition, the OTS has adopted a
prompt corrective action rule under which a savings institution that has a core
capital ratio of less than 4.0% would be deemed to be "undercapitalized" and may
be subject to certain sanctions. At June 30, 1997, the Bank exceeded the
minimum requirements for the well-capitalized category as shown in the following
table:
- ---------------------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk- to Risk-
Total Assets Weighted Assets Weighted Assets
- ---------------------------------------------------------------------------------------------
Percentage of adjusted assets 6.47% 12.79% 13.81%
Minimum requirements to be
classified well-capitalized 5.00% 6.00% 10.00%
- ---------------------------------------------------------------------------------------------
Under OTS capital regulations, savings institutions must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal
to 3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS has recently adopted regulations which impose
certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated Composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definition as core capital. See "-- Prompt Corrective Regulatory
Action."
Under the OTS's capital regulations, tangible capital is defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries and certain nonwithdrawable accounts and
pledged deposits, less intangible assets, with only a limited exception for
purchased mortgage servicing rights and purchased credit card relationships.
Purchased mortgage servicing rights and purchased credit card relationships may
be deducted from tangible capital, if not meeting certain criteria (the lower
of 90.0% of fair market value, 90.0% of original cost, or 100.0% of current
amortized book value).
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets. Effective December 31, 1994, no newly added
intangible assets other than those includable in tangible capital are permitted
to be included in core capital. The Bank's core capital of $458.1 million at
June 30, 1997, includes no qualifying supervisory goodwill and $11.8 million of
restricted amounts of certain intangible assets (core value of deposits).
Regulatory capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. Certain subsidiaries are exempted from this
treatment, including any subsidiary engaged in impermissible activities solely
as agent for its customers (unless the FDIC determines otherwise), subsidiaries
engaged solely in mortgage banking, and depository institution subsidiaries
acquired prior to May 1, 1989. In addition, the capital deduction is not
applied to federal savings associations existing as of August 9, 1989, that were
either chartered as a state savings bank or state cooperative bank prior to
October 1, 1982, or that acquired their principal assets from such an
association.
Accordingly, at June 30, 1997, the Bank had approximately $3.8 million of debt
and equity invested in CFSC which is engaged in activities not permissible for
national banks which was deducted from capital. See "Business -- Subsidiaries."
43
Adjusted total assets for purposes of the core and tangible capital requirements
are equal to a savings institution's total assets as determined under generally
accepted accounting principles, increased by certain goodwill amounts and by a
prorated portion of the assets of subsidiaries in which the savings institution
holds a minority interest and which are not engaged in activities for which the
capital rules require the savings institution to net its debt and equity
investments in such subsidiaries against capital, as well as a prorated portion
of the assets of other subsidiaries for which netting is not fully required
under phase-in rules. Adjusted total assets are reduced by the amount of assets
that have been deducted from capital and the portion of savings institution's
investments in subsidiaries that must be netted against capital under the
capital rules and, for purposes of the core capital requirement, qualifying
supervisory goodwill.
In determining compliance with the risk-based capital requirement, the Bank is
allowed to include both core capital and supplementary capital in its total
capital, provided the amount of supplementary capital included does not exceed
its core capital. Supplementary capital is defined to include certain preferred
stock issues, nonwithdrawable accounts and pledged deposits that do not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the Bank's general loss allowances. Allowances for
loan and lease losses includable in capital are includable only up to 1.25% of
risk-weighted assets. In addition, equity investments and those portions of
nonresidential construction and land loans, and loans with loan-to-value ratios
in excess of 80.0% must be deducted from total capital under the same phase-out
period as is applied to investments in subsidiaries engaged in activities not
permissible for national banks. The Bank's investments subject to this
deduction totaled $173,000 at June 30, 1997, which was deducted from capital in
accordance with applicable regulations.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each on-balance-sheet asset and the credit-equivalent
amount of each off-balance-sheet item after being multiplied by an assigned risk
weight. Under the OTS risk-weighting system, cash and securities backed by the
full faith and credit of the U.S. government are given a zero percent risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20.0% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80.0%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80.0% and average annual occupancy rates over 80.0%, and certain
qualifying loans for the construction of one- to four-family residences pre-sold
to home purchasers are assigned a risk weight of 50.0%. Consumer loans, non-
qualifying residential construction loans and commercial real estate loans,
repossessed assets and assets more than 90 days past due, as well as all other
assets not specifically categorized, are assigned a risk weight of 100.0%. The
portion of equity investments not deducted from core or supplementary capital is
assigned a 100.0% risk-weight. OTS capital regulations require savings
institutions to maintain minimum total capital, consisting of core capital plus
supplemental capital, equal to 8.0% of risk-weighted assets.
The OTS' risk-based capital requirments require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any, to
be deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. The Bank has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the rule and
believes that it will not be required to increase its total capital as a result
of the rule.
44
The OTS has adopted a prompt corrective action rule under which a savings
institution that has a core capital ratio of less than 4.0% would be deemed to
be "undercapitalized" and may be subject to certain sanctions. See "Prompt
Corrective Regulatory Action."
In addition to generally applicable capital standards for savings institutions,
the Director of the OTS is authorized to establish the minimum level of capital
for a savings institution at such amount or at such ratio of capital-to-assets
as the Director determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution. The Director of
the OTS may treat the failure of any savings institution to maintain capital at
or above such level as an unsafe or unsound practice and may issue a directive
requiring any savings institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
- -----------------------------
The FHLB of Topeka serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Topeka. Under applicable
law, long-term advances may only be made for the purpose of providing funds for
residential housing lending. At June 30, 1997 the Bank had advances of $1.4
billion from the FHLB of Topeka.
The Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Topeka, the Bank is required to acquire and hold shares of capital stock
in the FHLB of Topeka in an amount at least equal to the greater of (i) 1.0% of
the Bank's aggregate unpaid principal of its residential mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
(ii) 5.0% of its then outstanding advances (borrowings) from the FHLB of Topeka.
The Bank was in compliance with this requirement at June 30, 1997, with an
investment in FHLB of Topeka stock totaling $72.5 million compared to a required
amount of $70.8 million. During fiscal years 1997, 1996 and 1995 the Bank
received income from its investment in FHLB stock totaling $4.6 million, $5.8
million and $6.0 million, respectively.
LIQUIDITY REQUIREMENTS
- ----------------------
Federal regulations require savings associations to maintain an average daily
balance of liquidity assets (defined as cash, deposits maintained pursuant
Federal Reserve Board requirements, time and savings deposits in certain
institutions, U.S. Treasury and other government agency obligations, obligations
of states and political subdivisions thereof, shares in mutual funds with
certain restricted investment policies, highly rated corporate debt, and
mortgage loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to a monthly average of
not less than a specified percentage of its net withdrawable savings deposits
plus short-term borrowings. This liquidity requirement, which is currently
5.0%, may be changed from time to time by the OTS to any amount within the range
of 4.0% to 10.0% depending upon economic conditions and the savings flows of
savings associations. Regulations also require each savings association to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet liquidity requirements. The average liquidity and
short-term liquidity ratios of the Bank as of June 30, 1997, were 5.77% and
1.48%, respectively.
On May 14, 1997, the OTS proposed the following amendments in an effort to
update, simplify and streamline its liquidity regulation: (i) exclude accounts
with unexpired maturities exceeding one year from the definition of "net
withdrawable accounts," (ii) streamline the average balance calculations of
liquid assets and liquidity base; (iii) reduce the liquid asset requirement from
5.0% to 4.0% and remove the 1.0% short-term requirement, (iv) expand the
categories of liquid assets that count toward satisfaction of the liquidity
requirement, and (v) add a general safety and soundness requirement.
45
QUALIFIED THRIFT LENDER TEST
- ----------------------------
The Home Owners' Loan Act (the "HOLA") requires savings institutions to meet a
qualified thrift lender ("QTL") test. A savings institution that does not meet
the QTL test must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank; (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must cease any
activity and not retain any investment not permissible for a national bank and
immediately repay any outstanding FHLB advances (subject to safety and soundness
considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65.0% of "portfolio assets." Under OTS regulations, portfolio assets
are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20.0% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50.0% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20.0% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200.0% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In order
to maintain QTL status, the savings institution must maintain a weekly average
percentage of Qualified Thrift Investments to portfolio assets equal to 65.0% on
a monthly average basis in nine out of 12 months. A savings institution that
fails to maintain QTL status will be permitted to requalify once, and if it
fails the QTL test a second time, it will become immediately subject to all
penalties as if all time limits on such penalties had expired.
At June 30, 1997, approximately 90.1% of the Bank's portfolio assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
RESTRICTIONS ON CAPITAL DISTRIBUTIONS
- -------------------------------------
OTS regulations impose certain limitations on the payment of dividends and other
capital distributions (including stock repurchases and cash mergers) by the
Bank. Under these regulations, a savings institution that, immediately prior
to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75.0% of its net income for the previous four quarters; or (b) up to 100.0% of
its net income to date during the calendar year plus an amount that would reduce
by one-half the amount by which its ratio of total capital to assets exceeded
its fully phased-in risk-based capital ratio requirement at the beginning of the
calendar year. A savings institution with total capital in excess of current
minimum capital ratio requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Association") is permitted, after notice, to make
capital distributions without OTS approval of up to 75.0% of its net income for
the previous four quarters, less dividends already paid for such period. At
June 30, 1997, the Bank qualified as a Tier 1 Association, and would be
permitted to pay an aggregate amount approximating $113.1 million in dividends
under these regulations. A savings institution that fails to meet current
minimum capital requirements (a "Tier 3 Association") is prohibited from making
any capital distributions without the prior approval of the OTS. A Tier 1
Association that has been notified by the OTS that its is in need of more than
normal supervision will be treated as either a Tier 2 or Tier 3 Association.
The Bank is a Tier 1 Association. Despite the above authority, the OTS may
prohibit any savings institution from making a capital distribution that would
otherwise be permitted by the regulation, if the OTS were to determine that the
distribution constituted an unsafe or unsound practice. Furthermore, under the
OTS's prompt corrective action regulations, which took effect on December 19,
1992, the Bank would be prohibited from making any capital distributions if,
after making the distribution, the Bank would have: (i) a total risk-based
capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less
than 4.0%; or (iii) a leverage ratio of less than 4.0%. See "-- Prompt
Corrective Regulatory Action."
46
ENFORCEMENT
- -----------
Under the Federal Deposit Insurance Act of 1996 (the "FDI Act"), the OTS has
primary enforcement responsibility over savings institutions and has the
authority to bring enforcement action against all "institution-related parties,"
including stockholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on a savings institution. Civil penalties cover a wide range of
violations and actions and range up to $25,000 per day unless a finding of
reckless disregard is made, in which case penalties may be as high as $1.0
million per day. Criminal penalties for most financial institution crimes
include fines of up to $1.0 million and imprisonment for up to 30 years. In
addition, regulators have substantial discretion to take enforcement action
against an institution that fails to comply with its regulatory requirements,
particularly with respect to the capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship or the termination of deposit insurance. Under
the FDI Act, the FDIC has the authority to recommend to the Director of OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances.
DEPOSIT INSURANCE
- -----------------
The Bank is charged an annual premium by the SAIF for federal insurance of its
insurable deposit accounts up to applicable regulatory limits. The FDIC may
establish an assessment rate for deposit insurance premiums which protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and effect of the assessment rate on the earnings and
capital of SAIF members. The SAIF assessment is based on the capital adequacy
and supervisory rating of the institution and is assigned by the FDIC.
The FDIC has adopted a risk-based deposit insurance assessment system under
which the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC which is
determined by the institution's capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- based on the data reported to
regulators for the date closest to the last day of the seventh month preceding
the semi-annual assessment period. Well capitalized institutions are
institutions satisfying the following capital ratio standards: (i) total risk-
based capital ratio of 10.0% or greater; (ii) Tier 1 risk-based capital ratio of
6.0% or greater; and (iii) Tier 1 leverage ratio of 5.0% or greater. Adequately
capitalized institutions are institutions that do not meet the standards for
well capitalized institutions but which satisfy the following capital ratio
standards: (i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1
risk-based capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of
4.0% or greater. Undercapitalized institutions consist of institutions that do
not qualify as either "well capitalized" or "adequately capitalized." Within
each capital group, institutions are assigned to one of three subgroups on the
basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
On August 8, 1995, the FDIC approved a significant reduction in the deposit
insurance premiums charged to those financial institutions that are members of
the BIF. The FDIC adopted an amendment to the BIF risk-based assessment
schedule which lowered the deposit insurance assessment rate for most commercial
banks and other depository institutions with deposits insured by the BIF to a
range from 0.31% of insured deposits for undercapitalized BIF-insured
institutions to 0.04% of deposits for well-capitalized institutions, which
constitute over 90% of BIF-insured institutions. The FDIC amendment became
effective September 30, 1995. No similar reduction was approved for
institutions, such as the Bank, that are members of the SAIF. Subsequently, the
FDIC reduced the premium rate for the most highly rated BIF-insured institutions
to the statutory minimum of $1,000 per semi-annual period and reduced the rate
paid by undercapitalized BIF-insured institutions to 0.27% of insured deposits.
The FDIC amendment created a substantial disparity in the deposit insurance
premiums paid by the BIF and SAIF members and placed SAIF-insured savings
institutions at a significant competitive disadvantage to BIF-insured
institutions.
47
In order to recapitalize the SAIF and address this premium disparity, the
Deposit Insurance Funds Act of 1996, effective September 30, 1996, authorized
the FDIC to impose a one-time special assessment on institutions with SAIF-
assessable deposits in order to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits as of October 1, 1996.
Institutions were assessed at the rate of .657% based on the amount of their
SAIF-assessable deposits as of March 31, 1995. For the Corporation, this
nonrecurring special assessment totaled $27.1 million before income taxes and is
recorded in the general and administrative expense section of the Consolidated
Statement of Operations under a separate line item captioned "Federal deposit
insurance special assessment."
The FDIC adopted a new assessment schedule for SAIF deposit insurance pursuant
to which the assessment rate for well-capitalized institutions with the highest
supervisory ratings would be reduced to zero and institutions in the lower risk
assessment classification will be assessed at the rate of .27% of insured
deposits. Until December 31, 1999, however, SAIF-insured institutions will be
required to pay assessments to the FDIC at the rate of .064% of insured deposits
to help fund interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government established to finance
takeovers of insolvent thrifts. During this period, BIF members will be
assessed for FICO obligations at the rate of .013% of insured deposits. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments. The Corporation's annual deposit insurance rate in effect
prior to this recapitalization was .23% of insured deposits, declining to .18%
of insured deposits for the quarter ended December 31, 1996, and reduced to
.064% of insured deposits effective January 1, 1997.
The FDI Act provides that the BIF and SAIF will be merged into a single deposit
insurance fund effective December 31, 1999, but only if there are no insured
savings associations on that date. The legislation directed the Department of
Treasury to make recommendations to Congress for the establishment of a single
charter for banks and thrifts. Management of the Corporation cannot predict
accurately at this time what effect this legislation will have on the
Corporation.
The FDIC is authorized to raise insurance premiums for SAIF-member institutions
in certain circumstances. If the FDIC determines to increase the assessment
rate for all SAIF-member institutions, institutions in all risk categories could
be affected. While an increase in premiums for the Bank could have an adverse
effect on the Bank's earnings, a decrease in premiums could have a positive
impact on the earnings of the Bank.
Since the SAIF now meets its designated reserve ratio as a result of the special
assessment, SAIF members are now permitted to convert to the status of members
of the BIF and may merge with or transfer assets to a BIF member. However,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of the SAIF deposit insurance premiums effectively eliminated this
disparity and will have the effect of increasing the net income of the Bank and
restoring the competitive equality between BIF-insured and SAIF-insured
institutions.
The FDIC has adopted a regulation which provides that any insured depository
institution with a ratio of Tier 1 capital to total assets of less than 2.0%
will be deemed to be operating in an unsafe or unsound condition, which would
constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than certain purchased servicing rights and purchased credit card
receivables and qualifying supervisory goodwill eligible for inclusion in core
capital under OTS regulations and minus identified losses and investments in
certain securities subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2.0% of total assets may also be deemed to be
operating in an unsafe or unsound condition notwithstanding such capital level.
The regulation further provides that in considering applications that must be
submitted to it by savings institutions, the FDIC will take into account whether
the savings association is meeting the
48
Tier 1 capital requirement for state non-member banks of 4.0% of total assets
for all but the most highly rated state non-member banks.
TRANSACTIONS WITH RELATED PARTIES
- ---------------------------------
Transactions between savings institutions and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
institution is any company or entity which controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections 23A and 23B (i)
limit the extent to which the savings institution or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10.0% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings institution may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
institution.
Further, savings institutions are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions are also subject to the requirements and restrictions of
Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires approval by the board of directors of a
depository institution for extension of credit to executive officers of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10.0% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
49
CLASSIFICATION OF ASSETS
- ------------------------
Savings institutions are required to classify their assets on a regular basis,
to establish appropriate allowances for losses and report the results of such
classification quarterly to the OTS. Troubled assets are classified into one of
four categories as follows: Special Mention Assets, Substandard Assets,
Doubtful Assets and Loss Assets.
A special mention asset has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution's
credit position at some future date. Special mention assets are not considered
as adversely classified and do not expose an institution to sufficient risk to
warrant adverse classification. An asset classified substandard is inadequately
protected by the current net worth and paying capacity of the obligor or by the
collateral pledged, if any. Assets so classified must have a well-defined
weakness or weaknesses. They are characterized by the distinct possibility that
an association will sustain some loss if the deficiencies are not corrected. An
asset classified doubtful has the weaknesses of those classified substandard,
with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. That portion of an asset classified loss is
considered uncollectible and of such little value that its continuance as an
asset, without establishment of a specific valuation allowance or charge-off, is
not warranted. This classification does not necessarily mean that an asset has
absolutely no recovery or salvage value; but rather, it is not practical or
desirable to defer writing off a basically worthless asset (or portion thereof)
even though partial recovery may be effected in the future.
With respect to classified assets, if the OTS concludes that additional assets
should be classified or that the valuation allowances established by the savings
institution are inadequate, the examiner may determine, subject to review by the
savings institution's Regional Director, the need for and extent of additional
classification or any increase necessary in the savings institution's general or
specific valuation allowances. A savings institution is also required to set
aside adequate valuation allowances to the extent that an affiliate possesses
assets posing a risk to the institution and to establish liabilities for off-
balance sheet items, such as letters of credit, when loss becomes probable and
estimable.
In August 1993, the OTS issued revised guidance for the classification of assets
and a new policy on the classification of collateral-dependent loans (where
proceeds from repayment can be expected to come only from the operation and sale
of the collateral). With limited exceptions, effective September 30, 1993, for
troubled collateral-dependent loans where it is probable that the lender will be
unable to collect all amounts due, an institution must classify as "loss" any
excess of the recorded investment in the loan over its "value", and classify the
remainder as "substandard". The "value" of a loan is either all present value
of the expected future cash flows, the loan's observable market price or the
fair value of the collateral. The Bank does not anticipate any adverse impact
from the implementation of the revised guidance for classification of assets or
collateral dependent loans.
On December 21, 1993, the OTS, the FDIC, the Office of the Comptroller of the
Currency, and the Federal Reserve Board issued an interagency policy statement
on the allowance for loan and lease losses (the "Policy Statement"). The Policy
Statement requires that federally-insured depository institutions maintain an
allowance for loan and lease losses ("ALLL") adequate to absorb credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend. The Policy Statement defines an adequate ALLL as a level that is no
less than the sum of the following items, given the appropriate facts and
circumstances as of the evaluation date:
(1) For loans and leases classified as substandard or doubtful, all credit
losses over the remaining effective lives of those loans.
(2) For those loans that are not classified, all estimated credit losses
forecasted for the upcoming 12 months.
(3) Amounts for estimated losses from transfer risk on international loans.
Additionally, an adequate level of ALLL should reflect an additional
margin for imprecision inherent in most estimates of expected credit
losses.
50
The Policy Statement also provides guidance to examiners in evaluating the
adequacy of the ALLL. Among other things, the Policy Statement directs
examiners to check the reasonableness of ALLL methodology by comparing the
reported ALLL against the sum of the following amounts:
(a) 50 percent of the portfolio that is classified doubtful,
(b) 15 percent of the portfolio that is classified substandard; and
(c) For the portions of the portfolio that have not been classified (including
those loans designated special mention), estimated credit losses over the
upcoming twelve months given the facts and circumstances as of the
evaluation date (based on the institution's average annual rate of net
charge-offs experienced over the previous two or three years on similar
loans, adjusted for current conditions and trends).
The Policy Statement specified that the amount of ALLL determined by the sum of
the amounts above is neither a floor nor a "safe harbor" level for an
institution's ALLL. However, it is expected that the examiners will review a
shortfall relative to this amount as indicating a need to more closely review
management's analysis to determine whether it is reasonable, supported by the
weight of reliable evidence and that all relevant factors have been
appropriately considered. The Bank has reviewed the Policy Statement and does
not believe that it will adversely affect the level of the Bank's allowances for
loan losses.
PROMPT CORRECTIVE REGULATORY ACTION
- -----------------------------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take prompt
corrective action if an institution fails to satisfy certain minimum capital
requirements, including a leverage limit, a risk-based capital requirement, and
any other measure deemed appropriate by the federal banking regulators for
measuring the capital adequacy of an insured depository institution. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. An institution that fails to meet the
minimum level for any relevant capital measure (an "undercapitalized
institution") generally is: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset growth limits;
and (iv) required to obtain prior regulatory approval for acquisitions,
branching and new lines of businesses. The capital restoration plan must
include a guarantee by the institution's holding company that the institution
will comply with the plan until it has been adequately capitalized on average
for four consecutive quarters, under which the holding company would be liable
up to the lesser of 5.0% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning 270
days after the date it became critically undercapitalized.
Under OTS regulations implementing the prompt corrective action provisions of
FDICIA, the OTS measures a savings institution's capital adequacy on the basis
of its total risk-based capital ratio (the ratio of its total capital to risk-
weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital
to risk-weighted assets) and leverage ratio (the ratio of its core capital to
adjusted total assets). A savings institution that is not subject to an order
or written directive to meet or maintain a specific capital level is deemed
"well capitalized" if it also has: (i) a total risk-based capital ratio of 10.0%
or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
a leverage ratio of 5.0%
51
or greater. An "adequately capitalized" savings institution is a savings
institution that does not meet the definition of well capitalized and has: (i) a
total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater
(or 3.0% or greater if the savings institution has a composite 1 CAMEL rating).
An "undercapitalized institution" is a savings institution that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if
the institution has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings institution that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" savings institution is defined as a savings
institution that has a ratio of core capital to total assets of less than 2.0%.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the savings institution is in an unsafe or
unsound condition or that the institution has received and not corrected a less-
than-satisfactory rating for any CAMEL rating category. The Bank is classified
as "well capitalized" under the OTS regulations.
STANDARDS FOR SAFETY AND SOUNDNESS
- ----------------------------------
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
- --------------------------------
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect on August 9,
1995. The guidelines require savings associations to maintain internal controls
and information systems and internal audit systems that are appropriate for the
size, nature and scope of the association's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate risk exposure, and asset growth. The guidelines further provide
that savings associations should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and should take into account factors such as comparable
compensation practices at comparable institutions. If the OTS determines that a
savings association is not in compliance with the safety and soundness
guidelines, it may require the association to submit an acceptable plan to
achieve compliance with the guidelines. A savings association must submit an
acceptable compliance plan to the OTS within 30 days of receipt of a request for
such a plan. Failure to submit or implement a compliance plan may subject the
association to regulatory sanctions. Management believes that the Bank already
meets substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
association would be required to maintain systems, commensurate with its size
and the nature and scope of its operations, to identify problem assets and
prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and earnings
standards, in the form proposed by the banking agencies, would not have a
material effect on the Bank's operations.
FEDERAL RESERVE SYSTEM
- ----------------------
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$49.3 million of transaction accounts, plus 10.0% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a non-
interest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institution's interest-earning
assets. As of June 30, 1997, the Bank met its reserve requirements.
52
LIMITATIONS ON LOANS TO ONE BORROWER
- ------------------------------------
Under applicable law, with certain limited exceptions, loans and extensions of
credit to a person outstanding at one time shall not exceed 15.0% of a savings
association's unimpaired capital and surplus (defined as an association's core
and supplementary capital, plus the balance of its allowance for loan and lease
losses not included in its supplementary capital). Loans and extensions of
credit fully secured by readily marketable collateral may comprise an additional
10.0% of unimpaired capital and surplus. Savings associations are further
permitted to make loans to one borrower, for any purpose, in an amount not to
exceed $500,000 or, by order of the Director of the OTS, in an amount not to
exceed the lesser of $30.0 million or 30.0% of unimpaired capital and surplus to
develop residential housing provided (i) the purchase price of each single-
family dwelling in the development does not exceed $500,000 (ii) the savings
association is in compliance with its fully phased-in capital standards, (iii)
the loans comply with applicable loan-to-value requirements, (iv) the aggregate
amount of loans made under this authority does not exceed 150.0% of unimpaired
capital and surplus and (v) the savings association is, and continues to be, in
compliance with its fully phased in capital requirements. At June 30, 1997, the
Bank's loan to one borrower limitation was $124.7 million and all loans to one
borrower were within such limitation.
LIMITATIONS ON NONRESIDENTIAL REAL ESTATE LOANS
- -----------------------------------------------
The aggregate amount of loans which a savings association may make on the
security of liens on nonresidential real property may not exceed 400.0% of the
institution's capital. The Director of the OTS is authorized to permit federal
savings associations to exceed the 400.0% capital limit in certain
circumstances. The Bank estimates that it is permitted to make loans secured by
nonresidential real property in an amount equal to $2.0 billion. At June 30,
1997 the Bank's nonresidential real property loans totaled $278.6 million.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
- -------------------------------------------
The Corporation is a savings and loan holding company as defined by the HOLA.
As such, it is registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. As a subsidiary of a
savings and loan holding company, the Bank is subject to certain restrictions in
its dealings with the Corporation and affiliates thereof.
ACTIVITIES RESTRICTIONS
- -----------------------
The Board of Directors of the Corporation operates the Corporation as a unitary
savings and loan holding company. There are generally no restrictions on the
activities of a unitary savings and loan holding company. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose such
restrictions as deemed necessary to address such risk including limiting: (i)
payment of dividends by the savings institution; (ii) transactions between the
savings institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company. See "Qualified Thrift
Lender Test."
If the Corporation were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Corporation
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
the activities of the Corporation and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency
53
or escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS prior
to being engaged in by a multiple holding company.
RESTRICTIONS ON ACQUISITIONS
- ----------------------------
Savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5.0% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Under certain circumstances, a registered
savings and loan holding company is permitted to acquire, with the approval of
the Director of the OTS, up to 15.0% of the voting shares of an under-
capitalized savings institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding company. In
order for the shares acquired to constitute a "qualified stock issuance," the
shares must consist of previously unissued stock or treasury shares, the shares
must be acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6.5% of total assets, there
must not be more than one common director or officer between the savings and
loan holding company and the issuing savings institution, and transactions
between the savings institution and the savings and loan holding company and any
of its affiliates must conform to Sections 23A and 23B of the Federal Reserve
Act. Except with the prior approval of the Director of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25.0% of such company's stock, may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquired is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Under the Bank Holding Company Act of 1956, bank holding companies are
specifically authorized to acquire control of any savings association. Pursuant
to rules promulgated by the Federal Reserve Board, owning, controlling or
operating a savings institution is a permissible activity for bank holding
companies, if the savings institution engages only in deposit-taking activities
and lending and other activities that are permissible for bank holding
companies. A bank holding company that controls a savings institution may merge
or consolidate the assets and liabilities of the savings institution with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings institution plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
TAXATION
- --------
The Corporation is subject to the provisions of the Internal Revenue Code of
1986, as amended (the "Code"). The Corporation and its subsidiaries, including
the Bank, file a consolidated federal income tax return based on a fiscal year
ending June 30. Consolidated taxable income is determined on an accrual basis.
Prior to July 1, 1996, savings institutions that met certain definitional tests
and other conditions prescribed by the Code were allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income if
more favorable than the bad debt deduction based on actual loss experience (i.e.
experience method). The bad debt
54
deduction for fiscal years 1996 and 1995 was computed under the percentage of
taxable income method since it yielded a greater deduction than did the
experience method.
In August 1996, changes in the federal tax law (i) repealed both the percentage
of taxable income and experience methods effective July 1, 1996, allowing a bad
debt deduction for specific charge-offs only, and (ii) required recapture into
taxable income over a six year period of tax bad debt reserves which exceed the
base year amount, adjusted for any loan portfolio shrinkage. These tax law
changes resulted in the recognition to income tax expense of additional deferred
tax liabilities of approximately $103,000 in fiscal year 1997. The recapture of
excess reserves has no effect on the Corporation's results of operations since
income taxes were provided for in prior years in accordance with SFAS No. 109,
"Accounting for Income Taxes." The recapture may be delayed for a one or two-
year period if the Corporation originates more residential loans than its
average originations in the past six years. The Corporation met the origination
requirement for fiscal 1997, therefore delaying the recapture at least until the
six-year period beginning in fiscal year 1998. The recapture of excess reserves
totals $3,161,000 and will result in income tax payments of $1,130,000 which
have been previously accrued.
In accordance with provisions of SFAS No. 109, a deferred tax liability has not
been recognized for the bad debt reserves of the Bank created in the tax years
which began prior to December 31, 1987 (the base year). At June 30, 1997, the
amount of these reserves totaled approximately $81,757,000 with an unrecognized
deferred tax liability approximating $29,866,000. Such unrecognized deferred
tax liability could be recognized in the future, in whole or in part, if (i)
there is a change in federal tax law, (ii) the Bank fails to meet certain
definitional tests and other conditions in the federal tax law, (iii) certain
distributions are made with respect to the stock of the Bank or (iv) the bad
debt reserves are used for any purpose other than absorbing bad debt losses.
The Corporation is currently under audit by the Internal Revenue Service with
respect to its tax return for fiscal year 1994. Management is unaware of any
significant income tax deficiencies outstanding.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank may not join in the filing of a consolidated
return with the Corporation and will be assessed at a rate of $.47 per $1,000 of
average deposits. The franchise tax is limited to 3.81% of the Bank's income
before tax (including subsidiaries) as reported on the regular books and
records. At June 30, 1997, the Bank paid its Nebraska franchise tax based on the
average level of deposits. For Iowa, Kansas, Oklahoma, and Colorado the taxes
are computed on federal taxable income, subject to certain adjustments and
apportioned to that particular state. For further information regarding federal
income taxes payable by the Corporation, see Note 17 of the Notes to the
Consolidated Financial Statements.
55
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
At June 30, 1997, the Corporation conducted business through 34 offices in
Nebraska, 27 offices in Kansas, 20 offices in Colorado, 19 offices in Oklahoma
and seven offices in Iowa. See Item 1. Business - "Recent Developments--Pending
Acquisitions" for additional branches that will be added pursuant to pending
acquisitions.
At June 30, 1997, the Corporation owned the buildings for 79 of its branch
offices and leased the remaining 28 offices under leases expiring (not assuming
exercise of renewal options) between July 1997 and August 2031. The Corporation
has 107 "Cashbox" ATMs located throughout Nebraska, Colorado, Kansas, Oklahoma,
and Iowa. At June 30, 1997, the total net book value of land, office properties
and equipment owned by the Corporation was $84.1 million. Management believes
that the Corporation's premises are suitable for its present and anticipated
needs.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
There are no pending legal proceedings to which the Corporation, the Bank or any
subsidiary is a party or to which any of their property is subject which are
expected to have a material adverse effect on the Corporation's financial
position. See Item 1. Business -- "Recent Developments -- Supervisory Goodwill
Lawsuit" for other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1997.
56
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------------
The information contained under "Regulation -- Restrictions on Capital
Distributions" in Part I of this Report and the section "Stock Prices and
Dividends" appearing on page 35 of the Annual Report is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The presentation of selected financial data for the years ended June 30, 1993
through 1997 is included in the "Selected Consolidated Financial Data" section
appearing on pages 12 and 13 of the Annual Report and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's comments on the Corporation's financial condition, changes in
financial condition, and the results of operations for fiscal year 1997 compared
to fiscal year 1996 and fiscal year 1996 compared to fiscal year 1995 are
included in the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section appearing on pages 14 through 35 of the Annual
Report and are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The information contained under "Business-Market Risk" in Part I of this Report
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The "Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Independent Auditors' Report" set forth on pages 36 through
80 of the Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
- --------------------------------------------------------------------------------
None.
57
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
For information concerning the Board of Directors of the Corporation, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Corporation's definitive proxy statement for the Corporation's
1997 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
The executive officers of the Corporation and the Bank as of June 30, 1997, are
as follows:
Age at
Name June 30, 1997 Current Position(s) as of June 30, 1997
- --------------------------- ------------- -------------------------------------------------------------------------------
William A. Fitzgerald 59 Chairman of the Board and Chief Executive Officer of the Corporation and the
Bank
James A. Laphen 49 President, Chief Operating Officer and Chief Financial Officer of the
Corporation and the Bank
Gary L. Matter 52 Senior Vice President, Controller and Secretary of the Corporation and the
Bank
Joy J. Narzisi 41 Senior Vice President and Treasurer of the Corporation and the Bank and Assistant
Secretary of the Bank
Margaret E. Ash 44 Senior Vice President and Assistant Secretary of the Bank
Gary L. Baugh 56 Senior Vice President of the Bank
Roger L. Lewis 47 Senior Vice President and Assistant Secretary of the Bank
Jon W. Stephenson 49 Senior Vice President of the Bank
Terry A. Taggart 42 Senior Vice President of the Bank
Gary D. White 52 Senior Vice President of the Bank
Ronald A. Aalseth 41 First Vice President of the Bank
R. Hal Bailey 49 First Vice President of the Bank
Melissa M. Beumler 34 First Vice President of the Bank
Ronald P. Cheffer 45 First Vice President of the Bank
Monte M. Deere 56 First Vice President of the Bank
58
Age at
Name June 30, 1997 Current Position(s) as of June 30, 1997
- ---------------------- ------------- ---------------------------------------
John J. Griffith 37 First Vice President of the Bank
Robert E. Gruwell 49 First Vice President of the Bank
David E. Gunter, Jr. 59 First Vice President of the Bank
Michael J. Hoffman 43 First Vice President of the Bank
Kevin C. Parks 42 First Vice President of the Bank
Thomas N. Perkins 45 First Vice President of the Bank
Dennis R. Zimmerman 46 First Vice President of the Bank
The principal occupation of each executive officer of the Corporation and the
Bank for the last five years is set forth below.
WILLIAM A. FITZGERALD, Chairman of the Board and Chief Executive Officer of the
- ----------------------
Corporation and the Bank, joined Commercial Federal in 1955. He was named Vice
President in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
well known in the banking community for his participation in numerous industry
organizations, including the Federal Home Loan Bank Board, the Heartland
Community Bankers, the board of America's Community Bankers and the Board of
Governors of the Federal Reserve System Thrift Institutions Advisory Council.
Mr. Fitzgerald joined Commercial Federal's Board of Directors in 1973.
JAMES A. LAPHEN is President, Chief Operating Officer and Chief Financial
- ---------------
Officer of the Corporation and the Bank. Prior to his promotion to President in
November 1994, Mr. Laphen held the positions of Executive Vice President,
Secretary and Treasurer of the Corporation and Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary of the Bank. He joined
the Corporation in November 1988 as Treasurer of the Corporation and First Vice
President and Treasurer of the Bank and has been in various positions of
responsibility within the organization. Prior to 1988, Mr. Laphen was President
and Chief Executive Officer of Home Unity Mortgage Services, Inc. in
Pennsylvania and, prior to such positions, was Executive Vice President and
Chief Financial Officer of Home Unity Savings Bank.
GARY L. MATTER, a Senior Vice President, Controller and Secretary of the
- --------------
Corporation and the Bank since November 1993, joined the Bank in December 1990,
as First Vice President and Controller. Mr. Matter, a certified public
accountant, was the Treasurer of Anchor Glass Container Corporation from June
1983 to November 1990.
JOY J. NARZISI, Treasurer and Senior Vice President of the Corporation, and
- ---------------
Assistant Secretary of the Bank, joined the Bank in September 1980. Ms. Narzisi
was named Senior Vice President and Assistant Secretary of the Bank in July 1995
after first being appointed Treasurer of the Corporation in November 1994,
Treasurer of the Bank in 1991 and First Vice President in June of 1989. Prior
to 1989, Ms. Narzisi was Investment Portfolio Manager since July 1987. Since
joining the Bank, she has held other various Treasury related management
positions.
MARGARET E. ASH was named Senior Vice President and Assistant Secretary of the
- ---------------
Bank and Director of the Operations and Customer Services Division in July 1995.
Previous positions held include First Vice President of Operations in 1993,
First Vice President of Colorado Retail in 1989 and Vice President and Colorado
Regional Manager in 1987. Ms. Ash joined Commercial Federal in 1973 and also
serves as President of Commercial Federal Mortgage Corporation.
59
GARY L. BAUGH, a Senior Vice President responsible for the Kansas operation of
- --------------
the Bank since October 1995, joined the Bank pursuant to the Railroad
acquisition. Mr. Baugh, a certified public accountant, joined Railroad in 1973,
was employed in various capacities and in June 1988 was named President and
Chief Operating Officer.
ROGER L. LEWIS, a Senior Vice President and Assistant Secretary of the Bank,
- ---------------
joined the Bank in 1986 as Vice President and Director of Public Relations until
he became First Vice President and Director of Marketing in March 1988. Prior
to joining Commercial Federal, Mr. Lewis was Vice President and Communications
Director for Omaha National Bank.
JON W. STEPHENSON was appointed Senior Vice President of the Bank in July 1995
- -----------------
and serves as Director of Retail Banking, a position held since March 1997. Mr.
Stephenson joined the Bank as First Vice President in July 1994, with
responsibility for Oklahoma retail operations. Mr. Stephenson, a certified
public accountant, was President and Chief Executive Officer of Home Federal
Savings and Loan Association of Ada, Oklahoma prior to joining Commercial
Federal.
TERRY A. TAGGART, a Senior Vice President of the Bank and State Director of
- ----------------
Colorado since June 1995, has held various positions of responsibility within
the bank, including Senior Vice President of Corporate Retail Banking in August
1993, First Vice President and Manager of Retail Operations in May 1989, and
Vice President and Regional Sales Manager in March 1988. Mr. Taggart joined the
Bank in January 1986 as an advanced manager trainee.
GARY D. WHITE was named Senior Vice President for Administration and Special
- -------------
Projects in February 1997. Previous positions held include Senior Vice
President and Director of Nebraska/Iowa in July of 1995, Director of Residential
Mortgage Lending in May 1994, and First Vice President and Director of Human
Resources in March 1984. Mr. White joined the Bank in 1976 as an Investment
Account Executive and also has held the positions of Branch Manager and
Employment Manager. Prior to 1976, Mr. White was Vice President of College
Relations at the College of Saint Mary.
RONALD A. AALSETH, a First Vice President of the Bank since November 1994,
- ------------------
joined the Bank in December 1984 and serves as President of Commercial Federal
Insurance Corporation; ComFed Insurance Services Company, Limited; and
Commercial Federal Investment Services, Inc. He has served in this capacity
since June 1987.
R. HAL BAILEY was named First Vice President of the Bank in October 1995 and
- -------------
serves as Director of Residential Construction Lending. He joined Railroad
Savings Bank in June 1987 as Senior Vice President and Chief Lending Officer.
Prior to that he worked for American Savings and Loan in Salt Lake City, Utah;
Bank of America in Los Angeles and Smith Barney in San Francisco.
MELISSA M. BEUMLER was named First Vice President of the Bank in September 1996
- ------------------
and serves as Director of Advertising and Sales Development. Ms. Beumler joined
Commercial Federal Bank in June 1995 as Vice President of Advertising and Sales
Promotion. Prior to joining Commercial Federal, she was Vice President,
Director of Marketing for Norwest Bank Nebraska, N.A. Ms. Beumler is the
daughter of Sharon G. Marvin, a Board of Director member of the Bank.
RONALD P. CHEFFER was named First Vice President of the Bank in September 1996
- -----------------
and serves as Manager of Credit Administration. He joined the Bank in June
1985. Prior to joining the Bank, Mr. Cheffer was an Assistant Vice President at
Harris Trust & Savings Bank in Chicago from June 1974 to May 1985.
MONTE M. DEERE was appointed First Vice President of the Bank in May 1997 and
- --------------
serves as Oklahoma State Director. He joined the Bank in March 1996 as a Branch
Manager II and in November 1996, he was promoted to Area Sales Manager before
being promoted to his current position. Prior to joining the Bank, Mr. Deere
was a Branch Manager for Commercial Bank-Texas from 1994 to 1996, CFO of
Commercial Brick Corporation from 1993 to 1994 and CEO of the Trails Golf Club
from 1989 to 1993.
JOHN J. GRIFFITH was named First Vice President of the Bank in September 1996
- ----------------
and Community Investment Officer in June 1994. Mr. Griffith joined the Bank in
January 1984 and has held various management positions in the Bank's Treasury
and mortgage operations.
60
ROBERT E. GRUWELL joined the Bank in December 1996 as a First Vice President
- -----------------
with responsibility for the Treasury function. Prior to joining the Bank, Mr.
Gruwell was Vice President with Citibank for 16 years holding various positions
within its Treasury division.
DAVID E. GUNTER, JR., has been with the Bank since 1982. Mr. Gunter became
- --------------------
First Vice President of the Bank in December 1992 with responsibility for
commercial real estate lending and income recovery. Mr. Gunter is also the
President of Commercial Federal Service Corporation.
MICHAEL J. HOFFMAN joined the Bank in June 1997 as First Vice President and
- ------------------
State Director of Nebraska and Iowa Retail. Mr. Hoffman is a certified
financial planner and chartered financial consultant. Prior to joining the
Bank, Mr. Hoffman was Director of Sales for Direct-Link Insurance Services LLC
and has over 20 years experience in the financial services industry.
KEVIN C. PARKS was named First Vice President of the Bank responsible for
- --------------
Internal Audit, Legal Oversight/Compliance and Security in November 1993. Mr.
Parks, a certified public accountant, certified internal auditor and chartered
bank auditor was previously self employed as a practicing accountant since 1989.
Prior to 1989, Mr. Parks was Manager of Internal Audit for Security Pacific Bank
- - Arizona since 1985.
THOMAS N. PERKINS was named First Vice President in May 1992 and is in charge of
- -----------------
acquisitions. Mr. Perkins joined the Bank in 1976 and has held various
management positions in the Bank's Retail division prior to assuming the
Acquisitions position in August 1993.
DENNIS R. ZIMMERMAN became First Vice President in October 1991 and Director of
- -------------------
Information Systems as of July 1993. Mr. Zimmerman joined the Bank in 1987 and
has held the positions of Information Systems Audit Manager, Internal Audit
Manager and Director of Internal Audit/Legal Oversight. Prior to 1987, Mr.
Zimmerman was the Director of Financial Systems for a subsidiary of Enron
Corporation.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The information under the section captioned "Proposal I -- Election of Directors
- -- Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------------
Information concerning beneficial owners of more than 5.0% of the Corporation's
common stock and security ownership of the Corporation's management is included
under the section captioned "Principal Stockholders" and "Proposal I -- Election
of Directors" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I -- Election of Directors" in the Proxy Statement.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(A.) The following documents are filed as part of this report:
(1.) Consolidated Financial Statements (incorporated herein by reference from
the indicated section of the Annual Report):
(a.) Consolidated Statement of Financial Condition at June 30, 1997 and
1996.
(b.) Consolidated Statement of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995
(c.) Consolidated Statement of Operations for the Years Ended June 30,
1997, 1996 and 1995
(d.) Consolidated Statement of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995.
(e.) Notes to Consolidated Financial Statements.
(f.) Independent Auditors' Report.
(2.) Financial Statement Schedules:
All schedules have been omitted as the required information is not
applicable, not required or is included in the financial statements or
related notes thereto.
(3.) Exhibits:
3.1 Articles of Incorporation of Registrant (incorporated by
reference to the Registrant's Form S-4 Registration Statement No.
33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated by
reference to the Registrant's Form S-4 Registration Statement No.
33-60589)
4.1 Form of Certificate of Common Stock of Registrant (incorporated
by reference to the Registrant's Form S-1 Registration Statement
No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company (incorporated
by reference to the Registrant's Form 8-K Current Report Dated
January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to the
Securities and Exchange Commission a copy of each instrument
defining the rights of holders of the Cumulative Trust Preferred
Securities and the Subordinated Extendible Notes of the
Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8,
1995 (incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with William A.
Fitzgerald and James A. Laphen dated June 8, 1995 (incorporated
by reference to the Registrant's Form S-4 Registration Statement
No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement entered
into with Senior Vice Presidents and First Vice Presidents
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective July 1,
1994 (incorporated by reference to the Registrant's Form 10-K
Annual Report for the Fiscal Year Ended June 30, 1994 - File No.
0-13082)
62
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and Registrant,
dated August 21, 1996 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1996 - File No. 1-11515)
10.8 Employment Agreement with William A. Fitzgerald, dated May 15,
1974, as Amended February 14, 1996 (incorporated by reference to
the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor Income
Plan, as Amended February 14, 1996 (incorporated by reference to
the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.10 Employment Agreement with James A. Laphen dated June 1, 1997
(filed herewith)
10.11 Commercial Federal Corporation 1996 Stock Option and Incentive
Plan Effective January 30, 1997 (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 333-20739)
10.12 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan, Railroad Financial Corporation 1991 Directors' Stock Option
Plan and Railroad Financial Corporation 1986 Stock Option and
Incentive Plan, as Amended February 22, 1991 (incorporated by
reference to the Registrant's Form S-8 Registration Statement No.
33-63221 and Post-Effective Amendment No. 1 to Registration
Statement No. 33-01333 and No. 33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and Incentive
Plan (incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-63629)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders for
the Fiscal Year Ended June 30, 1997 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)
(B.) Reports on Form 8-K:
The Corporation filed no reports on Form 8-K during the three months
ended June 30, 1997.
(C.) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(D.) No financial statement schedules are filed, and as such are excluded
from the Annual Report as provided by Exchange Act Rule 14A-3(b)(i).
With the exception of the information expressly incorporated by reference in
Items 1, 2, 5, 6, 7, 8 and 14, the Corporation's 1997 Annual Report to
Stockholders is not deemed "filed" with the Securities and Exchange Commission
or otherwise subject to Section 18 of the Securities and Exchange Act of 1934.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, there unto duly authorized.
COMMERCIAL FEDERAL CORPORATION
Date: September 10, 1997 By: /s/ William A. Fitzgerald
----------------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and as of the date indicated.
PRINCIPAL EXECUTIVE OFFICER:
Date: September 10, 1997 By: /s/ William A. Fitzgerald
----------------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER:
Date: September 10, 1997 By: /s/ James A. Laphen
----------------------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
Date: September 10, 1997 By: /s/ Gary L. Matter
----------------------------------
Gary L. Matter
Senior Vice President, Controller
and Secretary
DIRECTORS:
Date: September 10, 1997 By: /s/ Talton K. Anderson
----------------------------------
Talton K. Anderson
Director
Date: September 10, 1997 By:
----------------------------------
Michael P. Glinsky
Director
64
Date: September 10, 1997 By: /s/ Robert F. Krohn
----------------------------------
Robert F. Krohn
Director
Date: September 10, 1997 By: /s/ Carl G. Mammel
----------------------------------
Carl G. Mammel
Director
Date: September 10, 1997 By: /s/ Robert S. Milligan
----------------------------------
Robert S. Milligan
Director
Date: September 10, 1997 By:
----------------------------------
James P. O'Donnell
Director
Date: September 10, 1997 By: /s/ Robert D. Taylor
----------------------------------
Robert D. Taylor
Director
Date: September 10, 1997 By: /s/ Aldo J. Tesi
----------------------------------
Aldo J. Tesi
Director
65
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- ----------
3.1 Articles of Incorporation of Registrant (incorporated by
reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
3.2 Bylaws of Registrant, as amended and restated (incorporated
by reference to the Registrant's Form S-4 Registration
Statement No. 33-60589)
4.1 Form of Certificate of Common Stock of Registrant
(incorporated by reference to the Registrant's Form S-1
Registration Statement No. 33-003300)
4.2 Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
(incorporated by reference to the Registrant's Form 8-K
Current Report Dated January 9, 1989)
4.3 The Corporation hereby agrees to furnish upon request to
the Securities and Exchange Commission a copy of each
instrument defining the rights of holders of the Cumulative
Trust Preferred Securities and the Subordinated
Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated
June 8, 1995 (incorporated by reference to the Registrant's
Form S-4 Registration Statement No. 33-60589)
10.2 Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.3 Form of Change in Control Executive Severance Agreement entered
into with Senior Vice Presidents and First Vice Presidents
(incorporated by reference to the Registrant's Form S-4
Registration Statement No. 33-60589)
10.4 Commercial Federal Corporation Incentive Plan Effective
July 1, 1994 (incorporated by reference to the Registrant's
Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1994 - File No. 0-13082)
10.5 Commercial Federal Corporation Deferred Compensation Plan
Effective July 1, 1994 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1994 - File No. 0-13082)
10.6 Commercial Federal Corporation 1984 Stock Option and Incentive
Plan, as Amended and Restated Effective August 1, 1992
(incorporated by reference to the Registrant's Form S-8
Registration Statement No. 33-60448)
10.7 Stock Purchase Agreement between CAI Corporation and Registrant,
dated August 21, 1996 (incorporated by reference to the
Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 1996 - File No. 1-11515)
10.8 Employment Agreement with William A. Fitzgerald, dated
May 15, 1974, as Amended February 14, 1996 (incorporated by
reference to the Registrant's Form 10-K Annual Report for the
Fiscal Year Ended June 30, 1996 - File No. 1-11515)
10.9 Commercial Federal Savings and Loan Association Survivor Income
Plan, as Amended February 14, 1996 (incorporated by reference
to the Registrant's Form 10-K Annual Report for the Fiscal Year
Ended June 30, 1996 - File No. 1-11515)
10.10 Employment Agreement with James A. Laphen dated June 1, 1997
(filed herewith).
10.11 Commercial Federal Corporation 1996 Stock Option and Incentive
Plan Effective January 30, 1997 (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 333-20739)
INDEX TO EXHIBITS
(Continued)
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibits System)
- ------ -------------------- ----------
10.12 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as
Amended February 22, 1991 (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 33-63221
and Post-Effective Amendment No. 1 to Registration
Statement No. 33-01333 and No. 33-10396)
10.13 Railroad Financial Corporation 1994 Stock Option and
Incentive Plan (incorporated by reference to the Registrant's
Form S-8 Registration Statement No. 33-63629)
11 Computation of Earnings Per Share (filed herewith)
13 Commercial Federal Corporation Annual Report to Stockholders
for the Fiscal Year Ended June 30, 1997 (filed herewith)
21 Subsidiaries of the Corporation (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedules (filed herewith)